CA Final September 2025 Suggested Answers Paper 4 Direct Tax Laws and International Taxation

FOR CA FINAL EXAM PREPARATION

CA Final 2025
Suggested Answers ·
Paper 4 Direct Tax
Laws and International
Taxation
EXAM YEAR TYPE

CA Final 2025 Suggested Answers
SUBJECT DATE

Paper 4 Direct Tax Laws and International Taxation September 2025

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 4: DIRECT TAX LAWS &
INTERNATIONAL TAXATION
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se relate to Assessment Year 2025-26, unless stated otherwise in the ag l
Part I - Multiple Choice Questions
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All lquestions
ag question.
Integrated Case Study - I
Mr. Shiv Aggarwal is married with Ambika Aggarwal. He has gifted a house
property to his wife on 15/03/2024. The stamp duty value of the said property
on the date of gift was ` 80 lakhs. The said house was let out by Mrs. Ambika
Aggarwal for a period of 15 months, w.e.f. 01/04/2024 at monthly rent of
` 50,000/- to Mr. Suresh Kumar. There is no payment of property tax in the
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financial year 2024-25. Mr. Shiv Aggarwal also gifted 2,000 debentures of ` 500
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each of RR Limited to his wife Mrs. Ambika Aggarwal on 01/04/2024.

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M/s RR Limited credited interest of ` 1,00,000/- on these debentures on

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30/03/2025 in the bank account of Mrs. Ambika Aggarwal. Mrs. Ambika
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Aggarwal does not have any other source of income.
Mr. Shiv Aggarwal in respect of a piece of land owned by him, entered into a
registered agreement for development of a real estate project in the financial
year 2020-21 with M/s XYZ Ltd, a real estate developer. As per the terms of the
agreement, Mr. Shiv Aggarwal was entitled to receive one constructed flat in the
project besides cash consideration of ` 30,00,000/- in the year of completion of
project. The certificate of completion of the project is issued by the competent
authority in the financial year 2024-25. Mr. Shiv Aggarwal received one of the
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constructed flat and cash consideration (as agreed) from XYZ Limited during the
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financial year 2024-25. The cash consideration was received in the form of an
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account payee bank draft. The stamp duty value of the said flat on the date of

s em the payment of cash consideration was ` 28,00,000/-.
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Mr. Shiv Aggarwal purchased 400 shares of G. Ltd (a listed company) on
14.06.2017 at a cost of ` 450 per share. He sold all the shares of G. Ltd. on
01.07.2024 through National Stock Exchange for ` 5,00,000/-. The applicable
security transaction tax was also paid. The price at which these shares were
traded in National Stock Exchange on 31.01.2018 is as follows –

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

Particulars Amount in `
Highest Trading Price 710
Average Trading Price 695
Lowest Trading Price 680

In respect of the Assessment Year 2023-24, in case of Mr. Shiv Aggarwal, the
Assessing Officer had in its possession the information in respect of the
undisclosed foreign asset under the Black Money (Undisclosed Foreign Income
and Assets) and Imposition of Tax Act, 2015. The said information has been
enclosed with a notice for the assessment year issued and served
u/s 148A(1) of the Income-tax Act to Mr. Shiv Aggarwal. However, the notice u/s
148 has still not been issued for the assessment year.
From the facts given in the case study, choose correct answer to following
Multiple Choice Questions (MCQ. No. 1 to 4):
1. The amount of income to be clubbed in the gross total income of Mr. Shiv
Aggarwal for the A.Y. 2025-26 will be -
(A) ` 4,20,000/- under the head "Income from House Property" and
` 1,00,000/- under the head "Income from other sources".
(B) Only ` 6,00,000/- under the head "Income from House Property".
(C) NIL, as the gift to wife is exempt under section 56(2)(x).
(D) ` 6,00,000/- under the head "Income from House Property" and
` 1,00,000/- under the head "Income from other sources". (2 Marks)
2. In respect of consideration paid in form of a flat and account payee bank
draft to Mr. Shiv Aggarwal, M/s. XYZ Limited during the financial year
2024-25 was required to make TDS of -
(A) ` 3,00,000
(B) ` 5,80,000
(C) NIL
(D) ` 28,000 (2 Marks)
3. Capital gain from sale of shares of G. Limited in the case of Mr. Shiv
Aggarwal for the A.Y. 2025-26 works out to-
(A) ` 2,16,000

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(B) ` 2,22,000
(C) ` 2,28,000
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(D) ` 91,000 (2 Marks)
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In the given facts, in the case of Mr. Shiv Aggarwal in respect of the
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Assessment Year 2023-24, which of the following statement is correct?
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(A) Mr. Shiv Aggarwal can file an updated return for the Assessment Year

ag (B) Mr. Shiv Aggarwal can file an updated return for the Assessment Year
upto 31/03/2026 or issue of notice u/s 148, whichever is earlier.

upto 31/03/2026.
(C) Mr. Shiv Aggarwal is not eligible to file an updated return for the
Assessment Year.
(D) Mr. Shiv Aggarwal can file an updated return for the Assessment Year
before the date of compliance mentioned in the notice u/s 148A(1).

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(2 Marks)

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em in manufacturing of certain products,
Integrated Case Study - II

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M/s KDPL, a domestic company, engaged
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2024-25. During the assessment g
declared its total income of ` 1,20,00,000/- in return of income filed for the A.Υ.
year, there was no other income other than the
profits from manufacturing.
In the return of income for assessment year 2024-25, M/s KDPL, claimed set off
of brought forward business loss of ` 10,00,000/- which relates to A.Υ. 2023-24.
Return of income for A.Y. 2023-24 was filed on 31/12/2023. The claim of set off
of said brought forward business loss was disallowed while processing of return
of income for the assessment year 2024-25 and total income of ` 1,30,00,000/-

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was determined in the intimation issued u/s 143(1)(a).

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The return for assessment year 2024-25 in the case of KDPL was selected for
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scrutiny by issue of notice u/s 143(2) of the Income-tax Act. During the

s em assessment proceeding, it is noticed by the Assessing Officer that the purchase
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of the raw material has been inflated by ` 5,00,000/- by introducing bogus

ag purchase invoices. From the facts given in the case study, choose correct answer
to following Multiple Choice Questions (MCQ. No. 5, 6 & 7):

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

5. In respect of inflation of raw material expenses of ` 5,00,000/- by KDPL,
which of the following statements is correct in respect of penalty imposable
for false entry in the books of account?
(A) The Assessing Officer is empowered to impose a penalty equal to 50%
of tax payable on ` 5,00,000/-.
(B) The Assessing Officer is empowered to impose a penalty equal to 200%
of tax payable on ` 5,00,000/-.
(C) The Assessing Officer is empowered to impose a penalty equal to
` 5,00,000/-
(D) The Assessing Officer is empowered to impose a Penalty equal to 100%
of tax payable on ` 5,00,000/-. (2 Marks)
6. The inflation of raw material expenses of ` 5,00,000/- by KDPL amounts to-
(A) Tax Evasion
(B) Tax Planning
(C) Tax Management
(D) Tax Avoidance (2 Marks)
7. Penalty imposable in respect of disallowance of set off of brought forward
business loss of ` 10,00,000/- relating to A.Y. 2023-24 in the intimation
under section 143(1) issued for AY 2024-25 u/s 270A shall be-
(A) 50% of tax payable on ` 10,00,000/-
(B) 200% of tax Payable on ` 10,00,000/-
(C) ` 10,00,000/-
(D) Nil (Zero) (2 Marks)
Integrated Case Study - III
A business trust registered under SEBI (Real Estate Investment Trust)
Regulations, 2014, has given particulars of its income for the financial year
2024-25 as under:
(i) Interest income from Axe Ltd- ` 12 lakhs;
(ii) Dividend income from Axe Ltd- ` 6 lakhs,

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(iii) Short-term capital gains on sale of listed shares (on 01/08/2024) of Indian
companies - ` 5 lakhs. STT was paid both at the time of sale and purchase).

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Axe Ltd. is a SPV (Special Purpose Vehicle) in which the business trust holds 80%
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of shareholdings. Axe Ltd. opts to pay tax under section 115BAA. The business
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trust distributes its entire income to the unit holders in the financial year
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2024-25 in the month of March, 2025.
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The business trust paid an interest of ` 2 lakhs on money borrowed by it from a
foreign company, by way of issue of rupee denominated bonds on 01.06.2024.
The bond is listed on a recognized stock exchange located in IFSC. The Interest
paid to Foreign Company does not exceed the rate approved by the Govt. of India.
Mr. Prakash, a resident shareholder holding 100 units and Mr. S. John (an
Australian Citizen) holding 500 units in the business trust. The total number of
units subscribed to by all unit holders is 5,000.
Mr. S. John, who is a unit holder in the business trust, came to India for the first
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time on 27th July, 2024. On 10th November, 2024, he left India for China on
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business trip. He came back to India on 15th February, 2025. He maintains a

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dwelling place in India from the date of his arrival in India (i.e. 27th July, 2024)

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till 27th February, 2025 when he left for Iran. Mr. S. John does not have

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permanent establishment or fixed place for carrying out his business in India.
He is liable to tax in Australia in respect of his income of Financial Year
2024-25.
Mr. S. John, in addition to income distributed by business trust, earned income
from following sources in India during the Financial Year 2024-25:
(i) Royalty received from Indian concern:
(Mr. S. John has incurred expenditures of ` 4 lakhs in respect of Royalty. The

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royalty is as per agreement with an Indian concern and agreement has
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c. o (ii) Rent from house property located in India (Property tax inserespect
been approved by the Government of India)

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la a default tax regime.
house property paid ` 50,000/- in the FY 2024-25): ` 7,50,000

ag Mr. S. John has not exercised option for opting out from the
From the facts given in the case study, choose correct answer to following
Multiple Choice Questions. (MCQ. No. 8 to 12):

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

8. In respect of the component of interest income received from Axe Ltd. and
distributed by the business trust to the unit-holders - Mr. Prakash and Mr. S.
John:
(A) No tax shall be deductible at source.
(B) Tax shall be deductible @ 5% on the income distributed to Mr. Prakash
and Mr. S. John.
(C) Tax shall be deductible @ 10% on the income distributed to
Mr. Prakash and @ 5% on income distributed to Mr. S. John.
(D) Tax shall be deductible @ 10% on income distributed to Mr. S. John
and @5% on income distributed to Mr. Prakash. (2 Marks)
9. In respect of short-term capital gains of ` 5 lakhs on sale of listed shares,
the business trust is-
(A) liable to pay income-tax (excluding surcharge and cess) at the rate of
15%.
(B) liable to pay income-tax (excluding surcharge and cess) at the rate of
10%.
(C) not liable to pay any tax on such short-term capital gains; such income
is subject to tax in the hands of unit-holders.
(D) liable to pay income-tax (excluding surcharge and cess) at the rate of
20%. (2 Marks)
10. The dividend component of income received from Axe Ltd. and distributed
to unit-holders by business trust -
(A) would be exempt in the hands of the business trust and the unit-
holders.
(B) would be exempt in the hands of the business trust but taxable in the
hands of unit-holders.
(C) would be taxable in the hands of the business trust; and exempt in the
hands of unit-holders.
(D) would be taxable in the hands of business trust and also in the hands
of the unit-holders. (2 Marks)

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11. In the given facts, on the interest of ` 2 Lakhs paid by the business trust on
rupee denominated bonds, the business trust would be liable to -

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(A) deduct income-tax @ 5% on ` 2 lakhs.

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(B) deduct income-tax @ 4% on ` 2 lakhs.

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(C) deduct income-tax @ 9% on 2 lakhs.
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(D) deduct income-tax @ 10% on ` 2 lakhs. (2 Marks)
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Income-tax Act will be -
(A) Resident in India
(B) Resident but Not Ordinarily Resident
(C) Deemed to be Resident Indian
(D) Non-resident in India (2 Marks)

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Independent Case Study based MCQs
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.registered in Australia), during the
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e in the business of operating passenger
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13. M/s S. International (a company

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lcruise ships owned by M/s S. International,
financial year 2024-25 was engaged
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cruise ships in India. The
operates between Mumbai & Lakshadweep and Mumbai & Goa ports.
M/s S. International fulfills all the conditions prescribed under the
presumptive taxation provision applicable to nature of the income from the
passenger cruise ships operated by it in India. In the above facts, the
amount of profit chargeable to tax in the case of M/s S. International for
Assessment Year 2025-26 shall be

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(A) 7.5% of the aggregate of the amount received or receivable or deemed

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to be received or receivable on account of carriage of passengers,
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directly or in-directly.

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(B) 20% of the aggregate of the amount paid or s
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a or In-directly),
M/s S. International (Directly or In-directly) and the amount

ag deemed to be received by M/s S. International (Directly
on account of carriage of passengers.

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

(C) 5% of the aggregate of the amount received or receivable or deemed to
be received or receivable on account of carriage of passengers, directly
or in-directly.
(D) 10% of the aggregate of the amount received or receivable or deemed
to be received or receivable on account of carriage of passengers,
directly or in-directly. (2 Marks)
14. AZ (India) Ltd (an Indian Company) is a wholly owned subsidiary of AZ Inc.
USA. AZ Inc. USA is incorporated in USA and tax resident of USA. During
the Financial Year 2024-25, AZ (India) Ltd imported Electronic Devices
manufactured by AZ Inc. USA for sale to unrelated customers in India.
AZ (India) Ltd has not made any value addition before the sale of the
devices imported from AZ Inc. USA and has also not incurred any marketing
or brand promotion expenses for or on behalf of AZ Inc. USA. In such a
situation, which of the following statement is correct :-
(A) The Most appropriated method for determination of the arm's length
price in respect of Electronic Devices imported by AZ (India) Ltd shall
be Profit Split Method.
(B) The Most appropriated method for determination of the arm's length
price in respect of Electronic Devices imported by AZ (India) Ltd shall
be Cost Plus Method.
(C) The Most appropriated method for determination of the arm's length
price in respect of Electronic Devices imported by AZ (India) Ltd shall
be Resale Price Method.
(D) The Most appropriated method for determination of the arm's length
price in respect of Electronic Devices imported by AZ (India) Ltd shall
be the Comparable Uncontrolled Price method. (2 Marks)
15. During the financial year 2024-25, ZX International Singapore (a company
incorporated in Singapore) held shares carrying voting power of 25% in ZX
(India) Ltd (an Indian Company). XZ (India) Ltd., who is a wholly owned
subsidiary of ZX International Singapore, also held shares carrying voting
power of 36% in ZX (India) Ltd. ZX (India) Ltd is engaged in manufacturing
of industrial chemicals and for such manufacturing, it is wholly dependent
on the technical know-how provided by ZX International Singapore. During

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the financial year, royalty of ` 25 Crores was paid by ZX (India) Ltd. to
ZX International Singapore.

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Considering the above facts, which of the following statements is correct:-
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(A) XZ (India) Ltd is only associated enterprise of ZX International

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Singapore.
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(B) XZ (India) Ltd and ZX (India) Ltd, both are associated enterprise of ZX
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International Singapore.

International Singapore.
(D) ZX (India) Ltd is only associated enterprise of ZX International
Singapore. (2 Marks)
Answer Key

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MCQ No. Correct Option
1. (A)
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2. (A)
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3. (A)
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4. (C) a
5. (B)/(C)
6. (A)
7. (D)
8. (C)
9. (D)

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10. (B)
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(C)

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(D)
la se
l as 13. (B)
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ag 14.
15.
(C)
(B)

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

Part II - Descriptive Questions
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 2025-26, unless stated otherwise in the
question.
Question 1
1. M/s RST Ltd., a company resident in India, engaged in the manufacturing of
leather products. The Statement of Profit & Loss for the year ended
31st March, 2025 shows a net profit of ` 97,38,000 after debiting or
crediting the following items:
(i) Foreign travel expenditure of ` 12,00,000 regarding three directors for
a collaboration agreement with a foreign company for setting up a new
plant in London for manufacturing of plastic products. The negotiation
could not succeed and project was abandoned.
(ii) Goods purchased of ` 4 lakhs from M/s Shiv Traders (a micro
enterprise) were delivered on 16.03.2025. M/s RST Ltd raised the quality
issues on 01.04.2025, which were resolved by M/s. Shiv Traders on
05.04.2025. M/s RST Ltd paid the above amount on 29.04.2025.
Payment terms agreed was 48 days from date of delivery as per written
contract.
(iii) Security deposit of ` 6,50,000 was paid to MNO Ltd. on 01.05.2024 for
hiring a building on rent for business purpose. Due to unforeseen
circumstances, RST Ltd. vacated the building which resulted in a
dispute. To end the dispute, RST Ltd. agreed not to claim the security
deposit and claimed the amount as deduction.
(iv) Profit of ` 6,25,000 earned from hedging contract entered into for
meeting out loss in foreign currency payments regarding an imported
printing machinery valued at ` 110 lakhs. The machinery was installed
and put to use on 05.01.2025.
(v) Depreciation of ` 13,00,000 under the Companies Act, 2013, has been
charged.

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(vi) One plot of land was sold on 28-08-2024 at a profit of ` 15,00,000 to
M/s James Inc., Russia (a wholly owned subsidiary company).

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(vii) Provision of ` 9,00,000 has been made for gratuity based on actuarial

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valuations. The gratuity actually paid of ` 5,80,000 to retired

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employees during the financial year was debited to Gratuity Provision

emaccount.
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The Company furnished following additional information:
plot of land sold to M/s James Inc. was purchased at a cost of
` 32,00,000 on 22.03.2014 and value assessed by the stamp valuation
authority was ` 60,00,000.
(Cost Inflation Index: FY 2013-14: 220, 2024-25:363)
(ii) The Company employed following 305 additional workers during the
F.Y. 2024-25:

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No. of Date from which Regular/Casual Wages/month
workers employed
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. Regular
(` )
82
01-08-2024se
01-07-2024
m 25,200
96
l a Casual 24,800
55
72
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01-09-2024
07-11-2024
Regular
Regular
25,000
24,300

The regular employees participate in recognized provident fund while
the casual employees do not participate. Additional wages were paid
through account payee cheque.
(iii) The Company purchased ` 7,500 equity shares of M/s PQR Pvt. Ltd. at
` 40 per share on 05.09.2024. The fair market value per share on such

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date was 95.
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(iv) Depreciation on fixed assets as per the Income-tax Rules,1962
excluding depreciation on imported printing machine is `e12,60,000.
em l a s Ignore MAT
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Compute the Total Income of M/s RST Ltd. for the A.Y. 2025-26.

ag and the provisions of section 115BAA. (14 Marks)

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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

Answer
Computation of Total Income of M/S RST Ltd. for the A.Y. 2025-26

Particulars Amount (in `)
I Profits and gains of business or
profession
Net profit as per the Statement of profit 97,38,000
and loss
Add: Items debited but to be considered
separately or to be disallowed
(i) Expenses on foreign travel of three 12,00,000
directors for a collaboration
agreement which failed to materialize
[Where expenditure is incurred for a project
not related to the existing business and the
project was abandoned without creating a
new asset, the expenses are capital in
nature 1. Manufacturing plastic products is
not related to the existing business of
manufacturing leather products. Since the
same has been debited to the statement of
profit and loss, the same has to be added
back while computing business income.]
(ii) Sum payable for purchase of goods Nil
from M/s Shiv Traders, a micro
enterprise
Since payment was made to a micro
enterprise on 29.4.2025 i.e., within 45 days
from date of delivery, deduction for
purchase of goods is allowed in the P.Y.
2024-25. Since the same has been debited
to the statement of profit and loss, no
adjustment is required to be made]

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Mc Gaw-Ravindra Laboratories (India) Ltd. v. CIT (1994) 210 ITR 1002 (Guj.)
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(iii) Forgoing of security deposit to settle 6,50,000
a dispute

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[The character of the security deposit is of
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capital nature and remained so though it is

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decided to forgo it. It cannot be treated as

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revenue expenditure merely because it was

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paid in the course of dispute. 2 Since it has

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been debited to the statement of profit and
loss, the same has to be added back while
computing business income]
(v) Depreciation as per the Companies 13,00,000
Act, 2013
(vii) Provision for gratuity 3,20,000
[Provision of ` 9 lakhs for gratuity based on

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actuarial valuation is not allowable as

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deduction. However, actual gratuity of

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` 5.80 lakhs paid is allowable as deduction.

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Hence, the difference has to be added back

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to income. [` 9 lakhs (-) ` 5.80 lakhs]
a 34,70,000
1,32,08,000
Less: Items credited but not taxable or
chargeable to tax under another head
(iv) Profit from hedging contract 6,25,000
[The profit from hedging contract entered

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into for meeting loss in foreign currency

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payments towards imported machinery has

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to be adjusted against the cost of plant and

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machinery. Since it has been credited to the
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las statement of profit and loss, the same has to
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be reduced while computing business income]

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2
Mahle Anand Filter Systems Pvt. Ltd. v. ACIT (2023) 456 ITR 29 (SC)
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SUGGESTED ANSWERS
FINAL EXAMINATION: SEPTEMBER 2025

(vi) Profit on sale of plot of land 15,00,000
[Profit on sale of plot of land taxable or
otherwise under the head “Capital Gains”. Since
this amount has been credited to the
statement of profit and loss, the same has to
be deducted for computing business income].
21,25,000
1,10,83,000
Less: Depreciation as per the Income-tax
Rules
Depreciation of fixed assets other than 12,60,000
imported machine
Depreciation on imported printing machine 7,78,125
[` 1,03,75,000 (` 110 lakhs – ` 6,25,000) x
15% x 50%, since machinery is put to use
for less than 180 days]
Additional depreciation on imported printing 10,37,500
machine [` 1,03,75,000 x 20% x 50%]
30,75,625
80,07,375
II Capital Gains
Long term capital gain on sale of plot of
land
As the sale is made to wholly owned
subsidiary being a foreign company the
transaction would not be tax-free. It would
be regarded as ‘transfer’ and the capital
gain is liable to tax.
Actual sale consideration [` 32 lakhs + ` 15 47,00,000
lakhs]
Valuation as per stamp valuation authority 60,00,000
Full value of consideration 60,00,000
(Since the stamp duty value exceeds 110%
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of the actual sale consideration, the stamp
duty value shall be taken to be the full
value of consideration as per section 50C)
m
m c. o
co
Less: Cost of acquisition [No indexation 32,00,000

. em
s
benefits allowable if transfer takes place on
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e term capital gain [Since plot of land
or after 23.7.2024]
l a
a s
l is held for more than 24 months] ag
g
Long 28,00,000

aIII Income from Other Sources
Acquisition of equity shares for inadequate 4,12,500
consideration
[Since the difference between fair market
value of shares i.e., ` 7,12,500 (7500 x 95)
and consideration i.e., ` 3,00,000 (7500 x

m
co
40) exceeds ` 50,000, the difference would
be taxable under section 56(2)(x)]
.
Gross Total Income
s VI-A em 1,12,19,875

l a
ag 80JJAA [30% of
Less: Deduction under Chapter
Deduction under section
additional employee cost of the employees
having emoluments of not exceeding
` 25,000 employed for 150 days or more, in
case of leather industry and participate in
recognized provident fund is allowed as
deduction. Accordingly, in the present case,

m
55 regular employees employed on

m
1.9.2024 would be considered for
c. o
c. o m
deduction]

em
[` 25,000 x 55 x 7 months] x 30%
la se 28,87,500
las Total Income
a g 83,32,375

ag Total Income (rounded off) 83,32,380

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Question 2
(a) (i) M/s PR Associates is an Association of Persons (AOP) has two members
namely Mr. P and Mr. R. Mr. P aged 46 years has 65% share and Mr. R
aged 44 years has 35% share.
For the financial year 2024-25, the AOP has earned income of
` 11,80,000. Mr. P and Mr. R has also earned income other than income
from AOP of ` 2,45,000/- and ` 2,97,000/- respectively.
Mr. P opted to pay tax under old tax regime and the AOP and its
member Mr. R opted new tax regime u/s 115BAC. Compute tax liability
of PR Associates and its member Mr. R for the A.Y. 2025-26. (4 Marks)
(ii) Mr. Shivansh purchased 11,000 equity shares of ` 10 each of M/s ABC
Ltd. on 08.03.2007 at a premium of ` 40 per share. On 07.10.2024, the
Company buy-backs 1,000 equity shares held by Shivansh at a price of
` 550 per share.
M/s ABC Ltd. distributed its assets to shareholders on its liquidation on
15.11.2024. Shivansh received ` 100 per share in cash and one plot of
land in consideration of remaining 10,000 shares. The book value and
fair market value of such land on 15.11.2024 was ` 45 lakhs and
` 60 lakhs respectively. On this date, M/s ABC Ltd. has equity share
capital of ` 10,00,000 (1,00,000 equity shares of ` 10 each) and
accumulated profits of ` 80,00,000.
Cost Inflation Index: 2024-25: 363, 2006-07: 122
Compute income chargeable in respect of following in the hands of
Mr. Shivansh assuming he has not opted tax regime u/s 115BAC for the
A.Y. 2025-26:
(1) On buyback of 1,000 equity shares; and
(2) Capital Gains chargeable on liquidation. (4 Marks)
(b) M/s Bittu Inc. (a notified Foreign Institutional Investor "FII"), has furnished
following details regarding its income for the financial year 2024-25:
Short Term Capital Gains:
Sale proceeds on sale of equity shares of Company 'A' : ` 16,90,000
(Sold on 10.02.2025)

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Cost of acquisition (Purchased on 08.09.2024) : ` 6,00,000
STT paid both at the time of purchase and sale
m
c. o
Sale proceeds on sale of equity shares of Company 'B' : ` 11,50,000

o m m
.c
(Sold on 29.12.2024)
s e
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enot paid on shares of Company 'B')
Cost of acquisition (Purchased on 24.05.2024) : ` 5,65,000
l a
a s
lLong Term Capital Gains: ag
g
(STT

a
Sale proceeds on sale of securities on 13.01.2025 : ` 55,00,000
Purchase cost of securities on 18.06.2015 : ` 29,00,000
Cost inflation index:
Financial year 2015-16: 254, 2024-25: 363
Income on securities:

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co
Interest received from an Indian Company on
.
em
investment in rupee denominated bonds : ` 18,50,000
(Issued on 25.06.2020) s
laCompanies
a g
Dividend income from Indian : ` 2,25,000
Interest on other securities of Indian Companies : ` 8,00,000
Compute the total income and tax liability of M/s Bittu Inc. for the
assessment year 2025-26. (6 Marks)
Answer
(a) (i) Since Mr. P and Mr. R’s income, other than income from the AOP,

m
does not exceed the basic exemption limit, the AOP would be taxed

co
as per the default tax regime or old regime (as per normal provisions
m .
c. o m
of the Act) applicable to an individual. In the present case, AOP is

em
paying tax as per default tax regime. Its tax liability would be follows:

la se
las a
Computation of tax liability of PR associates, AOP, as per the
g
ag default tax regime
Particulars Amount (`)
Tax on ` 11,80,000
` 3,00,000 – ` 7,00,000 @5% 20,000
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` 7,00,000 – ` 10,00,000 @10% 30,000
` 10,00,000 – ` 11,80,000 @15% 27,000
77,000
Add: HEC @4% 3,080
Tax Liability 80,080

Computation of tax liability of Mr. R [As per Default Tax Regime]

Particulars Mr. R
Share of profit from AOP (65:35) 4,13,000
Other income 2,97,000
Total Income (A) 7,10,000
Tax 21,000
Add: HEC @4% 840
Total Tax (B) 21,840
Average rate of tax [B/A x 100] 3.076%
Total Tax 21,840
Less: Rebate under section 86 read with section 110 in 12,704
respect of share of profit from AOP (share in AOP x
Average rate of tax)
Tax Liability 9,136
Tax Liability (Rounded off) 9,140

Note (Alternate Answer) – Section 87A provides a rebate in case
where total income of a resident individual is chargeable to tax under
section 115BAC does not exceed ` 7 lakhs. However, rebate is also
provided if total income exceeds ` 7 lakhs and income-tax on such
total income exceeds the amount by which the total income is in excess
of ` 7 lakhs. Section 86 read with section 110 provides a deduction
from the amount of income-tax chargeable to tax of an amount equal
to the income-tax calculated at the average rate of income-tax on the
amount on which no tax is payable. There is no clarity in the provisions
as to which rebate is to be provided first. In the main solution, rebate
under section 86 is provided first in which case rebate under section

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87A would not be applicable as the tax liability of ` 9,140 of Mr. R does
not exceed ` 10,000, being the difference between total income and ` 7
lakhs. However, an alternative is possible that rebate under section 87A
m
m
is provided before rebate under section 86. In such case, tax liability of
o c. o
.c
Mr. R would be as follows:
e m
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s
Computation of tax liability of Mr. R [As per Default Tax Regime]

la a g
ag
`
Share of profit from AOP (65:35) 4,13,000
Other income 2,97,000
Total Income (A) 7,10,000
Tax 21,000
Less: Rebate under section 87A 11,000
10,000

om
Add: HEC @4% 400

. c
em
Total Tax (B) 10,400

la s
Average rate of tax [B/A x 100] 1.465%
Total Tax
g
Less: Rebate underasection 86 read with section 110 in
10,400
6,050
respect of share of profit from AOP (share in AOP x
Average rate of tax)
Tax Liability 4,350

(ii) Computation of income chargeable in the hands of Mr. Shivansh
for A.Y. 2025-26

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Amount (`)

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(1) On buyback of 1,000 equity shares by
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se
M/s ABC Ltd.

s em Capital Gains
g la
gla Full Value of consideration
a Nil

a Less: Cost of Acquisition [1000 x ` 50]
Long-term capital loss [can be set off
50,000
50,000
against long term capital gain on
liquidation of company]
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Income from Other Sources
Dividend [1,000 x ` 550] 5,50,000
The sum paid by M/s ABC Ltd., a domestic company
for purchase of its own shares would be treated as
dividend and taxable under the head “Income from
Other Sources” in the hands of Mr. Shivansh. No
deduction for expenses would be available against
such dividend income
(2) Capital gains chargeable on liquidation
Capital Gains
Full value of the consideration 62,00,000
Cash (10,000 shares x ` 100 per share) 10,00,000
Market value of land on the date of 60,00,000
distribution
70,00,000
Less: Deemed Dividend [` 8 lakhs (` 80 8,00,000
lakhs/1 lakhs x 10,000), being the share
of Mr. Shivansh in accumulated profits
of ` 80 lakhs would be deemed as
dividend]
Less: Cost of acquisition [10,000 x ` 50 (` 10+` 40)] 5,00,000
Long-term capital gain 57,00,000

(b) Computation of total income of M/s Bittu Inc., a notified FII, for
A.Y. 2025-26

Particulars ` `
Capital Gains
Short-term capital gains on sale of STT paid
equity shares of Company “A”
Sale consideration 16,90,000
Less: Cost of acquisition 6,00,000 10,90,000

20

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Short-term capital gains on sale on STT
not paid equity shares of Company “B”

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c. o
Sale consideration 11,50,000

o m m
c
Less: Cost of acquisition 5,65,000 5,85,000

m . capital gains on sale of s e
e a
Long-term

s l
a ag
securities

g l Sale consideration
a Less: Cost of acquisition [Benefit of 29,00,000
55,00,000
26,00,000
indexation is not allowable]
Income from Other Source
Interest received from an Indian company on 23,35,859
investment in rupee denominated bonds
[18,50,000/79.20x100]

om
Interest on other securities 8,00,000
Dividend from Indian companies
. c 2,25,000 33,60,859
Total Income
s em 76,35,859
Total Income (Rounded off)
g l a 76,35,860
a
Computation of tax liability of M/s Bittu Inc. for A.Y.2025-26
`
Tax @ 20% on interest on securities, dividend and rupee 6,72,172
denominated bonds =20% x ` 33,60,859
Tax @ 10% on long-term capital gains on sale of 2,60,000
securities= 10% x ` 26,00,000

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Note – Alternatively, if it is assumed that the long-term

m .
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capital gain on sale of securities ` 26,00,000 is covered by
m
se
section 112A, the same will be eligible for exemption of

em la
` 1,25,000 and the balance is liable to tax @12.5% (date of

las sale 13.01.2025). Accordingly, tax on long-term capital
a g
ag gains on sale of securities would be ` 3,09,375 (12.5% on
` 24,75,000).
Tax @ 20% on short-term capital gains on sale of STT paid 2,18,000
equity shares of Company “A” = 20% of ` 10,90,000

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Tax @ 30% on short-term capital gains on sale of STT not 1,75,500
paid equity shares of Company “B” = 30% of ` 5,85,000
13,25,672
Add: Surcharge @ 10% [Since the total income exceeds 1,32,567
` 50 lakhs but does not exceed ` 1 crore] 3
14,58,239
Add: HEC@4% 58,330
Tax liability 15,16,569
Tax liability (rounded off) 15,16,570

Question 3
(a) A public charitable trust engaged in "Relief of Poor" and registered under
section 12AB, for the previous year ending 31.3.2025, derived gross income
of ` 114.50 lacs, which consists of the following:

Particulars Amount in `
Income from properties held by trust 1,10,00,000
Accrued Interest on FDR
[FDR was made in financial year 2022-23 for
4,50,000
investment under section 11(5) with regard to amount
set apart in terms of Section 11(2)]

During the financial year, the trust applied a sum of ` 86 lacs towards
charitable purposes, as per the objects of the trust, which includes:
• Electricity bill amounting to ` 80,000 paid on 18.04.2024 pertaining to
March 2024. The trust follows the mercantile system of accounting.
• Amount of ` 4,72,000 (including GST of ` 72,000) paid to M/s. XYZ and
Co, an event management company, for advertising and organising a
fundraising programme at Delhi. The full amount of ` 4,72,000 was
remitted to M/s. XYZ and Co through RTGS on 1.3.2025.
• ` 5,00,000 paid to M/s Parivartan, another charitable trust having
same objects, by way of donation (other than corpus donation).

3 Surcharge would not be levied if it is assumed that M/s Bittu Inc. is a foreign company.

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Additional information
The trust received a sum of ` 8 lacs as corpus donation for constructing a
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c. o
playground for poor children in F.Y. 2023-24. It spent ` 8 lacs in F.Y.

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2024-25 for constructing the same.

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You are required to compute the total income of the Charitable trust for the

l a s
s ag
A.Y. 2025-26. (8 Marks)

l a
ag
(b) Mr. Kamal Sharma (Age 32 years) is the Marketing manager in M/s. Patio
Systems Ltd. since 01.10.2021. His income for the Financial Year 2024-25 in
India consists of
(i) Salary (before standard deduction) of ` 23.50 lakhs;
(ii) Interest on Housing loan in respect of property at Delhi (self-occupied
by him) of ` 2,20,000;
(iii) Dividend received from Indian companies ` 1,90,000/-.

m
(iv) Interest on FDR, ` 24,000 received on FDR made by Mr. Kamal Sharma

c. o
in the name of his wife. Mrs. Kamal Sharma, who does not have any

He has the following incomese
other source income.
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for the year ended 31 March 2025 in st

Country 'K':
a g
(i) Income from business in Country K Euro 13,500;
(ii) Rent from house property in Country K Euro 8,000;
(iii) Municipal taxes in respect of the above house (Not allowed as
deduction in Country K) = Euro 800;
(iv) Short-term capital gain of Euro 6,000 on sale of shares of companies
registered in Country 'K' and sale proceeds were credited in bank

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account in Country 'K' on 31.03.2025.

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c. o m
During F.Y. 2024-25, Mr. Kamal Sharma visited the country K for 30 days.

em se
He has never stayed there for more than a month in one financial year.

s
India has not signed any DTAA with Country 'K'. The fiscal year for the
g la
gla purpose of income-tax is the same (both in India and Country 'K'). Rate of
a
a tax in Country 'K' is 25% in respect of all incomes.
Assume that Rate of 1 Euro ` 90 for all calculation purposes.

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FINAL EXAMINATION: SEPTEMBER 2025

Compute the total income and net tax liability of Mr. Kamal Sharma for the
A.Y. 2025-26 under the default tax regime. (6 Marks)
Answer
(a) Computation of total income of charitable trust for the A.Y.2025-26

Particulars ` `
Income from properties held by trust 1,10,00,000
Add: Accrued interest on FDR 4,50,000
1,14,50,000
Less: 15% of income eligible for being 17,17,500
set apart without any condition
97,32,500
Less: Amount applied for charitable
purposes
- Electricity bill of ` 80,000 80,000
pertaining to March 2024 [Treated
as application as payment is made
in P.Y. 2024-25]
- Payment to event management 3,52,000
company [` 1,20,000 (i.e. @ 30% of
` 4,00,000 being the amount
excluding GST of ` 72,000) is not
considered as application on
account of non-deduction of TDS.
Accordingly, ` 3,52,000 [` 4,72,000
– ` 1,20,000] would be allowed as
application.
- Donation to another charitable 4,25,000
trust having same objects (other
than corpus) [85% of amount
contributed would be treated as
application]
- Other application [` 86 lakhs – 75,48,000
` 80,000 – ` 4,72,000 – ` 5,00,000]

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- Amount spent on construction of
playground [Any application made Nil

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from corpus donation, being

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exempt income shall not be treated

.co
as application of income]
s em
me Income of the trust l a
s
84,05,000

g l a
Total 13,27,500
ag
a Note – (Alternative Presentation)
Computation of total income of charitable trust for the A.Y.2025-26

Particulars ` `
Income from properties held by trust 1,10,00,000
Add: Accrued interest on FDR 4,50,000

m
1,14,50,000
Less: 15% of income eligible for being
. co 17,17,500

em
set apart without any condition

l a s 97,32,500
Less: Amount applied gfor charitable
purposes a
Total amount spent 86,00,000
Less: Amount not considered as applied
- Electricity bill of ` 80,000 Nil
pertaining to March 2024 [Treated
as application as payment is made
in P.Y. 2024-25, hence no
o m
m
adjustment is required]
.c
c. o - Payment to event management 1,20,000
s em
em la
company [` 1,20,000 (i.e. @ 30% of

las ` 4,00,000, being the amount
a g
ag excluding GST of ` 72,000) is not
considered as application on
account of non-deduction of TDS]

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- Donation to another charitable 75,000
trust having same objects (other
than corpus) [85% of amount
contributed would be treated as
application and balance 15% is
not considered as application
(15% of ` 5,00,000).
Amount applied for charitable 84,05,000
purposes
- Amount spent on construction of
playground [Any application made Nil
from corpus donation, being
exempt income shall not be treated
as application of income]
Total Income of the trust 13,27,500

(b) Computation of total income and net tax liability of Mr. Kamal
Sharma for A.Y. 2025-26 as per the default tax regime under
section 115BAC
` `
Income from Salary
Gross Salary 23,50,000
Less: Standard Deduction u/s 16(ia) 75,000
22,75,000
Income from House Property
Self-occupied property in Delhi
Interest on housing loan [Not allowable -
under default tax regime]
Let out property in Country K Euro
Rent from house property in 8,000
Country K 4

4
Rental Income has been taken as GAV in the absence of other information relating to
fair rent, municipal value etc.
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Less: Municipal taxes paid in 800
Country K

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7,200
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Less: Deduction under section 24(a) 2,160
@30%
m . s e
s e l a
a ag
5,040

g lEuro 5,040 x ` 90
a Profits and Gains of Business or
4,53,600

Profession
Income from business in Country K [Euro 12,15,000
13,500 x ` 90]
Capital Gain
Short-term capital gain on sale of shares of 5,40,000

m
companies registered in County K [Euro 6,000
x 90]
. c o
e m
s
Income from Other Sources

gl a
Dividend received from Indian companies 1,90,000
Interest in FDR [To be a
included in the total 24,000
income of Mr. Kamal since FDRs are made
by Mr. Kamal]
2,14,000
Gross Total Income/ Total Income 46,97,600
Tax liability on `46,97,600

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Tax on total income [30% of ` 31,97,600 + 10,99,280
m
c. o
` 1,40,000]
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em
Add: Health and Education cess @4%
se 43,971
la 11,43,251
las a g
ag Less: Deduction u/s 91 (See Working Note below) 5,37,573

Net tax liability 6,05,678

Net tax liability (Rounded off) 6,05,680

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Working Note: Calculation of deduction under
section 91
Average Rate of tax in Country K is 25%
Indian Average Rate of tax = ` 11,43,251/
` 46,97,600 x 100 = 24.34%
Doubly taxed income pertaining to Country K =
Income from house property of ` 4,53,600 + Income from
Business of ` 12,15,000 + Capital Gain of ` 5,40,000 =
` 22,08,600
Deduction u/s 91 = Lower of average rate of tax in 5,37,573
Country K and Indian rate of tax rate of tax x Doubly
taxed income = [24.34% x ` 22,08,600]

Question 4
(a) Examine the obligation of Tax Deduction at source/Tax Collection at source
in the following cases keeping in view the provisions of the Income-tax Act,
applicable for Assessment Year 2025-26:
(i) Mr. A and Mrs. A jointly purchased a fully built-up and ready to move
flat at Lucknow on 10.12.2024 from M/s XYZ Builders Limited for ` 86
Lacs. In addition, they have paid an amount of ` 4 Lacs for two car
parking spaces to M/s XYZ Builders Limited. They also paid one time
generator cost of ` 2,50,000 and swimming pool cost of
` 1,50,000 to the M/s XYZ Builders Limited. The stamp duty value of
the property is ` 75 lacs. Mr. A and Mrs. A, each paid ` 47 lacs to the
Builder for effecting the sale deed on 10.12.2024. (3 Marks)
(ii) Gross Salary received by Mr. Pankaj, aged 42 years during the
F.Y. 2024-25 from M/s PPN Limited is ` 37,50,000. House property loss
declared by him for the financial year (along-with documentary
evidence) is ` 2,00,000 in respect of his self-occupied property.
` 60,000 is interest accrued on FDR with State Bank of India for
F.Y. 2024-25 in respect of which TDS was deducted at applicable rate
by the Bank. Mr. Pankaj purchased a Motor car of ` 32,00,000 on
01.12.2024 for personal purposes, TCS was separately charged on the
purchase price of Motor Car at applicable rate. He has no other income.

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Mr. Pankaj has submitted relevant information to his employer
M/s PPN Limited in prescribed form with supporting evidences.

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He also intimated his employer his intention to exercise the option to

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choose default tax regime for the financial year. (3 Marks)

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(iii) An Urban Cooperative Bank (engaged in the business of banking) made

l a s
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an FDR of ` 100 crores with Union Bank of India (UBI) at 2.5% p.a.

l a
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interest as per RBI guidelines for maintaining capital adequacy ratio.
The said Cooperative Bank is also maintaining a current account with
UBI from which, it withdrew ` 4 crores in cash during the financial year
2024-25. The Cooperative Bank is filing its returns of income without
any default. (2 Marks)
(b) Beta Ltd. is an Indian Company in which Robert Inc. (a company
incorporated in Country E), holds 30% shareholding and voting power
during the financial year 2024-25.

m
During the financial year 2024-25, the Beta Ltd. supplied 700 pieces of

. co
computers to Robert Inc. @ USD 1100 per piece. The price of computer

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supplied to other un-related parties in Country E is @USD 1400 per piece.

a s
The Transfer Pricing Officer while determining of arm's length price of 700
l
g
pieces of computers sold to Robert Inc. adopted the price charged for
a
computer supplied to un-related parties as Internal uncontrolled
comparable transaction and proposed adjustment to total income.
Considering above facts, you are required to answer the following questions:
(i) Would Beta Ltd. and Robert Inc. be treated as associate enterprises for
the purpose of transfer pricing? If yes, why?
(ii) What are the options available to Beta Ltd., if it accepts enhancement
to total income made on account of determination of Arm's length

o m
c
price by the Transfer Pricing Officer? (6 Marks)
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c. o Answer
(a) (i) As per section 194-IA, consideration for transfer of s
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e immovable
em l a alia, parking
any

las a g
property include all charges in the nature of, inter

ag charges, generator cost and swimming pool cost.
In case of more than one transferee, consideration shall be aggregate
of amount paid by all the transferees for transfer of such property.

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In the present case, since aggregate value of consideration of both
transferees i.e., of Mr. A and Mrs. A not less than ` 50 lakhs, tax is
required to be deducted at source under section 194-IA @1% on ` 94
lakhs or 1% on ` 47 lakhs by Mr. A and 1% on ` 47 lakhs by Mrs. A
since consideration of ` 94 lakhs is higher than stamp duty value of
` 75 lakhs on purchase of flat from M/s XYZ Builders Ltd.
(ii) M/s PPN Limited, being an employer has to deduct tax at source
under section 192 from the salary of Mr. Pankaj at the time of
payment by applying the average rate of income-tax computed at the
rates provided in section 115BAC(1A), where an employee does not
exercise an option to shift out of this tax regime. While computing
the tax, the employer PPN Ltd. has to consider any other income
chargeable to tax and any tax deducted at source and tax collected at
source of Mr. Pankaj.
Computation of tax liability of Mr. Pankaj under default tax regime
Particulars `
Gross Salary 37,50,000
Less: Standard deduction under section 16(ia) 75,000
36,75,000
Interest in respect of self-occupied property [Not Nil
allowed under default tax regime]
36,75,000
Interest on FDR 60,000
Total Income 37,35,000
Tax on ` 37,35,000 at slab rate [30% of ` 22,35,000 + 8,10,500
` 1,40,000]
Add: HEC@4% 32,420
Tax liability 8,42,920
Less: TDS under section 194A @10% on interest on 6,000
FDR of ` 60,000
TCS under section 206C(1F) @1% on motor car 32,000
of ` 32 lakhs
Tax liability 8,04,920
M/s PPN Limited has to deduct tax of ` 8,04,920.

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(iii) No deduction of tax under section 194A is to be made on interest
income credited or paid to co-operative society engaged in banking
business.
m
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co
Accordingly, Union Bank of India (UBI) is not required to deduct tax at

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s
source under section 194A on interest on FDR to Urban Co-operative
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eLiability to deduct tax at source under section 194N shall not be g
Bank.
l a
a s
l applicable on payment made to co-operative society engaged ina
g
a banking business. Accordingly, Union Bank of India (UBI) is also not
required to deduct tax at source on cash withdrawal by Urban co-
operative bank.
(b) (i) Beta Ltd., an Indian company and Robert Inc., a company
incorporated in Country E are deemed to be associated enterprise as
per section 92A(2), since Robert Inc. holds more than 26% of voting
power i.e., 30% in Beta Ltd.
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(ii) If Beta Ltd. accepts the enhancement to total income made on

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account of determination of Arm’s length price by the TPO, it has to

a s
make a secondary adjustment under section 92CE if the primary
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g
adjustment exceeds ` 1 crore.
a
In the present case, the primary adjustment would be USD 2,10,000
(700 pieces of computers x USD 300 (USD 1400 – USD 1100) which
exceeds ` 1 crore.
Accordingly, the excess money i.e., USD 2,10,000 available with
Robert Inc. has to be repatriated to India within 90 days of the date of
the order of the Assessing Officer.
In case of non-repatriation, USD 2,10,000 would be deemed as an
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c. o
advance made by the Beta Ltd. to its associated enterprise, Robert
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c. o Interest would be calculated on such advance at the rateem
Inc.

em s
LIBOR as on 30th September of the relevant previousayear + 3%, since
l
of six-month

las ag currency.
g
the international transaction is denominated in foreign
a Alternatively, Beta Ltd. can opt to pay additional income-tax
@ 20.9664% (tax @18% plus surcharge @12% plus cess@4%).

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In such case, Beta Ltd. will not be required to make the secondary
adjustment and compute interest up to the payment of tax from such
date.
Question 5
(a) Answer any two out of the following three sub-parts, viz. (i), (ii), (iii).
Your answer should cover:
• Issue involved
• Provision applicable
• Analysis and Conclusion
(i) In case of an assessee, the Assessing Officer passed an order
u/s 143(3) on 15/12/2022. CIT passed the order u/s 263 on 26.03.2025
holding that the said assessment order passed u/s 143(3) was
erroneous and prejudicial to the interests of the revenue. CIT set aside
the assessment order and directed the AO to make fresh assessment
after conducting necessary enquiries. The order passed u/s 263 was
dispatched to assessee on 28.03.2025. The AO issued notice
u/s 142(1) to the assessee on 06.05.2025 for making fresh assessment.
The assessee contended that it had come to know about the revision
order only when he received notice u/s 142(1) dated 06.05.2025. The
copy of the order passed by CIT u/s 263 was supplied to him on
29.05.2025 on the request made to the Assessing Officer by him after
receipt of notice u/s 142(1). Hence, the revision order is beyond the
period of limitation u/s 263(2). (4 Marks)
(ii) M/s. Rama Ltd. filed its return of income claiming deduction for bad
debts. The return was processed u/s 143(1)(a) of Income-tax Act, 1961.
Thereafter, the Assessing Officer noticed that the assessee had wrongly
claimed amounts of bad debts, he issued a notice u/s 154 after expiry
of the time limit prescribed u/s 154(7). During the pendency of the
proceedings initiated by notice u/s 154, the Assessing Officer issued a
notice u/s 148A(1) of the Act. It is contention of M/s. Rama Ltd that the
notice issued u/s 148A(1) is illegal. (4 Marks)
(iii) AZ Foundation, trust registered u/s 12AB, runs an educational
institution. The trust is paying rent of ` 30 lakhs per annum for the
building occupied by it but the trust has not deducted TDS on such rent
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under the relevant provisions of the Income-tax Act. The ITO TDS has
issued a notice to show cause as to why, the trust should not be treated
an assessee in default for the tax deductible and the interest should not
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be imposed for such default. The income of the trust is being exempt,
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whether ITO TDS was justified in issuing the said show cause notice?
s em
e m (4 Marks)
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(b) What is the need of applying principles of interpretation of law for
interpreting a tax- treaty (DTAA), briefly describe the objective behind such
interpretation? (3 Marks)
(c) Briefly describe Indicators of BEPS activity recommended under action plan
11 of Base Erosion and Profit Shifting (BEPS). (3 Marks)
Answer
(a) (i) Issue Involved: The issue under consideration is whether the revision
order which is passed within 2 years from the end of the financial
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year in which order sought to be revised was passed but received by

.
the assessee thereafter, is considered as beyond the period of

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limitation prescribed under section 263(2).

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Provision applicable: As per section 263(2), no revision order shall
a
be made after the expiry of two years from the end of the financial
year in which the order sought to be revised was passed.
Analysis: Sub-section (2) of section 263 mandates that no revision
order shall be "made" after the expiry of two years from the end of
the financial year in which the order sought to be revised was passed.
The word used is "made" and not the order "received" by the
assessee. Even the word "dispatch" is not mentioned in section

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263(2). The provisions of the statute are to be read as they are and

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nothing is to be added or taken away from the provisions of the

c. o m
statute. Therefore, once it is established that the order under section

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263 was made or passed within the period of two years from the end
la se
las of the financial year in which the order sought to be revised was
a g
g
passed, such an order cannot be said to be beyond the period of
a limitation prescribed under section 263(2).
Conclusion: In the present case, revision order under section 263 was
passed on 26.3.2025 before the expiry of two years i.e., 31.3.2025

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from the end of the F.Y. 2022-23 in which assessment order u/s
143(3) was passed. Thus, the revision order is within the period of
limitation prescribed under section 263(2).
Note – The facts given in the question are similar to the facts in CIT v.
Mohammed Meeran Shahul Hameed (2021) 438 ITR 288 (SC). The
above answer is based on the rationale of the Apex Court ruling in the
said case.
(ii) Issue Involved: The issue under consideration is whether notice
issued under section 148A during the pendency of the rectification
proceedings initiated under section 154 is valid on the ground that
the notice under section 154 was issued after the expiry of the time
limit prescribed under section 154(7).
Provision applicable: As per section 154(7), no amendment under
section 154 shall be made after the expiry of four years from the end
of the financial year in which the order sought to be amended was
passed.
Analysis: In the absence of any specific order of withdrawal of the
proceedings under section 154 on the ground that the same was
beyond the period of limitation prescribed under section 154(7), the
proceedings initiated under section 154 can be said to have been
pending. During the pendency of the proceedings under section 154,
it was not permissible on the part of the revenue to initiate the
proceedings under section 148A.
Conclusion: In the present case, notice under section 148A was
issued during the pendency of the proceedings under section 154.
Thus, notice issued under section 148A is illegal.
Note – The facts given in the question are similar to the facts in
S.M. Overseas (P) Ltd. v. CIT (2023) 450 ITR 1/14 SCC 111 (SC). The
above answer is based on the rationale of the Apex Court ruling in the
said case. The said ruling is in respect of erstwhile section 148,
however, the same can be applied in the case on hand.
(iii) Issue Involved: The issue under consideration is whether a trust,
being exempt can be treated as assessee in default for not deducting
tax at source and levy of interest for such default.

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Provision applicable: As per section 201, where any person who is
required to deduct any sum, does not deduct or does not pay or after
deducting fails to pay, then such person shall be deemed to be an
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assessee in default in respect of such tax unless the payee has paid
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such tax on such income at the time of furnishing return of income
s em
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eAnalysis: Section 194-I does not provide any exemption to a trust g
under section 139.
l a
a s
l registered under section 12AB, paying rent of an amount exceedinga
g
a the threshold limit, from deducting tax at source. If a trust registered
under section 12AB is liable to deduct tax at source and has not
deducted such tax, it shall be deemed to be assessee in default by
virtue of section 201 and would be liable to pay interest.
Conclusion: In the present case, since AZ Foundation trust has not
deducted tax at source on the rent payment of ` 30 lakhs, it shall be

m
deemed to be assessee in default and the ITO TDS was justified in

c o
. a different approach than the
issuing the show cause notice to AZ Foundation.
(b) The interpretation of DTAAs require
m
e as the latter is based on interpretative
interpretation of domestic tax slaws
a
principles set out by the lnational courts, whereas the DTAAs are an
g
international agreementabetween the government of two countries. The
treaties are interpreted in light of the customary principles set out under
the Vienna Convention of the Law of treaties (VCLT).
VCLT is a multilateral treaty signed and ratified by several countries, which
codifies the customary international law for interpretation of tax treaties.
Principles or rules of interpretation of a tax treaty would be relevant only

m
where terms or words used in treaties are ambiguous, vague or are such

m If words are clear or unambiguous, then there is no need mto.resort to
that different meanings are possible.
c o
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em different rules for interpretation.
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(c) Under Action Plan 11, there are six indicators of BEPS activity which are
described below:
(1) The profit rates of MNE affiliates located in lower-tax countries are
higher than their group’s average worldwide profit rate.

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(2) The effective tax rates paid by large MNE entities are estimated to be
lower than similar enterprises with only domestic operations.
(3) Foreign direct investment (FDI) is increasingly concentrated.
(4) The separation of taxable profits from the location of the value
creating activity is particularly clear with respect to intangible assets,
and the phenomenon has grown rapidly.
(5) Royalties received by entities located in these low-tax countries
accounted for 3% of total royalties.
(6) Debt from both related and third-parties is more concentrated in
MNE affiliates in higher statutory tax-rate countries.
Question 6
(a) ABC Ltd., an Indian company engaged in producing electrical equipment,
during the financial year 2024-25, paid interest of ` 95 lakhs to James Inc. (a
non-resident associated enterprise) on loan borrowed from it. On 01-04-2024,
ABC Ltd. also borrowed ` 5 crores from Jorge Plc. at the interest rate of 10%
per annum. Jorge Plc. is a foreign company in which ABC Ltd. holds 20%
voting power. James Inc. deposited ` 2 crores with Jorge Plc. According to ABC
Ltd, since the interest paid to non-resident associated enterprise does not
exceed ` 1 crore in the F.Y. 2024-25, the provisions of section 94B are not
applicable in its case. As per the opinion of the tax auditor, the interest of
` 20 lakhs (i.e., 10% of ` 2 crore) also has to be considered for the purpose of
section 94B. ABC Ltd. contended that James Inc. has not deposited a
corresponding and matching amount of ` 5 crores with Jorge Plc. and hence,
the provisions of section 94B will not be attracted in this case. Examine the
reporting requirement, if any, of the tax auditor in this case. (6 Marks)
(b) State with reasons whether the following acts can be considered as Tax
Planning or Tax Compliance or Tax Evasion:
(i) One credit note was issued by SK Ltd. of ` 75,000 as commission
payable to Mr. Kapil, although Mr. Kapil has not rendered any service
to SK Ltd. Mr. Kapil is the son of the managing director of SK Ltd. The
objective behind the issue of credit note is to increase the total income
of Mr. Kapil from ` 6,25,000 to ` 7,00,000 and correspondingly reduce

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the total income of SK Ltd. Mr. Kapil opted to pay tax under section
115BAC.

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(ii) M/s Durga Associates, a partnership firm, obtained declaration in Form
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No. 15G/15H from its lenders/depositors (wherever applicable) and
.
submitted the same to prescribed income-tax authorities.
m
(4 Marks)
se
(c) M/s eRio Inc., a non-resident company entered into contract with an Indian la
l a s M/s ABC Ltd. for installation of plant and machineries. Theag
ag amount
company
of contract is ` 125 crores. M/s Rio Inc. made an application to the
Board for Advance Rulings for determination of rate of withholding tax on
receipts from M/s. ABC Ltd. As a tax consultant, you are required to answer
following questions:
(i) Can M/s Rio Inc. withdraw such application made to the Board for
Advance Rulings?
(ii) What is the time line within which Board for Advance Rulings is

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required to pronounce its advance ruling? (4 Marks)

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e the debt is issued by a lender which is
Answer

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l enterprise either provides an implicit or
(a) Section 94B provides that where

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not associated but an associated
explicit guarantee to such lender or deposits a corresponding and
matching amount of funds with the lender, such debt shall be deemed to
have been issued by an associated enterprise.
In this case, the debt issued by Jorge Plc. is ` 5 crores and the deposit
made by the associated enterprise; James Inc. with Jorge Plc. is ` 2 crores.
Since the deposit is not of a matching amount, ABC Ltd. contends that

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provisions of section 94B will not be attracted in respect of interest

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payable by it to Jorge Plc. The tax auditor is of the opinion that interest
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on ` 2 crores amounting to ` 20 lakhs will have to be considered for the

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purpose of section 94B.

la se
las Accordingly, the interest payable/paid by ABC Ltd. to non-resident
a g
ag associated enterprises during the year would be ` 115 lakhs and hence,
the provisions of section 94B would be attracted, since the same exceeds
the threshold of ` 1 crore. This appears to be the legislative intent, since

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otherwise it is possible to escape the application of this provision even by
depositing a marginally lower amount than the loan taken.
Clause 30B(a) of Form 3CD requires the tax auditor to state whether the
assessee has incurred expenditure during the previous year by way of
interest or of similar nature exceeding ` 1 crore as referred to in section
94B(1).
As per the Guidance Note on Tax Audit, the tax auditor may have a
difference of opinion with regard to the particulars furnished by the
assessee. These differences are to be reported in para 3 of Form No. 3CA
or para 5 of Form 3CB.
If there is any difference in the opinion of the tax auditor and that of the
assessee in respect of any information furnished in Form No. 3CD by the
assessee, the tax auditor may consider stating both the viewpoints and
also the relevant information related to matter in order to enable the tax
authority to take a decision in the matter.
Therefore, the tax auditor has to report the difference of opinion
appropriately as an observation in para 3 of Form No. 3CA or para 5 of
Form No. 3CB as the case may be.
Accordingly, in this case, the tax auditor may state both the viewpoints in
Clause 30B as well as report the difference of opinion appropriately as an
observation in Form 3CA to enable the tax authority to take a decision in
the matter.
(b) (i) Tax Evasion: Issuance of a credit note for ` 75,000 by SK Ltd. as
commission payable to Mr. Kapil, the son of the Managing Director,
to increase his total income from ` 6.25 lakh to ` 7.00 lakh 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 Mr. Kapil would not be liable to pay any tax as
per the default tax regime under section 115BAC, since his total
income does not exceed ` 7,00,000, consequent to which he would be
eligible for tax rebate of entire tax under section 87A. Reducing tax

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liability by recording a fictitious transaction would tantamount to tax
evasion.

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(ii) Tax Compliance: Obtaining declaration from lenders/depositors in
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Form No. 15G/15H by M/s Durga Associates, a partnership firm and
.
forwarding the same to Income-tax authorities is in the nature of
m s e
s ecompliance with statutory obligation under the Income-tax Act, 1961.
l a
l a As per section 245Q(3), M/s Rio Inc. can withdraw an applicationag
ag made
(c) (i)
to the Board for Advance Rulings within 30 days from the date
of application.
(ii) The Board has to pronounce the advance ruling within 6 months from
the receipt of application by the Board.

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