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Mock Test Paper - Series II: April, 2025

Date of Paper: 9th April, 2025
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – II
PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
SOLUTIONS
Division A – Multiple Choice Questions
Answer Keys
MCQ Answer
No.
1 (c) Tax is deductible@10% on ` 20,000 distributed to Mr. Xavier and @5.2%
on ` 1 lakh distributed to Mr. Yatin
2 (c) Tax Evasion
3 (b) Only the cost of acquisition is allowed as a deduction to Mr. Xavier.
Interest expense is not deductible.
4. (d) Yes; ` 510
5. (c) Yes; ` 4,000
6. (a) No tax is required to be deducted at source u/s 194M.
7. (b) Yes; ` 6,600 to be deducted on the amount payable to Phoenix LLC; No
deduction is, however, required on the amount payable to DaVita Inc.
8. (a) ` 5,70,960
9. (b) No, Turmeric Ltd. is not required to deduct tax at source.
10. (a) Yes, Turmeric Ltd. is required to deduct tax at source of ` 1,42,14,720
11. (a) ` 1,42,14,720
12. (d) No, not required to file return of income, if Turmeric Ltd. deducted tax at
source on such income.
13. (d) ` 5 crores
14. (c) Only IV
15. (c) (i) and (iii)

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Division B – Descriptive Choice Questions

1. Computation of total income and tax liability of M/s Suraj Industries Ltd. for the
A.Y. 2025-26 as per section 115BAA
Particulars Amount in `
I Profits and gains of business and profession
Net profit as per Statement of Profit and Loss 9,50,00,000
Add: Items debited but to be considered
separately or to be disallowed
(i) Depreciation as per useful life of assets 2,80,00,000
(ii) Donation to political party 12,00,000
[Since donation to political party is not
wholly and exclusively for the purpose of
business or profession, it is not allowable
as deduction u/s 37. Since the amount of
contribution is debited to statement of profit
and loss, the same has to be added back]
(iii) Contribution to research institution 50,00,000
approved and notified by the Central
Government for scientific research
[As per section 35(1)(ii), 100% deduction is
allowed for amount paid to a research
institution undertaking scientific research,
if such institution is approved for this
purpose and notified by the Central
Government. However, since company is
opting for section 115BAA, deduction in
respect of this contribution is not allowed.
Since the amount of contribution is debited
to statement of profit and loss, the same is
required to be added]
(vi) Interest on borrowing to State Bank of 35,00,000
India (SBI) [10% x ` 420 lakhs x 10/12]
[Interest on borrowing from SBI upto
31.12.2024, being the date when
machinery is installed and put to use, is
not allowable as deduction since it has to
be capitalized as part of the cost of the
asset. Interest for January, February and
March 2025 is disallowed as per section

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43B since it is not paid on or before the

due date of filing return of income i.e.,
31.10.2025. Since the entire interest has
been debited to the statement of profit and
loss, it has to be added back while
computing business income]
(viii) Salary for installation of machinery 1,00,00,000
[As per ICDS V, expenses which are
specifically attributable for bringing the
fixed asset to its working condition would
form part of actual cost. Therefore, salary
to foreign technicians for installation of
machinery is a capital expenditure and not
allowable as deduction. Since it has been
debited to the statement of profit and loss,
it has to be added back while computing
business income]
4,77,00,000
14,27,00,000
Less: Items credited but not chargeable to
tax or chargeable to tax under other
head of income/expenses allowed but
not debited
(iv) Dividend received from foreign 15,00,000
company
[Dividend received from foreign company
is taxable under the head “Income from
other Source”. Since the same has been
credited to Statement of Profit and loss, it
has to be deducted while computing
business income.
(v) Long-term capital gain on sale of equity 4,00,000
shares
[Long-term capital gain on sale of equity
shares is taxable under the head “Capital
Gains”. Since the same has been credited
to Statement of Profit and loss, it has to be
deducted while computing business
income.

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(vii) Profit on sale of plot of land 8,00,000

Capital gains arising on sale of plot of land
are taxable under the “Capital Gains”.
Since the same has been credited to the
statement of profit and loss, the same has
to be reduced while computing business
income]
(ix) Bad debt recovered 10,00,000
[The deduction of bad debt allowed u/s 36
was ` 12 lakhs out of the total debt of ` 22
lakhs; The excess of amount recovered
i.e., ` 11 lakhs over the amount due after
bad debt allowance i.e., ` 10 lakhs will be
taxable as business income. Since the
entire amount of ` 11 lakhs recovered has
been credited to the statement of profit and
loss, ` 10 lakhs has to be reduced while
computing business income.]
37,00,000
13,90,00,000
Less: Depreciation as per Income-tax 1,50,00,000
Rules, 1962
Depreciation on assets acquired during the
P.Y. 2024-25
- Office building
Purchased and put to use on 15.12.2024
[` 300 lakhs x 10% x 50%, since it has
been put to use for less than 180 days
during the year] 15,00,000
- Computer
Purchased and put to use on 11.5.2024
[` 25 lakhs x 40%, since it has been put to
use for 180 days or more during the year] 10,00,000
- Plant and machinery
On P & M installed and put to use on
31.12.2024
[` 624.5 lakhs (` 500 lakhs + ` 100 lakhs of
salary for installation + ` 24.5 lakhs, being
interest from 1.6.2024 to 31.12.2024) x 15%

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x 50%, since it has been put to use for less 46,83,750 2,21,83,750
than 180 days during the year]
Additional depreciation (since company is opting
for section 115BAA, additional depreciation is - -
not allowed)
Profits and gains from business or 11,68,16,250
profession
II Capital Gains
Profit on sale of plot of land -
[Short-term capital gains arise on sale of plot of
land held for less than 24 months. However, in
this case, since the transfer is to a 100%
subsidiary company, which is an Indian
company, the same would not constitute a
transfer for levy of capital gains tax as per
section 47(iv)]
Long-term capital gain on listed equity 4,00,000 4,00,000
shares
III Income from Other Sources
Dividend received from a foreign company 15,00,000
Gross Total Income 11,87,16,250
Less: Deduction under Chapter VI-A
Deduction under section 80GGB [Donation to -
political party is not allowable as deduction to Suraj
Industries Ltd., since the company is opting for
section 115BAA]
Deduction under section 80M allowable, even if, 12,00,000
company is opting for section 115BAA, to the extent
of lower of dividend received and dividend
distributed. Therefore, ` 12,00,000, being the amount
of dividend distributed allowable as deduction
Total Income 11,75,16,250
Computation of tax liability as per section 115BAA
Particulars Amount in `
Tax payable on LTCG @10% u/s 112A on ` 2,75,000, being the 27,500
LTCG in excess of ` 1,25,000

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Tax @ 22% on ` 11,71,16,250 2,57,65,575

2,57,93,075
Add: Surcharge @ 10% [Domestic company opting for section 25,79,308
115BAA, rate of surcharge is 10%]
2,83,72,383
Add: Health and education cess @4% 11,34,895
Tax liability 2,95,07,278
Tax liability (rounded off) 2,95,07,280

2 (a) (i) Computation of total income of Laksh Limited for the A.Y. 2025-26
Particulars ` (in lakhs)
Business income before setting off brought forward 160.00
losses of Pigeon Ltd.
Add: Excess depreciation claimed in the scheme
of amalgamation of Pigeon Limited with
Laksh Limited.
Value at which assets are transferred by 150
Pigeon Ltd.
WDV in the books of Pigeon Ltd. 100
Excess accounted 50
Excess depreciation claimed in computing
taxable income of Laksh Ltd. [` 50 lakhs × 7.50
15%] [Explanation 2 to section 43(6)]
167.50
Set-off of brought forward business loss of (125.00)
Pigeon Ltd. (See Notes 2 & 4)
Set-off of unabsorbed depreciation under (20.00)
section 32(2) read with section 72A (See
Notes 2 & 4)
Set-off of unabsorbed capital expenditure
under section 35(1)(iv) read with section (2.50)
35(4) (See Note 5)
Business income 20.00

Notes:
1. It is presumed that the amalgamation is within the meaning of
section 72A of the Income-tax Act, 1961.

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2. In the case of amalgamation of companies, the unabsorbed losses

and unabsorbed depreciation of the amalgamating company shall
be deemed to be the loss or unabsorbed depreciation of the
amalgamated company for the previous year in which the
amalgamation was effected and such business loss and
unabsorbed depreciation shall be carried forward and set-off by
the amalgamated company for a period of 8 years and indefinitely,
respectively.
3. As per section 72A(7), the accumulated loss to be carried forward
specifically excludes loss sustained in a speculative business.
Therefore, speculative loss of ` 5.5 lakhs of Pigeon Ltd. cannot be
carried forward by Laksh Ltd.
4. Section 72(2) provides that where any allowance or part thereof
unabsorbed under section 32(2) (i.e., unabsorbed depreciation) or
section 35(4) (i.e., unabsorbed scientific research capital
expenditure) is to be carried forward, effect has to be first given to
brought forward business losses under section 72.
5. Section 35(4) provides that the provisions of section 32(2) relating
to unabsorbed depreciation shall apply in relation to deduction
allowable under section 35(1)(iv) in respect of capital expenditure
on scientific research related to the business carried on by the
assessee. Therefore, unabsorbed capital expenditure on scientific
research can be set-off and carried forward in the same manner as
unabsorbed depreciation.
6. The restriction contained in section 73 is only regarding set-off of
loss computed in respect of speculative business. Such a loss can
be set-off only against profits of another speculation business and
not non-speculation business. However, there is no restriction
under the Income-tax Act, 1961 regarding set-off of normal
business losses against speculative income. Therefore, normal
business losses can be set-off against profits of a speculative
business.
Consequently, there is no loss or allowance to be carried forward by
Laksh Ltd. to the A.Y. 2026-27

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(ii) Computation of taxable Capital gain in the hands of

Mrs. Urvashi for A.Y.2025-26
Particulars `
Full value of consideration 15,50,00,000
As per section 50C, the full value of consideration would
be actual sales consideration since the stamp duty value
as on 15.10.2024 of ` 17,00,00,000 does not exceed
110% of actual consideration of ` 15,50,00,000.
Less: Cost of acquisition 1,02,00,000
[` 1,02,00,000 (Higher of actual cost of
` 45,00,000 and Fair market value as on 1.4.2001 of
` 1,20,00,000, but restricted to stamp duty value as on
1.4.2001 of ` 1,02,00,000)
[Indexation benefit would not available while computing
capital gains since the property is transferred on or after
23.7.2024]
14,48,00,000
Less: Exemption under section 54 10,00,00,000
[Purchase of one residential plot of ` 8 crores on
18.2.2025 and deposit of ` 3 crores in Capital Gain
Account Scheme on 31.3.2025 (before the date of filing
of return of income) provided that the construction
thereon is completed within the stipulated time of three
years, but restricted to maximum of ` 10 crores]
Taxable long term capital gains 4,48,00,000

(b) Computation of total income and tax liability of Mr. Pradhyuman for
A.Y. 2025-26
Particulars ` `
Income from house property
Gross annual value 1 of house property in Country M 36,40,000
[CMD 52,000 x ` 70/CMD]
Less: Municipal taxes [CMD 6,000 x ` 70/CMD] 4,20,000
Net Annual value 32,20,000
Less: Deduction @30% 9,66,000 22,54,000

1In absence of any information regarding fair rent and standard rent, actual rent is considered as
gross annual value.

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Profits and gains from business and profession

Income from sole proprietary concern in India 80,00,000
Share of profit from a partnership firm in India of
` 20 lakhs, is exempt under section 10(2A) Nil
Business profit 80,00,000
Less: Business Loss 2 in Country G (CGD 5200 x 3,64,000
` 70/CGD) 76,36,000
Income from Other Sources
Agricultural income from tea gardens in Country G, 28,00,000
is taxable in India (CGD 40000 x ` 70/CGD)
Dividend income from Country M (CMD 30000 x
` 70/CGD) 21,00,000 49,00,000
Gross Total Income 1,47,90,000
Less: Deductions under Chapter VI-A
Under section 80C [deposit in PPF] 1,50,000
Under section 80D 25,000
[Medi-claim premium paid ` 28,000, restricted to 1,75,000
` 25,000]
Total Income 1,46,15,000
Tax on total income
Tax on ` 1,46,15,000 [(30% x ` 1,36,15,000) plus 41,97,000
` 1,12,500]
Add: Surcharge@15%, since total income exceeds 6,29,550
` 1 crore but does not exceed ` 2 crore
48,26,550
Add: HEC@4% 1,93,062
50,19,612
Average rate of tax in India 34.3456%
[i.e., ` 50,19,612/` 1,46,15,000 x 100]
Rebate u/s 91 in respect of income in Country G
Average rate of tax in Country G 20%
Doubly taxed income [` 28,00,000 – ` 3,64,000] 24,36,000

2 Since the eight year has not expired from the assessment year in which such business loss was
incurred, such business loss can be set-off against current year business income.

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Rebate under section 91 on ` 24,36,000 @20%

(lower of average Indian tax rate and rate of tax in 4,87,200
Country G)
Rebate u/s 91 in respect of income in Country M
Average rate of tax in Country M 13.1707%
[CMD 3,000 (30,000 x 10%) + CMD 7800 (52,000 x
15%)/ CMD 82,000] x 100
Doubly taxed income [` 22,54,000 + ` 21,00,000]
Rebate under section 91 on ` 43,54,000
@13.1707% 5,73,452
(lower of average Indian tax rate and rate of tax in
Country G)
Tax liability in India 39,58,960

3. (a) (i) As per Explanation below to section 10(23C)(iiiae), it has been clarified
that the limit of annual receipts of ` 5 crore is qua ‘taxpayer’ and not qua
‘activity’. Therefore, if the aggregate annual receipts from educational
activity and medical activity exceeds ` 5 crores, then exemption under
sub-clause (iiiad) and (iiiae) cannot be availed.
Since, in the present case, the aggregate annual receipt of ` 9 crores
(` 4.5 crores of educational institution and ` 4.5 crores from hospital)
exceeds the threshold of ` 5 crores, exemption under section
10(23C)(iiiad) and (iiiae) cannot be availed, even though the individual
receipts have not exceeded ` 5 crores.
(ii) Computation of taxable income of public charitable trust
Particulars `
(i) Income from property held under trust (net) 14,00,000
(ii) Income (net) from business (incidental to main 6,00,000
objects)
(iii) Voluntary contributions from public [Voluntary 9,00,000
contribution made with a specific direction
towards corpus are alone to be excluded under
section 11(1)(d). In this case, there is no such
direction and hence, included]
29,00,000

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Less: 15% of the income eligible for retention / 4,35,000

accumulation without any conditions
24,65,000
Less: Amount applied for the objects of the trust
(i) Amount spent for charitable purposes
(` 12,80,000 - ` 4,80,000) 8,00,000
(ii) Repayment of loan for construction of -
orphan home
Taxable Income 16,65,000

Note: As per Explanation 4(ii) to section 11(1), any application for charitable
or religious purposes, from any loan or borrowing in the concerned year,
shall not be treated as application of income for charitable or religious
purposes. However, the amount not so treated as application, shall be
treated as application in the year in which the loan is repaid. The Fourth
proviso to Explanation 4(ii) to section 11(1) clarifies that this provision will,
however, not apply where application from loan or borrowing is made on or
before 31.3.2021.
Since the amount spent on construction of orphanage was allowed as
deduction in the P.Y. 2020-21, repayment of loan taken for such purposes
will not be allowed as application since it would be tantamount to double
deduction.
(b) (i) Provision of scientific research services falls within the scope of
international transaction under section 92B. Laurus Labs Limited and
Meta Inc. are deemed to be associated enterprises as per section
92A(2)(d), since Meta Inc. guarantees not less than 10% of the total
borrowings of Laurus Labs Limited. Since there is an international
transaction between associated enterprises, transfer pricing provisions
are attracted in this case.
(ii) Where the Assessing Officer has made a primary adjustment of ` 310
lakhs to the transfer price and the same has been accepted by Laurus
Labs Limited, secondary adjustment has to be made in the books of
account as per section 92CE, since the primary adjustment made by the
Assessing Officer and accepted by Laurus Labs Limited exceeds ` 100
lakhs and the primary adjustment is in relation to P.Y.2022-23. The
excess money determined based on the primary adjustment has to be
repatriated to India within 90 days from the date of order, failing which the

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same would be deemed as an advance and interest would be attracted at

the one-year marginal cost of fund lending rate of State Bank of India as
on 1.4.2024 + 3.25%, since the international transaction has been
denominated in Indian Rupees. In this case, since the excess money has
not been repatriated within 90 days, the same would be deemed to be an
advance made by Laurus Labs Limited to Meta Inc. and interest would be
attracted@12.25% (9% + 3.25%) from 1.4.2024, being the date of the
order of the Assessing Officer. The interest would amount to ` 37.975
lakhs (i.e., 12.25% of ` 310 lakhs) for the P.Y.2024-25.
Alternatively, Laurus Labs Limited can opt to pay additional income-
tax@20.9664% (tax@18% plus surcharge@12% plus cess@4%) on
` 310 lakhs, which would amount to ` 65 lakhs. In such a case,
secondary adjustment is not required to be made.
4. (a) (i) The Explanation below section 194A(1) provides that where any income
by way of interest other than interest on securities is credited to any
account, whether called ‘interest payable account’ or ‘suspense account’
or by any other name, in the books of account of the person liable to pay
such income, such crediting shall be deemed to be credit of such income
to the account of the payee and provisions of section 194A, shall, thus,
apply.
However, the CBDT has, vide Circular No.3/2010 dated 2.3.2010,
clarified that Explanation below section 194A(1) will not apply in cases of
banks where credit is made to provisioning account on daily/monthly
basis for the purpose of macro monitoring only by the use of CBS
software.
Since no constructive credit to the depositor's / payee's account takes
place while calculating interest on daily / monthly basis in the CBS
software used by banks, tax need not be deducted at source on such
provisioning of interest by banks for the purposes of macro monitoring
only.
In such cases, tax shall be deducted at source on accrual of interest at
the end of the financial year or at periodic intervals as per practice of the
bank or as per the depositor's or payee’s requirement or on maturity or on
encashment of time deposit, whichever event takes place earlier and
wherever the aggregate amount of interest income credited or paid or
likely to be credited or paid during the financial year by the bank exceeds
the limits specified in section 194A i.e., ` 40,000.

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In view of the above, the action of the Assessing Officer in disallowing the
interest expenditure credited in a separate account for macro monitoring
purpose is not valid and consequent initiation of penalty proceedings
under section 271C is not tenable in law.
(ii) (I) Section 194D requires deduction of tax at source@10% from insurance
commission, where the commission exceeds ` 15,000.
Reinsurance is different from insurance since there is no direct
contractual relationship between the person insured and the re-insurer.
In order to attract section 194D, the commission or any other payment
covered under the section should be a remuneration or reward for
soliciting or procuring the insurance business. The insurance companies
do not procure business for the reinsurance company nor does the
reinsurer pay commission or other payment for soliciting the business
from the insurance companies. Therefore, section 194D has no
application.
Hence, when profit commission is paid by a reinsurance company to an
insurance company, after the expiry of the term of insurance, in respect of
cases where there is no claim during the operation of the reinsurance
treaty, tax deduction under section 194D is not attracted.
(II) Section 194J provides for deduction of tax at source @10% on any
remuneration or fees or commission, by whatever name called, paid to a
director, which is not in the nature of salary in respect of which tax is
deductible at source under section 192.
Hence, tax is to be deducted at source under section 194J @10% by
Krish Pvt. Ltd. on the commission of ` 3,10,000 paid to Amrish, a part-
time director. The tax deductible under section 194J would be ` 31,000,
being 10% of ` 3,10,000.
(b) (i) Chapter VIII of the Finance Act, 2016, "Equalisation Levy", provides for
an equalisation levy of 6% of the amount of consideration for specified
services received or receivable by a non-resident not having permanent
establishment in India, from a resident in India who carries out business
or profession, or from a non-resident having permanent establishment in
India.
“Specified Service” means
(1) online advertisement;

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(2) any provision for digital advertising space or any other facility or
service for the purpose of online advertisement and
(3) any other service as may be notified by the Central Government.
However, equalisation levy shall not be levied-
- where the non-resident providing the specified services has a
permanent establishment in India and the specified service is
effectively connected with such permanent establishment.
- the aggregate amount of consideration for specified service
received or receivable during the previous year does not exceed
` 1 lakh.
- where the payment for specified service is not for the purposes of
carrying out business or profession
In the present case, equalisation levy @6% is chargeable on the amount
of ` 20,00,000 received by Moonland Inc., a non-resident not having a PE
in India from Tekken Ltd., an Indian company. Accordingly, Tekken Ltd.
is required to deduct equalisation levy of ` 1,20,000 i.e., @6% of ` 20
lakhs, being the amount paid towards online advertisement services
provided by Moonland Inc., a non-resident having no permanent
establishment in India. Non-deduction of equalisation levy would attract
disallowance under section 40(a)(ib) of 100% of the amount paid while
computing business income.
(ii) The statement is correct.
Under section 245U, the Board for Advance Rulings shall have all the
powers vested in the Civil Court under the Code of Civil Procedure, 1908
as are referred to in section 131.
Accordingly, the Board for Advance Rulings shall have the same powers
as are vested in a court under the Code of Civil Procedure, 1908, when
trying a suit in respect of the following matters, namely -
(1) discovery and inspection;
(2) enforcing the attendance of any person, including any officer of a
banking company and examining him on oath;
(3) compelling the production of books of account and other
documents; and

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(4) issuing commissions.

Therefore, the Board for Advance Ruling has the powers of issuing
commissions.
5. (a) (i) (I) As per section 139(1)(b), an individual is required to file his return if
his total income, without giving effect to deductions under, inter
alia, Chapter VI-A and section 10AA, exceeds the basic exemption
limit. In this case, Mr. Govind’s total income of ` 2,00,000 is lower
than the basic exemption limit of ` 3,00,000/ ` 2,50,000, as the
case may be. However, such a person who is not required to file
his return on account of his total income being lower than the basic
exemption limit, would be required to file return of income if, inter
alia, his turnover in business exceeds ` 60 lakhs during the
previous year. In this case, since Mr. Govind’s turnover from
business for the P.Y.2024-25 is ` 70 lakhs, he has to file return of
his income for A.Y.2025-26.
(II) Gift of ` 50 lakhs received from son is not taxable under section
56(2)(x) in the hands of Mr. Vicky, since his son is his relative, and
gifts from a relative are excluded from the applicability of section
56(2)(x). The only income of Mr. Vicky for the P.Y.2024-25 would
be interest on savings account for a period of 4 days from 28th
March, 2025 to 31st March, 2025 on ` 50 lakhs, which would be
lower than the basic exemption limit. As per section 139(1)(b), an
individual is required to file his return if his total income exceeds
the basic exemption limit. In this case, Mr. Vicky’s total income is
lower than the basic exemption limit of ` 3,00,000/ ` 2,50,000, as
the case may be.
However, such a person who is not required to file his return on
account of his total income being lower than the basic exemption
limit, would be required to file return of income if, inter alia, the
deposit in his savings account is ` 50 lakhs or more during the
previous year.
Since a deposit of ` 50 lakhs has been made in the savings
account of Mr. Vicky in the P.Y.2024-25, he is required to file his
return of income for A.Y.2025-26.
(ii) (I) The proposition is not correct as per law. This is because section
254(2) specifically empowers the Appellate Tribunal to amend any

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order passed by it, either suo-moto or on an application made by

the assessee or Assessing Officer, with a view to rectify any
mistake apparent from record, at any time within 6 months from the
end of the month of the order sought to be amended.
The powers of the Tribunal under section 254(2) relating to
rectification of its order are very limited. Such powers are confined
to rectifying any mistake apparent from the record. The mistake
has to be such that for which no elaborate reasons or inquiry is
necessary. Accordingly, the re-appreciation of evidence placed
before the Tribunal during the course of the appeal hearing is not
permitted. It cannot re-adjudicate the issue afresh under the garb
of rectification [CIT vs. Vardhman Spinning (1997) 226 ITR 296 (P
& H), CIT v. Ballabh Prasad Agarwalla (1998) 233 ITR 354 (Cal.) &
Niranjan & Co. Ltd. v. ITAT (1980) 122 ITR 519 (Cal.)]
(II) The proposition is correct in law. A finding of fact cannot be
disturbed by the High Court in exercise of its powers under section
260A. The Income-tax Appellate Tribunal is the final fact finding
authority and the findings of fact recorded by the Tribunal can be
interfered with by the High Court under section 260A only on the
ground that the same were without evidence or material, or if the
finding is contrary to the evidence, or is perverse or there is no
direct nexus between conclusion of fact and the primary fact upon
which that conclusion is based.
In CIT vs. P. Mohanakala (2007) 291 ITR 278 and M. Janardhana
Rao v. Joint CIT (2005) 273 ITR 50, the Apex Court observed that
the High Court had set aside the factual findings of the lower
authorities and the Tribunal without any valid reason. The Apex
Court held that the findings of fact could not be interfered with by
the High Court without carefully considering the facts on record, the
surrounding circumstances and the material evidence. There is no
scope for interference with the factual findings, unless the findings
are per se without reason or basis, perverse and/or contrary to the
material on record.
Hence, only if the issue gives rise to a substantial question of law,
an appeal shall lie before the High Court.

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(b) Alibaba Ltd. is deemed to have under-reported its income since:

(1) the assessment under 143(3) has the effect of reducing the loss
determined in a return processed under section 143(1)(a); and
(2) the reassessment under section 147 has the effect of converting
the loss assessed under section 143(3) into income.
Therefore, penalty is leviable under section 270A for under-reporting of
income.
Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Loss assessed u/s 143(3) (5,00,000)
(-) Loss determined under section 143(1)(a) (7,50,000)
2,50,000
Tax payable on under-reported income 62,500
@ 25%
Add: HEC@4% 2,500
65,000
Penalty leviable@50% of tax payable 32,500
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 4,50,000
(-) Loss assessed under section 143(3) (5,00,000)
9,50,000
Tax payable on under-reported income 2,37,500
@ 25%
Add: HEC@4% 9,500
2,47,000
Penalty leviable@50% of tax payable 1,23,500

Note – The applicable rate of tax for Alibaba Ltd. for A.Y.2025-26 is 25%,
since its turnover for the P.Y.2022-23 does not exceed ` 400 crores.

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(c) (i) Principle of Contmporanea Expositio

A treaty’s terms are normally to be interpreted on the basis of their
meaning at the time the treaty was concluded. However, this is not a
universal principle.
In Abdul Razak A. Meman’s (2005) 276 ITR 306, the AAR observed that
“there can be little doubt that while interpreting treaties, regard should be
had to material contemporanea expositio. This proposition is embodied in
article 32 of the Vienna Convention and is also referred to in the decision
of the Hon’ble Supreme Court in K. P. Varghese v. ITO [1981] 131 ITR
597.
(ii) Teleological Interpretation
In this approach the treaty is to be interpreted so as to facilitate the
attainment of the aims and objectives of the treaty. This approach is also
known as the ‘objects and purpose’ method.
In case of Union of India v. Azadi Bachao Andolan 263 ITR 706, the
Supreme Court observed that “the principles adopted for interpretation of
treaties are not the same as those in interpretation of statutory legislation.
The interpretation of provisions of an international treaty, including one
for double taxation relief, is that the treaties are entered into at a political
level and have several considerations as their bases.”
One instance is where the Apex Court agreed with the contention of the
Appellant that “the preamble to the Indo-Mauritius DTAA recites that it is
for ‘encouragement of mutual trade and investment’ and this aspect of the
matter cannot be lost sight of while interpreting the treaty.
6. (a) (i) The proviso to section 132B(1)(i) provides that where the person
concerned makes an application to the Assessing Officer, within 30 days
from the end of the month in which the asset was seized, for release of
the asset and the nature and source of acquisition of the asset is
explained to the satisfaction of the Assessing Officer, then, the Assessing
Officer may, with the prior approval of the Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or Commissioner,
release the asset after recovering the existing liability under the Income-
tax Act, 1961, etc. out of such asset. ‘Existing liability’, however, does
not include advance tax payable. Such asset or portion thereof has to be
released within 120 days from the date on which the last of the
authorisations for search under section 132 was executed.

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In this case, since the application was made to the Assessing Officer
within 30 days from the end of the month in which search was conducted,
the department may retain only the amount of existing liability, if any, and
the balance may have to be released within 120 days from the date on
which the last of the authorisations for search under section 132 was
executed.
Note: It may be noted that one of the conditions mentioned above for
release of an asset is that the nature and source of acquisition of the
asset should be explained to the satisfaction of the Assessing Officer.
However, in this case, it has been given that the assessee’s application
for release of the asset, explaining the sources thereof, was turned down
by the Department. If the application was turned down by the Department
due to the reason that it was not satisfied with the explanation given by
the assessee as to the nature and source of acquisition of the asset,
then, the asset (in this case, cash) cannot be released, since the
condition mentioned above is not satisfied.
(ii) The above arrangement of splitting the investment through two
subsidiaries appears to be with the intention of obtaining tax benefit under
the treaty. Further, there appears to be no commercial substance in
creating two subsidiaries as they do not change the economic condition of
investor X Ltd. in any manner (i.e. on business risks or cash flow), and
reveals a tainted element of abuse of tax laws. Hence, the arrangement
can be treated as an impermissible avoidance arrangement by invoking
GAAR. Consequently, treaty benefit would be denied by ignoring Lalit Ltd.
and Mohan Ltd., the two subsidiaries, or by treating Lalit Ltd. and Mohan
Ltd. as one and the same company for tax computation purposes.
(b) The residential status of a foreign company is determined on the basis of place
of effective management (POEM) of the company.
For determining the POEM of a foreign company, the important criteria is
whether the company is engaged in active business outside India or not.
A company shall be said to be engaged in “Active Business Outside India”
(ABOI) for POEM, if
- the passive income is not more than 50% of its total income; and
- less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are
resident in India; and

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- the payroll expenses incurred on such employees is less than 50% of its
total payroll expenditure.
Mischief Ltd. shall be regarded as a company engaged in active business
outside India for P.Y. 2024-25 for POEM purpose only if it satisfies all the four
conditions cumulatively.
Condition 1: The passive income of Mischief Ltd. should not be more than
50% of its total income
Total income of Mischief Ltd. during the P.Y. 2024-25 is ` 110 crores [(` 25
crores + ` 50 crores) + (` 20 crores + ` 15 crores)]
Passive income is the aggregate of, -
(i) income from the transactions where both the purchase and sale of goods
is from/to its associated enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income
whether or not involving associated enterprises;
Passive Income of Mischief Ltd. is ` 50 crores, being sum total of :
(i) ` 15 crores, income from transactions where both purchases and sales
are from/to associated enterprises (` 5 crores in India and ` 10 crores in
Maldives)
(ii) ` 35 crores, being interest and dividend from investment (` 20 crores in
India and ` 15 crores in Maldives)
Percentage of passive income to total income = ` 50 crore/ ` 110 crore x 100
= 45.45%
Since passive income of Mischief Ltd. is 45.45%, which is not more than 50%
of its total income, the first condition is satisfied.
Condition 2: Mischief Ltd. should have less than 50% of its total assets
situated in India
Value of total assets of Mischief Ltd. during the P.Y. 2024-25 is ` 610 crores
[` 210 crores, in India + ` 400 crores, in Maldives]
Value of total assets of Mischief Ltd. in India during the P.Y. 2024-25 is ` 210 crores
Percentage of assets situated in India to total assets = ` 210 crores/` 610
crores x 100 = 34.43%

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Since the value of assets of Mischief Ltd. situated in India is less than 50% of
its total assets, the second condition for ABOI test is satisfied.
Condition 3: Less than 50% of the total number of employees of Mischief
Ltd. should be situated in India or should be resident in India
Number of employees situated in India or are resident in India is 70
Total number of employees of Mischief Ltd. is 160 [ 70 + 90]
Percentage of employees situated in India or are resident in India to total
number of employees is 70/160 x 100 = 43.75%
Since employees situated in India or are residents in India of Mischief Ltd. are
less than 50% of its total employees, the third condition for ABOI test is
satisfied.
Condition 4: The payroll expenses incurred on employees situated in India
or resident in India should be less than 50% of its total payroll expenditure
Payroll expenses on employees employed in and resident of India = ` 8 crores.
Total payroll expenses = ` 20 crores (` 8 crores + ` 12 crores)
Percentage of payroll expenses of employees situated in India or are
resident in India to the total payroll expenses = 8 x 100/20 = 40%
Since the payroll expenses incurred on employees situated in India or resident in
India is less than 50% of its total payroll expenditure, the fourth condition for
ABOI test is also satisfied.
Thus, since Mischief Ltd. has satisfied all the four conditions, the company would
be said to be engaged in “active business outside India” during the P.Y. 2024-25.
POEM of a company engaged in active business outside India shall be
presumed to be outside India, if the majority of the board meetings are held
outside India.
Since Mischief Ltd. is engaged in active business outside India in the P.Y. 2024-
25 and majority of its board meetings i.e., 5 out of 8, were held outside India,
POEM of Mischief Ltd. would be outside India.
Therefore, Mischief Ltd. would be non-resident in India for the P.Y. 2024-25.

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