56212rtpfinaloldnov19 p7

PAPER 7: DIRECT TAX LAWS
SECTION – A: STATUTORY UPDATE
The direct tax laws, as amended by the Finance Act, 2018, including significant notifications/
circulars issued upto 30 th April, 2019 are applicable for November, 2019 examination. The
relevant assessment year for November, 2019 examination is A.Y.2019-20. The significant
notifications/circulars issued upto 30 th April, 2019, relevant for November, 2019 examination
but not covered in the September, 2018 edition of the Study Material, are given hereunder.
STUDY MATERIAL MODULE-1
Chapter 3: Income which do not form part of Total Income
Computation of admissible deduction u/s 10AA of the Income-tax Act, 1961 [Circular No.
4/2018, Dated 14-8-2018]
As per the provisions of section 10AA(7), the profits derived from export of articles or things or
services (including computer software) shall be the amount which bears to the profits of the
business of the undertaking, being the Unit, the same proportion as the export turnover in
respect of such articles or things or services bears to the total turnover of the business carried
on by the undertaking.
Further as per clause (i) to Explanation 1 to section 10AA, "export turnover" means the
consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in, or brought into, India by the assessee, but does not include freight,
telecommunication charges or insurance attributable to the delivery of the articles or things
outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India.
The issue of whether freight, telecommunication charges and insurance expenses are to be
excluded from both "export turnover"' and "total turnover' while working out deduction
admissible under section 10AA on the ground that they are attributable to delivery of articles
or things outside India has been highly contentious. Similarly, the issue whether charges for
rendering services outside India are to be excluded both from "export turnover" and "total
turnover" while computing deduction admissible under section 10AA on the ground that such
charges are relatable towards expenses incurred in convertible foreign exchange in rendering
services outside India has also been highly contentious.
The controversy has been finally settled by the Hon'ble Supreme Court vide its judgment
dated 24.4.2018 in the case of Commissioner of Income Tax, Central-III Vs. M/s HCL
© The Institute of Chartered Accountants of India

PAPER – 7 : DIRECT TAX LAWS 51
Technologies Ltd. (CA No. 8489-8490 of 2013, NJRS Citation 2018-LL-0424-40), in relation to
section 10A.
The issue had been examined by CBDT and it is clarified, in line with the above decision of
the Supreme Court, that freight, telecommunication charges and insurance expenses are to be
excluded both from "export turnover" and "total turnover', while working out deduction
admissible under section 10AA to the extent they are attributable to the delivery of articles or
things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India are to be
excluded from both "export turnover" and "total turnover" while computing deduction
admissible under section 10AA.
Note: Though this CBDT Circular is issued in relation to erstwhile section 10A, the same is
also relevant in the context of section 10AA. Accordingly, the reference to section 10A in the
Circular and the relevant sub-section and Explanation number thereto have been modified and
given with reference to section 10AA and the corresponding sub-sections, Explanation number
and clause of Explanation.
Chapter 4: Salaries
Notified limit for exemption in respect of gratuity increased, in case of employees not
covered under the Payment of Gratuity Act, 1972 [Notification No. 16 /2019, dated
08.03.2019]
As per section 10(10)(iii), in case of an employee not covered under the Payment of Gratuity
Act, 1972, any gratuity received by an employee on his retirement or his becoming
incapacitated prior to such retirement or on termination of his employment or any gratuity
received by his widow, children or dependents on his death is exempt from tax to the extent of
least of the following limits:
(i) One-half month’s salary for each year of completed service
(ii) Actual gratuity received
(iii) Specified limit (i.e., limit notified by the Central Government)
The Central Government, having regard to the maximum amount of any gratuity payable to
employees, has specified `20 lakh as the limit for the purposes of section 10(10)(iii) in relation to
the employees who retire or become incapacitated prior to such retirement or die on or after 29th
March, 2018 or whose employment is terminated on or after the said date. In effect, the Central
Government has, vide this notification, increased the specified limit from `10 lakhs to `20 lakh with
effect from 29.03.2018.

52 FINAL (OLD) EXAMINATION: NOVEMBER, 2019
Chapter 6: Profits and gains of business or profession
Determining fair market value of inventory on the date of conversion into capital asset
[Notification No. 42/2018, dated 30-08-2018]
Section 28(via) has been inserted by the Finance Act, 2018 to provide that fair market value of
the inventory on the date of its conversion or treatment as capital asset, determined in the
prescribed manner, would be chargeable to tax as business income.
Accordingly, the CBDT, has vide this notification, inserted Rule 11UAB to prescribe the
manner of determination of fair market value (FMV) of the inventory on the date of conversion.
[Note: For detailed reading of 11UAB of the Income-tax Rules, 1962, students may visit
https://www.incometaxindia.gov.in/pages/rules/income-tax-rules-1962.aspx
Chapter 7: Capital Gains
Notification of transactions in equity shares in respect of which the condition of

chargeability to STT at the time of acquisition for claiming concessional tax treatment
under section 112A shall not apply [Notification No. 60/2018, dated 01-10-2018]
The Finance Act, 2018 has withdrawn exemption under section 10(38) and has inserted new
section 112A in the Income-tax Act, 1961, to provide that long-term capital gains arising from
transfer of a capital asset, being an equity share in a company or a unit of an equity oriented
fund or a unit of a business trust, shall be taxed at 10% of such capital gains exceeding one
lakh rupees. The said section, inter alia, provides that the provisions of the section shall apply
to the capital gains arising from a transfer of long-term capital asset, being an equity share in
a company, only if securities transaction tax (STT) has been paid on acquisition and transfer
of such capital asset.
However, to provide for the applicability of the concessional tax regime under section 112A to
genuine cases where the STT could not have been paid, it has also been provided in section
112A(4) that the Central Government may specify, by notification, the nature of acquisitions in
respect of which the requirement of payment of STT shall not apply in the case of acquisition
of equity share in a company.
In view of the above, the Central Government has, vide notification No. 60/2018, dated
1st October, 2018, notified that the condition of chargeability of STT shall not apply to the
acquisition of equity shares entered into
- before 1st October, 2004 or
- on or after 1st October, 2004 which are not chargeable to STT , other than the following
transactions.
In effect, only in respect of the following transactions mentioned in column (2), the
requirement of paying STT at the time of acquisition for availing the benefit of concessional
rate of tax under section 112A would apply. In may be noted that the exceptions are listed in
column (3) against the transaction. The requirement of payment of STT at the time of

acquisition for availing benefit of concessional tax rate under section 112A will not apply to
acquisition transactions mentioned in column (3).
(1) (2) (3)
Transaction Non-applicability of condition of chargeability of
STT
(a) Where acquisition of existing Where acquisition of listed equity share in a
listed equity share in a company –
company whose equity (i) has been approved by the Supreme Court,
shares are not frequently High Court, National Company Law Tribunal,
traded in a recognised stock Securities and Exchange Board of India or
exchange of India is made Reserve Bank of India in this behalf;
through a preferential issue
(ii) is by any non-resident in accordance with
foreign direct investment guidelines issued
by the Government of India;
(iii) is by an investment fund referred to in clause
(a) of Explanation 1 to section 115UB or a
venture capital fund referred to in section
10(23FB) or a Qualified Institutional Buyer;
(iv) is through preferential issue to which the
provisions of chapter VII of the Securities and
Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations,
2009 does not apply.
(b) Where transaction for Following acquisitions of listed equity share in a
acquisition of existing listed company made in accordance with the provisions of
equity share in a company is the Securities Contracts (Regulation) Act, 1956:
not entered through a (i) acquisition through an issue of share by a
recognised stock exchange in company other than through preferential the
India issue referred to in (a);
(ii) acquisition by scheduled banks,
reconstruction or securitisation companies or
public financial institutions during their
ordinary course of business;
(iii) acquisition by the Supreme Court, High
Courts, National Company Law Tribunal,
Securities and Exchange Board of India or
Reserve Bank of India in this behalf;
(iv) acquisition under employee stock option
scheme or employee stock purchase scheme

framed under the Securities and Exchange

Board of India (Employee Stock Option
Scheme and Employee Stock Purchase
Scheme) Guidelines,1999;
(v) acquisition by any non-resident in
accordance with foreign direct investment
guidelines of the Government of India;
(vi) acquisition in accordance with Securities and
Exchange Board of India (Substantial
Acquisition of Shares and Takeovers)
Regulation, 2011;
(vii) acquisition from the Government;
(viii) acquisition by an investment fund referred to
in clause (a) to Explanation 1 to section
115UB or a venture capital fund referred to in
section 10(23FB) or a Qualified Institutional
Buyer;
(ix) acquisition by mode of transfer referred to in
section 47 (e.g., transfer of capital asset
under a gift, an irrevocable trust, transfer of
capital asset between holding company and
its subsidiary, transfer pursuant to
amalgamation, demerger, etc.) or section
50B (slump sale) or section 45(3)
(Introduction of capital asset as capital
contribution in firm/ AOPs/ BOIs) or section
45(4) (Distribution of capital assets on
dissolution of firm/ AOPs/ BOIs) of the
Income-tax Act, if the previous owner or the
transferor, as the case may be, of such
shares has not acquired them by any mode
referred to in (a), (b) or (c) listed in column
(2) [other than the exceptions listed in
column (3)]
(c) acquisition of equity share of
a company during the period
beginning from the date on
which the company is
delisted from a recognised
stock exchange and ending
on the date immediately

preceding the date on which

the company is again listed
on a recognised stock
exchange in accordance with
the Securities Contracts
(Regulation) Act, 1956 read
with Securities and Exchange
Board of India Act,1992 and
the rules made thereunder;
Chapter 8: Income from Other Sources
Notification of company for the purposes of exemption under clause (ii) of the proviso to
section 56(2)(viib) [Notification No. 13/2019, dated 5-03-2019]
Where a company, other than a company in which public are substantially interested, issues
shares at a premium to a person being a resident, section 56(2)(viib) brings to tax in the hands of
such company, the difference between the aggregate consideration received for such shares as
exceeds the fair market value of the shares under the head “Income from Other Sources”.
However, such provision would not be attracted, inter alia, where the consideration for issue of
such shares is received by a company from a class or classes of persons as may be notified by the
Central Government in this behalf.
Earlier, the Central Government had, vide Notification No. 45/2016, dated 14.6.2016, notified
classes of persons. In supersession of the above mentioned Notification, the Central Government
has, vide this notification, notified that the provisions of section 56(2)(viib) shall not apply to
consideration received by a company for issue of shares that exceeds the face value of such
shares, if the said consideration received from a person, being a resident, by a company which
fulfills the conditions specified by the Ministry of Commerce and Industry in the Department for
Promotion of Industry and Internal Trade and files the declaration referred to in the said notifi cation.
In effect, vide this notification, the Central Government has notified the conditions to be fulfilled by
a company which issues shares rather than the class or classes of persons to whom suc h shares
are issued.
The Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal
Trade has, vide Notification No. G.S.R. 127(E) dated 19.2.2019, specified in para 4 thereunder,
that a startup shall be eligible for exemption under clause (ii) of the proviso to section 56(2)(vii b), if
it fulfills the following conditions:
(i) It has been recognized by the Department for Promotion of Industry and Internal Trade as
start up as per this notification or any earlier notification on the subject.

(ii) Aggregate amount of paid up capital and share premium of the startup after issue or
proposed issue of shares, if any, does not exceed, twenty five crore rupees.
However, in computing the aggregate amount of paid up share capital, the amount of paid up
share capital and share premium of twenty five crore rupees in respect of shares issued to
any of the following persons shall not be included:
(a) a non-resident
(b) a venture capital company or a venture capital fund
Further, consideration received by such startup for shares issued or proposed to be issued to
a specified company shall also be exempt and shall not be included in computing the
aggregate amount of paid up share capital and share premium of twenty five crore rupees.
For this purpose, a specified company means a company whose shares are frequently traded
within the meaning of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011 and whose net worth on the last date of financial year preceding the year in which
shares are issued exceeds one hundred crore rupees or turnover for the financial year
preceding the year in which shares are issued exceeds two hundred fifty crore rupees.
(iii) It has not invested in any of the following assets –
(a) building or land appurtenant thereto, being a residential house, other than that used by
the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary
course of business;
(b) land or building, or both, not being a residential house, other than that occupied by the
Startup for its business or used by it for purposes of renting or held by it as stock-in
trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary course of
business by the Startup where the lending of money is substantial part of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which
exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying,
hiring, leasing or as stock-in-trade, in the ordinary course of business;
(g) jewellery other than that held by the Startup as stock-in-trade in the ordinary course of
business;

(h) any other asset, whether in the nature of capital asset or otherwise, of the nature
specified in section 56(2)(vii)(d)(iv) to (ix) i.e., archaeological collections, drawings,
paintings, sculptures, any work of art or bullion.
However, the Startup should not invest in any of the assets mentioned above for the period
of seven years from the end of the latest financial year in which shares are issued at
premium;
Meaning of Startup:
A company would be considered as Startup if the following conditions are satisifed:
(i) Period – It would be considered as a Startup upto a period of ten years from the date of
incorporation/ registration, if it is incorporated as a private limited company (as defined in the
Companies Act, 2013) in India.
(ii) Turnover limit - Turnover of the company for any of the financial years since
incorporation/registration has not exceeded one hundred crore rupees.
(iii) Object and Purposes - The company is working towards innovation, development or
improvement of products or processes or services, or if it is a scalable business model with a
high potential of employment generation or wealth creation.
However, a private limited company shall not be considered a “Startup”, if it formed by splitting up
or reconstruction of an existing business.
This notification shall be deemed to have come into effect from 19.02.2019.
Note – Accordingly, students are advised to ignore Notifications No. 45/2016 dated 14.6.2016 and
the related paras in page 8.10 of Module 1 of the Study Material and instead, read this notification.
Chapter 15: Deduction, Collection and Recovery of Tax
No tax is required to be deducted at source on interest payable on “Power Finance

Corporation Limited 54EC Capital Gains Bond” and “Indian Railway Fi nance Corporati on
Limited 54EC Capital Gains Bond” - Notification No. 27 & 28/2018, dated 18-06-2018
Section 193 (Interest on securities) provides that the person responsible for paying to a
resident any income by way of interest on securities shall, at the time of credit of such income
to the account of the payee or at the time of payment thereof in cash or by issue of a cheque
or draft or by any other mode, whichever is earlier, deduct income-tax @ 10%, being the rates
in force on the amount of the interest payable.
As per clause (iib) of the proviso to section 193, no tax is required to be deducted at source
from any interest payable on such debentures, issued by any institution or authority, or any

public sector company, or any co-operative society (including a co-operative land mortgage
bank or a co-operative land development bank), as the Central Government may, by
notification in the Official Gazette, specify in this behalf.
Accordingly, the Central Government has, vide this notification, specified -
(i) “Power Finance Corporation Limited 54EC Capital Gains Bond” issued by Power Finance
Corporation Limited {PFCL} and
(ii) “Indian Railway Finance Corporation Limited 54EC Capital Gains Bond” issued by Indian
Railway Finance Corporation Limited {IRFCL}
The benefit of this exemption would, however, be admissible in the case of transfer of such
bonds by endorsement or delivery, only if the transferee informs PFCL/IRFCL by registered
post within a period of sixty days of such transfer.
No tax to be deducted at source under section 194A, in case of Senior Citizens if the
aggregate amount of interest does not exceed ` 50,000 [Notification No. 6/2018, dated
6-12-2018]
Section 194A requires deduction of tax at source on interest other than interest on securities.
However, section 194A(3) provides for exemption from this requirement where such interest
credited or paid or likely to be credited or paid during the Financial Year does not exceed `10,000
and the payer is a banking company, co-operative society engaged in banking business or post
office. In case of a senior citizen (being a resident), however, a higher threshold of `50,000 has
been specified for non-deduction of tax at source in such cases.
Accordingly, as per the third proviso to section 194A(3), no tax is required to be deducted at source
in the case of senior citizens where the amount of interest or the aggregate of the amount of
interest credited or paid during the financial year by a banking company, co-operative society
engaged in banking business or post office does not exceed `50,000. However, it has come to the
notice of the CBDT, that, some tax deductors/banks are making tax deductions even when the
amount of interest does not exceed `50,000.
Under Rule 31A(5) of the Income-tax Rules, 1962, the DGIT (Systems) is authorized to specify
the procedures, formats and standards for the purposes of furnishing and verification of the
statements or claim for refund and shall be responsible for the day-to-day administration in
relation to furnishing and verification of the statements or claim for refund in the manner so
specified.
Accordingly, the Principal Director General of Income-tax (Systems) has, in exercise of the
powers delegated by the CBDT under Rule 31A(5), clarified that no tax deduction at source
under section 194A shall be made in the case of senior citizens where the amount of such inc om e
or the aggregate of the amounts of such income credited or paid during the financial year does not
exceed `50,000.

Housing and Urban Development Corporation Ltd. (HUDCO), New Delhi notified for the
purpose of section 194A(3)((iii)(f) [Notification No. 26/2019, dated 20.03.2019]
Section 194A(3)((iii)(f) provides that no tax is required to be deducted on interest income paid or
credited to such other institution, association or body or class of institutions, associations, or
bodies which is notified by the Central Government. Accordingly, the Central Government has,
vide this notification, notified the Housing and Urban Development Corporation Ltd.(HUDCO),
New Delhi for the purpose of the said section.
Consequent to such notification, no tax need to be deducted at source from interest other th an
interest on securities credited or paid to HUDCO.
Chapter 17: Assessment Procedure
Time limit for making an application for allotment of PAN in respect of certain persons
[Notification No. 82/2018, dated 19-11-2018]
Section 139A(1) lists out the persons, who have not allotted PAN, to apply to the Assessing Officer
for allotment of PAN within such time, as may be prescribed. The time limit for making such
application is prescribed in Rule 114(3).
The Finance Act, 2018 has expanded the list of persons covered under section 139A(1) to inc lude
the persons mentioned in (iv) & (v) in column (2) of the table below, who have not been allotted a
PAN, to apply to the Assessing Officer for allotment of PAN. Accordingly, Rule 114(3) has been
amended vide this notification to provide the time limit (indicated in column (3) of the table below)
for such persons to apply to the Assessing Officer for allotment of PAN.
The table below contains the list of persons mentioned in section 139A(1), who have not been
allotted PAN, to apply for PAN and the time limit for making such application in each such case.
(1) (2) (3)
Persons required to apply for PAN Time limit for making such
application
(i) Every person, if his total income or the total on or before 31st May of the
income of any other person in respect of which he assessment year for which such
is assessable under the Act during any previous income is assessable
year exceeds the maximum amount which is not
chargeable to income-tax
(ii) Every person carrying on any business or before the end of that financial
profession whose total sales, turnover or gross year (previous year).
receipts are or is likely to exceed ` 5 lakhs in any
previous year
(iii) Every person who is required to furnish a return of before the end of the financial
income under section 139(4A) year (previous year).

(iv) Every person being a resident, other than an on or before 31st May of the
individual, which enters into a financial transaction immediately following financial
of an amount aggregating to ` 2,50,000 or more in year
a financial year
(v)Every person who is a managing director, director, on or before 31st May of the
partner, trustee, author, founder, karta, chief immediately following financial
executive officer, principal officer or office bearer year in which the person referred
of any person referred in (iv) above or any person in (iv) enters into financial
competent to act on behalf of such person referred transaction specified therein.
in (iv) above
Quoting of Aadhaar Number mandatory in returns filed on or after 1.4.2019 [Circular No.
6/2019 dated 31.03.2019]
As per section 139AA(1)(ii), with effect from 01.07.2017, every person who is eligible to obtain
Aadhaar number has to quote Aadhaar number in the return of income.
The Apex Court in a series of judgments has upheld the validity of section 139AA. Consequently,
with effect from 01.04.2019, the CBDT clarified that it is mandatory to quote Aadhaar number
while filing the return of income unless specifically exempted as per any notification issued under
section 139AA(3). Thus, returns being filed either electronically or manually on or after 1.4.2019
cannot be filed without quoting the Aadhaar number.
Time limit for intimation of Aadhar Number to Prescribed Authority [Notification No.
31/2019, dated 31.03.2019]
Section 139AA(2) provides that every person who has been allotted Permanent Ac c ount Number
(PAN) as on 1st July, 2017, and who is eligible to obtain Aadhar Number, shall intimate his Aadhar
Number to prescribed authority on or before a date as may be notified by the Central Government.
Accordingly, the Central Government has, vide this notification, notified that every person who
has been allotted permanent account number as on 1st July, 2017, and who is eligible to obtain
Aadhaar number, shall intimate his Aadhaar number to the Principal DGIT (Systems) or Principal
Director of Income-tax (Systems) by 30th September, 2019.
This notification would, however, not be applicable to those persons or such class of persons or
any State or part of any State who/which are/is specifically excluded under section 139AA(3).
Chapter 18: Appeals and Revision
Revision of monetary limits for filing of appeals by the Department before Income Tax
Appellate Tribunal, High Courts and SLPs/appeals before Supreme Court - Circular No.
3/2018, Dated 11-7-2018 and F. No. 279/Misc. 142/2007-ITJ (Pt), Dated 20-8-2018
Circular No. 21/2015 dated 10.12.2015 specified monetary limits and other conditions for filing
departmental appeals (in Income-tax matters) before Income Tax Appellate Tribunal, High
Courts and SLPs/ appeals before Supreme Court.

In supersession of the above Circular, it has been decided by the CBDT that departmental
appeals may be filed on merits before Income Tax Appellate Tribunal and High Courts and
SLPs/ appeals before Supreme Court keeping in view the monetary limits and conditions
specified below.
Henceforth, appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the
monetary limits given hereunder:
S. No. Appeals/ SLPs in Income-tax matters Monetary Limit (`)
1. Before Appellate Tribunal 20,00,000
2. Before High Court 50,00,000
3. Before Supreme Court 1,00,00,000
It is clarified that an appeal should not be filed merely because the tax effect in a case
exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided
on merits of the case.
For further details regarding the meaning of ‘tax effect’ in different situations and methodology
to be followed in such cases, the detailed circular may be referred.
Cases where adverse judgments should be contested on merits even if tax effect is less
than the specified monetary limits
Adverse judgments relating to the issues enumerated hereunder should be contested on
merits notwithstanding that the tax effect entailed is less than the monetary limits specified in
para 3 thereof or there is no tax effect:
(a) Where the Constitutional validity of the provisions of an Act or Rule is under challenge, or
(b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or
ultra vires, or
(c) Where Revenue Audit objection in the case has been accepted by the Department, or
(d) Where addition relates to undisclosed foreign income/undisclosed foreign assets
(including financial assets)/undisclosed foreign bank account.
(e) Where addition is based on information received from external sources in the nature of
law enforcement agencies such as CBI/ED/DRI/SFIO/Directorate General of GST
Intelligence (DGGI).
(f) Cases where prosecution has been filed by the Department and is pending in the Court.

Chapter 22: Liability in Special Cases
Clarification regarding liability and status of Official Assignees under the Income -tax Act,
1961 [Circular No. 4/2019, dated 28-01-2019]
Under provisions of the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act,
1920, where an order of Insolvency is passed against a debtor by the concerned Court, property
of the debtor gets vested with the Court appointed Official Assignee. The Official Assignee then
realizes property of the insolvent and allocates it amongst the creditors of the insolvent.
Consequentially, Official Assignee has the responsibility to handle income-tax matters of the
estate assigned to him.
In this regard, a clarification has been sought regarding applicability of section 160(1)(iii) which
applies on a 'Representative Assessee' in the case of an Official Assignee. Further, clarity
regarding status of the Official Assignee's i.e. their fallibility in the appropriate category of
'persons', as defined in section 2(31), has also been sought.
As per provisions of section 160(1)(iii), a 'Representative Assessee' amongst other situations
specified therein, becomes liable in respect of any income which the Assignee receives or is
entitled to receive while managing the property for benefit of any person. As per the two
insolvency Acts, Official Assignee manages the property of the debtor for the benefit of the
creditors. Further, the Insolvency Act, 1909, in unambiguous terms, provides that an insolvent
ceases to have an ownership interest in the estate once an order of adjudication is made under
section 17 of the Insolvency Act.
Thus, it is clarified by the CBDT that since Official Assignee does not receive the income or
manage the property on behalf of the debtor, they cannot be considered as a 'Representative
Assessee' of the debtor under the Act while computing the tax-liability arising from the estate of
the debtor.
As property of the insolvent is vested with the Official Assignee as per specific provisions of the
Act/Law regulating functioning of the Official Assignee's, they have to be treated as a 'juristic
entity' for purposes of the Income-tax Act. Hence, it is clarified by the CBDT that for purpose of
discharge of tax-liability under the Act, the status of Official Assignees is that of an 'artificial
juridical person' as prescribed in section 2(31)(vii), not being one of the 'persons' falling in sec tion
2(31)(i) to (vi).
Therefore, Official Assignee is required to file income-tax return electronically in the ITR Form
applicable to 'artificial juridical person' separately for each of the estate of the insolvent and the
income shall be taxed as per the rates applicable in a particular year to an 'artificial juridical
person'.
In view of the above position, Official Assignees would have to obtain a separate PAN for each of
the estate of the insolvent.

Chapter 1: Non-resident Taxation
Notification of exceptions, modifications and adaptations under Section 115JH for

applicability of the provisions of the Income-tax Act on a foreign company said to be
resident in India on account of PoEM [Notification No. 29/2018, dated 22-06-2018]
With effect from 1.4.2017, Chapter XII-BC consisting of Section 115JH has been inserted by
the Finance Act, 2016 to provide that where a foreign company is said to be resident in India
in any previous year on account of Place of Effective Management (PoEM) and such foreign
company has not been resident in India in any of the previous years preceding the said
previous year, then, notwithstanding anything contained in this Act and subject to the
conditions as may be notified by the Central Government in this behalf, the provisions of this
Act relating to the computation of total income, treatment of unabsorbed depreciation, set off
or carry forward and set off of losses, collection and recovery and special provisions relating
to avoidance of tax shall apply with such exceptions, modifications and adaptations as may be
specified in that notification for the said previous year.
Accordingly, the Central Government has, vide this Notification, specified the exceptions,
modifications and adaptions subject to which, the provisions of the Act relating to computation
of income, treatment of unabsorbed depreciation, set-off or carry forward and set off of losses,
special provision relating to avoidance of tax and the collection and recovery of taxes shall
apply in a case where a foreign company is said to be resident in India in any previous year on
account of its POEM being in India and the such foreign company has not been resident in
India before the said previous year.
Particulars Provisions
Determination of If the foreign company is assessed to tax in the foreign
opening WDV jurisdiction
Where depreciation is required to be taken into account for
the purpose of computation of its taxable income, the WDV of
the depreciable asset as per the tax record in the foreign country
on the 1st day of the previous year shall be adopted as the opening
WDV for the said previous year.
Where WDV is not available as per tax records, the WDV shall
be calculated assuming that the asset was installed, utilised and
the depreciation was actually allowed as per the provisions of the
laws of that foreign jurisdiction. The WDV so arrived at as on the
1st day of the previous year shall be adopted to be the opening
WDV for the said previous year.
If the foreign company is not assessed to tax in the foreign
jurisdiction
WDV of the depreciable asset as appearing in the books of

account as on the 1 st day of the previous year maintained in

accordance with the laws of that foreign jurisdiction shall be
adopted as the opening WDV for the said previous year.
Brought forward If the foreign company is assessed to tax in the foreign
loss and jurisdiction
unabsorbed Brought forward loss and unabsorbed depreciation as per the tax
depreciation record shall be determined year wise on the 1 st day of the said
previous year.
If the foreign company is not assessed to tax in the foreign
jurisdiction
Brought forward loss and unabsorbed depreciation as per the
books of account prepared in accordance with the laws of that
country shall be determined year wise on the 1st day of the said
previous year.
Other provisions
Such brought forward loss and unabsorbed depreciation shall be
deemed as loss and unabsorbed depreciation brought forward as on
the 1st day of the said previous year and shall be allowed to be set off
and carried forward in accordance with the provisions of the Act for
the remaining period calculated from the year in which they oc c urred
for the first time taking that year as the first year.
However, the losses and unabsorbed depreciation of the foreign
company shall be allowed to be set off only against such income of
the foreign company which has become chargeable to tax in India on
account of it becoming resident in India due to application of POEM.
In cases where the brought forward loss and unabsorbed
depreciation originally adopted in India are revised or modified in
the foreign jurisdiction due to any action of the tax or legal
authority, the amount of the loss and unabsorbed depreciation
shall be revised or modified for the purposes of set off and carry
forward in India.
Period of profit and The foreign company is required to prepare profit and loss account
loss account and and balance sheet for the period starting from the date on which the
balance sheet in accounting year immediately following said accounting year begins,
cases where upto 31st March of the year immediately preceding the period
accounting year of beginning with 1st April and ending on 31st March during which the
foreign company foreign company has become resident.
does not end on The foreign company is also required to prepare profit and loss
31st March account and balance sheet for succeeding periods of twelve months,
beginning from 1st April and ending on 31st March, till the year the
foreign company remains resident in India on account of its POEM.

Examples:
Example 1: If the accounting year of the foreign company is a
calendar year and the company becomes resident in India during
P.Y. 2018-19 for the first time due to its POEM being in India, then,
the company is required to prepare profit and loss account and
balance sheet for the period 1st January, 2018 to 31st March, 2018. It
is also required to prepare profit and loss account and balance sheet
for the period 1st April, 2018 to 31st March, 2019.
For the purpose of carry forward of loss and unabsorbed depreciation
in this case, since the period 1st January, 2018 to 31st March, 2018 is
less than 6 months, it is to be included in the accounting year
immediately preceding the accounting year in which the foreign
company is held to be resident in India for the first time. Accordingly,
the profit and loss and balance sheet of the 15 month period from 1
January, 2017 to 31st March, 2018 is to be prepared.
Example 2: If the accounting year of the foreign company is from 1 st
July to 30th June and the company becomes resident in India during
P.Y. 2018-19 for the first time due to its POEM being in India, then,
the company is required to prepare profit and loss account and
balance sheet for the period 1 st July, 2017 to 31st March, 2018. It is
also required to prepare profit and loss account and balance sheet
for the period 1st April, 2018 to 31st March, 2019.
For the purpose of carry forward of loss and unabsorbed
depreciation in this case, since the period is more than 6 months, it
is to be treated as a separate accounting year.
The loss and unabsorbed depreciation as per tax record or books
of account, as the case may be, of the foreign company shall, be
allocated on proportionate basis.
Applicability of Where more than one provision of Chapter XVII-B of the Act applies to
provisions of the foreign company as resident as well as foreign company, the
Chapter XVII-B provision applicable to the foreign company alone shall apply.
(TDS provisions) Compliance to those provisions of Chapter XVII-B of the Act as are
applicable to the foreign company prior to its becoming Indian resident
shall be considered sufficient compliance to the provisions of said
Chapter.
The provisions of section 195(2) relating to application to Assessing
Officer to determine the appropriate proportion of sum chargeable to
tax shall apply in such manner so as to include payment to the foreign
company.
Availability of The foreign company shall be entitled to relief or deduction of taxes
deduction under paid in accordance with the provisions of section 90 or section 91 of

section 90 or 91 the Act.

(Foreign tax credit) Where income on which foreign tax has been paid or deducted, is
offered to tax in more than one year, credit of foreign tax shall be
allowed across those years in the same proportion in which the
income is offered to tax or assessed to tax in India in respect of the
income to which it relates and shall be in accordance with the
provisions of rule 128 of the Income-tax Rules, 1962.
Non-applicability of The above exceptions, modifications and adaptations shall not
the notification apply in respect of such income of the foreign company which
otherwise would have been chargeable to tax in India, even if the
foreign company had not become Indian resident.
Applicability of the In a case where the foreign company is said to be resident in India
notification where during a previous year, immediately succeeding a previous year
foreign company during which it is said to be resident in India; the exceptions,
becomes resident in modifications and adaptations shall apply to the said previous year
the subsequent subject to the condition that the WDV, the brought forward loss and
previous year also the unabsorbed depreciation to be adopted on the 1st day of the
previous year shall be those which have been arrived at on the last
day of the preceding previous year in accordance with the
provisions of this notification.
No effect on other Any transaction of the foreign company with any other person or entity
transactions under the Act shall not be altered only on the ground that the foreign
company has become Indian resident.
Applicability of Subject to the above exceptions, modifications and adaptions
other provisions specifically provided vide this notification, the foreign company
relating to foreign shall continue to be treated as a foreign company even if it is said
company to be resident in India and all the provisions of the Act shall apply
accordingly. Consequently, the provisions specifically applicable
to-
(i) a foreign company, shall continue to apply to it;
(ii) non-resident persons, shall not apply to it; and
(iii) the provisions specifically applicable to resident, shall apply to it.
Applicability of tax In case of conflict between the provision applicable to the foreign
rate on foreign company as resident and the provision applicable to it as foreign
company company, the later shall generally prevail.
Therefore, the rate of tax in case of foreign company i.e., 40%
shall remain the same, i.e., rate of income-tax applicable to the
foreign company even though residency status of the foreign
company changes from non-resident to resident on the basis of
POEM.

Applicability of This notification shall be deemed to have come into force from 1st
notification April, 2017.
Meaning of foreign The place of incorporation of the foreign company.
jurisdiction
Applicability of rule The rate of exchange for conversion into rupees of value
115 of the Income- expressed in foreign currency, wherever applicable, shall be in
tax Rules, 1962. accordance with provision of rule 115 of the Income-tax Rules,
1962.
Exemption to interest income on specified off-shore Rupee Denominated Bonds [Press
Release, dated 17-09-2018]
Interest payable by an Indian company or a business trust to a non-resident, including a
foreign company, in respect of rupee denominated bond issued outside India before 1.7.2020
is liable for concessional rate of tax of 5%. Consequently, section 194LC provides for the
deduction of tax at a lower rate of 5% on the said interest payment.
Consequent to review of the state of economy on 14.9.2018 by the Prime Minister, the
Finance Minister has announced a multi-pronged strategy to contain the Current Account
Deficit (CAD) and augment the foreign exchange inflow. In this background, low cost foreign
borrowings through off-shore rupee denominated bond have been further incentivised to
increase the foreign exchange inflow.
Accordingly, it has been decided that interest payable by an Indian company or a business
trust to a non-resident, including a foreign company, in respect of rupee denominated bond
issued outside India during the period from 17.9.2018 to 31.3.2019 shall be exempt from tax,
and consequently, no tax shall be deducted on the payment of interest in respect of the said
bond under section 194LC.
Conditions under section 115JG(1) in respect of conversion of Indian branch of foreign
bank into Indian subsidiary company and specification of holding period of a capital asset
which becomes the property of the Indian subsidiary company i n consequence of such
conversion notified [Notification No. 85 & 86/2018, dated 6-12-2018]
Chapter XII-BB comprises of section 115JG which contains “Special provisions relating to
conversion of Indian branch of a foreign bank into a subsidiary Indian company”. Section
115JG inter-alia provides that, in case the conversion of an Indian Branch of foreign bank into
a subsidiary Indian company in accordance with the scheme framed by Reserve Bank of India
and fulfilling the conditions notified by the Central Government, the capital gains arising from
such conversion shall not be chargeable to tax and the provisions of the Income-tax Act, 1961
relating to unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in
respect of tax paid on deemed income relating to certain company and the compu tation of
income in case of foreign company and Indian subsidiary company would apply with such
modification, exception and adaptation as may be specified in the notification.

Accordingly, the Central Government has, vide notification no. 85/2018, specified the
conditions to be fulfilled –
(1) For Capital Gains exemption:
Where a foreign company is engaged in the business of banking through its Indian
branch and converts such Indian branch into its Indian subsidiary company in
accordance with the scheme framed by RBI, the capital gains arising from such
conversion would not be chargeable to tax, if -
(a) the Indian branch amalgamates with the Indian subsidiary company in accordance with
the scheme of amalgamation approved by the shareholders of the foreign c ompany and
the Indian subsidiary company and sanctioned by the RBI1
(b) all the assets and liabilities of the Indian branch immediately before conversion would
become the assets and liabilities of the Indian subsidiary company;
(c) the asset and liabilities of the Indian branch are transferred to the Indian subsidiary
company at values appearing in the books of account of the Indian branch immediately
before its conversion.
Note - Any change in the value of assets consequent to their revaluation would not be
considered while determining the value of the assets.
(d) the foreign bank or its nominee shall hold the whole of the share capital of the Indian
subsidiary company during the period beginning from the date of conversion and ending
on the last day of the previous year in which the conversion took place and continue to
hold the shares of Indian subsidiary company carrying not less than 51% of the voting
power for a period of five years immediately succeeding the said previous year;
(e) the foreign company does not receive any consideration or benefit, directly or indirectly,
in any form or manner, other than by way of allotment of shares in the Indian subsidiary
company.
(2) Application of the provisions of the Income-tax Act, 1961 with
modifications/exceptions
The provisions of the Income-tax Act, 1961 relating to unabsorbed depreciation, set off or
carry forward and set off of losses, tax credit in respect of tax paid on deemed income
relating to certain companies and the computation of income in case of foreign company
and Indian subsidiary company shall apply with following modifications, exceptions and
adaptation –
1 under paragraph 20(h) of the Framework for setting up of wholly owned subsidiaries by foreign banks in
India issued by the Reserve Bank of India vide Press release number 2013-2014/936 dated 6th day of
November, 2013

Purpose Modification/exception/adaptation
(a) Allowance of The aggregate deduction, in respect of depreciation on buildings,
depreciation machinery, plant or furniture, being tangible assets, or know-
under section how, patents, copyrights, trademarks, licences, franchises or any
32 other business or commercial rights of similar nature, being
intangible assets, allowable to the Indian branch and the Indian
subsidiary company shall not exceed in any previous year the
deduction calculated at the prescribed rates as if the conversion
had not taken place.
Such deduction would be apportioned between the Indian branch
and the Indian subsidiary company in the ratio of the number of
days for which the assets were used by them;
(b) Set-off and c/f The accumulated loss and the unabsorbed depreciation of
of loss and the Indian branch would be deemed to be the loss or allowance
depreciation for depreciation of the Indian subsidiary company for the
previous year in which conversion was effected; and provisions
of the Income-tax Act, 1961, relating to set off and carry forward
of loss and allowance for depreciation shall apply accordingly.
(c) Determination The actual cost of the block of assets in the case of the Indian
of actual cost subsidiary company shall be the written down value of the block
u/s 43(1) of assets as in the case of the Indian branch on the date of its
conversion into the Indian subsidiary company
The actual cost of any capital asset on which deduction has
been allowed or is allowable under section 35AD, shall be
treated as 'nil' in the case of the Indian subsidiary company if the
capital asset became the property of the Indian subsidiary
company as a result of conversion of the Indian branch
(d) Cost of Where the capital asset other than those referred to in (c) above
acquisition of became the property of the Indian subsidiary company as a
other capital result of conversion of the Indian branch, the cost of acquisition
assets of the asset for the purposes of computation of capital gains shall
be deemed to be the cost for which the Indian branch acquired it
or, as the case may be, the cost for which previous owner has
acquired it.
(e) Tax credit The tax credit of the Indian branch shall be deemed to be the
tax credit of the Indian subsidiary company for the purpose of the
previous year in which conversion was effected; and the
provisions of section 115JAA of the Income-tax Act, 1961 shall
apply accordingly.
(f) Amortisation of The provisions of 35DDA of the Act shall be, as far as may be,
VRS apply to the Indian subsidiary company, as they would have

Expenditure applied to the Indian branch, if the conversion had not taken
place
(g) Deemed credit The credit balance in the provision for bad and doubtful debts
balance in account made under section 36(1)(viia) of the Indian branch on
provision for the date of conversion shall be deemed to be the credit balanc e
bad and of the Indian subsidiary company and the provisions of section
doubtful debts 36 of the Income-tax Act, 1961, shall apply accordingly
(h) Non- The provisions of section 56(2)(x) shall not apply to the
applicability of transaction of receipt of shares in the Indian subsidiary company
section by the foreign company or its nominee in consequence of the
56(2)(x) conversion of the Indian branch into the Indian subsidiary
company.
Meaning of certain terms (given in bold in the above table):
Term Meaning
Accumulated So much of the loss of the Indian branch before its conversion into Indian
loss subsidiary company under the head “Profits and gains of business or
profession” (not being a loss sustained in a speculation business) which
such Indian branch would have been entitled to carry forward and set off
under the provisions of section 72, if the conversion had not taken place.
Unabsorbed So much of the allowance for depreciation of the Indian branch before its
depreciation conversion into Indian subsidiary company, which remains to be allowed
and which would have been allowed to the Indian branch under the
provisions of the Act, if the conversion had not taken place.
Previous In relation to any capital asset owned by the Indian subsidiary company
owner means the last previous owner of the capital asset who acquired it by a
mode of acquisition other than those referred in section
49(1)(i)/(ii)/(iii)/(iv) or section 115JG(1).
Tax credit So much of the tax credit of the Indian branch before conversion into
Indian subsidiary company which such Indian branch would have been
entitled to carry forward and set off under the provisions of section
115JAA of the Act, if the conversion had not taken place.
Date of The date, which the Reserve Bank of India appoints for the vesting of
conversion undertaking of the Indian branch in Indian subsidiary company2
2 under paragraph 20(i) of the Framework for setting up of wholly owned subsidiaries by foreign banks in
India issued by the Reserve Bank of India vide press release number 2013-2014/936 dated 6th day of
November, 2013.

Further, the CBDT has, vide Notification No. 86/2018, inserted sub-rule (4) in rule 8AA providing for
method of determination of period of holding of capital assets in certain cases. This su b-rule
provides that, in the case of a capital asset which became the property of the Indian subsidiary
company in consequence to conversion of a branch of a foreign company referred to in section
115JG(1), the period for which the asset was held by the said branch of the foreign company and
by the previous owner, if any, who has acquired the capital asset by a mode of acquisition referred
to in clause (i)/(ii)/(iii)/(iv) of section 49(1) or section 115JG(1) shall be included.
Chapter 3: Transfer Pricing & Other Anti-avoidance Measures
Time limit for furnishing of report by constituent entity of an international group, resident in
India specified [Notification No. 88/2018 dated 18-12-2018, Circular No. 9/2018 dated
26-12-2018 and Circular No. 7/2019 dated 08-04-2019]
I. Requirement of furnishing of report by constituent entity of an international group,
resident in India [Section 286(4)]
As per section 286(4), a constituent entity of an international group, resident in India,
other than the parent company or the alternate reporting entity, is required to furnish a
report in respect of the international group for a reporting accounting year within the
prescribed period, if the parent entity is resident of a country or territory –
(i) where the parent entity is not obligated to file the report of the nature referred to in
section 286(2).
(ii) with which India does not have an agreement providing for exchange of the report of the
nature referred to in section 286(2)
(iii) there has been a systemic failure of the country or territory and the said failure has been
intimated by the prescribed authority to such constituent entity.
II. Time limit for furnishing of report by constituent entity [Notification No. 88/2018 dated
18-12-2018 -Rule 10DB(4)]
The CBDT has, accordingly, amended Rule 10DB(4) vide Notification no. 88/2018 to provide
that the constituent entity is required to furnish the report under section 286(4) within twelve
months from the end of the reporting accounting year. However, in case the parent entity of
the constituent entity is resident of a country or territory, where, there has been a systemic
failure of the country or territory and the said failure has been intimated to such constituent
entity, the period for submission of the report would be six months from the end of the month
in which said systemic failure has been intimated.

III. Relaxation in time limit for report to be furnished under section 286(4) in respect of
reporting accounting years ending upto 28.2.2018 [Circular No. 9/2018 dated
26-12-2018]
Representations from the stakeholders were received by the CBDT in the matter, wherein it
has been stated, inter alia, that the constituent entity of an international group, which is
resident in India, having parent entity resident in jurisdictions with which India does not have
an agreement providing for exchange of the report of the nature referred to in section 286(2)
and where the reporting accounting year is calendar year based, i.e., ending on December 31
of the year, would need to furnish the report under section 286(4) in India by 31.12.2018. It
has also been represented that read with the amendment to section 286 and the substituted
rule 10DB(4), the constituent entity in such case for reporting accounting year ending on
31.3.2017 would have been required to furnish the CbCR by 31.3.2018 which is not plausible.
In order to remove the genuine hardship caused as above in furnishing of the report under
section 286(4) read with Rule 10DB(4) and as a one-time measure, the CBDT has, in
exercise of powers conferred under section 119 extended the period for furnishing of said
report by the constituent entities referred to in (i) and (ii) of I. above in respect of reporting
accounting years ending upto 28.2.2018 to 31.3.2019.
IV Relaxation in time limit for constituent entities, whose parent entities are resi dent i n
USA [Circular No. 7/2019 dated 08-04-2019]
The agreement for providing for exchange of the report of the nature referred to in section 286(2)
has been entered into by India and the USA on March 27, 2019. However, the agreement and the
exchange mechanism would come into effect only after both the countries notify each other about
the completion of all internal procedures for exchange which is underway.
Since filing of the report by the constituent entity referred to in section 286(4) [(i) and (ii) of I.
above] in India gets triggered on completion of twelve months from the last date of the
reporting accounting year and Circular 9/2018 has extended the period for furnishing of the
report till March 31, 2019 in respect of reporting accounting years ending upto February 28,
2018, due to non-notification of the agreement and resultantly non-activation of the exchange
mechanism between India and the USA, said report has to be filed by such constituent
entities, whose parent entities are resident in USA and whose reporting accounting years
ended after February 28,2018.
In view of the above, in order to remove the genuine hardship faced by the constituent entities
referred to in (i) and (ii) of I. above, whose parent entities are resident in USA, in furnishing of
the report under section 286(4) read with rule 10DB(4), the CBDT has extended the period for
furnishing of said report by such constituent entities, in respect of reporting accounting years
ending upto April 29, 2018, to April 30, 2019.

SECTION – B: QUESTIONS AND ANSWERS
OBJECTIVE TYPE QUESTIONS
From the options (a), (b), (c) and (d) given in each question, choose the most appropri ate
option.
(i) X Ltd. is engaged in the business of letting out of properties. As per the memorandum of
association of X Ltd., letting out of properties is its main objective. The total income of X
Ltd. comprises only of rental income from the business of letting out of properties. Y Ltd.
is engaged in the construction and sale of properties, which is also its main objective as
per its memorandum of association. Incidentally, it lets out some properties which are
held as stock-in-trade and earns rental income therefrom. Which of the following
statements are correct?
(a) Rental income from letting out of properties by X Ltd. and Y Ltd. is taxable under
the head “Income from house property”
(b) Rental income from letting out of properties by X Ltd. and Y Ltd. is taxable under
the head “Profits and gains of business or profession”
(c) Rental income from letting out of properties by X Ltd. is taxable under the head
“Income from house property” and by Y Ltd is taxable under the head “Profits and
gains of business or profession”
(d) Rental income from letting out of properties by Y Ltd. is taxable under the head
“Income from house property” and X Ltd is taxable under the head “Profits and
gains of business or profession”
(ii) PQ Ltd. is a company having two units – Unit P carries on specified business of setting
up and operating warehousing facility for storage of agricultural produce and Unit Q
carries on specified business of setting up and operating warehousing facility for storage
of edible oil. Unit P commenced operations on 1.4.2017 and claimed deduction of `120
lakhs incurred in April, 2017 on purchase of two buildings for `70 lakhs and `50 lakhs
(for operating warehousing facility for storage of agricultural produce) under section
35AD for A.Y.2018-19. However, in March, 2019, Unit P transferred its building costing
`70 lakhs to Unit Q. What are the tax implications of such transfer in the hands of PQ
Ltd.?
(i) `70 lakhs would be deemed as business income in the hands of PQ Ltd. for
A.Y.2019-20
(ii) `63 lakhs would be deemed as business income in the hands of PQ Ltd. for
A.Y.2019-20
(iii) Actual cost of building for computing depreciation for P.Y.2018-19 would be `70
lakhs

(iv) Actual cost of building for computing depreciation for P.Y.2018-19 would be `63
lakhs
Which of the above statements are correct?
(a) (i) and (iii) above
(b) (i) and (iv) above
(c) (ii) and (iii) above
(d) (ii) and (iv) above.
(iii) XYZ Ltd. engaged in the business of manufacture of steel, claimed deduction under
section 80-IB on the profits and gains of business which included transport subsidy,
interest subsidy and power subsidy received from the Government and duty drawback
receipts. XYZ Ltd. contended that all the above receipts are profits derived from the
business of the industrial undertaking and are hence, eligible for deduction under section
80-IB. Is the contention of XYZ Ltd. correct?
(a) Yes; transport subsidy, interest subsidy, power subsidy and duty drawback are
profits derived from the business of the industrial undertaking and hence, eligible for
deduction under section 80-IB.
(b) No; none of the above receipts can be treated as profits “derived” from the business
of the industrial undertaking and hence, deduction under section 80-IB cannot be
claimed in respect of any such receipt.
(c) No; transport subsidy, interest subsidy and power subsidy received from
Government are profits derived from the business of the industrial undertaking and
hence, eligible for deduction under section 80-IB. However, duty drawbacks belong
to the category of ancillary profits and hence, deduction under section 80-IB cannot
be claimed in respect of such receipt.
(d) No; transport subsidy, interest subsidy and power subsidy received from
Government are ancillary profits and hence, deduction under section 80-IB cannot
be claimed in respect of such receipts. However, duty drawbacks are profits derived
from the business of the industrial undertaking and hence, deduction under section
80-IB can be claimed in respect of such receipt.
(iv) A REIT has distributed `2 crore to its unitholders, which comprises of -
(i) Rental income from real estate property directly held by it `80 lakhs
(ii) Interest income from special purpose vehicle `50 lakhs
(iii) Dividend income from special purpose vehicle `40 lakhs
(iv) Capital gains on disposal of assets `30 lakhs

In this case, the special purpose vehicle is an Indian company, in which REIT holds
100% of shares. Which of the following statements relating to taxability of the above
income are correct?
(1) All the above income are taxable in the hands of REIT. The said income are exempt
in the hands of unit holders.
(2) Only income referred to in (i) and (ii) are taxable in the hands of REIT. Income
referred to in (iii) and (iv) are taxable in the hands of unit holders.
(3) Only income referred to in (i) and (ii) are taxable in the hands of REIT. Income
referred to in (iv) is taxable in the hands of unit holders. Income referred to in (iii) is
exempt both in the hands of REIT and unitholders.
(4) Only income referred to in (iv) is taxable in the hands of REIT. Income referred to in
(i) and (ii) is taxable in the hands of unit holders. Income referred to in (iii) is exempt
both in the hands of REIT and unitholders.
(5) Tax is deductible by REIT from income referred to in (i) and (ii).
(6) Tax is deductible by REIT from income referred to in (iii) and (iv).
(7) Tax is deductible by REIT only from income referred to in (iv)
(8) No tax is deductible by REIT since the entire income is taxable in its hands.
The correct option is –
(a) (1) and (8) above
(b) (2) and (6) above
(c) (3) and (7) above
(d) (4) and (5) above
(v) During the P.Y.2018-19, HelpAid Charitable Trust registered under section 12AA
received donations of `80 lakhs, out of which `10 lakhs were corpus donations and `20
lakhs were anonymous donations. The trust applied `40 lakhs towards its objects during
the P.Y.2018-19. The tax liability of the trust for A.Y.2019-20 is -
(a) `6,24,000
(b) `5,92,800
(c) `5,30,920
(d) `5,97,220
(vi) In the course of search operations under section 132 in May, 2019, Mr. Hari makes a
declaration under section 132(4) on the earning of income in respect of P.Y.2018-19 not
disclosed in the books of account. Mr. Hari explains the manner in which income was
derived and pays the tax, together with interest in respect of such income. However, he

does not disclose such income in his return of income filed on 31.7.2019. Is penalty
leviable in this case, and if so what is the quantum of penalty?
(a) No penalty is leviable since Mr. Hari has made a declaration under section 132(4)
(b) Penalty@10% is leviable
(c) Penalty@30% is leviable
(d) Penalty@60% is leviable.
(vii) A Ltd. filed its return of income for A.Y.2019-20 on 30th September, 2019. The return is
selected for regular assessment under section 143(3). The time limit for service of notice
under section 143(2) in this case is -
(a) 31.3.2020
(b) 30.6.2020
(c) 30.9.2020
(d) 31.3.2021
(viii) Shipcargo Inc., a company based in Netherlands operating its ships to and fro Cochin
port, collected freight of `85 lakhs, demurrage of `5 lakhs and handling charges of `2
lakhs in respect of goods shipped at Cochin port. It incurred expenses of `35 lakhs
during the year for operating its fleet. In respect of goods shipped at Rotterdam,
Netherlands, it received `50 lakhs in India. Its tax liability (rounded off) for the A.Y.2019-
20 is -
(a) `4,21,200
(b) `4,43,040
(c) `3,12,000
(d) `1,77,840
(ix) Mr. Ganesh, a citizen of India, is employed in the Indian embassy in the USA. He is a
non-resident for A.Y.2019-20. He received salary and allowances in the USA from the
Government of India for the year ended 31.3.2019 for services rendered by him in the
USA. In addition, he was allowed perquisites by the Government. Which of the following
statements are correct?
(a) Salary, allowances and perquisites received outside India are not taxable in the
hands of Mr. Ganesh, since he is a non-resident.
(b) Salary, allowances and perquisites received outside India by Mr. Ganesh is taxable
in India since they are deemed to accrue or arise in India.
(c) Salary received by Mr. Ganesh is taxable in India but allowances and perquisites
are exempt.

(d) Salary received by Mr. Ganesh is exempt but allowances and perquisites are
taxable.
(x) Mr. Rajesh, a resident Indian, is an employee of M/s. ABC Ltd., Bangalore. In addition to
the salary income from M/s. ABC Ltd., he also earns interest from fixed deposits. M/s.
PQR Inc., a foreign company not having permanent establishment in India, rendered
online advertisement services to Mr. Rajesh, for which Mr. Rajesh made a payment of `2
lakhs in the F.Y.2018-19. Which of the statements is correct?
(a) The transaction is subject to equalisation levy since payment exceeding `1 lakh has
been made for online advertisement services by a resident to a non-resident not
having permanent establishment in India.
(b) Equalisation levy@6% has to be deducted from the consideration of `2 lakhs
payable to M/s. PQR Inc.
(c) Both (a) and (b)
(d) The transaction is not subject to equalisation levy
DESCRIPTIVE QUESTIONS
1. PQR Ltd. is a company in which the whole of its share capital was held by LMN Ltd. Bo th
PQR Ltd. and LMN Ltd. are Indian companies. PQR Ltd. had made investment in shares
of Berkley Ltd. in 1992 for ` 7,00,000 which it sold to LMN Ltd. on April 1, 2010 for a
consideration of ` 42,00,000.
The fair market value of these shares of Berkley Ltd., as on April 1, 2001 is ` 32,00,000.
LMN Ltd. disinvested 7% of the shares held by it in PQR Ltd., in November 2018 by sale
to public. It sold the shares in Berkley Ltd. acquired by it from PQR Ltd. in February,
2019 for a sum of ` 95,00,000.
Examine the capital gains tax effect of these transactions in the hands of PQR Ltd. and
LMN Ltd. in the relevant assessment years, presuming that the shares of Berkley Ltd. are
unlisted shares.
The cost inflation index for the F.Y.2010-11 is 167 and F.Y.2018-19 is 280.
2. Ms. Janani reports to you that her gross receipt from interior decoration profession
carried on by her during the year ended 31-03-2019 is ` 47,80,000. Her net income as
per income and expenditure account is ` 25,00,000 before adjustment of depreciation of
` 1,50,000. She did not pay any amount by way of advance tax during the financial year
2018-19. She has two residential house properties, of which one is self-occupied for
residence and another is let out for the monthly rent of ` 15,000 during the financial year
2018-19.
Is Janani eligible to opt for presumptive tax provisions, if any, under the Income-tax Act,
1961? If so, is it beneficial for her to opt for such provisions? Advise, assuming that she
approached you for consulting on this matter in April, 2019.

3. Calculate the capital gains/loss on transfer of listed equity shares (STT paid both at the
time of acquisition and transfer of shares) for the A.Y.2019-20, in the following cases:
(i) Mr. Ravi purchased 500 shares in Tapti Ltd. on 15.11.2016 at a cost of `1,200 per
share. The Fair Market Value (FMV) of the share as on 31.1.2018 is `2,300. Ravi
sold all the shares of Tapti Ltd. on 15.5.2018 for `3,000.
(ii) Mr. Giri purchased 700 shares in Narmada Ltd. on 3.12.2016 at a cost of `3,100 per
share. The Fair Market Value (FMV) of the share as on 31.1.2018 is `4,500.
Mr. Giri sold all the shares of Narmada Ltd. on 24.4.2018 for `4,200.
(iii) Mr. Mani purchased 300 shares in Cauvery Ltd. on 12.1.2017 at a cost of `2,500
per share. The Fair Market Value (FMV) of the share as on 31.1.2018 is `1,800.
Mr. Mani sold all the shares of Cauvery Ltd. on 15.7.2018 for `3,200.
(iv) Mr.Sathy purchased 600 shares in Mahanadi Ltd. on 25.1.2017 at a cost of `1,900
per share. The Fair Market Value (FMV) of the share as on 31.1.2018 is `2,400.
Mr. Sathy sold all the shares of Mahanadi Ltd. on 31.1.2019 for `1,700.
4. PQR Ltd. is engaged in the manufacture of multi-layer tubes and other speciality
packaging and plastic products. It came out with an initial public issue of shares during
the year 2017-18 and deposited the share application money received in banks till the
allotment of shares was completed. The company earned interest of `75 lakhs on such
deposits, which it set off against the public issue expenses, while computing total income
for A.Y.2018-19. Accordingly, the company paid the tax on total income, after adjusting
tax deducted at source and advance tax paid, and filed its return of income in
September, 2018. On scrutiny, the Assessing Officer contended that interest of `75 lakhs
is not eligible for set-off against public issue expenses but is taxable under the head
‘Income from Other Sources’. Examine the correctness of contention of the Assessing
Officer.
5. ABC Ltd. has approached the Supreme Court under a special leave petition. There has
been a delay of 439 days in filing the appeal under section 260A for which reason ABC
Ltd. requested for a condonation of delay under section 14 of Limitation Act, 1963. The
company submitted that the delay was on account of pursuing an alternate remedy of
filing a miscellaneous application before the Income-tax Appellate Tribunal (ITAT) under
section 254(2).
From the above facts, examine whether delay in filing appeal under section 260A can be
condoned under section 14 of Limitation Act, 1963 where the stated reason for delay is
the pursuance of an alternate remedy by way of filing an application before the ITAT
under section 254(2) for rectification of mistake apparent on record.
6. (a) HelpAll charitable trust, having its main object as relief of poor, earned agricultural
income of ` 2.80 lakh, dividend income of ` 1.10 lakh and income of ` 1.30 lakh
from mutual funds specified under section 10(23D) during the P.Y.2018-19.

The trust claims exemption under section 10(1), 10(34) and 10(35) in respect of its
agricultural income, dividend income and income from mutual funds, respectively,
without complying with the conditions laid down under section 11. Examine the
correctness or otherwise of the claim of the trust.
(b) HistoSpace charitable trust, having its main object as preservation of monuments of
historic interest, purchased computers for ` 12 lakh in March, 2018 for the purposes
of the trust and claimed the same as application of income in the P.Y.2017-18. It
also claims depreciation @ 40% on such computers for P.Y.2018-19, while
computing income for the purpose of application for that year. Examine the
correctness or otherwise of the claim of the trust.
7. Sigma Ltd., incorporated on 1.4.2017, is a technology enabled eligible start-up engaged
in innovation of processes. The company filed its return of income for A.Y.2019-20 after
claiming deduction of ` 18 lakhs under section 80-IAC. The return was selected for
scrutiny. In the assessment, a sum of ` 7 lakhs, being 30% of ` 21 lakhs, towards
payment of fees for professional services was disallowed for non-deduction of tax at
source by invoking section 40(a)(ia). The Assessing Officer, however, limited the
deduction under section 80-IAC to the original amount claimed by Sigma Ltd. Sigma Ltd.
contended that it was eligible for a higher deduction of ` 25 lakhs under section 80-IAC
consequent to disallowance under section 40(a)(ia). Examine the correctness of
contention of Sigma Ltd.
8. Satpura Ltd. is an Indian company in which 52% of shares are held by Vindhyas Ltd.
Satpura Ltd. declared a dividend amounting to ` 60 lakhs to its shareholders for the
financial year 2017-18 in its Annual General Meeting held on 29th May, 2018. Dividend
distribution tax was paid by Satpura Ltd. on 5th June, 2018. Vindhyas Ltd. declared an
interim dividend amounting to ` 48 lakhs on 2nd December, 2018.
Compute the amount of tax on dividend payable by Vindhyas Ltd., an Indian company.
Would your answer change if Vindhyas Ltd. held 48% of shares of Satpura Ltd?
Examine.
9. The following are the details pertaining to M/s. Aravali, a partnership firm, for the year
ended 31-3-2019:
(i) Gross total income of ` 600 lakhs, which includes a profit of ` 550 lakhs from an
undertaking engaged in an irrigation project.
(ii) The profits of the undertaking are eligible for deduction under section 80-IA. This is
the third year and the deduction available is ` 510 lakhs.
(iii) The firm has undertaken “specified domestic transactions” referred to in section
92BA during the said year and has to obtain a report from an accountant under
section 92E and furnish such report.

Since M/s. Aravali wishes to seek opinion of tax consultants in relation to certain issues
before filing its return of income, it is planning to file its return of income only in the
month of March, 2020. Advise M/s. Aravali the right course of action. You may ignore
interest under section 234A, 234B, 234C and 234F while making your computations in
support of your advice.
10. Godavari Ltd., an Indian Company engaged in manufacture and sale of electrical
appliances in India and abroad, started adoption of Ind AS with effect from 1 st April,
2017. The following particulars are furnished for the year ended 31st March, 2019:-
(a) The book profit after adjustment of all items specified in section 115JB(2) amounted
to ` 87.34 lakhs (except the adjustment for brought forward losses/ unabsorbed
depreciation), for the year ended 31.3.2019.
(b) Brought forward losses as per books are as under : (` In lakhs)
Financial Year Business loss Depreciation
2016-17 8.20 7.60
2017-18 7.30 9.50
(c) The particulars of “Other Comprehensive Income” for the year ended 31.03.2019:
(` In lakhs)
Other Comprehensive Income (OCI) that will not be re-
Debit Credit
classified to profit and loss:
(i) Deferred costs of hedging 3.80
(ii) Changes in fair values of equity instruments 8.00
(iii)Revaluation surplus for assets 8.20
(iv) Deferred gains on cash flow hedges 6.70
(v) Re-measurement of post-employment benefit obligations 5.20
(vi) Share of other comprehensive income of other 2.80
associates
Other Comprehensive Income (OCI) that may be re- Debit Credit
classified to profit and loss:
(i) Deferred gains on cash flow hedges 8.20
(ii) Comprehensive income from discontinued operations 5.30
(iii) Exchange Differences of foreign exchange operations 1.80
(iv) Deferred costs of hedging 0.80

(d) The transition amount as on convergence date (01-04-2017) stood at ` 48 lakhs

(credit balance) including capital reserve of ` 6 lakhs and adjustment of ` 5 lakhs
relating to translation difference in a foreign operation.
(e) The National Company Law Tribunal (NCLT), Mumbai Bench has admitted an
application under section 7 of Insolvency and Bankruptcy Code, 2016 (IBC) made
by financial creditor against the company for initiation of Corporate Insolvency
Resolution Process on 30 th March, 2019.
You are required to compute the MAT liability for the assessment year 2019-20, applying
the provisions relating to Ind AS compliant companies. Assuming that the income tax
under normal provisions of Income-tax Act, 1961 for the assessment year 2019-20 works
out to ` 13.20 lakhs, compute the tax credit, if any, to be carried forward by the company
including the period up to which it will be available to be carried forward.
11. M/s. Uranus LLP filed its return of income for the A.Y. 2016-17 on 23-07-2016. The
assessment u/s 143(3) was completed on 27th April, 2017. T he Assessing Officer made
two additions to the income of the LLP, namely, ` 12 lakhs towards unexplained
investment u/s 69 and ` 4 lakhs u/s 40(b) due to excess interest paid to partners.
The LLP, being aggrieved, contested the addition of ` 12 lakhs under section 69 and
filed an appeal before the Commissioner (Appeals). The appeal was decided on 12th
February, 2019 against the LLP.
In March, 2019, the LLP approaches you to know whether it should apply for revision to
Principal Commissioner u/s 264 or for rectification u/s 154 to the Assessing Officer as
regards disallowance u/s 40(b). You are required to advise the LLP, keeping in mind the
relevant provisions of income-tax law.
12. M/s. Pluto LLP filed its return of income for A.Y.2019-20, declaring total income of `25
lakhs, on 2nd October, 2019. On processing of return, the total income determined under
section 143(1)(a) was `30 lakhs, after disallowing claim for deduction under section
10AA on account of late furnishing of return of income. Thereafter, on scrutiny, the
Assessing Officer made some additions under section 40(a)(ia) and section 43B and
passed an assessment order under section 143(3) assessing total income of `40 lakhs.
Later on, the Assessing Officer noticed that certain income had escaped assessment and
issued notice for reassessment under section 148. The total income reassessed under
section 147 was `45 lakhs.
Considering that none of the additions or disallowances made in the assessment or re -
assessment as above qualifies under section 270A(6), compute the amount of penalty to
be levied under section 270A of the Income-tax Act, 1961 at the time of assessment
under section 143(3) and at the time of reassessment under section 147 (Assume under-
reporting of income is not on account of misreporting).
13. Neptune Inc, a notified Foreign Institutional Investor (FII), derived the following incomes
for the financial year 2018-19:-

(1) Interest received on investment in Rupee Denominated Bonds of ABC Ltd., an

Indian company (investment was made in the F.Y.2017-18) - `8,50,000
(2) Dividend from listed shares of Indian companies – `6,20,000
(3) Interest on securities – `17,32,000 (Expenses of ` 26,000 has been incurred to
earn such income)
(4) Income from sale of securities and shares:
(i) Bonds of Jupiter Ltd.
[Date of purchase 5 May 2015; Date of sale 7 March 2019]
Sale proceeds : ` 47,00,000
Cost of purchase : ` 32,00,000
Cost Inflation Index: F.Y.2015-16:254; F.Y.2018-19:280
(ii) Listed Shares of Earth Ltd.
[Date of purchase – 2 May, 2018; Date of sale – 9 February, 2019]
Sale Consideration ` 12,40,000
Purchase cost ` 7,80,000
[STT paid both at the time of purchase and sale]
(iii) Unlisted equity shares of Mars Ltd.
[Date of purchase – 1 July, 2018; Date of sale – 7 March, 2019]
Sale Consideration ` 8,40,000
Purchase cost ` 3,72,000
Compute the total income and tax liability of the FII, Neptune Inc., for the A.Y. 2019-20,
assuming that no other income is derived by Neptune Inc. during the F.Y.2018-19.
14. Examine the following transactions and discuss whether the transfer price declared by
the following assessees, who have exercised a valid option for application of safe
harbour rules, can be accepted by Income-tax authorities –
(i) Mercury Ltd., an Indian company, provided data processing services to Venus
Inc., which is a specified foreign company in relation to Mercury Ltd. The
aggregate value of such international transactions entered into in the P.Y.2018-
19 is `105 crores. It declared an operating profit margin of `16 crores. Its
operating expenses were `80 crores.
(ii) Jupiter Ltd., an Indian company, provides contract R & D services relating to
software development to Saturn Inc., a US company which guarantees 12% of
the borrowings of Jupiter Ltd. The value of such international transactions
entered into in the P.Y.2018-19 is `190 crores. It declared an operating profit
margin of `40 crores against an operating expenses of `175 crores.

In case it is not binding on the income-tax authorities to accept the transfer price
declared by Mercury Ltd. or Jupiter Ltd., what is the primary adjustment, if any, to be
made by either company in the A.Y.2019-20?
15. Mr. Gopal, aged 50 years, is a resident individual having income from the following sources:
(i) Income from a sole-proprietary business in Pune ` 75 lakhs.
(ii) Share of profit from a partnership firm in Mumbai ` 25 lakhs.
(iii) Agricultural Income (gross) from tea gardens in Country G, a foreign country with whic h
India has no DTAA, CGD 45000. Withholding Tax on the above income CGD 9,000
(iv) Brought forward business loss of F.Y.2015-16 in Country G was CGD 5,000 which
is not permitted to be set off against other income as per the laws of that country.
(v) Mr. Gopal has deposited `1,50,000 in public provident fund and paid medical
insurance premium of `28,000 by account payee cheque to insure the health of
himself and his wife.
Compute total income and tax liability of Mr. Gopal for the A.Y. 2019-20, assuming that 1
CGD = `70.
MOST APPROPRIATE OPTION – OBJECTIVE TYPE QUESTIONS
(i) (d)
(ii) (d)
(iii) (c)
(iv) (d)
(v) (c)
(vi) (d)
(vii) (c)
(viii) (b)
(ix) (c)
(x) (d)
SUGGESTED ANSWERS/HINTS – DESCRIPTIVE QUESTIONS
1. (i) Sale of shares of Berkley Ltd. by PQR Ltd. to LMN Ltd. on 1.4.2010
Since LMN Ltd. is an Indian company which holds 100% of shares of PQR Ltd., the
transfer of capital asset, namely, shares of Berkley Ltd., by PQR Ltd. to LMN Ltd.
would not be treated as a transfer for attracting capital gains tax liability as per
section 47(v).

Hence, no capital gains tax would have been attracted on such transfer in the hands
of PQR Ltd.
(ii) Disinvestment by LMN Ltd., of 7% shares held in PQR Ltd. in November, 2018
As per section 47A(1), where a holding company ceases to hold 100% of shares of
the subsidiary company before the expiry of a period of eight years from the date of
transfer of capital asset, the amount of capital gains not charged to tax at the time
of transfer would be deemed to be income chargeable under the head “Capital
gains” of the previous year in which such transfer took place.
However, in this case, the above deeming provision would not apply because the
eight year period from the date of transfer expires on 31.3.2018 and the
disinvestment by LMN Ltd. of 7% shares held in PQR Ltd. was only in November,
2018.
(iii) Sale of shares of Berkley Ltd. by LMN Ltd. in February 2019
This transaction would attract capital gains tax in the hands of LMN Ltd. for the
A.Y.2019-20. The capital gains would be long-term, since the period of holding is
more than 24 months.
The cost of acquisition to PQR Ltd. in the year 1992 (i.e., ` 7,00,000) or the fair
market value as on 1.4.2001 (` 32,00,000), whichever is higher, would be deemed
as the cost of acquisition in the hands of LMN Ltd.
Computation of capital gains in the hands of LMN Ltd.
Particulars `
Sale consideration 95,00,000
Less: Indexed cost of acquisition [` 32,00,000 x 280/100] 89,60,000
Long-term capital gains 5,40,000
Tax on long-term capital [email protected]% (` 5,40,000 x 20.8%) 1,12,320
2. Since gross receipts of ` 47,80,000 of Ms. Janani from interior decoration profession
carried on by her is less than ` 50,00,000, she can opt for presumptive tax provisions
under section 44ADA.
In such a case, her income from interior decoration profession would be ` 23,90,000,
being 50% of ` 47,80,000. Since all deductions allowable under sections 30 to 38 are
deemed to have been given full effect to, no deduction in respect of depreciation would
be allowable from the income computed on presumptive basis under section 44ADA.

I. Where Ms. Janani declares income from profession on presumptive basis u/s
44ADA
Computation of total income of Ms. Janani
Particulars ` `
Income from house property
Self-occupied property Nil
Let-out Property:
Annual Value [` 15,000 x 12]3 1,80,000
Less: Deduction u/s 24 [30% of ` 1,80,000] 54,000
1,26,000
Profits and gains from business or profession
Income from interior decoration profession
[50% of ` 47,80,000] 23,90,000
Total Income 25,16,000
Computation of tax liability of Ms. Janani
Particulars `
Tax on total income = [30% of ` 15,16,000 5,67,300
(` 25,16,000 – `10,00,000) + ` 1,12,500]
Add: Health and education cess@4% 22,692
Total tax liability 5,89,992
Add: Interest under section 234B [1% of ` 5,89,900 ]
4 5,899
Interest under section 234C [1% of ` 5,89,900, since the
advance tax liability has to be paid in one instalment on or 5,899
before 15.3.2019]
Total tax and interest liability 6,01,790
Ms. Janani can, however, declare lower profits than the presumptive profits of
` 23,90,000, if she maintains books of accounts under section 44AA and gets
the same audited under section 44AB. In such case, she can file return on or
before 30.9.2019.
3 Rent received is taken as Annual Value in the absence of information relating to fair rent, municipal value and
standard rent.
4 Rounded off as per Rule 119A

II Where Ms. Janani declares income from profession as per books of account
Computation of total income of Ms. Janani
Particulars ` `
Income from house property
Self-occupied property Nil
Let-out property:
Annual Value [` 15,000 x 12] 1,80,000
Less: Deduction u/s 24 [30% of ` 1,80,000] 54,000 1,26,000
Profits and gains from business or profession
Income from interior decoration profession
[` 25,00,000 – ` 1,50,000] 23,50,000
Computation of tax liability:
Tax on total income = [30% of ` 14,76,000 (` 24,76,000 – ` 5,55,300
10,00,000) + ` 1,12,500]
Total tax liability 5,77,512
Add: Interest under section 234B [1% of ` 5,77,500] 5,775
Interest under section 234C [See Working Note below]
29,164
Total tax and interest liability 6,12,451
Total tax and interest liability (rounded off) 6,12,450
Although the income from profession computed as per books of account is lower
than the income from profession computed on presumptive basis under section
44ADA, however, the cumulative tax and interest liability would be higher by
` 10,660 (i.e., ` 6,12,450 - ` 6,01,790) in case of the former. Therefore, Ms. Janani
should opt to declare income on presumptive basis under section 44ADA, in which
case, she has to file her return of income on or before 31st July, 2019.
Working Note: Computation of interest under section 234C
Date Advance tax payable Short-fall Rate of interest Interest
till date [1% per month]
(` ) (` )
15.06.2018 15% 86,625 3% [1% x 3] 2,599
15.09.2018 45% 2,59,875 3% [1% x 3] 7,796
15.12.2018 75% 4,33,125 3% [1% x 3] 12,994
15.03.2019 100% 5,77,500 1% 5,775
29,164

Note – The above solution has been worked out by considering that Ms. Janani pays the
advance tax required to be paid in April, 2019 itself, after consulting the tax advisor in the
month of April, 2019.
3. For the purpose of computation of long-term capital gains chargeable to tax under section
112A, the cost of acquisition in relation to the long-term capital asset, being an equity share in
a company or a unit of an equity oriented fund or a unit of a business trust acquired before 1st
February, 2018 shall be the higher of
(i) cost of acquisition of such asset, i.e., actual cost; and
(ii) lower of
(a) the fair market value of such asset; and
(b) the full value of consideration received or accruing as a result of the transfer of
the capital asset.
In the four independent cases given in the question, the shares are long-term capital
asset, since they are held for a period of more than 12 months preceding the date of its
transfer. Accordingly, long-term capital gain/loss on transfer of STT paid listed equity
shares would be determined as follows:
(i) In the case of Mr. Ravi, the cost of acquisition of equity share of Tapti Ltd. would be
` 2,300, being higher of actual cost i.e., ` 1,200 and ` 2,300 (being the lower of
FMV of ` 2,300 as on 31.1.2018 and actual sale consideration of ` 3,000). Thus,
the long-term capital gain would be ` 3,50,000 i.e., (` 3,000 – ` 2,300) x 500
shares.
(ii) In the case of Mr. Giri, the cost of acquisition of equity shares of Narmada Ltd.
would be ` 4,200, being higher of actual cost i.e., ` 3,100 and ` 4,200 (being the
lower of FMV of ` 4,500 as on 31.1.2018 and actual sale consideration of ` 4,200).
Thus, the long-term capital gains would be Nil (` 4,200 – ` 4,200) x 700 shares.
(iii) In the case of Mr. Mani, the cost of acquisition of equity shares of Cauvery Ltd.
Accordingly, the long-term capital gains would be ` 2,10,000 i.e., [(` 3,200 –
` 2,500) x 300].
(iv) In the case of Mr. Sathy, the cost of acquisition of equity shares of Mahanadi Ltd.
The long-term capital loss would be ` 1,20,000 (` 1,700 – ` 1,900) x 600 shares.
4. The issue under consideration is whether the interest income from share application
money is taxable under the head ‘Income from Other Sources’, or can the same be set-
off against public issue expenses.

This issue came up before the Supreme Court in CIT v. Sree Rama Multi Tech Ltd.
[2018] 403 ITR 426. The Supreme Court observed that the assessee-company was
statutorily required to keep share application money in a separate account till the
allotment of shares was completed. Part of the share application money would normally
have to be returned to unsuccessful applicants, and therefore, the entire share
application money would not ultimately be appropriated by the company. The interest
earned was inextricably linked with the requirement of raising share capital.
The Supreme Court further observed that any surplus money deposited in the bank for
the purpose of earning interest is liable to be taxed as “Income from Other Sources”;
however, in this case, the share application money was deposited with the bank not to
make additional income by earning interest but to comply with the statute. The interest
accrued on such deposit is merely incidental. Moreover, the issue of shares relates to
capital structure of the company and hence, expenses incurred in connection with the
issue of shares are to be capitalized. Accordingly, the Supreme Court held that the
accrued interest on deposit of share application money is eligible to be set-off against
public issue expenses.
Applying the rationale of the Supreme Court ruling to the case on hand, the contention of
the Assessing Officer that interest income is taxable under the head “Income from Other
Sources” is not correct.
5. The issue under consideration is whether delay in filing appeal under section 260A can
be condoned under section 14 of the Limitation Act, 1963, where the stated reason for
delay is the pursuance of an alternate remedy by way of filing an application before the
ITAT under section 254(2) for rectification of mistake apparent on record.
This issue came up before the Supreme Court in Spinacom India (P.) Ltd. v. CIT [2018]
258 Taxman 128. The Supreme Court rejected the question of invoking section 14 of the
Limitation Act 1963 which allows condonation of delay on demonstration of sufficient
cause. The Apex Court did not accept the submission that the application before the
ITAT under section 254(2) was an alternate remedy to filing of the application under
section 260A. The former is an application for rectifying a ‘mistake apparent from the
record’ which is much narrower in scope than the latter. Under section 260A, an order of
the ITAT can be challenged on substantial questions of law. The Court stated that the
appellant had the option of filing an appeal under section 260A while also mentioning in
the Memorandum of Appeal that its application under section 254(2) was pending before
the ITAT. The Supreme Court, therefore, held that the time period for filing an appeal
under section 260A does not get suspended on account of the pendency of an
application before the ITAT under section 254(2).
Accordingly, applying the rationale of the above Supreme Court ruling to the facts of this
case, the delay in filing appeal under section 260A due to pursuance of an alternate

remedy by way of filing an application before the ITAT under section 254(2) cannot be
condoned.
6. (a) Section 11(7) provides that where a trust has been granted registration under
section 12AA and the registration is in force for a previous year, then, such trust
cannot claim any exemption under any provision of section 10 [other than
exemption of agricultural income under section 10(1) and exemption available under
section 10(23C)].
Therefore, a charitable trust cannot claim exemption under section 10(35) in respect
of income from mutual funds and exemption under section 10(34) in respect of
dividends, since it has voluntarily opted for the special dispensation under sections
11 to 13, and consequently has to be governed by the provisions of these sections.
Accordingly, it has to apply 85% of such income for charitable purposes to claim
exemption under section 11. However, it can claim exemption under section 10(1) in
respect of agricultural income, since section 11(7) provides an exception in respect
of such income.
Therefore, the claim of HelpAll charitable trust, as regards exemption under section
10(34) and section 10(35), is not correct.
(b) Section 11(6) provides that income for the purposes of application shall be
determined without allowing any deduction for depreciation or otherwise in respect
of any asset, the cost of acquisition of which has been claimed as an application of
income under section 11 in the same or any other previous year.
Accordingly, in this case, since the cost of computers (i.e., ` 12 lakh) has been
claimed and allowed as application of income under section 11 while computing the
income of the trust for the P.Y.2017-18, depreciation on computers will not be
allowed for the purpose of determining income for the purposes of application in the
P.Y.2018-19.
Therefore, the depreciation claim made by HistoSpace charitable trust is not
correct.
7. The issue under consideration in this case is whether the increase in gross total income
on account of disallowance of expenditure under section 40(a)(ia) can be considered for
the purpose of deduction under section 80-IAC.
The Bombay High Court, in CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630,
observed that if, on account of non-deduction of tax at source by a company, expenses
have been disallowed under section 40(a)(ia) which goes to increase the income
chargeable under the head ‘Profits and gains of business or profession’, such enhanced
income becomes eligible for deduction, as profit-linked deduction under Chapter VI-A is
with reference to an assessee’s gross total income.

The High Court held that the company is entitled to claim profit-linked deduction under
Chapter VI-A in respect of the enhanced gross total income as a consequence of
disallowance of expenditure under section 40(a)(ia).
Further, the CBDT has, in its Circular No.37/2016 dated 2.11.2016, mentioned that the
courts have generally held that if the expenditure disallowed is related to the business
activity against which the Chapter VI-A deduction has been claimed, the deduction needs
to be allowed on the enhanced profits. Thus, the settled position is that the
disallowances made under, inter alia, section 40(a)(ia), relating to the business activity
against which the Chapter VI-A deduction has been claimed, result in enhancement of
the profits of the eligible business, and that deduction under Chapter VI-A is admissible
on the profits so enhanced by the disallowance.
Accordingly, applying the rationale of the Bombay High Court ruling and the CBDT
Circular in this regard to the facts of this case, Sigma Ltd. would be entitled to claim
deduction under section 80-IAC in respect of the enhanced profits of ` 25 lakhs,
consequent to disallowance under section 40(a)(ia). The contention of Sigma Ltd. is,
therefore, correct.
8. As per section 115-O, dividend distribution tax at the rate of 17.472% (i.e., 15% plus
surcharge @12% and health and education cess@4%) is leviable on dividend declared,
distributed or paid by a domestic company. As per section 115-O(1A), a holding
company receiving dividend from its domestic subsidiary company can reduce the same
from dividend declared, distributed or paid by it for the purpose of payment of dividend
distribution tax. The dividend from its domestic subsidiary company should be received in
the same financial year in which the holding company declares, distributes or pays the
dividend. Further, the dividend shall not be considered for reduction more than once.
The conditions to be fulfilled for this purpose are as follows:
(1) The domestic subsidiary company should have paid the dividend distribution tax
which is payable on such dividend;
(2) The recipient holding company should be a domestic company;
For this purpose, a holding company is a company which holds more than 50% of the
nominal value of equity shares of another company.
Section 115-O(1B) provides that for the purposes of determining the tax on distributed
profits payable in accordance with section 115-O, any amount by way of dividends
referred to in section 115-O(1), as reduced by the amount referred to in section 115-
O(1A) [referred to as net distributed profits], shall be increased to such amount as would,
after reduction of the tax on such increased amount at the rate specified in section 115 -
O(1), be equal to the net distributed profits.

(i) Where Vindhyas Ltd. holds 52% of shares of Satpura Ltd.

In this case, Vindhyas Ltd. is the holding company of Satpura Ltd. It receives
dividend during the year from its subsidiary company, Satpura Ltd., which has paid
the DDT as payable on such dividend. Accordingly, dividend distributed by the
holding company, Vindhyas Ltd., in the same year to the extent of dividend received
from the subsidiary, Satpura Ltd., shall not be subject to DDT under section 115-O.
Therefore, Vindhyas Ltd. can reduce the amount of dividend received from Satpura
Ltd. from the dividend distributed by it for computation of dividend distribution tax
payable.
On the basis of the aforesaid provisions, dividend distribution tax payable by
Vindhyas Limited shall be computed as follows:
Particulars ` in lakh
Dividend distributed by Vindhyas Ltd. 48.00
Less: Dividend received from subsidiary Satpura Ltd. (52% of ` 60
lakhs) 31.20
Net distributed profits 16.80
Add: Increase for the purpose of grossing up of dividend 16.80 × 2.96
15/85
Gross dividend 19.76
Additional income-tax payable by Vindhyas Ltd. u/s 115-O [15% of 2.96
` 19.76 lakh]
Add: Surcharge@12% 0.36
3.32
Add: Health and education cess@4% 0.13
3.45
Therefore, dividend distribution tax payable by Vindhyas Ltd. shall be 17.472% of
` 19.76 lakhs (grossed up amount) i.e. ` 3.45 lakhs.
(ii) Where Vindhyas Ltd. holds 48% of shares of Satpura Ltd.
In this case, since Vindhyas Ltd. is not the holding company of Satpura Ltd., it
cannot reduce the dividend received from Satpura Ltd. from dividend distributed by
it, for computing dividend distribution tax payable.
Particulars ` in lakh
Dividend distributed by Vindhyas Ltd. 48.00
Add: Increase for the purpose of grossing up of dividend 48 × 15/85 8.47
Gross dividend 56.47

Additional income-tax payable by Vindhyas Ltd. u/s 115-O [15% of 8.47

` 56.47 lakh]
Add: Surcharge@12% 1.02
9.49
9.87
9. As per section 80AC, while computing the total income of an assessee of a previous year
(P.Y. 2018-19, in this case) relevant to any assessment year (A.Y. 2019-20, in this
case), any deduction is admissible, inter alia, under section 80-IA, such deduction shall
not be allowed unless it furnishes a return of income for such assessment year on or
before the due date specified in section 139(1).
Since the partnership firm, M/s. Aravali, has undertaken specified domestic transactions
and has to file transfer pricing report under section 92E for A.Y.2019-20, its due date of
filing return of income for A.Y.2019-20 would be 30th November, 2019 as per section
139(1). Therefore, the difference in tax liability where return is filed on or before
30th November, 2019 and where return is filed in March, 2020 has to be computed to
understand the impact of late filing of return on the tax liability of the firm.
Computation of total income and tax liability of M/s. Aravali for A.Y.2019-20
I. Where the firm files its return of income on 30 th November 2019:
Particulars ` in lakhs
Gross Total Income 600.00
Less: Deduction under section 80-IA 510.00
Total Income _90.00
Tax liability@30% 27.00
Regular income-tax payable 28.08
Computation of Alternate Minimum Tax payable [Section 115JC]
Total Income 90.00
Add: Deduction under section 80-IA 510.00
Adjusted Total Income 600.00
Alternate Minimum Tax (AMT) @ 18.5% on ` 600 lakhs 111.00
Add: Surcharge@12% (Since adjusted total income > ` 1 crore) 13.32
124.32
Total tax payable (AMT) 129.29

Since the regular income-tax payable by the firm is less than the alternate minimum
tax payable, the adjusted total income shall be deemed to be the total income of the
firm for P.Y.2018-19 and it shall be liable to pay income-tax on such total
[email protected]% [Section 115JC(1)]. Therefore, the tax payable for the A.Y.2019-20
would be ` 129.29 lakhs.
Tax credit for Alternate Minimum Tax [Section 115JD] ` in lakhs
Total tax payable for A.Y.2019-20 (Alternate Minimum Tax) 129.29
Less: Regular income-tax payable 28.08
To be carried forward for set-off against regular income-tax 101.21
payable (upto a maximum of fifteen assessment years).
II. Where the firm files its return of income in March, 2020:
Where the firm files its return in March, 2020, it would be a belated return under
section 139(4). Consequently, as per section 80AC, deduction under section 80-IA
would not be available. In such circumstances, the gross total income of ` 600
lakhs would be the total income of the firm.
Particulars ` in lakhs
Income-tax@30% of ` 600 lakhs 180.000
Add: Surcharge@12% (since total income exceeds ` 100 lakhs) 21.600
Income-tax (plus surcharge) 201.600
Total tax liability 209.664
Right course of action to minimize tax liability
The right course of action to minimize tax liability would be to file the return of
income under section 139(1) on or before the due date 30.11.2019 and claim
deduction under section 80-IA. In such a case, the firm can claim deduction of
` 510 lakhs under section 80-IA. Thereafter, consequent to the clarifications
obtained, if any change is required, it can file a revised return under section 139(5)
within 31.3.2020 (i.e., within the end of A.Y.2019-20) which would replace the
original return filed under section 139(1). A revised return filed under section 139(5)
would replace the original return filed under section 139(1).
If the firm files the return of income under section 139(1) on or before 30.11.2019,
its tax liability would stand reduced to ` 129.29 lakhs, as against ` 209.664 lakhs to
be paid if return is furnished after due date. Further, it would also be eligible for tax
credit for alternate minimum tax under section 115JD to the extent of ` 101.21
lakhs. Therefore, the firm is advised to file its return of income on or before
30.11.2019.

10. Computation of MAT liability of Godavari Ltd. under section 115JB for A.Y.2019-20
Particulars ` `
Book profit after adjustment of items under section 115JB(2) 87,34,000
[except brought forward business loss and unabsorbed
depreciation]
Less: Brought forward business loss [` 8,20,000 + ` 7,30,000] 15,50,000
Unabsorbed depreciation [` 7,60,000 + ` 9,50,000] 17,10,000
[Since Godavari Ltd. is a company against which an 32,60,000
application for corporate insolvency resolution process
has been admitted by NCLT under section 7 of the
Insolvency and Bankruptcy Code, 2016, the amount of
total loss brought forward (including unabsorbed
depreciation) is allowed to be reduced from the book profit
for the purposes of levy of MAT under section 115JB].
Book profit computed in accordance with Explanation 1 to 54,74,000
section 115JB(2)
Add: Items credited to OCI that will not be reclassified to
profit or loss:
Deferred gains on cash flow hedges 6,70,000
Share of Other Comprehensive Income of Other Associates 2,80,000
Re-measurement of post-employment benefit obligations 5,20,000
Revaluation surplus for assets ` 8,20,000 [Book profit not to
be increased by revaluation surplus for assets as per proviso Nil
to section 115JB(2A)]
14,70,000
69,44,000
Less: Items debited to OCI that will not be reclassified to
profit or loss:
Deferred costs of hedging 3,80,000
Changes in fair values of equity instruments ` 8,00,000
[Book profit not to be decreased by changes in fair
values of equity instruments as per proviso to section ______Nil
115JB(2A)]
3,80,000
65,64,000
Add: One-fifth of Transition amount [Credit Balance]
Transition amount 48,00,000

Less: Amounts to be excluded from above

Capital Reserve 6,00,000
Translation difference in foreign operations 5,00,000
37,00,000
One-fifth of ` 37,00,000 7,40,000
Book Profit for levy of MAT 73,04,000
MAT on book profit under section 115JB = 18.5% of ` 73,04,000 13,51,240
MAT liability for A.Y.2019-20
14,05,290
Computation of tax credit to be carried forward
Particulars `
MAT liability for A.Y.2019-20 (rounded off) 14,05,290
Income-tax computed as per the normal provisions of the Act for A.Y.2019-20 13,20,000
Since the income-tax liability computed as per the regular provisions of the
Income-tax Act,1961 is less than the MAT payable, the book profit would be
deemed to be the total income and tax is leviable @18.5%: The total tax liability
(rounded off) is ` 14,05,290.
Computation of tax credit to be carried forward
Tax payable for A.Y.2019-20 on deemed total income 14,05,290
Less: Income-tax payable as per the normal provisions of the Act 13,20,000
Tax credit in respect of tax paid on deemed income 85,290
[Can be carried forward for 15 Assessment Years i.e., upto A.Y.2034-35]
11. Section 264(4)(c) provides that the Principal Commissioner or Commissioner has no
power to revise any order which has been made the subject matter of an appeal to the
Commissioner (Appeals), even if the relief claimed in the petition is different from the
relief claimed in appeal. The concept of total merger would apply in the case of section
264. It was so held by the Supreme Court in the case of Hindustan Aeronautics Ltd v. CIT
(2000) 243 ITR 898.
Section 154(1A) provides that where any matter had been considered and decided in any
proceeding by way of appeal or revision relating to an order, Assessing Officer may
amend the order for rectification of mistake apparent from the record, in relation to a
matter other than the matter which has been considered and decided. The concept of
partial merger would apply in the case of section 154.

In the present case, since the order passed by the Assessing Officer in respect of the
addition of unexplained investment of ` 12 lakhs became the subject matter of an appeal
to the Commissioner (Appeals), the assessee, M/s. Uranus LLP, cannot apply for revision
under section 264 even if the subject matter of revision i.e., addition of ` 4 lakhs under
section 40(b) is different from the subject matter of appeal.
However, M/s. Uranus LLP can apply to the Assessing Officer for rectification of the order
in respect of addition of ` 4 lakh under section 40(b), if the mistake is apparent from the
record, as this matter has not been considered and decided in any proceeding by way of
appeal or revision.
In the view of above, the assessee, M/s. Uranus LLP should seek rectification under
section 154.
12. M/s. Pluto LLP is deemed to have under-reported its income since:
(1) its income assessed under 143(3) exceeds its income determined in a return
processed under section 143(1)(a); and
(2) the income reassessed under section 147 exceeds the income assessed under
section 143(3).
Therefore, penalty is leviable under section 270A for under-reporting of income.
Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Total income assessed under section 143(3) 40,00,000
(-) Total income determined u/s 143(1)(a) 30,00,000
10,00,000
Tax payable on under-reported income:
Tax on under-reported income of ` 10 lakhs plus tax on
total income of ` 30 lakhs determined u/s 143(1)(a) 12,48,000
[30% of ` 40 lakh + HEC@4%]
Less: Tax on total income determined u/s 143(1)(a) 9,36,000
[30% of ` 30 lakh +HEC@4%]
3,12,000
Penalty leviable@50% of tax payable 1,56,000
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 45,00,000
(-) Total income assessed under section 143(3) 40,00,000
5,00,000

Tax payable on under-reported income:

Tax on under-reported income of ` 5 lakhs plus tax on
total income of ` 40 lakhs assessed u/s 143(3) [30% of 14,04,000
` 45 lakh + HEC@4%]
Less: Tax on total income assessed u/s 143(3) [30% of
` 40 lakh + HEC@4%] 12,48,000
1,56,000
Penalty leviable@50% of tax payable 78,000
13. Computation of total income of Neptune Inc., a notified FII, for A.Y.2019-20
Particulars ` `
Interest on Rupee Denominated Bonds 8,50,000
Dividend income of ` 6,20,000 [Exempt under section 10(34)] Nil
Interest on securities [No deduction is allowable in respect of
expenses incurred in respect thereof] 17,32,000 25,82,000
Long-term capital gains on sale of bonds of Jupiter Ltd.

Less: Cost of acquisition 32,00,000
[Benefit of indexation is not allowable] 15,00,000
Short-term capital gains on sale of STT paid equity shares
of Earth Ltd.
Less: Cost of acquisition 7,80,000 4,60,000
Short-term capital gains on sale on unlisted equity shares
of Mars Ltd.
Less: Cost of acquisition 3,72,000 4,68,000
Computation of tax liability of Neptune Inc. for A.Y.2019-20

Particulars `
Tax@5% on interest of ` 8,50,000 received from an Indian company on 42,500
investment in rupee denominated bonds = 5% x ` 8,50,000
Tax@20% on interest on securities of ` 17,32,000 =20% x ` 17,32,000 3,46,400

Tax@10% on long-term capital gains on sale of bonds of Jupiter Ltd. = 10% x 1,50,000
` 15,00,000
Tax@15% on short-term capital gains on sale of listed equity shares of Earth
Ltd., in respect of which STT has been paid = 15% of ` 4,60,000 69,000
Tax@30% on short-term capital gains on sale of unlisted equity shares of
Mars Ltd. = 30% of ` 4,68,000 1,40,400
7,48,300
Add: HEC@4% 29,932
Tax Liability 7,78,232
Tax Liability (rounded off) 7,78,230
14. (i) Venus Inc. is a specified foreign company in relation to Mercury Ltd. Therefore, the
condition of Mercury Ltd. holding shares carrying not less than 26% of the voting
power in Venus Inc is satisfied. Hence, Venus Inc. and Mercury Ltd. are deemed to
be associated enterprises as per section 92A(2). Therefore, provision of data
processing services by Mercury Ltd., an Indian company, to Venus Inc., a foreign
company, is an international transaction between associated enterprises, and
consequently, the provisions of transfer pricing are attracted in this case.
Data processing services with the use of information technology falls within the
definition of “information technology enabled services”, and is hence, an eligible
international transaction. Since Mercury Ltd. is providing data processing services
to a non-resident associated enterprise and has exercised a valid option for safe
harbour rules, it is an eligible assessee.
Since the aggregate value of transactions entered into in the P.Y.2018-19 exceeds
` 100 crore but does not exceed ` 200 crore, Mercury Ltd. should have declared an
operating profit margin of not less than 18% in relation to operating expense, to be
covered within the scope of safe harbour rules. In this case, since Mercury Ltd. has
 16 
declared an operating profit margin of 20%  i.e. 100  , the same is in
 80 
accordance with the circumstance mentioned in Rule 10TD. Hence, the income-tax
authorities shall accept the transfer price declared by Mercury Ltd in respect of such
international transaction.
Therefore, Mercury Ltd. need not make any primary adjustment.
(ii) Saturn Inc., a foreign company, guarantees 12% of the total borrowings of Jupiter
Ltd., an Indian company. Since Saturn Inc. guarantees not less than 10% of the
total borrowings of Jupiter Ltd., Saturn Inc. and Jupiter Ltd. are deemed to be
associated enterprises as per section 90A(2). Therefore, provision of contract R & D

services relating to software development by Jupiter Ltd., an Indian company, to

Saturn Inc., a foreign company, is an international transaction between associated
enterprises, and consequently, the provisions of transfer pricing are attracted in this
case.
Provision of contract R& D services in relation to software development is an
eligible international transaction. Since Jupiter Ltd. is providing such services to a
non-resident associated enterprise and has exercised a valid option for safe
harbour rules, it is an eligible assessee.
Sinc e the value of the international transaction does not e xc eed ` 2 0 0 c ror e,
Jupiter Ltd. should have declared an operating profit m a rgi n o f n ot l es s t h a n
24% in relation to operating expense, to be covered wit h in t h e s c op e o f s a fe
harbour rules. In this c ase, since Jupiter Ltd. has declared an oper at ing p r of it
 40 
m argin of 22.86%  i.e. 100  , the sam e is not in ac c ordanc e with the
 175 
c ircumstance m entioned in Rule 10TD. Hence, it is not binding on the i nc om e-
tax authorities to accept the transfer price declared by Jupiter Ltd.
Jupiter Ltd. has to, therefore, m ake a primary adjustment of `2 crores [i.e., ` 42
c rores, being 24% of ` 175 c rores – ` 40 c rores] in the A.Y.2019-20.
15. Computation of total income and tax liability of Mr. Gopal for A.Y. 2019-20
Particulars ` `
Profits and gains from business and profession
Income from sole proprietary concern in India 75,00,000
Share of profit from a partnership firm in India of ` 25
lakhs, is exempt Nil
Business profit 75,00,000
Less: Business Loss5 in Country G (CGD 5000 x 3,50,000
` 70/CGD) 71,50,000
Income from Other Sources
Agricultural income from tea gardens in Country G, is
taxable in India (CGD 45000 x ` 70/CGD) 31,50,000
Gross Total Income 1,03,00,000
5 Since the eight year has not expired from the assessment year in which such business loss was incurred, such
business loss can be set-off against current year business income.

Less: Deductions under Chapter VI-A

Under section 80C [deposit in PPF] 1,50,000
Under section 80D 25,000
[Medi-claim premium paid `28,000, restricted to 1,75,000
Total Income 1,01,25,000
Tax on total income
Tax on ` 1,01,25,000 [(30% x ` 91,25,000) plus 28,50,000
` 1,12,500]
Add: Surcharge@15%, since total income exceeds ` 1 4,27,500
crore
32,77,500
Less: Marginal Relief (See Working Note below) 58,750
32,18,750
Add: HEC@4% 1,28,750
33,47,500
Average rate of tax in India 33.06%
[i.e., ` 33,47,500/` 1,01,25,000 x 100]
Average rate of tax in Country G 20%
[i.e., CGD 9000/CGD 45000]
Doubly taxed income [` 31,50,000 – ` 3,50,000] 28,00,000
Rebate under section 91 on ` 28,00,000 @20%
(lower of average Indian tax rate and rate of tax in Country 5,60,000
G)
Tax payable in India [` 33,47,500 – ` 5,60,000] 27,87,500
Note: Since Mr. Gopal is resident in India for the P.Y.2018-19, his global income would
be subject to tax in India. He is eligible for deduction under section 91 since the following
conditions are fulfilled:-
(a) He is a resident in India during the relevant previous year.
(b) Agricultural income accrues or arises to him outside India during that previous year.
(c) Such agricultural income is not deemed to accrue or arise in India during the
previous year.
(d) The income in question i.e., agricultural income, has been subjected to income-tax
in Country G in his hands and he has paid tax on such income in Country G.

(e) There is no agreement under section 90 for the relief or avoidance of double
taxation between India and Country G, where the income has accrued or arisen.
Working Note : Computation of Marginal Relief
(A) Tax payable including surcharge on total income of ` 1,01,25,000
` 2,50,000 – ` 5,00,000@5% ` 12,500
` 5,00,000 – ` 10,00,000@20% ` 1,00,000
` 10,00,000 – ` 1,01,25,000@30% ` 27,37,500
Total ` 28,50,000
Add: Surcharge @ 15% ` 4,27,500 ` 32,77,500
(B) Tax payable on total income of ` 1 crore [(` 12,500 plus
` 1,00,000 plus ` 27,00,000) plus surcharge@10%] ` 30,93,750
(C) Excess tax payable (A)-(B) ` 1,83,750
(D) Marginal Relief (` 1,83,750 – ` 1,25,000, being the amount
of income in excess of ` 1,00,00,000) ` 58,750

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PAPER 7: DIRECT TAX LAWS

SECTION – A: STATUTORY UPDATE

Chapter 3: Income which do not form part of Total Income

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Chapter 6: Profits and gains of business or profession

Notification of transactions in equity shares in respect of which the condition of

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

framed under the Securities and Exchange

© The Institute of Chartered Accountants of India

preceding the date on which

Chapter 8: Income from Other Sources

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Chapter 15: Deduction, Collection and Recovery of Tax

No tax is required to be deducted at source on interest payable on “Power Finance

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Chapter 22: Liability in Special Cases

© The Institute of Chartered Accountants of India

STUDY MATERIAL MODULE-4

Chapter 1: Non-resident Taxation

Notification of exceptions, modifications and adaptations under Section 115JH for

© The Institute of Chartered Accountants of India

account as on the 1 st day of the previous year maintained in

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

section 90 or 91 the Act.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

SECTION – B: QUESTIONS AND ANSWERS

OBJECTIVE TYPE QUESTIONS

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(d) The transition amount as on convergence date (01-04-2017) stood at ` 48 lakhs

© The Institute of Chartered Accountants of India

(1) Interest received on investment in Rupee Denominated Bonds of ABC Ltd., an

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India