Gurukripa’s Guideline Answers for Nov 2018 CA Final Direct Taxes Exam – New Syllabus

Gurukripa’s Guideline Answers to Nov 2018 Exam Questions

CA Final – Direct Taxes – New Syllabus
Question No.1 is compulsory (10 X 2 = 20 Marks).
Answer any five questions from the remaining six questions (16 X 5 = 80 Marks). [Answer any 4 out of 5 in Q.4]
Working Notes should form part of the answer.
Wherever necessary, suitable assumptions should be made and indicated in answer by the Candidates.

Note: Page Reference Numbers are given from Padhuka’s Direct Taxes – A Ready Referencer – For CA Final
All questions pertaining to Income Tax have been solved based on the Law applicable for Assessment Year 2018–2019.

Question 1(a): 14 Marks

M/s Hind Udyog, a manufacturing Partnership Firm, consisting of three partners namely X, Y and Z, provides following
information relating to the year ending on 31.03.2019:
Net Profit of ` 28.75 Lakhs, as per Profit and Loss Account, was arrived at after debiting/crediting the following items:
(i) The firm had provided an amount of ` 12 lakhs being sum estimated as payable to workers based on agreement to be
entered with the workers union towards periodical wage revision once in three years. The provision is based on a fair
estimation on wage and reasonable certainty of revision once in three year.
(ii) Sale proceeds of import entitlements amounting to ` 1 lakhs have been credited to Profit and Loss Account, which the
Firm claims as Capital Receipt not chargeable to Income Tax.
(iii) Goods and Service Tax Demand paid includes an amount of ` 5300 charged as penalty for delayed filing of returns and `
12,750 towards interest for delay in Deposit of Tax.
(iv) A free air ticket was provided by a supplier for reaching a certain volume of purchase during the F.Y. 2018–19. The same is
not credited in Profit & Loss Account because it was encashed by the firm for ` 2 lakhs in April 2018.
(v) Interest amounting ` 20,000 paid to X as a Karta of HUF @ 18% per annum.
(vi) The firm had taken on lease an old building for the purpose of locating its business. Due to old age of building, it was demolished
and a new building put up, which was used by the firm from September 2017. The cost of new building ` 10 lakhs was written off as
Revenue Expenditure. The lessor permitted the firm to have an extension of the lease by another 20 years.
(vii) Loss incurred in transactions of purchase and Sale of Shares (without delivery) of various companies ` 3 lakhs.
(viii) A Scheduled Bank sanctioned and disbursed a Term Loan in the Financial Year 2014–15 for a sum of ` 50 lakhs. Interest of
` 8 lakhs was in arrears. The bank has converted the arrear of interest into a new loan repayable in 10 equal installments.
During the year, the company has paid 2 instalments and the amount so paid has been reduced from Funded Interest in
the Balance Sheet. The Firm furnishes following additional information relating to it:
(1) Provision for Audit Fees ` 2.5 Lakhs was made in the books for the year ended on 31.03.2018 without Deducting Tax at
Source. Such fees was paid to the Auditors in September 2018 after deducting Tax u/s 194J and the Tax so deducted was
deposited on 7th October 2018.
(2) The Firm had made an Investment of ` 23 lakhs and ` 12 lakhs on the construction of two warehouse (excluding the Cost
of Land), in rural areas for the purpose of Storage of Agricultural produce and Edible Oil respectively. These were made
available for use from 15.09.2018. The Profits from setting of these warehouses (before claiming deduction u/s 35AD and
32 for the A.Y.2019–2020 is ` 15 lakhs and ` 5 lakhs respectively.
(3) In July 2017 firm received a Dividend of ` 11 lakhs from A Ltd in which it holds 10% of shares.
Compute the Total Income of M/s Hind Udyog for the A.Y.2019–20 by Analyzing, Integration and applying the relevant
provisions of Income Tax Law. Explain in brief, the reasons for the treatment of each item.
Solution:
Assessee: M/s Hind Udyog Previous Year: 2018–2019 Assessment Year: 2019–2020

Status: Resident Partnership Firm

Computation of Total Income
Particulars `
Deduction Addition to
Profits and Gains of Business or Profession:
from Profit Profit
Net Profit as per Profit and Loss A/c 28,75,000

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Particulars `
Provision for Wages [W.N. 1] Nil
Sale of import entitlements [W.N. 2] Nil
Penalty on Late filing of GST Returns [W.N. 3] 5,300
Interest on Late Payment of GST [W.N. 4] Nil
Value of Free Air Tickets given by the Supplier [W.N. 5] 2,00,000
Interest paid to X representing HUF [W.N. 6] Nil
Cost of Constructions of New Building [W.N. 7] Nil
Speculative Loss [W.N. 8] 3,00,000
Repayment of Interest [W.N. 9] 1,60,000
Payment of Audit Fees which was disallowed earlier [W.N. 10] 75,000
Profit from Warehouse for Storage of Edible Oil [W.N. 11] 3,80,000
Profit from Warehouse for Storage of Agricultural Produce [W.N. 11] Nil
Sub Total (2,35,000) 37,60,300
Profits and Gains from Business or Profession 35,25,300
Income from Other Sources: Dividend Income [W.N. 12] 1,00,000
Gross Total Income 36,25,300
Less: Deductions under Chapter VI–A Nil
Total Income 36,25,300

Notes:
1. Payment for Wages: As per Section 37 read with ICDS X, in computing Business Income, any provision which
result in outflow of resources with reasonable certainty, such provisions shall be allowed as deduction in computing
Business Income. Here, the provision is based on agreement to be entered with workers union and there is a
reasonable certainty of wage revision to employees. Therefore, deduction is allowable.

2. Sale of Import Entitlements: U/s 28, any income arising on Export incentives and Import entitlements are
chargeable under the Head “PGBP”. Hence, ` 1,00,000 which credited to P&L is taxable under Income Tax also.
Therefore, it does not require any adjustment.

3. Penalty on Late filing of GST: U/s 37 Explanation 1, any sum incurred which is Penal in nature or in violation of any
law the same is disallowed. Hence, the Penalty on Late Filing of GST is disallowed.

4. Interest on Late Payment of GST: Interest on Late Payment of GST is compensatory is in nature and it is not penal
in Nature. Hence, the same shall be allowed as deduction.

5. Value of Free Air Tickets given by the Supplier: U/s 28(iv), any perquisite received in the course of business or
profession is chargeable under the head “PGBP”. Income under the head is chargeable as per the Method of
Accounting. It is assumed that the Assessee follows accrual method and the same is taxable in the Current Year.
6. Interest to X in representative capacity: As per Explanation to Sec.40(b), where an individual is a Partner in his
personal capacity and he receives Interest in representative capacity, then provisions of Sec.40(b) will not be applicable
for such interest receipt. Hence, interest of ` 20,000 paid to Mr.X is deductible. It is assumed that Tax has been
deducted on this ` 20,000 u/s 194A. Hence, disallowance u/s 40 (a) (ia) is not applicable.
7. Cost of Constructions of New Building in the place of Leased Building: As per Madras Auto Service Private
Limited 238 ITR 468 (SC), Cost of Construction of New Building in place of Old Building which is taken on Lease shall be fully
allowed as Deduction and treated as Revenue Expenditure.
8. Speculative Loss: Loss from Speculative Transactions shall be treated separately and it shall not be adjusted with
profits from Non–speculative Business u/s 70. Hence, the same shall be added from the Net Profits.
9. Repayment of Interest: U/s 43B, interest on Loan taken from Scheduled Bank shall be allowed as Deduction only if
the same is paid during the Previous Year or before 139 (1) time limit. In the given case, arrears of interest relating to
earlier years amounting ` 8,00,000 would have been disallowed earlier. Post conversion of this interest as a separate
loan, any repayment of this converted loan amounting to repayment of Interest. The outstanding interest of ` 8,00,000
has been converted to 10 equal installments by the Bank. During the Previous Year, 2 installments (` 8,00,000/10 X 2)
`1,60,000 is paid. Hence, the same is allowable as deduction.

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10. Payment of Audit Fees which was disallowed earlier: U/s 40 (a) (ia), any expenditure which is disallowed earlier,
the same will be allowed during the year in which tax has been deducted and remitted. In the given case, TDS on Audit
Fees for the year 2016–17 was remitted after 139 (1) time limit (i.e., after 30.09.2017). Since, the TDS has been
remitted on 07.10.2017 (i.e., during current year), 30% of the Audit Fee amounting ` 75,000 is allowable in current
year (30% of the Audit Fee `2,50,000 would have been disallowed in last year).
11. Profit from Warehouse for Storage of Edible Oil and Agricultural Produce:
Activity of constructing and maintaining warehouses for storage of Agricultural Produce is a Specified Business u/s
35AD. This business is entitled to deduction on all Capital Expenditure except Land, Goodwill and Financial Instruments
u/s 35AD. Constructing and Maintaining warehouses for Edible Oil storage is not a Specified Business. Hence, not
entitled to 35AD deductions. If 35AD deduction is claimed, depreciation is not allowed. The Income from both the
business is computed as below :–
Particulars Edible Oil Agricultural Produce
1. Profit from Business `5,00,000 `15,00,000
2. Less: Depreciation `1,20,000 Nil
(`12,00,000 X 10%)
3. Less: Deduction u/s 35AD NA `23,00,000
4. Business Income `3,80,000 (`8,00,000)
5. Tax Implication Added to Net Profits Carried Forwarded to next year since Loss from
Specified Business cannot be set–off with Normal
Business Income.
12. Dividend Income: Any dividend received from Domestic Company by Specified Assessees, in excess of `10,00,000 is
not exempted u/s 10(34) and the same is taxable u/s 115BBDA.
Note: Since, the question is silent on Partners’ interest and remuneration, the same is not provided in computing Business Income of the Firm.

Question 1(b): 6 Marks

Red Ltd a non–resident Foreign Company, had entered into a collaboration agreement, approved by the Central Government,
with Blue Ltd an Indian Company on February 21, 2003 and is in receipt of following payments during the previous year ending
on March 31 2019:
(i) Interest on 8% Debentures for ` 40 lakhs issued by Blue Ltd on July 1, 2018 in consideration of providing of technical
know–how, manufacturing process and designs (date of payment of interest being March 31 every year).
(ii) Service Charges @ 2.5% of the value of Plant and Machinery for ` 500 Lakhs leased out to Blue Ltd, Payable each year
before March 31.
(iii) Apart from the above incomes, Red Ltd received a long term Capital Gain amounting to ` 1.90 Lakhs on Sale of
Debentures of Green Ltd an Indian Company, subscribed in US$.
Compute the Total Income of Red Ltd and determine its Tax Liability for the Assessment Year 2019–20.
Solution:
Assessee: M/s Red Ltd Previous Year: 2018–2019 Assessment Year: 2019–2020

Status: Non Resident Foreign Company

Particulars Amount (`)
1. Royalty Income for providing Manufacturing Process and Designs & Fee for Technical Service 40,00,000
2. Interest on Debentures 2,40,000
3. Service Charges (`500 Lakhs X 2.5%) 12,50,000
4. Long Term Capital Gains on sale of debentures 1,90,000
5. Gross Total Income 56,80,000
6. Less: Deductions under Chapter VI A Nil
7. Total Income 56,80,000
8. Tax Liability
(a) On Royalty Income u/s 115A(1)(b) [`40,00,000 X 10%] 4,00,000
(b) On Long Term Capital Gains (Refer Note) [`1,90,000 X 10%] 19,000
(c) On Remaining Income [`52,50,000 X 40%] 21,00,000
Total Tax Liability 25,19,000
Add: Health and Education Cess @ 4% 1,00,760
Final Tax Liability 26,19,760

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Note: It is assumed that the Debentures are listed in recognized Stock Exchange and the Capital Gain is computed after giving effects
of Proviso 1 to Section 48 but without giving Indexation benefit. U/s 112, such Long Term Capital Gains are chargeable @ 10% on
such gains.

Question 2(a): 14 Marks

Anustup Chandra Flour Mills Ltd a Domestic Company engaged in Manufacture of Wheat Flour, furnishes the following
information pertaining to the year ended 31.03.2019:
(i) Net Profit as per the Statement of Profit and Loss is ` 77 Lakhs, after considering the items listed in (ii) to (vi) below.
(ii) The Company is a member of Vishnu Foods & Co and AOP in which the members’ Shares are determinate and their
Shares in Profit & Loss are clearly known. The entire Income of the AOP is from Business Activities. During the year, the
company has derived Share Income of ` 9 Lakhs from the AOP. The company has spent a sum of ` 90,000 towards
earning such Income.
(iii) The Company has provided for Income–Tax (including Interest under sections 234B and 234C of ` 62,000) for ` 3 lakhs,
and ` 5 lakhs towards share in loss of Foreign subsidiary.
(iv) Amount debited to the statement Profit and Loss towards Interest to a Public Financial institution is ` 12 lakhs. Of this, ` 4
lakhs was paid on 12.12.2018 only.
(v) The company committed breach of building norms while extending the Factory Building. The City Corporation initiated
proceedings against the company and the company settled the issue by paying compounding fee of ` 1 lakh. This amount
forms part of General Expenses, which has been debited to the Statement Profit and Loss.
(vi) In the Administrative Expenses, the Company has debited a sum of ` 70,000 towards fee for delayed filing of Statement of
TDS under section 234E of the Income–Tax Act, 1961.
(vii) The Company has credited revaluation surplus of ` 10 lakhs on Fair valuation of Asset under Ind AS–16 and Ind AS–38 to
other Equity.
(viii) The Company has credited ` 5 lakhs to other comprehensive Income on Fair Valuation of Equity instruments in which the
Company has Investment.
During the Current Year, the Depreciation charged as per books of account of the Company is the same as allowable under the
IT Act, 1961 [before considering the provisions of section 32[2]. The company proposes to adopt this practice consistently in
the future years.
You are required to compute the Income–Tax payable by the company for the Assessment Year 2019–2020. The Company is an
Indian Accounting Standard compliant Company.
Note: The Turnover of Company for the P.Y 2016–2017 was ` 150 crore.
Solution:

Assessee: Anustup Chandra Flour Mills Ltd Previous Year: 2018–2019 Assessment Year: 2019–2020
1. Computation of Total Income and Tax thereon
Particulars `
Deducn from Addition to Amount
Profits and Gains of Business or Profession:
Pft Pft
Net Profit as per Profit and Loss A/c 77,00,000
Share Income from AOP [Refer Note 1] 8,10,000
Income Tax and Interest thereof [Refer Note 2] 3,00,000
Provision for Losses of Subsidiary Company [Refer Note 3] 5,00,000
Non Payment of Interest to Financial Institutions [Refer Note 4] 8,00,000
Regularization Charges [Refer Note 5] 1,00,000
Fee on Late Filing of TDS [Refer Note 6] Nil
Credit on Revaluation Surplus under Ind AS 16 & 38 [Refer Note 7] Nil
Amount Credited to OCI on Equity Instruments designated at Fair Nil
Value [Refer Note 8]
Sub–Total (8,10,000) 17,00,000
Profits and Gains of Business 85,90,000
TOTAL INCOME 85,90,000
Tax on Total Income @ 25% 21,47,500

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Notes:
1. Share Income from AOP whose profits suffered tax u/s 167B is allowed as deduction in the hands of the members u/s
86. Correspondingly, expenses incurred for earning such income is also not allowed as deduction. Hence, `9,00,000 –
`90,000 is deducted from the Net Profits.
2. U/s 40 (a) of the Income Tax Act, 1961, any taxes on Profits or Gains from Business or Profession is disallowed.
Further, any interest levied under Income Tax Act u/s 234A/ 234B / 234C is also disallowed u/s 37.
3. Provisions relating to losses some another entity (though it may be a subsidiary) is not allowed as deduction u/s 37.
4. U/s 43B, interest on Loan taken from Financial Institutions shall be allowed as Deduction only if the same is paid during
the Previous Year or before 139 (1) time limit. Since, only `4,00,000 is paid out of `12,00,000 debited to P&L, the
unpaid interest of `8,00,000 is disallowed.
5. Regularization Charges or Compounding Fees are in the nature of Penalty and the same shall be disallowed u/s 37.
6. Fee on Late Filing of TDS is compensatory in nature and it is not penal in Nature. Hence, the same shall be allowed as deduction.
7. Credit on Revaluation Surplus under Ind AS 16 & 38 are not Real Income. Hence, it is not taxable at the time of Credit.
Upon disposal of the Assets, the actual gain/loss shall be considered in computing Total Income.
8. Any Amount Credited to OCI on Equity Instruments designated at Fair Value shall not be considered at the time of
credit. Upon disposal of such Equity Instruments, the same shall be considered in computing Total Income.

2. Computation of MAT u/s 115JB

Deduction Addition
Particulars
from Pft to Pft
Net Profit as Per Profit and Loss A/c 77,00,000
Share of Profit from AOP 9,00,000
Expenses on Earning profit share from AOP 90,000
Income Tax and Interest thereon 3,00,000
Provision for losses of Subsidiary Company 5,00,000
Interest on Loan from Financial Institutions Nil
Regularization Charges Nil
Fee on Late Filing of TDS [Refer Note 6] Nil
Credit on Revaluation Surplus under Ind AS 16 & 38 [Refer Note 7] Nil
Amount Credited to OCI on Equity Instruments designated at Fair Value [Refer Note 8] Nil
Sub–Total (9,00,000) 85,90,000
BOOK PROFITS (360 – 170) 76,90,000
MAT at 18.5% u/s 115JB (B) 14,22,650

3. Computation of Tax Liability

Particulars `
Tax Payable (Higher of A or B) 21,47,500
Add: Health + Education Cess @ 4% 85,900
Net Tax Payable (Rounded Off) 22,33,400

Question 2(b): 6 Marks

Mr. Manav, a Resident, has derived certain Income from a nation Q with which no DTAA exists. In Q, any Income chargeable to
Tax is charged at a flat rate of 18%.
Mr. Manav has derived the following Income from Q:
(i) Agricultural Income from lands in Q ` 14 lakhs
(ii) Share Income from a Partnership Firm in Q ` 18 lakhs
In nation Q, Agricultural Income is Exempt and does not form part of Total Income.
State with reasons, whether, Mr. Manav (assesse) can claim double taxation relief in respect of the above two items of income
and also determine the quantum of double taxation relief available.
The “Indian Rate of Tax” may be taken as 20%.

Solution:

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Assessee: Mr. Manav Previous Year: 2018–2019 Assessment Year: 2019–2020

Status: Resident Individual
Computation of Total Income and Tax Payable
Particulars ` `
Profits and Gains from Business or Profession from Country Q
Agricultural Income 14,00,000
Share of profits from Partnership Firm 18,00,000
Gross Total Income 32,00,000
Tax on Total Income [20% on (`32,00,000)] 6,40,000
Total Tax Payable before Relief u/s 91 6,40,000
Average Rate of Indian Tax (Given) 20%
Average Rate of Foreign Tax (Given) 18%
Less: Relief u/s 91 at 18% on Doubly Taxed Foreign Income of ` 18,00,000 (3,24,000)
Net Tax Payable (Rounded–off) 3,16,000
Note: Health and Education Cess is not considered in computing Indian Tax Liability since the problem specifically mentions
the tax rate at flat 20%.

Question 3(a): 6 Marks

Eden Fabs Private Ltd went into liquidation on 31.07.2018. The Company was seized and possessed of the following funds
prior to the distribution of Assets to the Shareholders:
`
Share Capital (issued on 01.04.2012) 8,00,000
Reserves prior to 31.07.2018 4,00,000
Excess realization in the course of liquidation 6,00,000
Total 18,00,000
There are 8 Shareholders, each of whom received ` 2,25,000 from the liquidator in full settlement. You are required to examine
the various issues and advice the Shareholders about their Liability to Income Tax.
Solution:
Assessee: Eden Fabs Private Ltd Previous Year: 2018–2019 Assessment Year: 2019–2020
Particulars `
Amount received from Eden Fabs Pvt. Ltd (` 18 Lakhs ÷ 8) 2,25,000
Less: Deemed Dividend(to the extent of Reserves) (` 4 Lakhs ÷ 8) (50,000)
Consideration for Capital Gain 1,75,000
Less: Cost of Acquisition (assuming the shares were acquired at par) (` 8 Lakhs ÷ 8) (1,00,000)
Taxable Capital Gain 75,000
The following course of action is suggested –
(a) The Shareholders can claim the benefit of indexation on the shares if it is a Long Term Capital Asset, i.e. they
have held the shares for more than 12 months.
(b) They can invest an amount equal to the Capital Gains in residential house property and claim exemption u/s
54F subject to other conditions.
Question 3(b): 8 Marks
Mani Foundations, a Charitable Trust Registered u/s 12AA of the Income Tax Act run schools for Primary and Secondary
Education. The following particulars pertaining to the previous year 2018–19 are furnished to you by the Trust:
` (in Lakhs)
(i) Gross Receipts from students towards Tuition Fees, Development Fees, Laboratory Fees, etc. 200
(ii) Voluntary contributions received from Public (including anonymous donation ` 5 lakhs) 25
(iii) Government Grants 8
(iv) Donation given towards corpus to a Trust Registered u/s 10(23C) 2
(v) Amount applied for the purpose of Schools 90
(vi) Included in (V) above, a sum of ` 15 lakhs, being the amount applied for the benefits of the founder of the –
Trust
(vii) The Trust set apart ` 55 lakhs for acquiring a building to Expand its schools. But the amount was paid –
in December 2018 when the Sale Deed was Registered in its name.
(viii) Excess of Expenditure over Income in the Previous Year 2017–2018 25

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Compute the Total Income of the Trust for the Assessment Year 2019–2020 in order to avail maximum benefits within the four
corners of Law.
Solution:
Assessee: Mani Foundations Previous Year: 2018–2019 Assessment Year: 2019–2020
Computation of Total Income
Particulars `(Lakhs) `(Lakhs)
Gross Receipt from Students
(towards Admission Fees, Tuition Fees, Development Fees ) 200
Less: Amount applied for the purpose of School – (90 – 15) (75) 125
(Excluding application for the benefit of Prohibited Person) (Note 2)
Donations received (excluding anonymous donations) (Refer W. N.) 21.25
Grants from Government 8
Income available for Application 154.2500
Less: Maximum Permissible Accumulation at 15% of Gross Receipts 23.1375
Amount to be applied 131.1125
Less: Deemed Application u/s 11(1) 55
Excess of Expenditure over Income in the Previous Year 2017–2018 (Note 3) 25 80.0000
Income of the Trust (Taxable at Normal Rates) 51.1125
Add: Taxable Anonymous Donation (Note 1) 3.7500
Add: Income applied for the benefit of Prohibited Person (Founder) 15.0000
Total Taxable Income 69.8625
Tax Liability
–on Anonymous Donation u/s 115BBC (` 3,75,000 × 30%) (Note 1) 1,12,500
–on Money applied for the benefit of Prohibited Person (` 15,00,000 × 30%) 4,50,000
–on Other Income at Normal Rate (` 51,12,500) (`1,12,500 + `41,12,500 X 30%) 13,46,250
Total Tax as above 19,08,750
Add: Surcharge @ 10% 1,90,875
Total Tax (including Surcharge) 20,99,625
Add: Health and Education Cess @ 4% 83,985
Total Tax Payable (Rounded off) 21,83,610

Note:
1. Computation of Taxable Anonymous Donation:
Particulars ` `
Anonymous Donation received 5,00,000
Less: Higher of the following –
• 5% of Total Donations received = 25,00,000 × 5% (or) 1,25,000
• ` 1,00,000 1,00,000 (1,25,000)
Taxable Anonymous Donation 3,75,000

2. Amount spent for the benefit of the Prohibited Person shall be taxed at Maximum Marginal Rate of 30%.

3. Excess of application of income of a prior year can be set off against shortage of current year (Matriseva
Trust 158 CTR 433).

Question 3(c): 6 Marks

State with reasons, whether Netlon LLC, (Incorporated in Singapore) and Briggs Ltd a Domestic Company, are / can be deemed
to be associated Enterprises for the Transfer Pricing Regulations (Each situation is Independent) of the others:
(i) Netlon LLC has advanced a Loan of ` 53 crores to Briggs Ltd on 12.01.2019. the Total Book Value of Assets of Briggs Ltd
is ` 100 crores. The Market Value of the Assets, however, is ` 150 crores. Briggs Ltd repaid ` 10 crores before 31.03.2019.
(ii) Netlon LLC has the power to appoint 2 of the directors of Briggs Ltd, whose total number of Directors in the Board is 4.
(iii) Total Value of Raw Materials and consumables of Briggs Ltd is ` 900 crores. Of this, Nelton LLC supplies to the tune
of ` 820 crores, at prices mutually agreed upon once in six months and depending upon the Market Conditions.

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Solution:
Case No Provisions of the Act Conclusion
1 A Loan advanced by one Enterprise to the other Enterprise constitutes Since, Loan of `53 crores constitute
not less than 51% of the Book Value of the Total Assets of the other > 50% of Book Value of Total Assets
Enterprise, then the enterprises are associated – Sec. 92A (2) (c) on the date of Loan, both enterprises
are associated.
2 More than half of the Board of Directors or Members of the Since, Netlon LLC has not appointed
Governing Board of the Governing Board of one enterprise, are > ½ of Board of Directors of Brigge
appointed by the other Enterprise, then the enterprises are associated. Ltd, the Enterprises are not
– Sec. 92A (2) (e) associated.
3 90% or more of the Raw Materials and Consumables required for Even though, purchases of Netlon
the manufacture or processing of goods or articles carried out by one LLC from Brigge Ltd constitutes >
Enterprise, are supplied by the other Enterprise, or by persons 90% of the Total Purchase, the Price
specified by the other Enterprise, and the prices and other conditions and other conditions relating to
relating to the supply are influenced by such other Enterprise, then supply are not influenced by Brigge
the enterprises are associated. – Sec. 92A (2) (h) Ltd. Hence, they are not associated.

Question 4(a): 4 Marks

Tulsi Private Ltd a Company engaged in ship breaking activity, sold some old and used plates, wood etc in respect of which it
did not collect Tax from the buyer. The Company claimed that such items are usable as such. Hence these are not ‘Scrap’ to
attract the provisions for collection of Tax at Source. The Assessing Officer treated such items in the nature of ‘Scrap’ and
raised a Demand u/s 201(1) and Interest u/s 201(1A).
Is the action of the Assessing Officer in treating such items as ‘Scrap’ tenable in Law? Discuss.
Solution:
Refer: Chapter 41, Page 41.49 Para 41.6.3
Scrap: "scrap" means waste and scrap from the manufacture or mechanical working of materials which is definitely not
usable as such because of breakage, cutting up, wear and other reasons; [Sec 206C]
• Tulsi Private Ltd., sold old and used plates, wood, etc., whch are usable as such.
• Assessing Officer treated such items in the nature of ‘Scrap’ and raised demand u/s 201 (1)
• But the above items are not the scrap from the manufacture or mechanical working of materials
• Hence, the Items sold by Tulsi Private Limited is not covered under the definition of Scrap

Also, Where products obtained in course of ship breaking activity are usable as such, they do not fall within the definition of
scrap for purposes of TCS on their sale. [Priya Blue Industries (P) Ltd (2016) 65 taxmann 206 (Guj)(HC)]
Conclusion:
As per the above decision, the action of the Assessing Officer is Incorrect.

Question 4(b)(i): 4 Marks

Discuss whether Liability to deduct Tax at Source arises in the under mentioned (independent) situations in respect of
following payments made by resident in India:
Dindayal & Co a Partnership Firm, has credited a sum of ` 67,000 and ` 4,000 respectively, as Interest to Partners L (Resident
in India) and M (non–resident) respectively.

Solution:

Payment to Partner L: [Refer Page 41.9 Point 3 – No TDS u/s 194A]

Any Payment of Interest by a Firm to its Partner who is resident in India, then payment obligation of TDS u/s 194A is
exempted

Payment to Partner M: [Refer Page 41.32 Para 41.3.8 Point 1 –TDS provisions u/s 195]
Conclusion: For Payment of Interest to a non resident, the payer is liable to deduct TDS u/s 195. Exemption u/s 194A is
applicable only to Interest paid to Partners who are resident in India.

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 Gurukripa’s Guideline Answers for Nov 2018 CA Final Direct Taxes Exam – New Syllabus

Question 4(b)(ii): 4 Marks

Lumnous Pvt. Ltd whose accumulated Profits are ` 20 lakhs, wants to disburse a Loan of ` 25 lakhs to Mrs. Nisha, a Resident
Shareholder holding 20% of the Equity Shareholding in the Company. Can the entire amount of loan be disbursed to the
Shareholder, keeping in mind the provisions of the Income–Tax Act, 1961? The Finance Manager feels that this being a pure
loan transaction, there is no bar for disbursing the entire amount. Is his view correct?

Solution: Refer: Sec. 2 (22) (e) in Page 8.13, Para 8.3.1 Point (e) in Direct Taxes Ready Referencer – AY 2019–2020
• Lumunous Pvt Ltd (a company in which Public are not substantially interested) has given a Loan to Mrs. Nisha, a
Resident Shareholder holding 20% of the Equity Shareholding
• Since, the Shareholder holds more than 10% of the Shareholding of the said company, the amount given as “Loans”
has to be treated as “Dividends” u/s 2(22)(e)
• However, Dividend amount u/s 2 (22) (e) is limited to the amount of Accumulated Profits available.
• Hence, Dividend u/s 2(22)(e) in the given case = Rs. 20,00,000/–

Conclusion:
If Lumunous Pvt Ltd gives loan to the Shareholder, then to the extent of `20,00,000 shall be treated as Deemed Dividends. The
Company is liable to pay DDT u/s 115–O @ 30% on `20,00,000. This dividend is exempted to the shareholder u/s 10(34).

Question 4(b)(iii): 2 Marks

Payment of ` 5 lakhs made by Shiv & Company (Partnership Firm) to Jyoti & Company Ltd for organizing debate competition
on the subject ‘Rural Heritage of Rajasthan’.

Solution: Refer: Chapter 41, Page 41.25 Illustration – Applicability of TDS u/s 194 J – N 13 – Point 1

Question 4(c): 6 Marks

“Every Jurisdiction, in the Domestic Law, prescribes the Mechanism to determine Residential Status of a person. In case, a
person in considered to be Resident of both contracting states, it becomes necessary to apply the Tie–Breaker Rule.”
Discuss the manner for application of the Tie–Breaker Rule.

Solution: Refer Chapter 46 – International Taxation – Page 46.6

Question 5(a)(i): 5 Marks

The Business Premise of Mr. Rajneesh was subjected to a survey under section 133A of the Act. There were some
indiscriminating Material found at the time of survey. The assessee apprehends reopening of assessments of the earlier years.
He wants to know whether he can approach the Settlement Commission.
Explain briefly the basic conditions to be satisfied and the benefits that may accrue to Mr. Ranjeesh by approaching the
Settlement Commission.

Solution: Refer: Chapter 37, Page 37.4, Illustration – M 15

Question 5(a)(ii): 5 Marks

The Assessment of Foundation Bank Ltd for Assessment Year 2015–16 was made under section 143(3) on 30th November 2016
allowing deduction u/s 36(1)(vii) and deduction in respect Foreign Exchange Rate difference as claimed in the return of Income.
Subsequently, two notices of reassessment were issued u/s 148 and an order of reassessment was passed u/s 147 on 31st
December 2018 which did not deal with the above deductions. Later the Principal Commissioner after examining the records of
assessment, initiated revisionary proceeding u/s 263 on 31st May 2019 for disallowing deduction u/s 36(1)(vii) and Deduction in
respect of Foreign Exchange Rate difference. The Bank claims that the order passed by the Principal Commissioner u/s 263 is
barred by limitation.
Is the claim made by Foundation Bank tenable in Law?

Solution: Refer: Chapter 38, Page 38.8 Illustration – M 08

Conclusion: The contention of the Foundation Bank is valid in Law.

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 Gurukripa’s Guideline Answers for Nov 2018 CA Final Direct Taxes Exam – New Syllabus

Question 5(b): 6 Marks

State with brief reason, whether the following statements are True or False: (No mark will be awarded for answer without reason.)
(i) Where a notice under section 143(2) is issued to the assessee, it is not required to process u/s 143(1), the Return of
Income filed by the assessee.
(ii) Even without rejecting the books of accounts, if any, maintained by the assessee, the Assessing Officer can make a
reference to the Valuation Officer u/s 142A for estimating the Cost of Construction of an immovable Property.
(iii) Expenses of Capital Audit conducted under section 142 shall be paid by the Central Government.
(iv) Only an Individual can be regarded as a Tax Return Preparer under section 139B.

Solution:

S. No. Reference True / False

(i) Chapter 33, Page 33.3 Para 33.1 Point 10 False
(ii) Chapter 32, Page 32.13, Para 32.3.4 Point 3 True
(iii) Chapter 32, Page 32.11, Para 32.3.2 Point 2 (e) True
(iv) Chapter 31, Page 31.17, Para 31.2.5 Point 1 True

Question 5(c): 3 Marks

In the course of search Operation under section 132 of the Income Tax Act 1961, in the month of July 2019, Mr. Khemka has
made a declaration under section 132(4) to the Income Tax Authorities on the earning of his Income not disclosed in respect of
previous year 2018–19. Can that statement save Mr. Khemka from a Levy of Penalty, if he is yet to file his Return of Income for
Assessment Year 2019–20?

Solution: Refer: Chapter 45, Page 45.6, Point 4 Below the Table

Conclusion: The Assessee is liable for penalty u/s 271AAB.

Question 5(d): 6 Marks

John Butler Tex Inc. is a company incorporated in Colombo, Sri Lanka. 60% of its Shares are held by I Pvt. Ltd a Domestic
Company. John Butler Tex Inc. has its presence in India also. The data relating to John Butler Tex Inc. are as under:
Particulars India Sri Lanka
Fixed Assets at Depreciated values for Tax purposes (` in crores) 90 70
Intangible Assets (` in Crores) 40 180
Other Assets (` in Crores) 30 90
Income from trading Operations (` in Crores) 15 42
Income from Investments (` in Crores) 30 13
Number of Employees (Residents in respective Countries) 40 60
For POEM purposes, state whether,
(i) The Company shall be said to be engaged in ‘active business outside India’.
(ii) Because of increased operations in India, more manpower is needed. 30 more employees may be required in this regard.
The company can either take these employees directly in its roll or can outsource the increased operation to an External
Agency which will engage the 15 employees in its roll and finish the work for the company. Which choice will be better?
Note: If for any test, average figures are needed, the same may be ignored and the data as given above to the applicant may be used.
Solution: Refer Chapter 19, Page 19.2, Para 19.1.2 (Guidelines for P.O.E.M.)

Particulars
Computation of Proportion of Passive Income:
1. Passive Income of the Assessee (Income from Investments – 30+13) 43
2. Total Income [Income from trading operations(15+42) + Income on Investments (30+13)] 100
3. Percentage of Passive Income out of Total Income (1 / 2) 43%
Computation of Proportion of Assets in India:
1. Assets in India (Fixed Assets – 90 + Intangible Assets – 40 + Other Assets – 30 ) 160
2. Total Assets of the Company (Assets Outside India – 70+180+90 = 340+ Assets in India – 160) 500
3. Percentage of Assets in India out of Total Assets (1 / 2) 32%

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 Gurukripa’s Guideline Answers for Nov 2018 CA Final Direct Taxes Exam – New Syllabus

Computation of Proportion of No. of Employees in India:

1. No. of employees in India 40
2. Total No. of employees (Employees outside India – 60 + In India 40) 100
3. Percentage of Employees in India out of Total Employees 40%
Computation of Proportion of Employee Cost in India – Not Given
It is assumed that Employee Cost in India out of Total Employee Cost < 50%

Conclusion: Since, all the conditions for classifying a company as “Company having active business outside India” is
satisfied, the Company is having active business outside India as per Place of Effective Management Guidelines.

Case 2: If the Company employs 30 additional employees in India, then the Percentage of Employees in India out of Total
Employees of the company will be 53.85% (i.e., 70/130). In such situation, the company will not be satisfying the conditions
for “ABOA”. Hence, it is advisable to outsource the additional manpower requirement.

Question 6(a): 5 Marks

Mr. B proposes to purchase for his business, certain Raw Materials from Mr. S in view of the scarcity of the products, S insists
on cash payments for the purchases, to which B agrees. On 27.3.2019, the purchases are effected through a cash invoice for `
3,20,000. In respect of the above transactions, will there be any detrimental effect in the hands of B and S under the Provisions
of the Income–Tax Act 1961? Explain briefly. Will your answer be different, if the cash purchases are effected by the buyer B on
two different dates for different Raw Materials for ` 1,80,000 and ` 1,40,000 respectively?

Solution: Refer Chapter 45, Page 45.21, Para 45.4 in Ready Referencer – AY 2019–2020
Conclusion:
Case 1: Penalty u/s 269ST is applicable in the hands of Mr. S. In the hands of Mr. B, disallowance u/s 40A(3) will be attracted.
Case 2: Penalty u/s 269ST is not applicable in the hands of Mr. S. In the hands of Mr. B, disallowance u/s 40A(3) will be attracted.

Question 6(b): 9 Marks

Mr. Sarthak a Software Engineer wants to commence a business in Manufacture of solar powered car. He provides the
following information:
(i) The project Cost is estimated at ` 5 Crores.
(ii) He has a Residential house in Surat Since 2010 which could be sold for ` 3 Crores.
(iii) And the Balance ` 2 Crores could be financed through bank borrowings at a Cost of 13% per annum.
(iv) He has another option Viz. his friend Miss Juhi who is willing to contribute ` 2 Crores and become a co–promoter.
The Indexed Cost of acquisition of the Residential House (Computed) is ` 70 Lakhs.
Mr. Sarthak seeks your guidance on the Project Finance taking into Account any Tax incentives available under Income Tax
Law besides the funding of project through bank finance or accepting Miss Juhi as Co–Promoter.
You are requested to advise Mr. Sarthak, on Income Tax aspects to avail Tax benefits within the four corners of Law.

Solution: Refer Chapter 7 Page 7.58, Para 7.4.7 and Page 11.30 Para 11.5.3 in Ready Referencer – AY 2019–2020

Particulars Amount
Sale Consideration 3,00,00,000
Less: Expenses on Transfer NIL
Net Sale Consideration 3,00,00,000
Less: Indexed Cost of Acquisition: Original Cost (70,00,000)
Less: Exemption already claimed u/s 54GB (Since Net Consideration to be invested in Eligible Start–up (2,30,00,000)
as referred in Sec. 80–IAC)
Taxable Long Term Capital Gain Nil

The Assessee can avail benefit if capital gain exemption u/s 54GB if he invest the entire net consideration in an eligible
startup as defined u/s 80IAC and satisfy other conditions mentioned in 54GB. By investing in eligible startup, the startup will
be entitled to deduction in accordance with 80IAC. For funding is concerned, both equity or debt finding will not affect the
eligibility in availing 54GB exemptions.

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 Gurukripa’s Guideline Answers for Nov 2018 CA Final Direct Taxes Exam – New Syllabus

Question 6(c): 3 Marks

T, Inc a Non–Resident Entity incorporated in Mauritius, has permanent Establishment (PE) in India. The PE filed its return of
income for the Assessment year 2019–20 disclosing income ` 100 lakhs and paid tax at the rate applicable to the Domestic
Company i.e 30% plus applicable surcharge and cess on the basis of paragraph 2 of Article 24 of Double Tax Avoidance
Agreement (non–discrimination) between India and Mauritius, which reads as follows:
“The Taxation of PE which is 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 Enterprise of that other state carrying on the same activities in the same
circumstances.” However, the Assessing Officer computed the Tax on the PE at the rate applicable to a Foreign Company
(40%). Is the action of AO in accordance with law?

Solution:
1. Analysis:
(a) DTAA between India and Mauritius says that the tax rate applicable for Permanent Establishment of Mauritius
Company shall not be less favorable than those applicable for Indian Company.
(b) As per Sec.90(5) the charge of tax for a Foreign Company at a rate higher than the rate at which Domestic
Company is chargeable , shall not be regarded as less favorable charge or levy of tax in respect of such
Foreign Company.

2. Conclusion: Tax Rate applicable for PE of Mauritius Company as computed by A.O is correct as charging of Higher rate
than an Indian company shall not be regarded as less favorable..

Question 6(d): 3 Marks

Alpha Inc. a Non–Resident Company has an IT enabled Business Process Outsourcing Unit in India (BPO) and it provides
certain Outsourcing Services to a Resident Indian Entity.
Discuss, the Tax implications, in the hand of Alpha Inc. due to presence of BPO Unit in India.
Solution: Refer Chapter 26, Page 26.9, Para 26.3.6 in Direct Tax Ready Referencer – AY 2019–2020

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