© The Institute of Chartered Accountants of India

Test Series: October, 2018
MOCK TEST PAPER - 2

FINAL (NEW) COURSE: GROUP – II
PAPER – 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION
SOLUTIONS
1. (a) (i) Computation of total income and tax liability of Sai LLP for A.Y.2018-19 (under the
regular provisions of the Income-tax Act, 1961)
Particulars Rs. Rs.
Profits and gains of business or profession
Unit in SEZ 40,00,000
Less: Deduction under section 10AA [See Note (1) below] 32,00,000
Business income of SEZ unit chargeable to tax 8,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Deduction under section 35AD [See Note (2) below] 65,00,000
Business income of warehousing facility chargeable to tax 40,00,000
Total Income 48,00,000
Computation of tax liability (under the normal/regular
provisions)
Tax@30% on Rs. 48,00,000 14,40,000
Add: Education cess@2% and SHEC@1% 43,200
Total tax liability 14,83,200
Computation of adjusted total income of Sai LLP for levy of Alternate Minimum Tax
Particulars Rs. Rs.
Total Income (as computed above) 48,00,000
Add: Deduction under section 10AA 32,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @10% of Rs. 65 lakhs1 6,50,000 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum [email protected]% 25,62,250
Add: Surcharge@12% (since adjusted total income > Rs.1 3,07,470
crore)
28,69,720
Add: Education cess@2% and SHEC@1% 86,092
29,55,812
Tax liability under section 115JC (rounded off) 29,55,810
1 Assuming the capital expenditure of Rs.65 lakhs is incurred entirely on buildings
© The Institute of Chartered Accountants of India

Since the regular income-tax payable is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total income and tax is leviable @18.5%
thereof plus surcharge@12% and cess@3%. Therefore, the tax liability is Rs. 29,55,810.
AMT Credit to be carried forward under section 115JEE Rs.
Tax liability under section 115JC 29,55,810
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 14,83,200
14,72,610
Notes:
(1) Deduction under section 10AA in respect of Unit in SEZ =
Export turnover of the Unit in SEZ
Profit of the Unit in SEZ ×
Total turnover of the Unit in SEZ
Rs.80,00,000
Rs.40,00,000 × = Rs.32,00,000
Rs.1,00,00,000
(2) Deduction@100% of the capital expenditure is available under section 35AD for A.Y.
2018-19 in respect of specified business of setting up and operating a warehousing
facility for storage of agricultural produce which commences operation on or after
01.04.2009.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such
specified business, shall be allowed as deduction during the previous year in which he
commences operations of his specified business if the expenditure is incurred prior to
the commencement of its operations and the amount is capitalized in the books of
account of the assessee on the date of commencement of its operations.
Deduction under section 35AD would, however, not be available on expenditure incurred
on acquisition of land.
In this case, since the capital expenditure of Rs. 65 lakhs (i.e., Rs. 75 lakhs – Rs. 10
lakhs, being expenditure on acquisition of land) has been incurred in the F.Y.2016 -17
and capitalized in the books of account on 1.4.2017, being the date when the warehouse
became operational, Rs. 65,00,000, being 100% of Rs. 65 lakhs would qualify for
deduction under section 35AD.
(ii) Statement showing computation of depreciation allowable to
X Ltd. & Y Ltd. for A.Y. 2018-19
Particulars Rs.
Written down value (WDV) as on 1.4.2017 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on Rs. 40,00,000 @ 15% 6,00,000
Depreciation on Rs. 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:
(a) Amalgamating company, X Ltd.
Rs. 6,00,000 × 275/365 4,52,055

Rs. 1,08,000 × 61/151 43,629
4,95,684
(b) Amalgamated company, Y Ltd.
Rs. 6,00,000 × 90/365 1,47,945
Rs. 1,08,000 × 90/151 64,371
2,12,316
Notes:
(i) The aggregate deduction, in respect of depreciation allowable to the amalgamating
company and amalgamated company in the case of amalgamation shall not exceed in
any case, the deduction calculated at the prescribed rates as if the amalgamation had
not taken place. Such deduction shall be apportioned between the amalgamating
company and the amalgamated company in the ratio of the number of days for which the
assets were used by them.
(ii) The price at which the assets were transferred, i.e., Rs. 60 lacs, has no implication in
computing eligible depreciation.
(b) (i) Fees for technical services is taxable under section 9(1)(vii). In this case, the separate
payments made towards drawings and designs (described as “engineering fee”) are in the
nature of fee for technical services and, therefore, it is taxable in India by virtue of section
9(1)(vii) [Aeg Aktiengesllschaft v. CIT (2004) 267 ITR 209 (Kar.)].
As per Explanation to section 9, where income is deemed to accrue or arise in India under
section 9(1)(vii), such income shall be included in the total income of the non-resident
Australian company, regardless of whether it has a residence or place of business or business
connection in India or not.
(ii) As per section 9(1)(i), all income accruing or arising, whether directly or indirectly, through or
from any business connection in India is deemed to accrue or arise in India.
In this case, there was a professional connection between the firm of solicitors in Delhi and
the barrister in Canada. The expression “business” includes not only trade and manufacture;
it includes, within its scope, “profession” as well. Therefore, the existence of professional
connection amounts to existence of “business connection” under section 9(1)(i). It was so
held by the Supreme Court in Barendra Prasad Roy v. ITO (1981) 129 ITR 295.
Hence, the amount of 5,000 Canadian Dollars paid to the barrister in Canada as per the terms
of the professional engagement constitutes income which is deemed to accrue or arise in
India under section 9(1)(i). Hence, it is taxable in India.
Note – Since he has represented a case in India, income can also be said to accrue or arise
in India.
(iii) Rs. 20 lakhs, being the value of debentures issued by an Indian company in consideration of
providing technical know-how, is in the nature of fee for technical services, deemed to accrue
or arise in India to Dream Engineering, a non-resident foreign company, under section
9(1)(vii). Hence, it is taxable in India.
Further, as per section 9(1)(v), income by way of interest payable by a person who is a
resident of India is deemed to accrue or arise in India. Therefore, interes t income from
debentures of an Indian company is deemed to accrue or arise in India in the hands of Dream
Engineering by virtue of section 9(1)(v). Hence, it is taxable in India.

Note – Since the question specifically requires the candidates to examine the taxability of the
above transactions under section 9, the provisions of double taxation avoidance agreement, if any,
applicable in the above cases, have not been taken into consideration.
2 (a) Computation of Total Income of Avantika Hospitality Ltd. for the A.Y.2018-19
Particulars Amount (Rs.)
Profit as per Statement of profit and loss 1,52,00,000
Add: Items debited but to be considered separately or to be
disallowed
(i) Payment to middleman for purchase of crab etc. in an 30,000
amount exceeding Rs. 10,000
[Under section 40A(3), disallowance is attracted in respect
of expenditure for which cash payment exceeding
Rs. 10,000 is made on a day to a person. Payment of
Rs. 25,000 to fishermen for purchase of crab etc. is covered
by exception under Rule 6DD. However, payment of
Rs. 30,000 to middlemen for purchase of crab etc. is not
covered under the exception - CBDT Circular 10/2008 dated
5/12/2008].
(ii) Contribution towards employees’ pension scheme in excess 50,000
of 10% of salary disallowed under section 40A(9)
[Contribution to the extent of 10% of salary (basic salary +
dearness allowance, if it forms part of pay for retirement
benefits) is allowable as deduction under section 36(1)(iva).
In this case, it is presumed that dearness allowance forms
part of pay for retirement benefits]
(iii) Payment to transport contractor without deduction of tax at -
source
[Since the contractor opts for presumptive taxation under
section 44AE and furnished a declaration to this effect, tax is
not required to be deducted at source under section 194C in
respect of payment to transport contractor].
(vi) Expenses on foreign travel of two directors for a 10,00,000
collaboration agreement which failed to materialize
[Where expenditure is incurred for a project not related the
existing business and the project was abandoned without
creating a new asset, the expenses are capital in nature as
per Mc Gaw-Ravindra Laboratories (India) Ltd. v. CIT (1994)
210 ITR 1002 (Guj.). Brewery project is not related to the
existing business of running three star hotels]
(vii) Fees paid to directors without deducting tax at source [30% 30,000 11,10,000
of Rs. 1 lakh]
[Disallowance@30% would be attracted under section
40(a)(ia) for non-deduction of tax at source from director’s
remuneration on which tax is deductible under section 194J]
1,63,10,000
Less: Items credited but to be considered separately or not
taxable/Expenditure to be allowed

(iv) Profit on sale of plot of land to 100% subsidiary 12,00,000
[Short-term capital gains arises on sale of plot of land
held for less than 24 months. However, in this case, since
the transfer is to a 100% subsidiary company and the
subsidiary company is an Indian company, the same would
not constitute a transfer for levy of capital gains tax as per
section 47(iv). Since this amount has been credited to the
statement of profit and loss, the same has to be deducted for
computing business income].
(v) Contribution to IIT for scientific research 1,25,000
[Contribution to IIT for scientific research programme
approved by the prescribed authority qualifies for weighted
deduction@150% under section 35(2AA). Since 100% of
contribution has already been debited to the statement of
profit and loss, the balance 50% has to be deducted while
computing business income].
(viii) Depreciation 5,00,000
[Depreciation allowable under the Income-tax Act, 1961 is
Rs.15 lakhs whereas the depreciation as per books of
account debited to the statement of profit and loss is Rs. 10
lakhs. Hence, the additional amount of Rs. 5 lakhs has to be
deducted while computing business income]
(ix) Additional compensation received from State Government 10,00,000
[Since the additional compensation has been received
pursuant to an interim order of the Court, the same would be
deemed as income chargeable to tax under the head “Capital
Gains” in the year of final order as per section 45(5). Since
the compensation has been credited to the statement of
profit and loss, the same has to be deducted while computing
business income]
(x) Dividend received from foreign company 5,00,000
[Dividend received from foreign company is taxable under
the head “Income from other sources”. Since the said
dividend has been credited to the statement of profit and
loss, the same has to be deducted while computing business
income]
(I) Interest paid during the year 2,00,000
[Conversion of unpaid interest into loan shall not be
construed as payment of interest for the purpose section
43B. The amount of unpaid interest converted into a new
loan will be allowable as deduction only in the year in which
such converted loan is actually paid. Since Rs. 2 lakhs has
been paid in the P.Y.2017-18, the same is allowable as
deduction]
(III) Purchases omitted to be recorded in the books 2,00,000 37,25,000
[Since the purchase is made in March, 2018 (i.e., P.Y.2017-
18), in respect of which bill of Rs. 2 lakhs received on
31.3.2018 has been omitted to be recorded in the books in
that year, it has to be deducted to compute the business
income [Kedarnath Jute Manufacturing Company Ltd. v. CIT
5

(1971) 82 ITR 363 (SC)]. It is logical to assume that the
company is following mercantile system of accounting.].
Income under the head “Profits and Gains of Business or 1,25,85,000
Profession”
Income from Other Sources
Dividend received from foreign company
[Dividend received from a foreign company is chargeable to tax
under the head “Income from other sources”.] 5,00,000
Gross Total Income 1,30,85,000
Less: Deduction under Chapter VI-A Nil
Total Income 1,30,85,000
(b) Computation of total income and tax liability of Miss Aarika for the A.Y. 2018-19
Particulars Rs. Rs.
Indian Income [Income from playing hockey matches in India] 23,00,000
Foreign Income [Income from playing hockey matches in country
XYZ] 15,00,000
Gross Total Income 38,00,000
Less: Deduction under Chapter VI-A
Deduction under section 80C
PPF deposit of Rs. 1,50,000 made during the previous year
is within the overall limit of 1.5 lakh. Hence, fully allowable 1,50,000
as deduction
Deduction under section 80D
Medical insurance premium of Rs. 40,000 paid for her
mother aged 75 years. Since her mother is a senior citizen,
the deduction is allowable to a maximum of
Rs. 30,000 (assuming that her mother is also a resident in
India), even though she is not dependent on her. Further,
deduction is allowable where payment is made by any
mode other than cash. Here payment is made by credit
card hence, eligible for deduction. 30,000 1,80,000
Total Income 36,20,000
Tax on Total Income
Income-tax 8,98,500
Add: Education cess @ 2% 17,970
Add: Secondary and higher education cess @ 1% 8,985 9,25,455
Average rate of tax in India
(i.e. Rs. 9,25,455/Rs. 36,20,000 × 100) 25.57%
Average rate of tax in foreign country “XYZ”
(i.e. Rs. 3,00,000/Rs.15,00,000 ×100) 20.00%
Rebate under section 91 on Rs. 15 lakh @ 20% (lower of average
Indian-tax rate or average foreign tax rate) 3,00,000
Tax payable in India (Rs. 9,25,455 – Rs. 3,00,000) 6,25,455
Tax payable in India (Rounded off) 6,25,460

Note: Miss Aarika shall be allowed deduction under section 91, since the following conditions are
fulfilled :
(a) She is a resident in India during the relevant previous year.
(b) The income accrues or arises to her outside India during that previous year and such income
is not deemed to accrue or arise in India during the previous year.
(c) The income in question has been subjected to income-tax in the foreign country XYZ in her
hands and she has paid tax on such income in the foreign country XYZ.
(d) There is no agreement under section 90 for the relief or avoidance of double taxation between
India and country XYZ where the income has accrued or arisen.
3. (a) (i) Aarav, Varun, Charan and Dinesh are the four shareholders of a private limited company.
The shareholding pattern of the company in the three financial years are given below:
As on 31 st
Aarav Varun Charan Dinesh Ganesh Rajesh
day of March
% % % % % %
2016 25 25 25 25 - -
2017 - 25 25 25 25 -
2018 - - 25 25 25 25
Section 79 provides that, in case of a closely held company not being an eligible start up
referred to in section 80-IAC, no loss incurred in the previous year shall be carried forward
and set off against the income of the subsequent previous year unless t he shares carrying at
least 51% of the voting power of the company are beneficially held on the last day of the
previous year in which the loss is sought to be set off, by the same shareholders, who
beneficially held the shares carrying at least 51% of the voting power on the last day of the
previous year in which the loss was incurred.
Since shareholders holding at least 51% of the voting power are the same on 31 st March 2016
and 2017, the restriction imposed by section 79 is not applicable for set-off of losses of the
P.Y. 2015-16 against income of the P.Y. 2016-17. Thus, the taxable income for the
assessment year 2017-18 would be:
Particulars Rs.
Business profit 20,00,000
Less: Current year's depreciation 8,00,000
12,00,000
Less: Brought forward business loss [as per section 72(2)] 10,00,000
Unabsorbed depreciation [as per section 32(2)] 2,00,000
Taxable income for A.Y. 2017-18 Nil
Balance Unabsorbed depreciation relating to the earlier assessment years can be carried
forward to the next assessment year i.e., A.Y.2018-19. There is no brought forward business
loss and section 79 is not applicable in case of carry forward of unabsorbed depreciation.
Section 32 governs the carry forward and set off of depreciation for which the shareholding
pattern is not relevant at all. Consequently, the income for A.Y.2018-19 will be determined as
under -
Particulars Rs. Rs.
Business income 50,00,000
Less: Current year’s depreciation 10,00,000

40,00,000
Less: Unabsorbed depreciation:-
Assessment year 2014-15 14,00,000
Assessment year 2015-16 12,00,000
Assessment year 2016-17 7,00,000 33,00,000
Taxable Income for A.Y.2018-19 7,00,000
(ii) (I) As the main object of the institution is “advancement of object of general public utility”,
the institution will lose its “charitable” status for the P.Y.2017-18, since it has received
Rs. 30 lakhs from an activity in the nature of trade, which exceeds Rs. 28 lakhs, being
20% of the total receipts of the institution undertaking that activity for the previous year.
The application of 85% of such receipt for its main object during the year would not help
in retaining its “charitable” status for that year. The institution will lose its charitable
status and consequently, the benefit of exemption of income for the P.Y.2017-18,
irrespective of the fact that its approval is not withdrawn or its registration is not
cancelled.
(II) If the total receipts of the institution is Rs. 150 lakhs, and the institution receives Rs. 30
lakhs in aggregate from an activity in the nature of trade during the P.Y.2017 -18, then it
will not lose its “charitable” status since receipt of upto 20% of the total receipts of the
institution in a year from such activity is permissible. The institution can claim exemption
subject to fulfilment of other conditions under sections 11 to 13. Further, such activity
should also be undertaken in the course of actual carrying out of such advancement of
any other object of general public utility.
(III) The restriction regarding carrying on of a trading activity for a cess, fee or other
consideration will not apply if the main object of the institution is “relief of the poor”.
Therefore, receipt of Rs. 30 lakhs from a trading activity by such an institution will not
affect its “charitable” status, even if it exceeds 20% of the total receipts of the institution.
The institution can claim exemption subject to fulfilment of other conditions under
sections 11 to 13.
(b) (i) As per section 245S(1), the advance ruling pronounced under section 245R by the Authority
for Advance Rulings shall be binding only on the applicant who had sought it and in respect
of the specific transaction in relation to which advance ruling was sought. It shall also be
binding on the Principal Commissioner/Commissioner and the income-tax authorities
subordinate to him, in respect of the concerned applicant and the specific transaction.
In view of the above provision, Mr. Bhuwan cannot use the advance ruling, obtained on an
identical issue by his brother, for his assessment pertaining to the assessment year 2014 -15.
Note – Though the ruling of the Authority for Advance Rulings is not binding on others but
there is no bar on the Tribunal taking a view or forming an opinion in consonance with the
reasoning of the Authority for Advance Rulings de hors the binding nature [CIT v. P. Sekar
Trust (2010) 321 ITR 305 (Mad.)].
(ii) Section 44C restricts the allowability of the head office expenses to the extent o f lower of an
amount equal to 5% of the adjusted total income or the amount actually incurred as is
attributable to the business of the assessee in India.
For the purpose of computing the adjusted total income, the head office expenses of
Rs. 200 lakhs charged to the profit and loss account have to be added back.

The amount of income to be declared by the assessee for A.Y. 2018-19 will be as under:
Particulars Rs.
Net loss for the year ended on 31.03.2018 (100 lakhs)
Add: Amount of head office expenses to be considered separately as
per section 44C 200 lakhs
Adjusted total income 100 lakhs
Less: Head office expenses allowable under section 44C is the lower of
(i) Rs. 5 Lakhs, being 5% of Rs. 100 Lakhs, or
(ii) Rs. 200 Lakhs. 5 lakhs
Income to be declared in return 95 lakhs
4. (a) (i) As per section 192A, in a case where the accumulated balance due to an employee
participating in a recognized provident fund is includible in his total income owing to the
provisions of Rule 8 of Part A of the Fourth Schedule not being applicable, the trustees of the
Employees Provident Fund Scheme, 1952 or any person authorised under the scheme to
make payment of accumulated balance due to employees are required to deduct i ncome-
tax@10% at the time of payment of accumulated balance due to the employee. Tax deduction
at source has to be made only if the amount of such payment or aggregate amount of such
payment of the payee is Rs. 50,000 or more.
Rule 8 of Part A of the Fourth Schedule, inter alia, provides that only if an employee has
rendered continuous service of five years or more with the employer, then accumulated
balance in a recognized provident fund payable to an employee would be excluded from the
total income of that employee.
In the present case, Mr. Verma has withdrawn an amount exceeding Rs. 50,000 on his
resignation after rendering a continuous service of four years with M/s. MNO Ltd. Therefore, tax
has to be deducted at source@10% under section 192A on Rs. 60,000, being the amount
withdrawn on his resignation without rendering continuous service of a period of five years with
M/s. MNO Ltd.
The net amount receivable by Mr. Verma is Rs. 54,000 [i.e., Rs. 60,000 – Rs. 6,000, being
tax deducted at source].
(ii) The Explanation below section 194A(1) provides that where any income by way of interest
other than interest on securities is credited to any account, whether called ‘interest payable
account’ or ‘suspense account’ or by any other name, in the books of a ccount of the person
liable to pay such income, such crediting shall be deemed to be credit of such income to the
account of the payee and provisions of section 194A, shall, thus, apply.
However, the CBDT has, vide Circular No.3/2010 dated 2.3.2010, clarified that Explanation
to section 194A will not apply in cases of banks where credit is made to provisioning account
on daily/monthly basis for the purpose of macro monitoring only by the use of CBS software.
Since no constructive credit to the depositor's / payee's account takes place while calculating
interest on daily / monthly basis in the CBS software used by banks, tax need not be deducted
at source on such provisioning of interest by banks for the purposes of macro monitoring only.
In such cases, tax shall be deducted at source on accrual of interest at the end of the financial
year or at periodic intervals as per practice of the bank or as per the depositor's or payee’s
requirement or on maturity or on encashment of time deposit, whichever event takes place
earlier and wherever the aggregate amount of interest income credited or paid or likely to be
credited or paid during the financial year by the bank exceeds the limits specified in section
194A i.e., Rs. 10,000.
9

In view of the above, the action of the Assessing Officer in disallowing the interest expenditure
credited in a separate account for macro monitoring purpose is not valid and consequent
initiation of penalty proceedings under section 271C is not tenable in law.
(iii) (I) In this case, since the programme is produced by the production house as per the
specifications given by Star TV, a television channel, and the copyright is also
transferred to the television channel, the same falls within the scope of definition of t he
term ‘work’ under section 194C. Therefore, the payment of Rs. 50 lakhs made by Star
TV to the production house would be subject to tax deduction at source under section
194C.
If, however, the payment was made by Star TV for acquisition of telecasting rights of the
content already produced by the production house, there is no contract for ‘’carrying out
any work”, as required in section 194C(1). Therefore, such payment would not be liable
for tax deduction at source under section 194C.
(II) The issue of whether fees/charges taken or retained by advertising companies from
media companies for canvasing/booking advertisements (typically 15% of the billing) is
'commission' or 'discount' to attract the provisions of tax deduction at source has been
clarified by the CBDT vide its Circular No.5/2016 dated 29.2.2016.
The relationship between the media company and the advertising agency is that of a
'principal-to-principal' and, therefore, not liable for TDS under section 194H. In view of
the same, the CBDT has clarified that no liability to deduct tax is attracted on payments
made by television channels to the advertising agency for booking or procuring of or
canvassing for advertisements.
Accordingly, in view of the clarification given by CBDT, no tax is deductible at source on
the amount of Rs. 15 lakhs retained by Shipra Ltd., the advertising company, from
payment due to Sky TV, a television channel.
(b) (1) Y Inc., a foreign company, is a subsidiary of B Ltd., an Indian company. Hence, Y Inc. and B
Ltd. are associated enterprises. Therefore, provision of data processing services by B Ltd.,
an Indian company, to Y Inc., a foreign company, is an international t ransaction 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 B 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.2017-18 exceeds Rs. 100
crore but does not exceed Rs. 200 crore, B 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 B Ltd. has declared an operating profit margin of
 30 
20%  i.e.,  100  , the same is in accordance with the circumstance mentioned in Rule
 150 
10TD. Hence, the income-tax authorities shall accept the transfer price declared by B Ltd in
respect of such international transaction.
(2) ABC Inc., a foreign company, guarantees 15% of the total borrowings of D Ltd., an Indian
company. Since ABC Inc. guarantees not less than 10% of the total borrowings of D Ltd., ABC
Inc. and D Ltd. are deemed to be associated enterprises. Therefore, provision of contract
R & D services relating to generic pharmaceutical drug by D Ltd., an Indian company, to ABC
10

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 generic pharmaceutical drug is an eligible
international transaction. Since D 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.
Since the value of the international transaction does not exceed Rs. 200 crore, D Ltd. should
have declared an operating profit margin of not less than 24% in relation to operating expense,
to be covered within the scope of safe harbour rules. In this case, since D Ltd. has declared
 9 
an operating profit margin of 30%  i.e., 100  , the same is in accordance with the
 30 
circumstance mentioned in Rule 10TD. Hence, the income-tax authorities shall accept the
transfer price declared by D Ltd in respect of such international transaction.
5. (a) (i) Section 149 requires issue of notice under section 148 within a period of 6 years from the end
of the relevant assessment year, where income escaping assessment exceeds Rs. 1 lakh.
Accordingly, in respect of A.Y.2010-11, notice can be issued upto 31.3.2017. Section 150(1)
enables issue of notice at any time to give effect to a finding contained in an appellate order.
However, this is subject to the provisions of section 150(2), which places a restriction that if
on the date of passing of the order which was the subject-matter of appeal, no notice could
have been issued, then, such notice cannot be issued by virtue of the enabling provision
contained in section 150(1).
In this case, the income was taxable in the A.Y.2005-06 as per the order of the Appellate
Tribunal. The six year time limit, in this case, expires on 31.3.2012. Since the original
assessment in respect of such income was made on 28.3.2012, the notice issued under
section 148 consequent to the Appellate Tribunal order is valid.
Had the assessment order for A.Y.2010-11 been made on 4.4.2012 (instead of 28.3.2012),
then the same would have been outside the six year time limit from A.Y.2005 -06. Hence,
since notice could not have been issued at that point of time, it cannot be now issued invoking
the provisions of section 150(1).
(ii) The Appellate Tribunal may, on merit, pass an order of stay in any proceedings relating to an
appeal. However, such period of stay cannot exceed 180 days from the date of such order.
The Appellate Tribunal has to dispose off the appeal within this period of stay. Where the
appeal has not been disposed off within this period and the delay in disposing the appeal is
not attributable to the assessee, the Appellate Tribunal can further extend the period of stay
originally allowed. Section 254(2A) provides that the aggregate of the period originally allowed
and the period or periods so extended or allowed shall not, in any case, exceed 365 days,
even if the delay in disposing of the appeal is not attributable to the assessee. If the appeal
is not disposed of within such period or periods, the order of stay shall stand vacated after
the expiry of such period or periods.
Accordingly, even if an appeal is not heard by the bench, say, due to the bench not functioning
or due to the department seeking adjournment, the stay granted by the Appella te Tribunal
shall stand vacated after the period of 365 days, inspite of the assessee having taken all steps
to ensure speedy disposal of the appeal and having a good prima facie case.
In the present case, the period of 365 days has expired on 31.12.2017, after which date the
order of stay stands vacated. Accordingly, the recovery of Rs. 15 lacs against the arrear
demand of Rs. 25 lacs made by the Assessing Officer is in order.
11

(iii) Taxability in case of succession of Neha Textiles by New Look Textile Private Limited
As per provisions of section 47(xiv), in case a proprietorship concern is succeeded by a
company in the business carried by it and as a result of which any capital asset is transferred
to the company, then the same shall not be treated as transfer and will not be chargeable to
capital gain tax in case the following conditions are satisfied:
(1) all the assets and liabilities of sole proprietary concern becomes the assets and liabilities
of the company.
(2) the shareholding of the sole proprietor in the company is not less than 50% of the total
voting power of the company and continues to remain as such for a period of 5 years
from the date of succession.
(3) the sole proprietor does not receive any consideration or benefit in any form from the
company other than by way of allotment of shares in the company.
In the present case, all the conditions mentioned above are satisfied therefore, the transfer of
capital asset by Neha Textiles to New Look Textiles Private Limited shall not attract capital
gain tax provided Neha continues to hold 50% or more of voting power of New Look Textiles
Private Limited for a minimum period of 5 years.
Taxability in case of transfer of land by New Look Textiles Private Limited
As per the provisions of section 49(1) and Explanation 1 to section 2(42A), in case a capital
asset is transferred in the circumstances mentioned in section 47(xiv), the cost of the asset
in the hands of the company shall be the cost of the asset in the hands of the sole proprietor.
Consequently, for the determining the period of holding of the asset, the period for which the
asset is held by the sole proprietor shall also be considered.
Therefore, in the present case, the urban land shall be a long-term capital asset since it is
held for more than 24 months by New Look Textile Private Limited and Neha Textiles taken
together. Cost of acquisition of land in the hands of the company shall be Rs. 9,80,000 i.e.,
the purchase cost of the land in the hands of Neha.
Computation of capital gain chargeable to tax in the hands of New Look Textile Private
Ltd.
Particulars Rs.
Net Sale Consideration 15,00,000
Less: Indexed cost of acquisition 9,80,000 × 272/272 (Refer Note below) 9,80,000
Long-term capital gain 5,20,000
Note: The year of transfer and the year in which the company first held the asset are the
same in this case, which is the reason why the numerator and the denominator for calculating
the indexed cost of acquisition would remain the same. Therefore, in effect, there is no benefit
of indexation in this case. However, as per the view expressed by Bombay High Court in CIT
v. Manjula J. Shah 16 Taxman 42, in case the cost of acquisition of the capital asset in the
hands of the assessee is taken to be cost of such asset in the hands of the previous owner,
the indexation benefit would be available from the year in which the capital asset is acquired
by the previous owner. If this view is considered, the indexed cost of acquisition would have
to be calculated by taking the CII of F.Y.2011-12 i.e., 184, being the year in which the capital
asset was acquired by the previous owner, Neha, as the denominator, in which case, the
capital gains chargeable to tax would undergo a change. The long-term capital gains in such
a case would be Rs. 51,304 [Rs. 15,00,000 - Rs. 14,48,696 (9,80,000 x Rs. 272/184)].
12

(b) In order to provide equality in terms of tax treatment, Article 24 of OECD Model Convention, Non -
discrimination, provides that the tax provision cannot be discriminatory merely because one person
is a non-resident.
Para 1 of Article 24 provides that a Nationals of a Contracting State shall not be subjected in the
other Contracting State to any taxation or any requirement connected therewith, which is other or
more burdensome than the taxation and connected requirements to which nationals of that other
State in the same circumstances, in particular with respect to residence, are or may be subjected.
This provision shall, notwithstanding the provisions of Article 1, also apply t o persons who are not
residents of one or both of the Contracting States.
Para 2 of Article 24 provides that Stateless persons who are residents of a Contracting State shall
not be subjected in either Contracting State to any taxation or any requirement c onnected
therewith, which is other or more burdensome than the taxation and connected requirements to
which nationals of the State concerned in the same circumstances, in particular with respect to
residence, are or may be subjected.
As per para 3 of Article 24, the taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less favourably levied in that other
State than the taxation levied on enterprises of that other State carrying on the same activities.
This provision shall not be construed as obliging a Contracting State to grant to residents of the
other Contracting State any personal allowances, reliefs and reductions for taxation purposes on
account of civil status or family responsibilities which it grants to its own residents.
Para 5 provides that Enterprises of a Contracting State, the capital of which is wholly or partly
owned or controlled, directly or indirectly, by one or more residents of the other Contracting State,
shall not be subjected in the first-mentioned State to any taxation or any requirement connected
therewith which is other or more burdensome than the taxation and connected requirements to
which other similar enterprises of the first-mentioned State are or may be subjected.
As per para 6 of Article 24, the provisions of Article 24 shall, notwithstanding the provisions of
Article 2, apply to taxes of every kind and description.
6. (a) (i) Section 292B provides that no return of income, assessment, notice or sum mons furnished
or made or issued or taken in pursuance of any of the provisions of the Income -tax Act, 1961
shall be invalid or deemed to be invalid merely by reason of any mistake, defect or omission
in such return of income, assessment or notice etc., if such return of income, assessment,
notice, summons etc. is in substance and effect in conformity with or according to the intent
and purpose of the Act. Therefore, a clerical mistake cannot invalidate an otherwise valid
assessment. Thus, the typographical error in the assessment order as to assessment year
and previous year does not make the same invalid unless established otherwise.
Accordingly, the action of the CIT(Appeals) in not accepting the claim of the assessee is valid.
OR
(i) M/s. Saturn of U.K shall be required to file the return of income in India for the journey of its
ship before it leaves for onward journey to Korea.
However, as per the proviso to section 172(3), where the Assessing Officer is satisfied that it
is not possible for the master of the ship to furnish the return before the departure of the ship
from the port, and if satisfactory arrangements have been made for filing of return and
payment of tax by the authorised agent in India, he may permit filing of return within 30 days
of departure of the ship.
Section 172(4A) provides a time limit of 9 months for completion of assessment in such cases.
The period of 9 months is reckoned from the end of the financial year in which the return
under section 172(3) is furnished.
13

(ii) The selection of the form of organisation to carry on any business activity is essential in view
of the differential tax rates prescribed under the Income-tax Act, 1961 and specific
concessions and deductions available under the Act in respect of different entities. For the
purpose of formulating advice as to the tax efficient structure of the business, it is necessary
for the tax consultant to consider the following issues:
• In the case of sole proprietary concern, interest on capital and remuneration paid to the
proprietor is not allowable as deduction under section 37(1) as the expenditure is of
personal nature. On the other hand, in the case of partnership firm, both interest on
capital and remuneration payable to partners are allowable under section 37(1) subject
to the conditions and limits laid down in section 40(b). Remuneration and interest should
however, be authorised by the instrument of partnership and paid in accordance with
such instrument. Such interest and salary shall be taxable in the hands of partners to
the extent the same is allowed as deduction in the hands of the firm under section 40(b).
Interest to partners can be allowed upto 12% on simple interest basis, while the limit for
allowability for partners' remuneration is based on book profit under section 40(b). As
per section 40(b)(v), partners’ remuneration shall be allowed to the extent of aggregate
of -
(a) On the first Rs. 3,00,000 of book profit or in case of loss – Rs. 1,50,000 or at the
rate of 90% of book profits, whichever is more
(b) On the balance of book profit – at the rate of 60%
• Partner's share in the profits of firm is not taxed in the hands of the partners by virtue of
section 10(2A).
• If a proprietary concern is formed, the salary of Mrs. Ganesh shall be allowed as
deduction under section 37(1).
• The possibility of invoking section 40A(2) cannot be ruled out as salary is payable to a
relative, who is an interested person within the meaning of section 40A(2). However, it
can be argued successfully that salary of Rs. 5 lacs is justified in view of her long
experience as marketing manager of a multinational company and the fair market value
of services to be rendered by her to the concern.
• An issue arises as to whether remuneration of Mrs. Ganesh would be includible in the
total income of Mr. Ganesh. Under section 64(1)(ii), remuneration of the spouse of an
individual working in a concern in which the individual is having a substantial interest
shall be included in the total income of the individual. However, the clubbing provision
does not apply if the spouse possesses technical or professional qualification and the
income is solely attributable to the application of his or her technical or professional
knowledge and experience. Further, technical or professional qualification would not
necessarily mean the qualifications obtained by degree or diploma of any recognized
body [Batta Kalyani vs. CIT (1985) 154 ITR 0059 (AP)]. The experience of Mrs. Ganesh
as a marketing manager in a multinational company for 15 years may reasonably be
considered as a professional qualification for this purpose.
• If Mrs. Ganesh joins the proprietary concern or partnership concern of her husband as
employee, remuneration of Rs. 5 lacs shall be taxed in her hands under the head
"salary".
• lf she joins as partner in the business, remuneration shall be taxed in her hand as
business income under section 28 to the extent such remuneration is allowed in the
hands of the firm under section 40(b).
14

• The tax rate applicable to an individual depends on the level of his/her income, whereas
for partnership firms it is flat rate at 30%. Surcharge@12% would be attracted only if
total income exceeds Rs. 1 crore. For individuals, the rate of tax is 5% on income
exceeding Rs. 2.50 lakhs but not exceeding Rs. 5 lakhs, 20% for total income exceeding
Rs. 5 lakhs but not exceeding Rs. 10 lakhs and @30% in respect of income exceeding
Rs. 10 lakhs for the assessment year 2018-19. The surcharge for total income exceeding
Rs. 50 lakhs but not exceeding Rs. 1 crore is 10% and for total income exceeding Rs. 1
crore is 15% of tax payable. Education cess@2% and Secondary and higher education
cess@1% is attracted in both the cases.
(iii) The powers under section 131(1A) deal with power of discovery and production of evidence.
They do not confer the power of seizure of cash or any asset. The Director General, for the
purposes of making an enquiry or investigation relating to any income concealed or likely to
be concealed by any person or class of persons within his jurisdiction, shall be competent to
exercise powers conferred under section 131(1), which confine to discovery and inspection,
enforcing attendance, compelling the production of books of account and ot her documents
and issuing commissions. Thus, the power of seizure of unaccounted cash is not one of the
powers conferred on the Director General under section 131(1A).
However, under section 132(1), the Director General has the power to authorize any
Additional Director or Additional Commissioner or Joint Director or Joint Commissioner etc.
to seize money found as a result of search [Clause (iii) of section 132(1)], if he has reason to
believe that any person is in possession of any money which represents wholly or partly
income which has not been disclosed [Clause (c) of section 132(1)]. Therefore, the proper
course open to the Director General is to exercise his power under section 132(1) and
authorize the Officers concerned to enter the premises where the cash is kept by Mr. Mahesh
and seize such unaccounted cash.
(b) In addition to allocating the taxing rights and elimination of double taxation, there are various other
important considerations while entering into a tax treaty, as mentioned below:
• Ensuring non-discrimination between residents and non-residents
• Resolution of disputes arising on account of different interpretation of tax treaty by the treaty
partner.
• Providing assistance in the collection of the fair and legitimate share of tax.
Further, in addition to above, there are some other principles which must be considered by
countries in their tax system –
(i) Equity and fairness: Same income earned by different taxpayers must be taxed at the same
rate regard less of the source of income.
(ii) Neutrality and efficiency: Neutrality factor provides that economic processes should not be
affected by external factors such as taxation. Neutrality is two-fold.
(a) Capital export neutrality and
(b) Capital import neutrality (CIN).
Capital export neutrality (CEN) provides that business decision must not be affected by tax factors
between the country of residence and the target country; whereas CIN provides that the level of
tax imposed on non-residents as well as the residents must be similar.
Promotion of mutual economic relation, trade and investment: In some cases, it is observed
that avoidance of double taxation is not the only objective. The other objective may be to give
impetus to a country’s overall economic growth and development.
15

© The Institute of Chartered Accountants of India

Uploaded by

Copyright:

Available Formats

© The Institute of Chartered Accountants of India

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

© The Institute of Chartered Accountants of India

Uploaded by

Copyright:

Available Formats

Test Series: October, 2018

MOCK TEST PAPER - 2

1 Assuming the capital expenditure of Rs.65 lakhs is incurred entirely on buildings