This Question Paper is copyrighted property of AIR1CA Career Institute.

Sharing and Circulating it without

permission is punishable offence.

CA FINAL (May 2025)

GROUP II – PAPER 4
DIRECT TAX LAWS & INTERNATIONAL TAXATION
(Series 2)
Time Allowed: - 3 Hours Maximum Marks: 100

This question paper comprises two parts, Part I and Part II.
Part I comprises MCQ & Part II comprises questions which require descriptive answers.
All questions relate to A.Y. 2025-26 unless stated otherwise in the question.

PART – I (MCQs)
All MCQs are compulsory

Question no. 1-15 carry 2 marks each

Case Study 1
Wellness Pvt Ltd, an Indian company incorporated on 1st April, 2024 offers multi-disciplinary
marketing services in print and digital media to Indian businesses. To carry on its business, the
company has engaged local advertising specialists in the field of print and digital media. These
specialists attend to clients of the company by doing required consultancy, execution and also perform
analysis of results. Depending upon the service request of the client – whether print or digital mode,
specialists perform relevant tasks. The specialists employ their individual skills and exercise discretion,
judgement while performing the duties. The policies of the company regarding working hours, annual
leave applicable to the staff do not apply to these specialists. The remuneration of specialists varies
every month depending upon type of service, seniority of specialist, skills involved etc.
During the year 2024-25, Wellness Pvt Ltd recorded a turnover of Rs. 1.10 crores in its books of
accounts. Inspired by the Government’s Digital India initiative, the company provided electronic
payment facilities to customers. Most of the billed amount was collected through digital means, except
from Customer X (Bill no. 15, dated 26th June, 2024 of Rs. 5,50,000). Customer X paid the amount in
cash to the company in 4 installments on different dates - Rs. 1,50,000, Rs. 75,000, Rs. 1,75,000 and Rs.
1,50,000.
The details of payments made by the company during the year 2024-25 are as under:
Particulars Mode of Amount
payment (Rs.)
Remuneration to 20 specialists Net-banking 35,00,000
Salary to staff (3 employees) (HR, junior co-ordinators) (Each Net-banking 25,00,000
person has total income more than Rs. 8 lakh)
Wages to 1 security guard, 2 housekeeping staff (wages of Rs. Cash 5,40,000
15,000 p.m. each)
Computers purchased on 15th May, 2024 and put to use from 15th A/c payee Cheque 3,50,000

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 1
October, 2024
Interest for P.Y. 2024-25 on loan availed on 15th April, 2024 from A/c payee Cheque 34,500
SBI for purchase of computers
Other administration expenses (Each expense is of less than Rs. Cash 70,000
8,000)
Advance given to suppliers, specialists etc. Cash 90,000
The company could recruit a qualified finance and accounts professional only on 21 st March, 2025. Post
his appointment, necessary income tax statutory compliances were undertaken and the default with
respect to non-deduction of tax on expenses from April, 2024 to March, 2025 was corrected in the
month of April, 2025. The company withheld tax on expenses liable for withholding tax and paid such
tax to the credit of Government in the same month.
Being the first year of operation, all transactions of the company are with Indian resident parties. The
company has chosen to follow mercantile system of accounting for tax purposes.
You are required to answer the following:
1. Is Wellness Pvt. Ltd. required to get its books of account audited under section 44AB for
A.Y.2025-26?
(i) No, since turnover of company is less than Rs. 10 crore.
(ii) Yes, since the turnover of the company is more than Rs. 1 crore.
(iii) No, since the turnover of the company is less than Rs. 2 crore.
(iv) No, as aggregate cash receipts during the year do not exceed 5% of total amount received.
(v) Yes, as cash payments during the year exceed 5% of aggregate payments.
(vi) Yes, as the company is not eligible for presumptive taxation.
The correct answer is -
A. No, due to reasons stated in (i) and (iv) above
B. Yes, due to reasons stated in (ii) and (v) above
C. No, due to reason stated in (iii) above
D. Yes, due to reasons stated in (ii) and (vi) above
2. What is the amount to be disallowed for non-deduction of tax at source while computing
profits and gains of business or profession?
A. Nil, since the entire amount of tax has been deducted and remitted on or before the due
date of filing of return u/s 139(1)
B. Rs. 10,50,000
C. Rs. 18,00,000
D. Rs. 19,62,000
3. What is the amount of depreciation allowable u/s 32(1) for the P.Y. 2024-25 on the
computers purchased?
A. Rs. 73,600
B. Rs. 70,000
C. Rs. 73,450
D. Rs. 76,900
4. What is the total income of Wellness Pvt Ltd. for the A.Y. 2025-26?

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 2
 A. Rs. 66,39,900
B. Rs. 66,25,500
C. Rs. 49,89,900
D. Rs. 44,49,900
5. Is any penalty imposable on the company for cash receipts from Customer X and if yes,
how much?
A. No, since each receipt is less than Rs. 2,00,000
B. Yes, Rs. 5,50,000
C. No, since amount exceeding Rs. 2,00,000 is not received on a single day
D. No, since amount received is not in the nature of loan or advance

Case Study 2
Ganga LLP is a limited liability partnership set up a unit in Special Economic Zone (SEZ) in the financial
year 2018-19 for manufacture of textiles. The unit fulfills all the conditions under section 10AA of the
Income-tax Act, 1961. During the financial year 2023-24, it has also set up a warehousing facility in
Pune for storage of sugar, fulfilling the conditions for claim of deduction under section 35AD. Capital
expenditure in respect of warehouse amounted to Rs. 97 lakhs (including cost of land Rs. 32 lakhs). The
warehouse became operational with effect from 1 st April, 2024 and the expenditure of Rs. 97 lakhs was
capitalized in the books on that date.
The details for the financial year 2024-25 are given hereunder:
Particulars Rs.
Profit of unit located in SEZ 60,00,000
Export sales of above unit received in India in convertible foreign exchange on or 1,20,00,000
before 30.9.2025
Domestic sales of above unit 40,00,000
Profit from operation of warehousing facility (before considering deduction under 1,60,00,000
section 35AD)
Mr. Ganesh, one of the partners of the LLP, commenced the business of manufacture of leather on
1.4.2023. His turnover in the P.Y.2023-24 is Rs. 180 lakh and in the P.Y.2024-25 is Rs. 200 lakhs. The
payments made in the P.Y.2024-25 is Rs. 190 lakhs. The profit for P.Y.2024-25 as per books of account
maintained u/s 44AA is Rs. 12.10 lakhs. Out of the turnover of Rs. 200 lakhs, Rs. 190 lakhs is received
through RTGS and NEFT and Rs. 10 lakhs is received by way of cash. Out of the payments of Rs. 190
lakhs made (including expenditure incurred), Rs. 180 lakhs is through RTGS/ NEFT and the remaining
Rs. 10 lakhs through cash.
You are required to answer the following:
6. What is the amount of deduction under section 10AA and 35AD available to Ganga LLP
while computing income under the regular provisions of the Income-tax Act, 1961 for
A.Y.2025-26?
A. Rs. 45 lakhs and Rs. 65 lakhs, respectively
B. Rs. 22.50 lakhs and Rs. 65 lakhs, respectively
C. Rs. 45 lakhs and Rs. 97 lakhs, respectively
D. Rs. 22.50 lakhs and Rs. 97 lakhs, respectively

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 3
7. What is the tax liability of Ganga LLP computed under the regular provisions of the
Income-tax Act, 1961 for A.Y.2025-26?
A. Rs. 38,43,840
B. Rs. 31,70,000
C. Rs. 46,30,080
D. Rs. 19,65,600
8. What the alternate minimum tax (rounded off) payable by Ganga LLP as per section 115JC
for A.Y.2025-26?
A. Rs. 39,49,750
B. Rs. 41,07,740
C. Rs. 43,95,280
D. Rs. 46,00,670
9. Is there any AMT credit to be carried forward under section 115JEE? If so, what is the
amount of such credit?
A. Yes; Rs. 5,22,340
B. Yes; Rs. 7,56,830
C. Yes; Rs.2,63,900
D. No
10. What is the income to be declared by Mr. Ganesh for A.Y.2025-26 under the head “Profits
and gains of business or profession”, so that he makes maximum tax savings without
getting his books of account audited?
A. Rs. 12 lakhs
B. Rs. 12.10 lakhs
C. Rs. 12.20 lakhs
D. Rs. 16 lakhs

Case Study 3
X Pvt. Ltd. (“X”) is an Indian company. Y Inc (“Y”) is a private company incorporated in the USA and its
income is not chargeable to tax in India. Both are promoted by Mr. Ayush who holds 30% equity share
capital and voting power in both X and Y. The balance sheet of X as on 31 st March, 2025 is as follows:
Liabilities Amount (Rs. million) Assets Amount
(Rs. million)
Paid up capital 250 Fixed Assets 700
Loans: 800 Investments 300
From 620 Cash and bank balance 200
Y
From 180
others
Current liabilities 150
Total 1,200 Total 1,200
Additional information:

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 4
(i) The loan was advanced by Y to X on 1st July, 2024 in rupee terms and carries 6.5% p.a. rate of
interest. For borrowers with similar risk profile who are not associated enterprises of Y, Y
advances loan at 4% p.a. interest rate.
(ii) X has maintained such information and document in respect of the international transaction as
has been prescribed under section 92D but has not reported the transaction as an international
transaction. X does not make any adjustment to its total income on account of application of
provisions of Chapter X of the Income-tax Act, 1961 in its return of income.
You are required to answer the following:
11. What is the amount of primary adjustment required to be made to the total income of X for
A.Y.2025-26?
A. Rs. 1,16,25,000
B. Rs. 58,12,500
C. Rs. 1,55,00,000
D. Rs. 77,50,000
12. If X has accepted the primary adjustment made by the Assessing Officer on 31.3.2026,
what should X do if it does not want to treat the excess money as deemed advance and
include interest on the same in its total income?
(i) The excess money which is available to Y, has to be repatriated to India within 90 days
from the due date of filing of return.
(ii) The excess money which is available to Y, has to be repatriated to India within 90 days
from the date of order of the Assessing Officer.
(iii) X has to pay additional income-tax @20.9664% on the excess money.
(iv) Interest has to be paid upto the date of payment of additional income-tax.
The most appropriate answer is -
A. (i) or (iii)
B. (ii) or (iii)
C. (i) or [(iii) and (iv)]
D. (ii) or [(iii) and (iv)]
13. If X has accepted the primary adjustment made by the Assessing Officer on 31.3.2026 and
the excess money has not been repatriated into India upto 31.3.2027, what would be the
consequence if X has not opted to pay additional income-tax? Assume that SBI one-year
marginal cost of lending rate is 10% on 1.4.2026 and 11% on 1.4.2027.
A. Interest of Rs. 16,56,563 has to be added to its total income for P.Y.2026-27
B. Interest of Rs. 11,60,509 has to be added to its total income for P.Y.2026-27
C. Interest of Rs. 15,40,313 has to be added to its total income for P.Y.2026-27
D. Interest of Rs. 20,53,750 has to be added to its total income for P.Y.2026-27
14. Which factor is relevant in determining whether penalty under section 270A of the
Income-tax Act, 1961 will be leviable in respect of the primary adjustment to X’s total
income?
A. Since X has maintained information and documents as prescribed under section 92D, that
by itself is sufficient for holding that X has not under-reported its income
B. If the Assessing Officer/Transfer Pricing Officer makes adjustment to X’s total income on
account of an international transaction not being in accordance with arm’s length price,

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 5
 that by itself is sufficient to hold that X has under-reported its income; consequently,
penalty u/s 270A is leviable
C. Since X has not reported the transaction as an international transaction, X will be
considered to have under-reported its income and penalty will be 50% of the amount of tax
payable on the under-reported income
D. Since X has not reported the transaction as an international transaction, X will be
considered to have misreported its income and penalty will be 200% of the amount of tax
payable on the misreported income
15. In the scenario given above, what would be the situation on account of application of
transfer pricing provisions if X, the Indian company would have been the lender and Y, the
US company, the borrower?
Rate of interest on loan by X to Y = 6.5% p.a.
For borrowers with similar risk profile who are not associated enterprises of X, X
advances loan at 4% p.a. interest rate.
A. Identical adjustment would be made to the income of Y instead of X
B. No adjustment would be required in the hands of X or Y
C. Identical adjustment would made to the income Y as well as X
D. Adjustment would still be made to the income of X and no adjustment would be made to
the income of Y

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 6
 PART – II (Descriptive Questions)
This part comprises 6 questions. Question No. 1 is compulsory. Attempt any
4 questions out of the remaining 5 questions.

Question 1 (14 Marks)

MP Ltd. is engaged in the manufacture of textile since 01.05.2015. Its Statement of Profit and Loss for
the financial year ended 31st March, 2025 shows a profit of ₹ 560 lakhs after debiting or crediting the
followings items:
(a) Depreciation charged on the basis of useful life of assets as per Companies Act is ₹ 52 lakhs.
(b) Industrial power tariff concession of ₹ 5.40 lakhs, received from Madhya Pradesh Government
was credited to Statement of Profit and Loss.
(c) Contribution of ₹ 2.50 lakhs to a scientific laboratory functioning at the national level with a
specific direction for use of the amount for scientific research programme approved by the
prescribed authority.
(d) Profit of ₹ 8 lakhs on sale of a plot of land to AVM Limited, a domestic company, the entire shares
of which are held by the assessee company. The plot was acquired by MP Ltd. on 30 th June, 2023.
(e) Payment of ₹ 3.50 lakhs towards transportation of various materials procured by one of its units
to M/s Bansal Transport, a partnership firm, without deduction of tax at source. The firm opts for
presumptive taxation under section 44AE and has furnished a declaration to this effect. It also
furnished its Permanent Account Number in the tender document.
(f) Bonus paid to staff includes an amount of ₹ 1.50 lakhs which was provided for in the books on
31.03.2024 but has been paid in August 2024.
(g) Interest of 15 lakhs paid on loans taken specifically for purchase of plant and machinery. Out of
this ₹ 5 lakh is for upto the period till such machinery was commissioned.
(h) A debtor who owed the company an amount of ₹ 20 lakhs was declared insolvent and hence, was
written off by debiting the Statement of Profit and Loss.
(i) ₹ 5 lakhs, being the additional compensation received from the State Government pursuant to an
interim order of Court in respect of land acquired by the State Government in the previous year
2021-22.
(j) In order to expand its overseas business, the company planned online advertisement campaign
for which it engaged Fastex Inc., a London based company not having any PE in India, and paid ₹
5 lakhs for services availed. No tax/TDS was deducted by the company.
(k) ₹ 2 lakhs paid to consultant for expert opinion on new business set-up.
Additional Information:
(i) Normal depreciation computed as per Income-tax Rules on the book assets is ₹ 71 lakhs.
(ii) Debenture of face value of 1500 lakhs having 5 years tenure were issued at a discount of 3% and
were subscribed in full.
(iii) The company received a bill for ₹ 3 lakhs on 31 st March, 2025 from a supplier of cotton for supply
made in March, 2025. The bill was omitted to be recorded in the books in March, 2025. Payment
against the bill was made in April, 2025 and necessary entry was made in the books then. The
same has been considered in closing inventory valuation during physical verification conducted
on 31.03.2025.
(iv) The company has purchased 1000 bales of cotton at ₹ 5,000 per bale from Enpee LLP, a firm in

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 7
 which majority of the directors are partners. The normal selling price in the market for the same
material is ₹ 4,600 per bale.
Compute total business income of the company for A.Y. 2025-26 giving a brief explanation to each item
of addition or deletion. Ignore MAT provisions and the provisions of section 115BAA.

Question 2A (8 Marks)
'X' Ltd., transferred its fertilizer business to a new company ' Y ' Ltd., by way of demerger with effect
from appointed date of 1.4.2024 after satisfying the conditions of demerger. Further information given:
(a) WDV of the entire block of plant and machinery held by 'X' Ltd. as on 1.4.2024 is ₹ 100 crores;
(b) Out of the above, WDV of block of plant and machinery of fertilizer division is 70 crores;
(c) 'X' Ltd. has unabsorbed depreciation of ₹ 50 lacs as at 31.3.2024;
On the above facts:
(i) You are required to explain the provisions of the Income-tax Act as regards allowability of
depreciation, after demerger, in the hands of 'X' Ltd. and 'Y' Ltd. as at 31.3.2025 duly calculating
the depreciation.
(ii) State how the unabsorbed depreciation has to be dealt with for the assessment year 2025-26

Question 2B (6 Marks)
Mr. Pravek (aged 41 years), a sportsman and an individual resident in India, furnishes the following
particulars of income earned in India and from Country Y. India does not have a Double Taxation
Avoidance Agreement with Country Y.
Particulars Amount (₹)
Income from India
Income from Salary (computed) 8,40,000
Dividend Income from Indian companies 10,50,000
Income/loss in Country Y
Gift in foreign currency from a friend (exempt in Country Y) 90,000
Dividend (taxed in Country Y) 2,30,000
Total rent from house property in Country Y (taxed in Country Y) 3,00,000
Municipal taxes paid for above house (Not allowed as deduction in Country Y) 30,000
Business loss (not allowed to be set off in Country Y) 1,60,000
Agriculture Income (taxed in Country Y) 2,20,000

Note: Country Y taxes dividend at the rate of 10% and all other incomes at the rate of 20%.
Compute total income and tax payable by Mr. Pravek in India for Assessment Year 2025-26 assuming
he wants to be taxed as per default tax regime under section 115BAC.

Question 3A (8 Marks)
Edu All Charitable Trust registered under section 12AB, following cash system of accounting, furnishes
you the following information for P.Y. 2024-25:
(i) Gross receipts from hospital ₹ 600 lakhs.
(ii) Corpus donations by way of cheque ₹ 42 lakhs and by way of cash ₹ 6 lakhs. The corpus donation

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 8
 is invested in modes specified under section 11(5).
(iii) Anonymous donations by cash ₹ 12 lakhs.
(iv) Administrative expenses for hospital ₹ 415 lakhs.
(v) Fees not realized from patients ₹ 18,00,000 as on 31 st March, 2025.
(vi) Depreciation on assets of the trust ₹ 37,50,000. The entire cost of assets ₹ 250 lakhs claimed as
application in the earlier years.
(vii) Acquired a building for ₹ 80 lakhs on 01.06.2024 for expansion of hospital (cost of land included
therein ₹ 50 lakhs). Stamp duty value of the land and building on the date of registration of sale
deed ₹ 210 lakhs.
(viii) The trust gave corpus donation of ₹ 19 lakhs to Help Aid Trust having objects of charitable nature
registered under section 12AB but not similar to the objects of the donor trust.
You are required to compute the total income of the trust and its income-tax liability in such a manner
that it can avail the optimal benefit within the four corners of the Income Tax Act, 1961 assuming trust
has not opted for Section 115BAC.
Note: Trust does not want to seek accumulation of income by virtue of section 11(2) of the Act.

Question 3B (6 Marks)
Arnold Ltd. (incorporated in UK) has a branch office (PE) in India. The Net Profit of the Branch as per
the statement of profit and loss for the year was ₹ 83 lakhs. It includes the following:
(i) Dividend from Indian companies (listed) ₹ 8,00,000.
(ii) Dividend from Indian companies (unlisted) ₹ 4,00,000.
(iii) Interest from MMS Ltd. of Mumbai ₹ 7,00,000. The loan was received by the Indian company MMS
Ltd. in foreign currency as per loan agreement on or before 30.6.2023 (section 194LC applicable).
(iv) Fee for technical services from Barun Co. Ltd., Kolkata ₹ 25,00,000. The agreement was approved
by Central Government. Expenditure incurred for providing technical service amounts to ₹
6,00,000.
Additional information:
Total income chargeable to tax as per regular provisions of the Income-tax Act, 1961 is ₹ 20,00,000
(without considering the items (i) to (iv) above).
You are required to compute the book profit tax under section 115JB of the Act for the assessment year
2025-26 and also the total income-tax liability of the assessee.

Question 4A (8 Marks)
Discuss the liability of TDS/TCS provisions in the following independent cases:
(i) A partnership firm making sales of timber in which was procured and obtained under a forest
lease.
(ii) A nationalized bank receiving professional services from a registered society made provision on
31.03.2025 of an amount of ₹ 25 lakh against the service charges bills to be received.
(iii) A notified infrastructure debt fund eligible for exemption under section 10(47) of the Income-tax
Act, 1961 pays interest of ₹ 5 lakhs to a company incorporated in USA. The US Company incurred
expenditure of ₹ 12,000 for earning such interest. The fund also pays interest of ₹ 3 lakhs to Mr.

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 9
 X, who is a resident of a notified jurisdictional area.
(iv) Payment of ₹ 5 lakh on 8th December, 2024 made to Mr. Phelps who is an athlete by a
manufacturer of a swim wear for brand ambassador.

Question 4B (6 Marks)
Mr. Robert, a non-resident and German citizen, is employed in a German company. The German
company has a PE in India and accordingly the income of the PE is chargeable to tax in India. Robert
visited India during the FY 2024-25 on official work and stayed for 85 days. His salary for that period
was ₹ 28,00,000 which is borne by the Indian PE.
Robert held 1200 shares of Nalapir Pvt. Ltd. (NP), an Indian company since 28.11.2017 which he
acquired for ₹ 15 per share. For acquiring the shares, he remitted USD 50,000 to India on 1.11.2017. He
sold these shares on 23.12.2024 for ₹ 43 per share.
Robert also held 2000 equity shares of Aribitz GmbH (AG), a German company, which he had acquired
for ₹ 145 per share in 2020. AG follows April to March as its financial year. He sold all these shares for ₹
615 per share to David, another non-resident, on 26.12.2024. The relevant information of AG as on
31.3.2024 is given below:
(i) Total value of assets ₹ 15 crores.
(ii) Total value of immovable properties worldwide= ₹ 12 crores.
(iii) Immovable properties held in India (included in (ii) above) - ₹ 8 crores.
Dividend from Aribitz GmbH received in India on 28.06.2024 was - ₹ 1,11,000.
You are required to compute the total income taxable in India of Mr. Robert ignoring the provisions of
DTAA between India and Germany, if any. He has exercised the option to shift out of the default tax
regime under section 115BAC.
Exchange rates for 1 USD on the relevant dates is given as hereunder:
Date Buying Rate (1 US $) Selling Rate (1 US$)
28.11.2017 ₹ 59 ₹ 61
1.11.2017 ₹ 61 ₹ 64
23.12.2024 ₹ 74 ₹ 76

Question 5A (8 Marks)
(i) In the case of M/s HKHR Ltd., the Income-tax Appellate Tribunal decided against the assessee and
issued order under section 254. The assessee filed an appeal to the jurisdictional High Court by
framing the substantial question of law under section 260A(2)(c). The High Court, without
framing the substantial question of law u/s 260A(3) at the time of admission of appeal, issued
notices, heard both the parties and decided the appeal affirming the order of the Tribunal on the
questions raised by the assessee appellant. Discuss whether the High Court was justified in not
formulating the substantial question of law as required under section 260A(3) and adjudicating
merely on the questions put forth by the appellant under section 260A(2)(c).
(ii) IT Finance (I) Ltd. repays a loan merely by passing adjustment entries in its books of account.
Loan repayment was not actually made. The cause shown by the assessee for repayment of the
loan otherwise than by account payee cheque/bank draft was on account of the fact that the
assessee was liable to receive amount towards the sale price of the shares sold by the assessee to
the person from whom loan was received by the assessee. In order to avoid the unnecessary

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 10
 circular transfer of shares, both the parties agreed to set-off the amount payable and receivable
by way of passing journal entries and the balance loan amount was paid by the assessee by way
of an account payee cheque. The amount of loan settled by way of passing journal entries exceeds
₹ 20,000. Neither the genuineness of the receipt of loan nor the transaction of repayment of loan
by way of adjustment through book entries has been doubted in the regular assessment. But the
Assessing Officer imposed penalty under section 27IE as a contravention of the provisions of
section 269T with regard to repayment of loan otherwise than by banking channel. Is the
Assessing Officer justified in imposing penalty?

Question 5B (6 Marks)
State with brief reasons, which method of determination of ALP will be most appropriate in the
following cases:
(i) A Co. Ltd., Mumbai is engaged in manufacture of garments. It manufactured and supplied as per
the variation and customization in finishing of products to its associated enterprises Xylo Inc. UK
as compared to the goods regularly sold to third parties.
(ii) DEF Co. Ltd., is engaged in manufacture of medicines. It manufactured semi-finished drugs in bulk
and sold to related parties located in India and outside India. It adds gross profit mark up on
direct and indirect costs of production.
(iii) ZY Ltd., Bengaluru provided identical call centre services to both related and unrelated parties.

Question 6A (6 Marks)
Matrix Inc. incorporated in Country X, holds 26% controlling interest in Pilu Ltd., an Indian Company.
Pilu Ltd. declared dividend of ₹ 50,00,000 during the current year. The DTAA between India and
Country X, which came into force on 1.1.2018, provides for taxation of dividend @15%. Thereafter,
India entered into a DTAA with Country Y, which came into force from 15.5.2018. The India-Country Y
DTAA, inter alia, provides for concessional tax rate of 10% in respect of dividend. Country X is an OECD
member since 2015 and Country Y is also an OECD member since 2017.
Mr. Jack, CFO of Matrix Inc. seeks your opinion on whether the concessional tax rate provided in the
DTAA between India and Country Y can be availed by a resident of Country X and if so, are there any
further conditions to be satisfied in this regard. You may assume that the protocol annexed to India’s
DTAAs with all OECD member countries contain the relevant tax parity clause.
Would your answer change, if Country Y had become an OECD member only in the year 2020?

Question 6B (4 Marks)
Aditya Co. Ltd. is engaged in manufacturing activity. The machineries owned by it have become old and
obsolete. The company wants to know whether to replace machineries by borrowing loan (or) buy the
finished goods from open market and sell in its brand name. Relevant details are as under:
Cost of machinery if acquired ₹ 500 lakhs. The company has own funds of ₹ 200 lakhs and would
borrow ₹ 300 lakhs from bank@9% per annum interest to buy the machinery. The sales would be ₹
2500 lakhs with net profit of 15% before tax.
In case, the assessee decided to buy and sell the goods, the margin of profit would be 5%. The funds so
retained would earn interest income of 9% per annum.
Note: Ignore other commercial considerations and GST input tax credit. Assume tax rate @30% (ignore
Surcharge and Cess).
MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)
AIR1CA Career Institute (ACI)
Page 11
Advise the company suitably supporting your views.

Question 6C (4 Marks)
Explain the expression "Round Trip Financing" in relation to Impermissible Avoidance Agreement
(IAA).

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 12