PAPER – 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION

Part - II
Question No.1 is compulsory.
Answer any four questions out of the remaining five questions.
Working notes should form part of the answer
All questions relate to Assessment Year 2022-23, unless stated otherwise in the question.
Question 1
M/s Kaveri Ltd., a manufacturing company, having an annual turnover of ` 6,000 lakhs, shows
a net profit of ` 850 lakhs after debit / credit of following amounts to its Statement of Profit and
Loss for the year ended 31st March, 2022:
(a) Depreciation as per Companies Act ` 65 lakhs.
(b) Employer's contribution to EPF of ` 18 lakhs together with similar amount of Employee's
contribution for the month of March, 2022 was remitted on 20th May, 2022. (The due date
for the remittance to the credit of employee's EPF account being 15th April, 2022.)
(c) GST paid includes an amount of ` 10,500 charged as penalty for delayed filing of returns
and ` 15,400 towards interest for delay in deposit of tax.
(d) An amount of ` 10 lakhs was incurred on notified skill development project u/s. 35CCD.
(e) Loss of ` 20 lakhs, on destruction of an old machinery by fire in the factory and ` 5 lakhs
received as scrap value on this machinery. The insurance company did not admit the
claim of the company on the charge of gross negligence.
(f) Dividend ` 15 lakhs received from a foreign company in which the company holds 32% of
the equity share capital of the company, ` 50,000 was also expended on earning this
income.
(g) Profit of ` 15 lakhs on sale of a building to X Ltd., a domestic company, the entire shares
of which are held by the assessee company. The building was acquired by Kaveri Ltd. on
1st December, 2020.
Additional information:
(i) Normal depreciation computed as per Income-tax Rules, 1962 is ` 92 lakhs.
(ii) During the previous year 2020-21, the company has purchased a new plant and
machinery worth ` 20 lakhs on 10th January, 2021. Balance of Additional depreciation on
this machine is not included in the depreciation computed for the previous year 2021-22.
The Suggested Answers for Paper 7: Direct Tax Laws and International Taxation are based on
the provisions of direct tax laws as amended by the Finance Act, 2021, which are relevant for
May, 2022 examination. The relevant assessment year is A.Y.2022-23.

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 2 FINAL EXAMINATION: MAY, 2022

(iii) The company had credited in the account of a sub-contractor, an amount of ` 7 lakhs on
31st March, 2021 towards repairs of factory building. The tax deducted on such payment
was remitted on 31st December, 2021.
(iv) On 15th May, 2022, M/s Kaveri Ltd. declared and distributed dividend of ` 20 lakhs.
Compute the total income and tax payable by M/s Kaveri Ltd. for the Asst. Year 2022-23
clearly stating the reasons for treatment of each item. Assume that the company has opted
for section 115BAA for the A.Y. 2022-23. (14 Marks)
Answer
Computation of Total Income of M/s Kaveri Ltd. for the A.Y. 2022-23 under section 115BAA
Particulars Amount (in `)
I. Profits and gains of business and profession
Net profit as per Statement of profit and loss 8,50,00,000
Add: Items debited but to be considered
separately or to be disallowed
(a) Depreciation as per Companies Act 65,00,000
(b) Employees’ contribution to EPF 18,00,000
[Since employees’ contribution to EPF has not
been deposited on or before the due date under
the PF Act, the same is not allowable as
deduction as per section 36(1)(va) read with
Explanations 1 and 2 thereto. Since the same
has been debited to Statement of profit and loss,
it has to be added back for computing business
income].
(c) Employer’s contribution to EPF Nil
[As per section 43B, employers’ contribution to
EPF is allowable as deduction since the same
has been deposited on or before the due date of
filing of return under section 139(1). Since the
same has been debited to Statement of profit
and loss, no further adjustment is necessary]
(d) Penalty for delayed filing of GST return 10,500
[Penalty imposed for delay in filing GST return is
not deductible since it is on account of infraction
of the law requiring filing of the return within the

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 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 3

specified period 1. Since the same has been

debited to Statement of profit and loss, it has to
be added back for computing business income]
(e) Interest for delay in deposit of GST Nil
[Interest paid for delay in deposit of GST is
compensatory in nature and hence, allowable as
deduction. Since the same has been debited to
Statement of profit and loss, no further
adjustment is necessary]
(f) Expenditure on notified skill development 10,00,000
project u/s 35CCD
[Expenditure on notified skill development
project u/s 35CCD is not allowable as deduction
since the company has opted for section
115BAA]
(g) Loss due to destruction of machinery by fire
[Loss of ` 20 lakhs due to destruction of 20,00,000
machinery caused by fire is not deductible since
it is capital in nature. As the loss has been
debited to statement of profit and loss, the same
is required to be added back while computing
business income.
(h) Expenditure on earning dividend income 50,000
[Allowability or otherwise of expenditure on
earning dividend income has to be considered
under the head “Income from Other Sources".
Since the said expenditure has been debited to
the statement of profit and loss, the same has to
be added back while computing business
income] 1,13,60,500
9,63,60,500
Less: Items credited but chargeable to tax under
another head/expenses allowed but not
debited
1. Scrap value of machinery 5,00,000
[Scrap value of machinery, being capital in
nature, has to be reduced from WDV of

1 CIT v. Ratanchand Bholanath (S.S) (1986) 160 ITR 500 (M.P.)

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 4 FINAL EXAMINATION: MAY, 2022

machinery. Since the same has been credited to

the statement of profit and loss, it has to be
deducted while computing business income]
2. Dividend received from specified foreign 15,00,000
company
[Dividend income from specified 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]
3. Profit on sale of building to 100% subsidiary 15,00,000
[Taxability or otherwise to be considered under
the head “Capital Gains". Since such profit has
been credited to the statement of profit and loss,
the same has to be deducted while computing
business income]
4. Depreciation as per Income-tax Rules
Normal depreciation 92,00,000
Additional depreciation Nil
[Though the balance 10% additional
depreciation of the earlier year is allowable as
deduction in the current year, since the company
is opting for section 115BAA, additional
depreciation is not permissible in this case]
5. Payment to a sub-contractor where tax 2,10,000
4 deducted last year was remitted after the due
. date of filing of return
[30% of ` 7 lakhs, being payment to a sub-
contractor, would have been disallowed u/s
40(a)(ia) while computing the business income
of A.Y.2021-22, since tax deducted was remitted
after the due date of filing of return. However,
the same is allowable in A.Y.2022-23, since the
remittance has been made on 31.12.2021] 1,29,10,000
8,34,50,500
II Capital Gains
1. Profit on sale of building to 100% Indian Nil
subsidiary

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 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 5

[Short-term capital gains arise on sale of building

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)]
III Income from Other Sources
Dividend income from specified foreign company 15,00,000
[Since M/s Kaveri Ltd. holds 26% or more equity
shares in foreign company, such foreign company is a
specified foreign company u/s 115BBD. Expenditure
on earning dividend income from specified foreign
company is not allowable as deduction.]
Gross Total Income 8,49,50,500
Less: Deduction under Chapter VI-A
Deduction u/s 80M in respect of inter-corporate 15,00,000
dividends [being lower of ` 15 lakh, being dividend
received from specified foreign company, and ` 20
lakh, being dividend distributed by M/s Kaveri Ltd. on
or before the due date specified u/s 139(1) of filing
return of income]
Total Income 8,34,50,500
Computation of tax payable by M/s Kaveri Ltd. for the A.Y. 2022-23 under section 115BAA
Particulars `
Tax on business income @ 22% of ` 8,34,50,500 1,83,59,110
Add: Surcharge@10% 18,35,911
2,01,95,021
Add: Health and education cess@4% 8,07,801
Tax liability 2,10,02,822
Tax payable (rounded off) 2,10,02,820
Question 2
(a) Buildwell Ltd., a Real Estate Investment Trust, registered under relevant SEBI
Regulations, holds 51% shares in HATS Ltd. Buildwell Ltd. provides the following
information about its income for the F.Y. 2021-22.
(i) Interest income from HATS Ltd. - ` 10 crores

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 6 FINAL EXAMINATION: MAY, 2022

(ii) Dividend income from HATS Ltd. - ` 3 crores

(iii) Short-term capital gains on sale of developmental properties - ` 1 crore
(iv) Interest received from investments in unlisted debentures of companies - ` 10 lakhs
(v) Rental income from directly owned real estate assets - ` 2.5 crores
Mr. Vijay, a resident Indian, holds 70% of the units of the REIT. He does not have any
other income during the year.
Compute the total income and tax payable in the hands of M/s Buildwell Ltd. and Mr. Vijay.
Note: HATS Ltd. has opted to pay tax under section 115BAA and Mr. Vijay has opted for
section 115BAC. Ignore TDS implications. (8 Marks)
(b) Ms. Black and Brown S.A., (BnB) a company incorporated in Country X, appointed
Mr. Lal Singh as an agent in India. Lal Singh habitually maintains in India, stock of goods
or merchandise and regularly delivers the same on behalf of various non-resident entities
including BnB. BnB does not have a permanent establishment or a fixed place of
profession in India. Also, there is no DTAA between India and Country X.
BnB earned the following incomes from India during the FY 2021-22:
Income from delivery of goods by Mr. Lal Singh ` 2 crores.
Fee for technical services ` 55 lakhs (After deducting ` 6 lakhs spent on earning such
income)
Long-term capital gains from sale of unlisted debentures of White Ltd., an Indian
Company (subscribed in US$) ` 14 lakhs
BnB had paid a sum equal to ` 50 lakhs as tax in Country X in respect of the above-
mentioned income earned from India.
You are required to discuss the relevant provisions of Income-tax Act with respect to the
taxability of incomes earned by BnB in India and compute the tax payable by BnB on
above income. (6 Marks)
Answer
(a) Computation of total income and tax payable in the hands of M/s Buildwell Ltd.
(REIT) and Mr. Vijay (unit-holder)
Particulars Buildwell Mr. Vijay
(REIT) (Unit-holder)
(i) Interest income of ` 10 crore from HATS Ltd. Nil 7,00,00,000
(SPV)
Interest income from SPV would be exempt in
the hands of REIT by virtue of section
10(23FC)(a).

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 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 7

The component of such interest income

distributed to unit holders would be deemed as
income of the unit holders as per section
115UA(3). Accordingly, ` 7 crores being 70% of
` 10 crores is taxable in the hands of the
unitholder Mr. Vijay.
(ii) Dividend income of ` 3 crore from HATS Ltd. Nil 2,10,00,000
(SPV)
The dividend distributed by the SPV to the REIT
is exempt in the hands of REIT by virtue of
section 10(23FC)(b).
The component of such dividend income
distributed to unitholders is taxable in the hands
of unitholders by virtue of the exception
contained in section 10(23FD), since HATS Ltd.
(SPV) has exercised the option u/s 115BAA.
Accordingly, ` 2.10 crore, being 70% of ` 3
crores, would be taxable in the hands of the
unitholder Mr. Vijay.
(iii) Short-term capital gains of ` 1 crore on sale 1,00,00,000 Nil
of developmental properties
STCG on sale of development properties is
taxable at maximum marginal rate of 42.744% in
the hands of the REIT as per section 115UA(2).
There would be no tax liability in the hands of the
unit holders on the capital gain component of
income distributed to them by virtue of
exemption contained in section 10(23FD).
(iv) Interest of ` 10 lakh received in respect of 10,00,000 Nil
investment in unlisted debentures of
companies
Such interest is taxable@42.744%, being the
maximum marginal rate, in the hands of the REIT
as per section 115UA(2).
There would be no tax liability in the hands of the
unit holders on the interest component of income
distributed to them by virtue of section 10(23FD).
(v) Rental income of ` 2.50 crore from directly Nil 1,75,00,000
owned real estate assets
Income by way of renting or leasing or letting out
any real estate asset owned directly by REIT is
exempt in the hands of the REIT as per section

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 8 FINAL EXAMINATION: MAY, 2022

10(23FCA).
However, the component of such rental income
distributed to unitholders is deemed as income of
the unit holders as per section 115UA(3).
Accordingly, ` 1.75 crores, being 70% of ` 2.5
crores would be taxable in the hands of Mr. Vijay.
Total income 1,10,00,000 10,85,00,000

Particulars ` `
Computation of tax payable
In the hands of REIT (M/s Buildwell)
Tax on total income of ` 1,10,00,000 @ 42.744% 47,01,840
[Maximum marginal rate – 30% + surcharge@37% +
cess@4%]
In the hands of the unitholder, Mr. Vijay who has
opted for section 115BAC
Upto ` 2,50,000 Nil
` 2,50,001 – ` 5,00,000 @5% 12,500
` 5,00,001 – ` 7,50,000 @10% 25,000
` 7,50,001 – ` 10,00,000 @15% 37,500
` 10,00,001 – `12,50,000 @20% 50,000
` 12,50,001 – `15,00,000 @25% 62,500
` 15,00,001 – ` 10,85,00,000 @30% 3,21,00,000
3,22,87,500
Add: Surcharge@37% since total income exceeds ` 5
crores 1,19,46,375
4,42,33,875
Add: Health and education cess@4% 17,69,355
Tax payable 4,60,03,230
Notes:
(i) It has been assumed that 100% of income received by the REIT is distributed to its
unitholders.
(ii) Since question specifically contains a note at the end to ignore TDS implications,
tax payable is computed without deducting the amount of tax deducted at source.

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 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 9

(b) Computation of Tax liability of BnB for the A.Y.2022-23

Particulars `
Income from delivery of goods by Mr. Lal Singh, an agent of BnB 2,00,00,000
As per section 9(1)(i), business profits of a foreign company would
be deemed to accrue or arise in India, if such income accrues or
arises through or from any business connection in India. In case of
BnB, business connection is established, since Mr. Lal Singh acting on
its behalf habitually maintains in India a stock of goods or merchandise
from which he regularly delivers goods or merchandise on its behalf.
Therefore, such income is taxable in the hands of BnB.
Fee for technical services (FTS) 55,00,000
FTS would be taxable in the hands of a foreign company, since the
FTS has been received in India. Therefore, such FTS would be
taxable in the hands of BnB after deducting expenditure on earning
such income. Accordingly, ` 55 lakhs would be taxable.
Long-term capital gains from sale of unlisted debentures of
White Ltd. an Indian company, would be taxable in the hands of
BnB, since it arises from the capital asset situated in India. 14,00,000
Total Income 2,69,00,000
Tax payable on total income
Tax on long-term capital gain @10% as per section 112(1)(c)(iii) 1,40,000
Tax on other income@40% on ` 2,55,00,000 1,02,00,000
1,03,40,000
Add: Surcharge@2% since total income > ` 1 crore but ≤ `10 crore 2,06,800
1,05,46,800
Add: Health and education cess @4% 4,21,872
Tax liability 1,09,68,672
Tax liability (rounded off) 1,09,68,670
Note – No credit will be available in respect of ` 50 lakhs paid as tax
in Country X since there is no DTAA with Country X and the
provisions of section 91 providing for deduction in cases where there
is no DTAA will not apply to BnB, being a foreign company.
Alternate Answer
If it is assumed that the agreement for FTS is approved by the Central Government, then
FTS would be taxable@10% under section 115A. The tax liability would be as follows –

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 10 FINAL EXAMINATION: MAY, 2022

Particulars `
Income from delivery of goods by Mr. Lal Singh, an agent of BnB 2,00,00,000
As per section 9(1)(i), business profits of a foreign company would be
deemed to accrue or arise in India, if such income accrues or arises
through or from any business connection in India. In case of BnB,
business connection is established, since Mr. Lal Singh acting on its
behalf habitually maintains in India a stock of goods or merchandise
from which he regularly delivers goods or merchandise on its behalf.
Therefore, such income is taxable in the hands of BnB.
Fee for technical services (FTS) 61,00,000
FTS would be taxable in the hands of a foreign company, since the
FTS has been received in India. Assuming that the Agreement has
been approved by the Central Govt., as per section 115A, such FTS
would be taxable in the hands of BnB without deducting expenditure
on earning such income. Accordingly, ` 61 lakhs would be taxable.
Long-term capital gains from sale of unlisted debentures of White 14,00,000
Ltd. an Indian company, would be taxable in the hands of BnB, since
it arises from the capital asset situated in India.
Total Income 2,75,00,000

Computation of tax liability

Particulars `
Tax liability on total income of ` 2,75,00,000
Tax on long-term capital gain @10% as per section 112(1)(c)(iii) 1,40,000
Tax on Fees for technical services @ 10% on ` 61,00,000 6,10,000
Tax on other income @40% on ` 2,00,00,000 80,00,000
87,50,000
Add: Surcharge@2% since total income > ` 1 crore but ≤ `10 crore 1,75,000
89,25,000
Add: Health and education cess@4% 3,57,000
Tax liability 92,82,000
Question 3
(a) Examine each of the following independent cases of charitable trust/institutions for the
assessment year 2022-23:
(i) Raj Charitable trust registered under section 12AB, received corpus donation of ` 5
lakhs during the previous year 2021-22. The trust intends to utilize it during the

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previous year 2022-23 and claimed that since the donor gave the donation with a
specific direction that it is towards the corpus of the trust, it is exempt from tax
under section 11(1)(d). Further, during the year, the trust took a loan of ` 20 lakhs
from a nationalized bank and out of it, applied ` 18 lakhs on the construction of its
building. The trust claimed ` 18 lakhs as application for charitable purposes during
the year.
(ii) Smile Foundations is a 'not for profit' trust that runs a secondary school. The total
receipts consisting of voluntary contributions and the government grants of the trust
during the previous year 2021-22 amounted to ` 30 lakhs (` 14 lakhs and 16 lakhs
respectively). Is the trust required to get an approval to claim exemption under
section 10(23C)?
(iii) Mani Foundations is a charitable trust registered under section 12AB. On
31.07.2021, it gets an approval under section 10(23C) also. The trust intends to
know whether it can enjoy the benefits of both the sections that is, section 11 and
section 10(23C).
(iv) Little Angels is a charitable institution registered under section 12AA. To continue
claiming the benefits of the exemption provisions contained in sections 11 & 12 for
the assessment year 2022-23, it wants to apply for re-registration under section
12AB. What would be the effective date for making the application for re-registration
under section 12AB?
The trust wants to confirm whether the registration granted under section 12AB has
the same perpetual validity as granted under section 12AA. (8 Marks)
(b) Mr. Chetan, an Indian citizen aged 51 years, left India on 1st April 2018 to settle in
Country Y. But owing to some personal unavoidable circumstances, he returned back to
India permanently on 1st June 2021.
He has a residential property in Country Y from which he earned an income of $ 25,000
for the year ended 31st March 2022. He is eligible for basic exemption limit of $ 8,000 and
on balance income, he paid income tax @20% in Country Y. The tax was paid on
10th May 2022 from his bank account in India.
His income from business in India is ` 5,00,000 for the year ended on 31st March 2022.
He also received dividend amounting to ` 1,25,000 from an Indian company and interest
of ` 11,500 on saving bank account with SBI, during the year.
The exchange rates of 1 $ on various dates is given below:
1.04.2021 - ` 74; 31.03.2022, ` 75; 10.05.2022 - ` 75.5;
Compute the net tax liability of Mr. Chetan in India for the assessment year 2022-23 on
the assumption that there is no DTAA between India and Country Y.
Assume that the assessee does not opt for the provisions of Section 115BAC. (6 Marks)

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 12 FINAL EXAMINATION: MAY, 2022

Answer
(a) (i) Corpus donations of ` 5 lakhs would be exempt from tax only if they are received
with a specific direction that they shall form part of the corpus and are invested in
any of the modes specified under section 11(5).
If the same is not so invested, then, it would not be exempt under section 11(1)(d)
for P.Y.2021-22.
Application for charitable purposes from a loan or borrowing shall not be treated as
application of income for charitable purposes. Accordingly, ` 18 lakhs applied by
the trust out of loan of ` 20 lakhs taken from a nationalised bank cannot be claimed
as application for charitable purposes. However, the same can be claimed as
application at the time of repayment of loan to the extent of repayment in the
relevant previous year.
Therefore, both the claims of Raj Charitable trust are not correct.
(ii) Smile foundations is an education institution existing solely for educational purposes
and not for the purposes of profit.
It is substantially financed by the Government, since government grants of `16
lakhs constitute 53.33% of its total receipts of ` 30 lakhs (`14 lakhs voluntary
contributions + ` 16 lakhs government grants), which is more than 50% of its total
receipts.
The income of the institution is exempt u/s 10(23C)(iiiab).
Hence, it is not required to get the approval of prescribed authority for claiming
exemption under section 10(23C).
(iii) No, the trust cannot enjoy the benefits under both section 11 and 10(23C).
The registration granted to Mani Foundations under section 12AB for availing
exemption under section 11 would become inoperative from 31.7.2021, being the
date on which it is approved under section 10(23C).
The trust, whose registration has become inoperative, may apply to get its
registration operative under section 12AB subject to the condition that on doing so,
the approval under section 10(23C) to such trust shall cease to have any effect from
the date on which the said registration becomes operative.
(iv) The effective date of making the application for re-registration under section 12AB is
30.6.2021, being three months from 1st April, 2021. CBDT has, vide Circular
No.16/2021 dated 29.8.2021, extended the date upto 31.3.2022.
No, the registration granted under section 12AB would be valid only for 5 years and
not perpetually, as in the case of registration granted under section 12AA.

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(b) Mr. Chetan is a resident in India for A.Y.2022-23, since his stay in India in the
P.Y.2021-22 is for 304 days which exceeds the minimum required stay of 182 days in that
previous year. Also, his stay in India is for 1461 days (i.e., 365 days each in P.Y.2014-15
to P.Y.2017-18 + 1 day for leap year) during the last seven years (which exceeds the
minimum specified requirement of 730 days in the immediately preceding seven years)
and he has been resident in 7 years (P.Y.2011-12 to P.Y.2017-18) out of 10 years
immediately preceding P.Y.2021-22.
Hence, he is resident and ordinarily resident in India for A.Y.2022-23. Accordingly, his
global income would be subject to tax. He would, however, be entitled for deduction
under section 91 in respect of doubly taxed income earned in Country Y.
Computation of total income of Mr. Chetan for A.Y.2022-23
Particulars ` `
Income from House Property [Residential property in
Country Y]
Annual Value2 ($ 25,000 x ` 75, exchange rate on 18,75,000
31.3.2022)
Less: Deduction under section 24 – 30% of NAV 5,62,500
13,12,500
Profits and Gains of Business or Profession
Income from business in India 5,00,000
Income from Other Sources
Dividend from Indian company [`1,25,000 x 100/90] 1,38,889
Interest on savings bank account with SBI 11,500
1,50,389
Gross Total Income 19,62,889
Less: Deduction under Chapter VIA
Under section 80TTA – Interest on savings bank 10,000
account (actual interest of ` 11,500 or ` 10,000,
whichever is lower)
Total Income 19,52,889
Total Income (rounded off) 19,52,890

2Rental Income has been taken as GAV in the absence of other information relating to fair rent, municipal
value etc.

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Computation of tax liability of Mr. Chetan for A.Y.2022-23

Particulars `
Tax on total income [30% of ` 9,52,890 + ` 1,12,500] 3,98,367
Add: Health and Education cess@4% 15,935
4,14,302
Less: Deduction under section 91 (See Working Note below) 1,78,500
Net Tax Liability 2,35,802
Net Tax liability (rounded off) 2,35,800
Working Note: Calculation of deduction under section 91
Particulars ` `
Average rate of tax in India [i.e., ` 4,14,302/` 19,52,890x100] 21.21%
Average rate of tax in country Y [20% of $ 17,000 ($ 25,000 - 13.60%
$ 8,000) = $ 3,400/$ 25,000 x 100 = 13.6%
Doubly taxed income
Income from house property 13,12,500
Deduction u/s 91 on `13,12,500 @13.60% (being the lower of 1,78,500
average Indian tax rate (21.21%) and foreign tax rate (13.60%)]
Question 4
(a) In respect of the following independent case scenarios you are required to discuss the
provisions related to tax deducted/collected at source and amount of tax deductible for
the year ended 31st March 2022.
(i) Mr. Rajat aged 79 years, a retired resident individual, maintains a savings bank
account (S) and a fixed deposit account (F) with ABC Bank, Delhi. He provides the
following details to ABC Bank in respect of financial year 2021-22:
Interest on (S) ` 75,100
Pension from employer (received in savings account S) ` 55,000 per month
Interest from fixed deposit account (F) ` 1,20,000
He does not have any other income during the financial year 2021-22. Assume that
Mr. Rajat did not opt for section 115BAC.
(ii) High and Tall Ltd., a real estate development company, entered into a Joint
Development Agreement with Mr. John, a resident individual, whereby Mr. John
would transfer a plot of land measuring 10 acres for a part consideration of ` 6
crores to be paid on the date of agreement, i.e., 1.6.2021. High and Tall Ltd. has

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planned to develop a high-rise apartment complex on such land by 31.3.2024. Upon

completion of the project, High and Tall Ltd. would transfer 6 flats in the apartment
to Mr. John as final settlement. The FMV of the flats is estimated to be ` 1.20 crores
each as on 31.3.2024.
(iii) M/s Aryan Ltd., a domestic company having a total turnover of ` 12 crores for the
financial year 2020-21, purchased goods worth ` 85 lakhs (excluding purchase
return) from M/s Varun & Co. during the previous year 2021-22. M/s Varun & Co., a
resident firm, has furnished its PAN to Aryan Ltd. Details of payments for purchases
from M/s Varun (P) Ltd. are given below:
On 25.05.2021 - ` 30 lakhs; On 28.06.2021 - ` 25 lakhs; On 10.12.2021 - ` 20
lakhs (out of these purchases, goods worth ` 5 lakhs were returned on 20.12.2021
due to quality issue for which money was refunded by M/s Varun & Co.); On
20.02.2022 - ` 10 lakhs. Assume that the turnover of M/s Varun & Co. during the
Financial year 2020-21 was ` 8 crores and the above amounts were credited to
M/s Varun & Co.'s account in the books of M/s Aryan Ltd. on the same date.
(iv) State Government of Telangana grants a lease of coal mine to M/s XYZ Co. Ltd. on
1.09.2021 and charged ` 10 crores for the lease. M/s XYZ Co. Ltd. sold coal for ` 1
crore to M/s AB (P) Ltd. during the previous year 2021-22. The turnover of M/s XYZ
Co. and M/s AB (P) Ltd. for the financial year 2020-21 amounted to ` 5 crores and
` 6 crores, respectively. (8 Marks)
(b) Alfa Ltd., Australia, holds 30% equity shares in Beta Ltd., India. Beta Ltd. develops
software and also provides the related support services. Beta Ltd. during the year billed
Alfa Ltd., Australia for 150 man-hours at the rate of ` 2,500 per man hour. The total cost
(direct and indirect) for executing this work amounted to ` 3,50,000.
However, Beta Ltd. billed Gama Ltd., India at the rate of ` 3,500 per man hour for the
similar level of manpower and earned Gross Profit of 40% on its cost.
The transactions of Beta Ltd. with Alfa Ltd. and Gama Ltd. are comparable, subject to the
following differences:
(i) While Beta Ltd. also derives technological support from Alfa Ltd., there is no such
support from Gama Ltd. The value of technological support received from Alfa Ltd.
may be put at 15% of normal gross profits,
(ii) As Alfa Ltd. gives business in large volumes, Beta Ltd. offered to Alfa Ltd., a
quantity discount which may be valued at 10% of the normal gross profits,
(iii) In the case of rendering services to Alfa Ltd., Beta Ltd. neither runs any risk nor
incurs any marketing costs. On the other hand, in the case of services to Gama Ltd.,
Beta Ltd. has to assume all the risks and costs associated with the marketing
function which may be estimated at 20% of the normal gross profits,

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(iv) Beta Ltd. offered one month credit to Alfa Ltd. The cost of providing such credit may
be valued at 5% of the normal gross profits. No such credit was given to Gama Ltd.
Compute the Arm's Length Price alongwith income to be adjusted under the cost plus
method. (6 Marks)
Answer
(a) (i) Mr. Rajat is a specified person as per section 194P as he is of age of 79 years,
having pension income and only interest on fixed deposit with ABC Bank. His
pension income is also received in savings bank with ABC Bank.
As per section 194P, ABC Bank (specified bank) is required to deduct tax at source
on the basis of rates in force on the total income of Mr. Rajat for A.Y. 2022-23,
computed after giving effect to -
- deduction allowable under Chapter VI-A; and
- rebate allowable under section 87A
Particulars ` `
Pension (` 55,000 x 12) 6,60,000
Less: Standard deduction u/s 16(ia) 50,000 6,10,000
Interest on fixed deposit 1,20,000
Interest on Saving bank account 75,100 1,95,100
Gross Total Income 8,05,100
Deduction u/s 80TTB [Interest on fixed deposit and 50,000
savings account, restricted to 50,000, since Mr. Rajat
is a resident Indian of the age of 79 years]
Total Income 7,55,100
Tax to be deducted by the specified bank i.e., ABC
Bank [20% x ` 2,55,100 (` 7,55,100 – ` 5,00,000) +
` 10,000 (being 5% of ` 2,00,000)] plus HEC@4% 63,461
(ii) Mr. John, a resident, is entering into an agreement with High and Tall Ltd., a real
estate developer, to develop a high-rise apartment complex on his land in
consideration of ` 6 crore and 6 flats in the apartment. This is a specified
agreement under section 45(5A).
As per section 194-IC, High and Tall Ltd. is required to deduct tax at source @ 10%
on ` 6 crores, being the consideration paid other than consideration in kind, under a
specified agreement to Mr. John.
Tax is to be deducted at the time of credit of such sum or payment, whichever is earlier.
Tax u/s 194-IC would be = ` 6 crore x 10% = ` 60 lakhs

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(iii) M/s Varun & Co. is not required to collect tax at source on the sale of goods to
M/s Aryan Ltd., since his turnover for the P.Y. 2020-21 does not exceed ` 10 crores.
Since turnover of M/s Aryan Ltd. for the P.Y. 2020-21 exceeds ` 10 crores and the
aggregate value of purchases from M/s Varun & Co. exceeds ` 50 lakhs, M/s Aryan
Ltd. is required to deduct tax at source u/s 194Q@0.1% of such sum exceeding
` 50 lakhs. However, the provisions of section 194Q are applicable with effect from
1.7.2021.
In case of purchase return, if the money is refunded by the seller, then, this tax
deducted on purchase return would be adjusted against the next purchase from the
same seller.
Applicability of TDS on purchases from M/s Varun & Co
25.05.2021 ` 30 lakhs Not required to deduct tax at source
28.06.2021 ` 25 lakhs Aggregate value of purchase exceeds ` 50 lakhs
but still M/s Aryan Ltd. is not required to deduct tax
at source u/s 194Q as the provisions of section
194Q are effective only from 1.7.2021
10.12.2021 ` 20 lakhs TDS = ` 2,000 [0.1% x ` 20 lakhs]
20.02.2022 ` 10 lakhs TDS = ` 500 [` 1,000, being 0.1% x ` 10 lakhs –
` 500, being the TDS on purchase return of ` 5
lakhs]

(iv) State Government is required to collect tax at source@2% u/s 206C(1C) on ` 10

crores, being the charges for lease of coal mine.
TCS = 2% x ` 10 crores = ` 20,00,000
M/s XYZ Co. Ltd. is required to collect tax at source @1% u/s 206C(1) on sale of
coal to M/s AB (P) Ltd.
TCS = 1% of ` 1 crore = ` 1,00,000.
(b) Two enterprises are deemed to be associated enterprises where one enterprise, directly
or indirectly, holds shares carrying not less than 26% of the voting power in the other
enterprise.
In this case, since Alfa Ltd., a foreign company, holds 30% equity shares in Beta Ltd., an
Indian company, Alfa Ltd. and Beta Ltd. are deemed to be associated enterprises. Since
the transaction of developing software and providing related support service by Beta Ltd.
to Alfa Ltd. is an international transaction between associated enterprises, the provisions
of transfer pricing would be attracted in this case.

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 18 FINAL EXAMINATION: MAY, 2022

Computation of Arm’s Length Price as per Cost Plus Method

Particulars % %
Gross Profit mark-up on cost in case of Gama Ltd. Ltd. [an 40%
unrelated party]
Less: Adjustments for functional and other differences
- Value of technology support [Alfa Ltd. provides technology 6%
support, but Gama Ltd. does not provide such support.
Therefore, value of technology support shall be adjusted] [15%
of 40%, being gross profit]
- Quantity discount to Alfa Ltd. [Quantity discount is allowed to 4%
Alfa Ltd. as it gives business in large volumes, but the same is
not provided to Gama Ltd. Therefore, it shall be adjusted] [10%
of 40%, being gross profit]
- Risk and cost associated with marketing [Beta Ltd. has to bear 8%
all the risk and costs associated with the marketing function in
case of Gama Ltd., while there is no such risk in case of
services to Alfa Ltd. Therefore, market risk and cost shall be
adjusted] [20% of 40%, being gross profit] 18%
22%
Add: Cost of credit to Alfa Ltd. [Beta Ltd has provided credit of 1
month to Alfa Ltd. but not to the unrelated party. Therefore,
adjustment for the cost of such credit has to be carried out to
arrive at the ALP] [(5% of 40%, being gross profit] 2%
Arm’s length gross profit mark up to cost 24%
Cost incurred by Beta Ltd. for executing Alfa Ltd.’s work 3,50,000
Add: Adjusted gross profit (` 3,50,000 x 24%) 84,000
Arm’s length billed value 4,34,000
Less: Actual Billed Income from Alfa Ltd. (` 2,500 x 150 man hours) 3,75,000
Total Income of Beta Ltd to be increased by 59,000
Question 5
(a) Your answer should cover these aspects:
• Issue involved
• Provision applicable
• Analysis and
• Conclusion

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(i) Mr. X filed his return of income for A.Y. 2022-23 by declaring a total income of ` 10
lakhs. His case was selected for scrutiny assessment and an addition of ` 4 lakhs
was made by the Assessing Officer on account of disallowances of certain
expenses. During the course of the assessment proceedings, Mr. X found that he
erroneously failed to claim the set-off of brought forward losses under section 72
amounting to ` 3 lakhs, which he was otherwise entitled to. By the time the error
was discovered by Mr. X, the time-limit for filling revised return had also expired.
Hence, during the course of the proceedings, Mr. X approached the Assessing
Officer to allow the set-off of the brought forward losses which was erroneously not
claimed in the return of income filed under section 139(1). Whether the Assessing
Officer is bound to accept the request of Mr. X?
OR
On 14.10.2021, a search under section 132 of Income-tax Act, 1961 was conducted
in the premises of Mr. Sahir, a resident individual. On verification of bank account of
the assessee, a sum of ` 20 crores was found to have been credited in the bank
account of the assessee. The Assessing Officer added such sum as unexplained
cash credit under section 68. On appeal, the assessee declared that the sum was
received from Mr. Shekhar, one of his close friends. Mr. Shekhar agreed to have
transferred such sum to the account of the assessee. However, the Assessing
Officer is of the view that since Mr. Shekhar is unable to explain the source of this
sum, it should be treated as unexplained cash credit in the hands of the assessee.
Whether the claim of the Assessing Officer is justified?
(ii) On 1st May, 2020, D. Venkatswami, a resident individual, received 1,000 bonus
shares from ABC Pvt. Ltd. in which he held 1,000 equity shares. The Assessing
Officer held that since the assessee has not paid any consideration for bonus
shares, he was under an obligation in law to offer the market value as income from
other sources under section 56(2)(vii)(c) of the Act. The Assessing Officer computed
the fair value of these bonus shares and added the amount to the income of D.
Venkatswami as “Income from other sources”.
Whether the decision of the Assessing Officer is correct in law? (4 x 2 = 8 Marks)
(b) Sun Ltd., an Indian company, is engaged in the business of manufacture and sale of
carpets. To expand its international sales, it hired the services of a London based
company, Shine Inc., for online advertisements. Shine Inc. has no permanent
establishment in India. During the previous year 2021-22, Sun Ltd. paid ` 5 lakh to Shine
Inc. for such services and deducted the equalization levy on 15.03.2022 and credited it to
the account of Central Government on 15.04.2022.
You are required to -
(i) Compute interest leviable to Sun Ltd. on the delayed payment of equalization levy.
(ii) What are the circumstances under which penalty cannot be imposed?

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 20 FINAL EXAMINATION: MAY, 2022

(iii) Sun Ltd. is aggrieved by the order imposing penalty. What is the time limit for filing of
appeal against the order of the Assessing Officer imposing the penalty? (6 Marks)
Answer
(a) (i) [First Alternative]
Issue Involved: The issue under consideration is whether the Assessing Officer is
bound to allow the set-off of brought forward losses under section 72 even if the
assessee, Mr. X, in this case, has not claimed the same in the return filed by him
and the time limit for filing revised return has expired.
Provision Applicable: Under section 72, business losses shall be carried forward
and shall be set-off against the profits and gains of any business in the next
assessment year. It is assumed that the assessee has filed the Return of income
within the time stipulated u/s 139(1) and hence is eligible for set off of the
unabsorbed loss in the subsequent year.
The wording used in section 72 is “shall”, indicating that the provisions relating to
set off of brought forward business loss are mandatory provided the loss was
determined in pursuance of a return filed under section 139(3) in any earlier
previous year.
Analysis: As per CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955, it is the
duty of the Assessing Officer to assist a taxpayer in every reasonable way,
particularly in the matter of claiming and securing reliefs and in this regard, they
should take the initiative in guiding a taxpayer where proceedings or other
particulars before them indicate that some refund or relief is due to him.
Thus, it is the duty of the Assessing Officer to apply the relevant provisions of the
Act for the purpose of determining the true figure of Mr. X’s total income and
consequential tax liability. Merely because Mr. X has not claimed the set-off of
brought forward losses of ` 3 lakh in the original return filed and the time limit for
filing revised return has expired, it cannot relieve the Assessing Officer of his duty to
apply section 72 in the appropriate case.
Conclusion: The Assessing Officer is bound to accept the request of Mr. X and
allow the set-off of brought forward losses of ` 3 lakh under section 72, even if
Mr. X has not claimed the same in the return filed, and the time limit for filing the
revised return has expired.
Note – This facts given in the question are similar to the facts in CIT v. Mahalakshmi
Sugar Mills Co. Ltd. (1986) 160 ITR 920, wherein the above issue came up before
the Supreme Court. The above answer is based on the rationale of the Supreme
Court ruling in that case, taking note of the CBDT Circular No.14 (XL-35) of 1955
dated 11.04.1955.

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 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 21

[Second Alternative]
Issue Involved: The issue involved in this case is whether, for cash credit to be
genuine, is the assessee required to explain the source of sum in the hands of the
lender also.
Provision applicable: Section 68 brings to tax any sum found credited in the books
of an assessee, where the assessee does not offer explanation about the nature
and source thereof or the explanation offered by him is not found satisfactory by the
Assessing Officer.
Analysis: For cash credits to be genuine, Mr. Sahir has to prove the identity of the
creditor, Mr. Shekhar, in this case, the capacity of the creditor to advance money
and finally, the genuineness of the transaction.
Mere confirmation from Mr. Shekhar will not suffice.
Conclusion: Accordingly, the action of the Assessing Officer in bringing to tax
unexplained cash credit in the hands of Mr. Sahir is correct, since his friend Mr. Shekhar,
from whom he had received ` 20 crores which was found credited to his (Mr. Sahir’s)
bank account, is unable to explain the source of this sum in his hands.
Note - The facts given in the question are similar to the facts in CIT v. Sadiq Sheikh
(2020) 429 ITR 163, wherein the above issue came up before the Bombay High Court.
The above answer is based on the rationale of the Bombay High Court in that case.
(ii) Issue Involved: The issue under consideration is whether bonus shares received
by shareholders would be taxable under the head ‘Income from other sources’ as
per the provisions of section 56(2)(x), as they are received without consideration.
Provision Applicable: Section 56(2)(x) brings to tax any sum of money or value of
property received by any person without consideration or for inadequate
consideration from any person.
Analysis: When a shareholder gets bonus shares, the value of the original shares
held by him goes down and the market value as well as intrinsic value of the two
shares put together will be the same or nearly the same as the value of original
share before the issue of bonus shares.
Thus, any profit derived by the assessee shareholder on account of receipt of bonus
shares is adjusted by depreciation in the value of equity shares originally held by him.
Conclusion: Accordingly, the action of the Assessing Officer in including the fair
value of bonus shares as Income from other sources of D. Venkatswami is incorrect.
Note – The facts given in the question are similar to the facts in PCIT v. Dr. Ranjan
Pai (2021) 431 ITR 250, wherein the issue came up before the Karnataka High
Court. The above answer is based on the rationale of the Karnataka High Court in
the said case.

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 22 FINAL EXAMINATION: MAY, 2022

(b) (i) Interest for delayed remittance of equalization levy

Equalisation levy = 6% of ` 5 lakh = ` 30,000
The equalization levy deducted on 15.3.2022 has to be paid to the credit of the
Central Government by 7.4.2022 (i.e., 7th of the succeeding month).
However, in this case, Sun Ltd. remitted the same only on 15.4.2022.
The delay in this case is 8 days.
Simple interest@1% is leviable per month or part of month by which crediting of tax
is delayed.
Accordingly, interest would be 1% of ` 30,000 = ` 300
(ii) Circumstances under which penalty cannot be imposed
No penalty for failure to deduct or pay equalisation levy shall be imposable, if Sun
Ltd. proves to the satisfaction of the Assessing Officer that there was reasonable
cause for the said failure.
Further, no order imposing a penalty shall be made unless Sun Ltd. has been given
a reasonable opportunity of being heard.
(iii) Time limit for filing appeal
If Sun Ltd. is aggrieved by the order imposing penalty, it may appeal to
Commissioner (Appeals) within a period of 30 days from the date of receipt of the
order of the Assessing Officer imposing the penalty.
Question 6
(a) State with reason, whether the following acts can be considered as Tax Planning or Tax
Management or Tax Evasion.
(i) An individual assessee deposits a sum of ` 10,000 in Sukanya Samriddhi Account
of his daughter, so that his total income is reduced from ` 5,05,000 to ` 4,95,000
which entitles him to rebate under section 87A and consequently his tax liability
becomes Nil.
(ii) A company obtaining declaration in Form No.60 from customers who are required to
provide their PAN but the same is not allotted to them.
(iii) A partnership firm made a payment of ` 35,000 for purchase of a refrigerator which
is installed at the residence of one of the partners. However, the same is shown as
being installed in the office of the firm for claiming depreciation.
(iv) A company pays ` 4 lakhs to Mrs. D (wife of Director Mr. D), who, although being a
qualified professional but is a house-wife. The purpose is to increase the total

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income of Mrs. D (upto ` 5 lakhs) and claim expenditure in the books of the
company without provision of any professional service by Mrs. D to the company.
(4 Marks)
(b) In respect of insolvency proceedings initiated against D Ltd., Mr. Prateek was appointed·
as "Official Assignee", You are required to advise him as to whether he will be treated as
Representative Assessee in this regard and what will be his status and his liability with
respect to other procedures under the Income-tax Act, 1961. (4 Marks)
(c) What is meant by Digital economy? What are the taxation issues in E-Commerce? List
out the OECD recommendations under Action Plan 1 which deals with the digital
economy. (6 Marks)
Answer
(a)
Answer Reason
(i) Tax planning Depositing money in Sukanya Samriddhi Account of his
daughter for claiming deduction under section 80C to reduce
total income from ` 5,05,000 to ` 4,95,000 in order to avail
rebate under section 87A, which consequently reduces his
tax liability to ‘Nil’, is a permitted tax planning measure under
the provisions of income-tax law.
(ii) Tax management Obtaining declaration from customers in Form No. 60 by the
company is in the nature of compliance of statutory
obligation under the Income-tax Law.
(iii) Tax evasion A refrigerator fitted at the residence of a partner and shown
as being installed in the office of the firm for claiming
depreciation would tantamount to furnishing of false
particulars with an attempt to evade tax.
(iv) Tax evasion Payment of ` 4 lakhs to Mrs. D (wife of Director Mr. D) without
provision of any professional services, to increase her total
income upto ` 5 lakhs and to correspondingly reduce the
company’s total income is a method of reducing the tax
liability of the company by recording a fictitious transaction.
The company is liable to tax at a flat rate of 30%/25%/22%, as
the case may be, whereas Mrs. D would not be liable to pay
any tax, since her total income does not exceed
` 5,00,000, consequent to which she would be eligible for tax
rebate of ` 12,500 under section 87A. Reducing tax liability
by recording a fictitious transaction would tantamount to tax
evasion.

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(b) CBDT Circular No. 4/2019, dated 28.1.2019 has clarified that since Official Assignee
does not receive the income or manage the property on behalf of the debtor, he 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. Therefore, Mr. Prateek
appointed as “Official Assignee” in respect of insolvency proceedings initiated against D
Ltd. will not be treated as representative assessee.
As property of the insolvent is vested with the Official Assignees as per specific
provisions of the Act/Law regulating functioning of the Official Assignees, they have to be
treated as a 'juristic entity' for purposes of the Income-tax Act.
For purpose of discharge of tax-liability under the Act, the status of Official Assignee is
that of an 'artificial juridical person' as prescribed in section 2(31)(vii), not being one of
the 'persons' falling in section 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, D Ltd., in this case, 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.
(c) In digital economy transactions like sale, purchase, payment, rendering services are
performed through digital or virtual mode. In the digital domain, business do not actually
occur in any physical location but instead takes place in "cyberspace."
Taxation issues in e-commerce
The typical taxation issues relating to e-commerce are:
(i) the difficulty in characterizing the nature of payment and establishing a nexus or link
between taxable transaction, activity and a taxing jurisdiction,
(ii) the difficulty of locating the transaction, activity and identifying the taxpayer for
income tax purposes.
The following are OECD recommendations under Action Plan 1 dealing with digital economy:
(1) Modifying the existing permanent establishment rule to provide for whether an
enterprise engaged in fully de-materialized digital activities would constitute a PE, if
it maintained a significant digital presence in another country's economy.
(2) a virtual fixed place of business in the concept of permanent establishments
i.e., creation of a PE when the enterprise maintains a website on a server of another
enterprise located in a jurisdiction and carries on business through that website.
(3) Imposition of a final withholding tax on certain payments for digital goods or
services provided by a foreign e-commerce provider or imposition of equalisation
levy on consideration for certain digital transactions received by a non-resident from
a resident or from a non-resident having permanent establishment in other
contracting state.

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