CA Final January 2026 Suggested Answers Paper 4 Direct Tax Laws and International Taxation

FOR CA FINAL EXAM PREPARATION

CA Final 2026
Suggested Answers ·
Paper 4 Direct Tax
Laws and International
Taxation
EXAM YEAR TYPE

CA Final 2026 Suggested Answers
SUBJECT DATE

Paper 4 Direct Tax Laws and International Taxation January 2026

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
On 1.4.2024, UI Ltd., an Indian company, borrowed ` 50 crores @ 10% p.a. from
M Inc., a US entity, thereby increasing its total borrowings to ` 70 crores. The
said loan is guaranteed by H Inc., another US entity. The place of effective
management of both M Inc. and H Inc. is in the USA. The total assets of UI Ltd.
are ` 180 crores. UI Ltd, imported telecommunication equipment worth ` 22
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crores from H Inc. to resale in India to independent customers. Import duty of
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` 4.50 crores on the same was paid by UI Ltd. The equipment was sold to

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customers in India for ` 30 crores. Normal GP margin of UI Ltd. in similar

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uncontrolled transaction is 20% on sale.
g was ` 10.25 crores after debiting interest of
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Net profit of UI Ltd. of A.Y.2025-26
` 6.25 crores (out of which ` 1.25 crores was interest pertaining to borrowings
made in India from unrelated entities), depreciation of ` 2.5 crores and income
tax of ` 1.5 crores. Interest expenditure to the extent of ` 2 crore was disallowed
for the AY 2024-25 on account of the interest paid to a foreign associated
enterprise under the provision relating to limitation on interest deduction in
respect of debt issued by a non-resident associated enterprise.

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Mrs. Jenifer, a Director of UI Ltd., during the financial year 2023-24 visited USA

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and stayed there for a period of 90 days. During that period, she opened a bank
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` 50 Lakhs. The said amount was deposited by remitting the money from her

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bank account in India out of the salary income earned by her in India and duly
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disclosed in her returns of income. She invested the said money in purchase of
a shares in a US based company during the said financial year. The balance in the
foreign bank account as on 31st December, 2023 and on 31st March, 2024 was
` 4 lakhs and ` 1 lakhs respectively. Neither any interest was credited or
allowed by the Branch of USA bank during the said financial year, nor was any

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FINAL EXAMINATION: JANUARY 2026

income arisen from investment in shares of USA company directly or indirectly.
Mrs. Jenifer has not disclosed the foreign bank account and the investment
made in the shares of the foreign company in the return of income filed for A.Y.
2024-25. Based on the information received under the automatic exchange of
information, the Assessing officer has served a notice under the Black Money &
Imposition of Tax Act, 2015 (Black Money Act) on 06/12/2024 asking
Mrs. Jenifer to explain as to why the penalty under relevant provisions of Black
Money Act should not be imposed for non-disclosure of foreign bank account
and investment made in shares of USA based company.
During the FY 2023-24, Mr. Shyam father-in-law of Mrs. Jenifer, on the occasion
of her marriage gifted ` 20 Lakhs by way of issue of cheque on the date of her
marriage in her name. Mrs. Jenifer invested the gifted amount in fixed deposit
with a private bank in Mumbai. On the said fixed deposit interest of ` 80,000/-
was accrued during the FY 2023-24 and ` 1,20,000/- during the FY 2024-25.
She disclosed the said accrued interest income in her returns of income filed for
relevant AY i.e. AY 2024-25 and AY 2025-26 under the head "Income from other
sources."
From the facts given in the case study, choose the correct answer to the
following Multiple Choice Questions (MCQs No. 1 to 5):
1. The allowable deduction of interest in the computation of total income of
UI Ltd. for A.Y. 2025-26 works out to -
(A) ` 7,40,00,000
(B) ` 5,00,00,000
(C) ` 6,25,00,000
(D) ` 8,25,00,000 (2 Marks)
2. In respect transaction of telecommunication equipment entered between UI
Ltd. and H Inc. for A.Y. 2025-26, assuming that the Resale Price Method is
the most appropriate method, transfer pricing adjustment works out to-
(A) ` 3,00,00,000
(B) ` 2,50,00,000
(C) ` 2,00,00,000
(D) NIL (2 Marks)

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3. In the given facts, Mrs. Jenifer for AY 2024-25 was-
(A) required to disclose the foreign bank account in her return of income.
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(B) not required to disclose the foreign bank account in her return of

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income as the balance as on 31/12/2023 was less than ` 5 Lakhs.
(C) not .required to disclose the foreign bank account in her return of e
m as the balance as on 31/03/2024 was less than ` 5 Lakhs.
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a required to disclose the foreign bank account in her return of incomea
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a only, if her total income during the financial year 2023-24 was above
basic exemption limit. (2 Marks)
4. The amount of penalty which the Assessing Officer may impose under the
Income-tax Act, 1961 for non-disclosure of investment in shares of US
company in the FA Schedule in the return of income for AY 2024-25 by Mrs.
Jenifer shall be
(A) ` 50 Lakhs
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(B) ` 1 Crore
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(C) ` 10 Lakhs
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(D) NIL
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g is correct in respect of money worth ` 20
(2 Marks)

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5. Which of the following statement
lakhs gifted by father-in-law to Mrs. Jenifer-
(A) Mrs. Jenifer was required to disclose ` 20 lakhs as income under the
head "Income from other sources" in her return of income for
AY 2024-25
(B) Mrs. Jenifer correctly included interest of ` 80,000/- and ` 1,20,000/- in
her total income, respectively in her return of income for

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AY 2024-25 and AY 2025-26.

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(C) Mr. Shyam was required to include interest of ` 80,000/- and

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` 1,20,000/- in his total income in the return of income for

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AY 2024-25 and AY 2025-26 respectively.
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(D) Mrs. Jenifer was required to include ` 20.80 lakhs in her total income
a under the head "Income from other sources" in the return of income for
AY 2024-25 and ` 1,20,000/- under the head "Income for other
sources" for AY 2025-26. (2 Marks)

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FINAL EXAMINATION: JANUARY 2026

Integrated Case Study - II
Mr. A is an interior designer by profession. He also delivers online lectures on
interior decoration via an e-commerce platform-Indeco-Academy. The relevant
information from Mr. A's Indeco- Academy account is given hereunder:

Date of Credit for services Date of Payment Value of Services
to account of Mr. A to Mr. A Provided (`)
31.05.2024 10.06.2024 2,00,000
31.10.2024 10.10.2024 1,40,000
31.03.2025 10.04.2025 1,30,000

Mr. A has furnished his PAN to Indeco-Academy.
On 05.05.2024, Mr. A provided interior decorating services to Mr. N in Mumbai
(whose business turnover during the FY 2023-24 was ` 1.99 crores) for his office
premises as well as residential premises. He charged professional fee of
` 45,000/- for the services provided in respect of his office premises and
` 65,000/- for the services provided in respect of his residential premises. No
business is carried out by Mr. A 1 from the residential premises. Mr. A has
provided PAN to Mr. N for the purpose of making TDS.
Gross receipts of Mr. A from interior decoration profession (excluding fees for
online lecture) from clients in India (including from Mr. N) in the FY 2024-25
was ` 38 Lakhs.
For the FY 2024-25, ` 1,10,000 is payable by Mr. A to Tumble LLC a social
networking website having no office in India and ` 1,05,000 to Doodle Inc., USA
for giving online advertisements for the purpose of attracting foreign clients.
Though Doodle Inc., USA has office in India, the said office is involved in
providing designing services and nothing in relation to online advertisements.
Mr. A, during the FY 2024-25, from a client based in Country-X received
` 3,50,000/-. The client in Country-X paid the above amount after deducting tax
of ` 50,000/- as per the Income-tax Law of Country-X. India does not have a
DTAA with Country-X.
Mr. A has not maintained the books of accounts as required under section 44AA
of the Income-tax Act and opted to be assessed under the default tax regime

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Read as ‘N’
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SUGGESTED ANSWERS DIRECT TAX LAWS & INTERNATIONAL TAXATION

after computing the profit from his profession under the special provision for
computing profits and gains of profession on presumptive basis.

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From the facts given in the case study, choose the correct answer to the
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following Multiple Choice Questions (MCQs No. 6 to 8):

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6.
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In the given facts, Indeco-Academy in respect to amount paid/ payable to
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Mr. A for the lectures undertaken during the FY 2024-25, was required to
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deduct tax at source (Ignore Cess and Surcharge, if any) as e-commerce
operator.
(A) ` 94,000/-
(B) ` 4,700/-
(C) ` 23,500/-
(D) NIL (2 Marks)
7. In the given facts, which of the following statement is correct in respect of

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TDS (excluding Cess and Surcharge) for the FY 2024-25 was to be made by
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. by Mr. N
Mr. N for the professional services rendered by Mr. A:

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ededucted by Mr. N
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(A) No tax was required to be deducted
(B) ` 2,200/- was required toabe
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(C) ` 4,500/- was required
(D) ` 11,000/- was required to be deducted by Mr. N (2 Marks)
8. In the given fact, gross tax liability of Mr. A for AY 2025-26, including Cess
and Surcharge, if any (before giving any credit for TDS, prepaid taxes or
foreign tax relief etc.) works out to:
(A) ` 3,95,720
(B) ` 4,06,120
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(C) ` 3,84,280
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(D) ` 3,49,960

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las Integrated Case Study - III
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a 12AB runs an
ag Seva Niketan, a charitable trust registered under section
education institution and a hospital for treatment of persons suffering from
mental disorder solely for philanthropic purposes. The trust has furnished the
following information:

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FINAL EXAMINATION: JANUARY 2026

(i) The total receipts of the trust for the F.Y. 2024-25 for educational institution
is ` 3.50 crores and for the hospital is ` 3.90 crores.
(ii) Voluntary contributions [included in (i) above) received during the F.Y.
2024-25 from the public amounted to ` 115 lakhs. Voluntary contributions
of ` 115 lakhs includes corpus donations of ` 65 lakhs (for purchase of
building for the trust) and anonymous donations of ` 20 lakhs with specific
direction that such donations is for the purpose of educational institution
run by the trust.
(iii) During the F.Y. 2024-25, computers for use in the educational institution of
trust were purchased for ` 85 lakhs out of –
• Corpus fund mentioned in (ii) above - ` 35 lakhs.
• Loan - ` 25 lakhs
• Voluntary contributions - ` 25 lakhs
(iv) Corpus donation received during the FY 2024-25 are invested in the same
FY in-
• Post Office Saving Accounts- ` 15 lakhs
• Canara Bank as Fixed deposits - ` 5 lakhs
• Deposit with a Private Limited Company-` 10 lakhs
(v) Amount paid to another trust registered u/s 12AB by way of donation of
` 12 lakhs. Out of said amount ` 3 lakhs are given as corpus donations.
(vi) ` 6 lakhs, being the amount set apart in the F.Y. 2023-24 by the trust for
charitable purpose u/s 11(2) utilized in the F.Y. 2024-25 for making
donation to another charitable trust, whose object is also education.
From the facts given in the case study, choose the correct answer to the
following Multiple Choice Questions (MCQs No. 9 to 12):
9. Out of the amount corpus donation invested in FY 2024-25 [as mentioned
in (iv)] by Seva Niketan, which of the following amount would not form part
of it's total income of the A.Y. 2025-26?
(A) ` 30 Lakhs
(B) ` 5 Lakhs only
(C) ` 20 Lakhs

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SUGGESTED ANSWERS DIRECT TAX LAWS & INTERNATIONAL TAXATION

(D) ` 15 Lakhs only (2 Marks)
10. In case, Seva Niketan, accumulate or set apart in excess of 15% of income
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(where such accumulation is not allowed under any specific provision of the

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Income-tax Act), the tax on such excess income shall be calculated -

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(A) At the rate of 30%

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(B) At the rate of 10%
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a (D) At the average rate of Income-tax (2 Marks)
11. Which of the following amount in respect of purchase of computer, will be
treated as application of income of Seva Niketan for AY 2025-26:
(A) ` 35 Lakhs from Corpus Fund
(B) ` 25 Lakhs from the Loan
(C) ` 25 Lakhs from Voluntary Contributions

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(D) ` 60 Lakhs from the Corpus Fund & Loan
12. Tax Payable (excluding cess and m
(2 Marks)

e surcharge) by Seva Niketan in respect of
anonymous donations receivedsduring F.Y. 2024-25 works out to -
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(A) ` 6,00,000
(B) ` 5,70,000
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(C) NIL
(D) ` 4,27,500 (2 Marks)
13. Shark Shipping International, a non-resident foreign company, is engaged
in the business of operating a cruise ship in India and is eligible for taxation
on presumptive basis under section 44BBC. The ship operates between
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Chennai, Andaman and Lakshadweep and provides a complete package
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that includes dining and cabin facilities for the passengers. During the

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financial year ended on 31.03.2025, from the said operations it earned ` 50

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crores. This ` 50 crores includes an amount of ` 10 crores received by
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various travel agents for booking the cruise on behalf of Shark Shipping

a International. The expenses for operating the cruise ships amounted to ` 15
crores.
Based on the above information, the profit chargeable to tax in India under
the head 'Profits and gains of business or profession' on presumptive basis
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SUGGESTED ANSWERS
FINAL EXAMINATION: JANUARY 2026

for the assessment year 2025-26 in the case of Shark Shipping International
works out to:
(A) ` 3,75,00,000
(B) ` 1,87,50,000
(C) ` 10,00,00,000
(D) ` 2,50,00,000 (2 Marks)
14. Mr, Raj Kumar, a resident and corporate employee for the AY 2024-25 filed
his return of income on 31/07/2024 disclosing total income of
` 45,50,000/-. During the relevant financial year 2023-24, he purchased a
plot of land in the Rural Area for actual consideration of ` 10 Lakhs. The
value of the plot as per the stamp duty valuation authority (Guidance
Value) was ` 19.50 Lakhs. The return has been selected for scrutiny and the
FAO has issued a notice to Mr. Raj Kumar to show cause as to why the
difference of ` 9.50 Lakhs between the stamp duty value and actual
consideration should not be added to his total income under the head
"Income from other Sources". Mr. Raj Kumar has actually purchased the
plot for ` 10 Lakhs, however, he is worried that the FAO is not going to
accept his version and after the assessment order, he may face penalty for
under reporting of income and prosecution for wilful attempt to evade
Income Tax.
After the assessment order is passed, which amongst the following is an
option available to Mr. Raj Kumar, to get the dispute resolved:
(A) Filing an objection before DRP.
(B) Filing an application before DRC.
(C) Filing a grievance petition.
(D) Filing an appeal before the Principal Chief Commissioner. (2 Marks)
15. Mr. Raman, a resident during the financial year 2024-25 in addition to
Income under the Head "Salaries" of ` 20 Lakhs and Income from other
sources of ` 70,000/- has earned the following income-
- Profit of ` 3,50,000 (Sale price - Cost Price) on sale of crypto currency-
held for 36 months
- Loss of ` 20,000 on sale (Cost Price - Sale Price) of crypto currency held
for 13 months

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- Gift of virtual digital asset by a friend - FMV ` 1,00,000/-
- Short-term capital gain of ` 40,000/- on sale of listed equity shares
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(STT paid) on 1.07.2024

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Tax payable by Mr. Raman for the AY 2025-26 (Excluding Cess and

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Surcharge) in respect of profit from sale of crypto currency, VDU 2 received
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in gift and Short-term capital gain works out to -

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a (B) ` 1,11,000
(C) ` 1,26,000
(D) ` 1,05,000 (2 Marks)
Answer Key

MCQ No. Correct Option

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1. (A)
2. (B)
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4. (C) or (D)
5.
6. (D)
7. (C)
8. (B)
9. (C)
10. (A)

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11. (C)
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12. (D)

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13. (C)
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las 14. (B)
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ag 15. (A)

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Read as ‘VDA”
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SUGGESTED ANSWERS
FINAL EXAMINATION: JANUARY 2026

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
M Automobile Ltd. (M Auto) is engaged in the manufacture of automobile spare
parts at Lucknow. In June 2024, M Auto established a new unit at Patna for the
manufacture of automobile accessories. Separate books of accounts are being
maintained for both the businesses.
Statement of Profit & Loss (of Lucknow unit) for the financial year ended on
31.03.2025 shows a profit (before depreciation) of ` 50 lakhs after the debit/
credit of following items:
(a) Commission of ` 2,50,000/- was paid to Robert, a non-resident, who does
not have any office or permanent establishment in India. The payment was
made without deducting tax at source.
(b) A standard warranty is provided at the time of sale, under which the
product would be replaced free of charge, in case of any manufacturing
defect detected within the stipulated time. Provision for warranty@ 0.5% of
sales, amounting to ` 5,00,000 was made during the year.
(c) The assessee contributed ` 6,00,000/- (20% of the basic salary) to the
account of employees under National Pension Scheme.
(d) The company issued 10,000 debentures during the year out of which 2000
were convertible in to shares after a period of 5 years. Expenditure incurred
on issue of the said debentures during the financial year was
` 3,50,000.
(e) The company's branch office was located in an old building taken on rent
under an agreement with the lessor. During the FY, with the consent of the
lessor, the old building was demolished and a new office building was
constructed on the same site at a cost of ` 20,00,000/-. Under an
agreement, the company was permitted to re-occupy the newly constructed
office building for a further period of 20 years at the same rent.
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Additional information:
(i) During the financial year 2024-25, M Auto entered into an agreement with
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Garg Auto Ltd. As per the agreement, Garg Auto Ltd. has agreed not to
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engage in the manufacturing of automobile spare parts at Lucknow. On

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1.05.2024, the assesse paid ` 12 lakhs without deduction of tax at source as

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non-compete fee to Garg Auto Ltd.

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(ii) Net profit (before depreciation) from the business of automobile accessories
of Patna unit was ` 25 lakhs for the financial year.
(iii) Details of plant and machinery (rate of depreciation 15%) owned by the
assessee -
Lucknow unit:
Opening WDV as on 1.04.2024 was ` 14,75,000.
All the machines were sold in March 2025 for ` 15,00,000.
Patna unit:
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. for ` 10,00,000.
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Old machinery purchased in June 2024

s e 2024 for ` 6,00,000.
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New machinery purchased in August
Assume, the company doesgnot
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(iv) Plot of land purchased by the company in FY 2010-11 was compulsorily
acquired by the State Government on 10.12.2022. Original compensation
awarded was ` 10 lakh, out of which ` 8 lakhs were received on 10.04.2023
and the balance t 2 lakhs on 1.10.2023.
On an appeal made by the assessee, the Court awarded an additional
compensation of ` 7 lakhs. Out of this, ` 4 lakhs were received on

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14.10.2023 and ` 3 lakhs were received on 1.02.2025. The Court further
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awarded an interest on additional compensation amounting to ` 12 lakhs,

c. o Compute the total income and tax liability of M Auto for the assessment
the same was received on 20.03.2025.
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year
2025-26 under the regular provision of the Income-taxg Act applying and
gl a explaining the relevant provisions in brief, assuming thata the assessee has not
a opted for any concessional tax rates under special provisions of the Income-tax
Act, 1961.

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SUGGESTED ANSWERS
FINAL EXAMINATION: JANUARY 2026

Total turnover of the company for the financial year 2021-22 and 2022-23 was
` 300 crores and ` 350 crores respectively. Ignore the provisions of MAT.
Would it be beneficial for M Auto to opt for beneficial tax rates for financial
year 2024-25. Support your view with necessary explanations. (14 Marks)
Answer
Computation of Total Income and tax liability of M Automobile Ltd.
for the A.Y. 2025-26 under regular provisions of the Act
Particulars `
I Profits and gains of business or
profession
Profit (before depreciation) as per the 50,00,000
Statement of profit and loss of Lucknow unit
Add: Items debited but to be considered
separately or to be disallowed
(i) Commission to Robert, a non-resident Nil
without deducting TDS
[Commission to a non-resident who does
not have any office or PE in India is not
chargeable to tax in India if the services are
performed outside India. In such case, the
obligation to deduct tax does not arise.
Since the same has been debited to the
statement of profit and loss, no adjustment
is required to be made]
(ii) Provision for warranty Nil
The provision is allowed as deduction 3, if
there is present obligation as a result of past
event, it is reasonably certain that an outflow
of resources embodying economic benefit
will be required to settle the obligation and
a reliable estimate can be made of the
obligation. In the present case, assuming

3
By virtue of ICDS X
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that these conditions are satisfied, provision
for warranty is allowable as deduction 4. Since
the same has been debited to the Statement
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of Profit and loss, no adjustment is required
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to be made.
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e pension scheme
(iii) Contribution towards employees’ 1,80,000
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a (basic salary + dearness allowance, if it forms
part of pay for retirement benefits) is allowable
as deduction. Accordingly, ` 1,80,000, being
6% of ` 6,00,000/20% is disallowed.]
(iv) Expenditure on issue of debentures Nil
including convertible debentures
The expenditure incurred on the issue and
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collection of debentures would be treated as
revenue expenditure even in case of
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convertible debentures, i.e., the debentures

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which had to be converted into shares at a
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later date 5. Since the same has been debited
to the Statement of Profit and loss, no
adjustment is required to be made.
(v) Expenditure on construction of new 20,00,000
building
Cost of repairs to the premises occupied by
the assessee as a lessee is allowed as
deduction other than of capital in nature.
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Since it has been debited to the statement of

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profit and loss, the same has to be added
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back while computing business income

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a 4
As per Supreme Court in M/S. Rotork Controls India (P) Ltd vs CIT, Chennai on
12 May, 2009
5
CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Kar.)
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SUGGESTED ANSWERS
FINAL EXAMINATION: JANUARY 2026

AI(i) Payment of non-compete fee 8,40,000
without deduction of tax at source
[Non-compete fees is in the nature of
revenue expenditure. Since TDS u/s 194J has
not been deducted on non-compete fee paid
to Garg Auto Ltd., 30% of ` 12 lakhs would
be disallowed under section 40(a)(ia).
However, as the amount is not debited in the
Statement of Profit and loss, only ` 8,40,000
is allowed as deduction]
Note – Alternatively, if the non-compete fees
is in the nature of capital, then depreciation
needs to be computed on the said
expenditure. 6
Profit (before depreciation) as per the 63,40,000
Statement of Profit and Loss of Lucknow
Unit
Profit (before depreciation) as per the 25,00,000
Statement of Profit and loss of Patna unit
88,40,000
Less: Depreciation as per the Income-tax
Rules, 1962
Depreciation on construction of new 2,00,000
building [M Auto is eligible for depreciation
on construction of new building not owned
by it but in respect of which it holds a
leasehold right. 7 ` 2,00,000, being 10% of
` 20 lakh is allowed as deduction assuming it
was put to use for more than 180 days]
Depreciation on Plant & Machinery
Opening WDV as on 1.4.2024 14,75,000

6
Sharp Business System v. CIT (High Court of Delhi) ITA 492/2012 & C.M. APPL.
14836/2012 dated 05-11-2012
7
Explanation 1 to section 32
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Add: Old machinery (Patna Unit) 10,00,000
in June 2024

m
c. o
Add: New machinery (Patna 6,00,000

m
co
Unit) in August 2024

. em
s
Less: Sales Consideration of 15,00,000

e m l a
s
machinery of Lucknow unit

g a
l Depreciation 15,75,000
ag
a ` 15,75,000 @15% on 2,36,250

Additional depreciation on new 1,20,000
machinery @20% (Patna unit)
5,56,250
Note – If non-compete fees is in the capital
nature, then depreciation of ` 3,00,000 being

m
c. o
@ 25% on ` 12,00,000 is allowable.

m enhanced
82,83,750
Long-term capital gain e

l a s on

g
compensation

of receipt]
a [Taxable in the year
Compensation received 3,00,000

Less: Cost of acquisition -
Long-term capital gain [Since plot of land 3,00,000
was held for more than 24 months]
III Income from Other Sources
Interest on enhanced compensation 12,00,000

o m
c
Less: 50% of interest 6,00,000
m .
c. o m
se 91,83,750
6,00,000

em la
Gross Total Income/ Total Income

las Tax on ` 91,83,750
a g
ag Tax on LTCG of ` 3 lakhs @20% [Since 60,000
transfer takes place before 23.7.2024]
[Note – Alternatively, rate of 12.5% can also
be applied considering that enhanced
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compensation is received on or after
23.7.2024. In such case, tax on LTCG would be
` 37,500 and tax liability would be
` 23,48,780]
Tax on balance income of ` 88,83,750 @25%, 22,20,938
since total turnover for P.Y. 2022-23 does
not exceed ` 400 crores
22,80,938
Add: HEC @4% 91,238
Tax liability 23,72,176
Tax liability (rounded off) 23,72,180
Computation of total income and tax liability of M Auto for the A.Y.
2025-26 under section 115BAA

Particulars ` `
Total Income as per regular provisions of the 91,83,750
Act
Add: Additional depreciation 1,20,000
Total Income as per section 115BAA 93,03,750
Tax on ` 93,03,750
Tax on LTCG of ` 3 lakhs @20% [Since transfer 60,000
takes place before 23.7.2024]
[Note– Alternatively, rate of 12.5% can also be
applied considering that enhanced compensation
received on or after 23.7.2024. In such case, tax on
LTCG would be ` 37,500 and tax liability would be
` 23,08,960]
Tax on balance income of ` 90,03,750 @22% 19,80,825
20,40,825
Add: Surcharge @10% 2,04,083
22,44,908
Add: HEC @4% 89,796
Tax liability 23,34,704

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Tax liability (Rounded off) 23,34,700
Since the tax liability of M Auto under section 115BAA is lower than the tax
m
c. o
liability computed under regular provisions of the Act, it would be

o m
beneficial for it to opt for section 115BAA for A.Y. 2025-26.
m
Question 2 . c s e
em an Indian company is a wholly owned subsidiary of another gla
(a) A sLtd.,
g a company - E Ltd. On 1.10.2020, A Ltd. sold a plot of land to E Ltd.a
lIndian
a for ` 35 lakhs (Plot was purchased in January 2010 for ` 15 lakhs). On
1.02.2023, E Ltd. converted the said plot into stock-in-trade when the fair
market value (Stamp Duty Value) of the said plot was ` 60 lakhs. The plot is
sold by E Ltd. on 30.06.2024 for ` 65 lakhs. Discuss the tax implications in
the hands of A Ltd. and E Ltd.
CII: FY 2009-2010-148; 2020-21- 301; 2022-23 -331; 2024-25-363.
(4 Marks)
m
. co
(b) S Ltd., a domestic company, purchased its own shares on 10th November,

em
2024 in accordance with the provision of Section 68 of the Companies Act,

a s
2013. The consideration for buyback amounted to ` 25 lakhs, which was
l
a g
paid on the same day. The amount received by the company on 1.04.2021
for issue of 10,000 shares having face value of ` 100 per share was ` 15
lakhs (including premium).
Rohan, who acquired 100 shares of S Ltd. @ ` 150 per share (including the
premium of ` 50/- sold these shares to Divyam at ` 200 per share on
1.03.2023. Divyam received ` 250 per share in the buyback scheme of S Ltd.
in respect of all the 100 shares he purchased from Rohan.
You are required to -

o m
c
(i) Compute the additional income-tax payable by S Ltd.
m (ii) Discuss the taxability of amount received on account of such. buyback
c. o s em
em la and the date of
of shares in the hands of Divyam.

las a g
(iii) Will your answer change, if S Ltd. is a foreign company

ag buyback is 10 September, 2024? (4 Marks)
th

(c) Mr. Manoj, aged 47 years born in India, left for employment in United
States in October, 2010. Since, then he is staying in USA and his wife is
residing at Delhi. After FY 2010-11, Mr. Manoj never stayed for more than

17

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30 days in India in any financial year. He remitted $40,000 in joint bank
account (maintained with his wife) at Punjab National Bank, Delhi branch
on 10th April, 2011. His wife invested in his (Manoj's) name ` 13 lakhs in the
listed shares of a domestic company on 20th April, 2012. The consideration
for the purchase of shares was paid in USD and the value as translated in
INR terms. On 2nd March, 2025, these shares were sold for ` 15 lakhs. STT
was paid both at the time of purchase and sale.
On 10th March, 2025, Manoj acquired a vacant land from Tulsi Foundations,
a welfare trust registered u/s 12AB of the Act, for ` 30 lakhs when the
Stamp Duty Value (guideline value) of the said land was ` 40 lakhs. He has
following incomes during the financial year 2024-25 -
• dividend of ` 55,000/- from X Ltd., an Indian company.
• interest of ` 20,000 credited to his NRE account with State Bank of
India, Delhi branch.
• royalty of ` 2,00,000 (gross) received for authoring a book on literature,
from a publication house at Delhi.
During the financial year, he paid a premium of ` 2,00,000/- on his life
insurance policy in India.
Compute the total income and net tax liability of Mr. Manoj for the
assessment year 2025-26 assuming that he has opted out from the default
tax regime.
(Ignore the provisions of Chapter XII-A).
Average of telegraphic buying and selling rates of 1USD in Indian Rupees:
• 20th April 2012 - ` 60; 2nd March 2025 - ` 75
Cost inflation indices: F.Y. 2012-13 - ` 200; F.Y: 2024-25 - ` 363 (6 Marks)
Answer
(a) (i) Tax implications in the hands of A Ltd.
Transfer of plot of land by A Ltd., an Indian subsidiary company to
E Ltd., its Indian holding company on 1.10.2020 is not regarded as
transfer as per section 47. Hence, there is no tax implications in the
hands of A Ltd., being the transferor.

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However, on conversion of the plot of land into stock in trade by
E Ltd. on 1.2.2023 before the expiry of 8 years from the date of
transfer, the capital gains exempt from tax by virtue of section 47 will
m
m
be deemed to be the income of A Ltd. chargeable under the head
c. o
.co
‘capital gains’ of the P.Y. 2020-21, being the year in which such
s em
m
eAccordingly, the following amount of long-term capital gains would g
transfer took place.
l a
a s
l be chargeable to tax for the A.Y. 2021-22: a
ag
Capital gains (`)
Full value of consideration 35,00,000
Less: Indexed cost of acquisition [` 15,00,000 x 30,50,676
301/148]
Long-term capital gain chargeable to tax for A.Y. 4,49,324
2021-22

m
co
(ii) Tax implications in the hands of E Ltd.

.
em
Conversion of capital asset into stock in trade is a transfer. The profits

l a s
or gains arising from the conversion will be chargeable to income-tax

g
as income of the previous year in which such stock-in-trade is sold.

a
Hence, nothing is taxable in the hands of E Ltd. in P.Y. 2022-23.
Accordingly, on transfer of stock-in trade by E Ltd. the capital gains and
business income for the previous year 2024-25 would be as follows:

Capital Gains (`)
Fair market value of land on the date of conversion 60,00,000
Less: Indexed cost of acquisition [` 35,00,000 x 38,48,837
331/301]
m
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Long-term capital gains chargeable to tax for 21,51,163

c. o m
A.Y.2025-26

em
Business Income
la se
las Sale price
g
a of
65,00,000

ag Less: Fair market value of land on the date
conversion
60,00,000

Business income chargeable to tax for A.Y. 5,00,000
2025-26

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(b) (i) No additional income-tax is to be paid by S Ltd. since the buy-back of
shares took place on or after 1.10.2024
(ii) The sum of ` 250 per share paid by S Ltd. for purchase of its own
shares would be deemed as dividend and taxable under the head
“Income from Other Sources” in the hands of Divyam. Accordingly,
` 25,000 [` 250 x 100] would be taxable in the hands of Divyam.
No deduction for expenses would be available against such dividend
income.
(iii) Yes, in such case, ` 5,000 being the difference between the cost of
acquisition of ` 20,000 (` 200 x 100) and the value of consideration
received of ` 25,000 (` 250 x 100) is chargeable to tax as Short-term
capital gains in the hands of Divyam.
(c) Computation of total income and net tax liability of Mr. Manoj for
the A.Y. 2025-26
Mr. Manoj is a non-resident for the A.Y. 2025-26 since he never stayed for
more than 30 days in India in any financial year after F.Y.2010-11.

Particulars (`) (`)
Capital Gains
Long term capital gain on sale of listed shares
of a Domestic Company
Full value of consideration 15,00,000
Less: Cost of Acquisition [Assuming that the 13,00,000
fair market value as on 31.1.2018 is the same.
Further, no indexation and foreign currency
fluctuations will be allowed while computing
LTCG u/s 112A]
Higher of
- Actual cost 13,00,000
- Lower of
- Fair market value on
31.1.2018 13,00,000
- Full value of consideration 15,00,000
Long-term capital gain 2,00,000

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Income from Other Sources
Difference between actual consideration and Nil
m
c. o
stamp duty value on purchase of vacant land
m
c. o
will not be taxable u/s 56(2)(x), since the same

em
s
is received from a trust registered u/s 12AB

s em from X Ltd. l a
ag
Dividend 55,000

g laInterest credited to NRE Account with SBI, Nil
a Delhi Branch - exempt
Royalty for authoring a book on literature 2,00,000
2,55,000
Gross Total Income 4,55,000
Less: Deduction under section 80C in respect 1,50,000
of life insurance premium restricted to

om
Total Income 3,05,000
Computation of tax payable
. c
Tax on Dividend @ 20%
s em 11,000

g l a
Tax on Long-term capital [email protected]% on 9,375
` 75,000 exceeding ` 1,25,000
a
Tax on other income of ` 50,000 at slab rate, Nil
since it is less than the basic exemption limit of
` 2,50,000
20,375
Add: Health and education cess@4% 815
Tax Liability 21,190
m
co
Note – Question states that Mr. Manoj’s wife invested in her husband’s
m .
c. o m
name in listed shares of a domestic company. Long term capital gain on

em
sale of listed shares on which STT has been paid at the time of purchase

l a se
s g
and sale, is calculated under section 112A.

gla On transfer of listed shares acquired before 1.2.2018,athe Fair Market Value
a as on 31.1.2018 is required. However, this information is not given in the
question. On account of absence of this information, the above solution is
given on the assumption that the fair market value as on 31.1.2018 is same

21

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as the actual cost of ` 13 lakhs. However, alternate answer is also possible
on the assumption that the fair market value as on 31.1.2018 is same as
sale consideration of ` 15 lakhs. In such case, LTCG would be Nil, Total
Income and Tax Liability would ` 1,05,000 and ` 11,440, respectively.
Question 3
(a) (i) J Education Centre, a Charitable trust registered u/s 12AB of
Income-tax Act runs schools for primary and secondary education. The
following particulars pertaining to FY 2024-25 are furnished by the
institution:

S. Particulars ` (in Lakhs)
No.
(i) Gross receipts from students towards 175.00
admission fees, tuition fees, development fees
etc.
(ii) Interest from tax free bonds specified in 20.00
section 10(15)
(iii) Voluntary Contribution received (including 10.50
anonymous donation ` 1.50 lakh)
(iv) Grant from State Government (corpus fund) 8.50
(v) Salary to teachers and administrative staff 40.00
(This includes salary expenses of ` 5 lakhs
which were not paid till 31.03.2025)
(vi) Other General Expenses (This includes 20.00
payment to a grocery store of ` 60,000 by un-
crossed cheque)
(vii) A land belonging to trust in a nearby village 10.50
was sold (Purchased in 2007-08 for ` 5 Lakhs)
and another land adjacent to the trust
premises was purchased for ` 12 Lakhs to be
used as playground of the children (ignore
indexation)

Compute the total income of the trust for the AY 2025-26. (6 Marks)

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(ii) An educational institution having annual receipts of ` 4.95 crore during
the financial year 2023-24. The institution has claimed exemption
under section 10(23C)(iiiad). The assessing office has denied the
m
m
exemption on the grounds that the educational institution has not
c. o
.co
made any application to the prescribed authority for approval under
s em
m
e
the said section 10(23C)(iiiad). Examine the action of the assessing
l a
a s officer in denying the exemption. (2 Marks)
(b) lMr. Dhruv, an individual resident in India aged 62 years, furnished you thea
g
ag following particulars of income earned in India, Country "A" and Country
"B" for the financial year 2024-25 -

Particulars `
Income from profession carried on in India 8,50,000
Agriculture Income in Country "A" (gross) 60,000
Dividend from a company incorporated in Country "B" 1,60,000

o m
c
Royalty Income from a literary book from Country "A" 5,00,000

m .
Expenses incurred for earning royalty 55,000

s e
a
Business Loss in Country "B" (Proprietary business) 75,000
Rent from a house situatedlin Country "B" (gross)
a g 2,10,000
Municipal tax paid in respect of the above house in Country 10,000
"B" (not allowed as deduction in Country "B")
Interest on Fixed Deposits and savings accounts with banks 55,000
in India

India has not entered into double taxation avoidance agreement (DTAA)
with Country "A" and Country "B".

m
c. o
Business loss in Country "B" not eligible for set off against other incomes
m
c. o
as per law of that country. The rates of tax in Country "A" and Country "B"

em
s
are 10% and 20% respectively.

s em Compute total income and net tax liability of Mr. Dhruva in India for the
glout from taxation
gla a
Assessment Year 2025-26, assuming that he has opted

a under the tax regime under section 115BAC. (6 Marks)

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Answer
(a) (i) Computation of total income of J Education Centre, a Charitable
Trust for the A.Y.2025-26
`
Gross Receipts from students 1,75,00,000
Interest from tax-free bonds specified in section 20,00,000
10(15) [not eligible for exemption, since trust is
registered u/s 12AB]
Voluntary Contribution [other than anonymous 9,00,000
donations]
Grant from the State Government ` 8.50 lakhs Nil
[Corpus Fund] [Assuming invested in the modes
specified u/s 11(5)]
Note – If it is assumed that grant from State
Government, being corpus fund is not invested in the
mode specified u/s 11(5), then the same would not be
exempted.
Anonymous donations [to the extent not chargeable to 1,00,000
tax@30% under section 115BBC(1)(i)] being ` 1 lakh,
is to be considered here. The balance of
` 50,000 of anonymous donation is taxable @30%
under section 115BBC.
Note: Total donations ` 10.50 lakh includes
anonymous donation of ` 1,50,000. (i) 5% total
donation being ` 52,500; (or ` 95,000 if Government
grants are considered) (ii) Monetary limit ` 1,00,000,
whichever is higher is not taxable under section
115BBC. So, the balance of ` 50,000 taxable @30%
under section 115BBC. The sum of ` 1,00,000 is
considered for computing aggregate receipts to reckon
15% and consequently the total income of the trust.
Alternatively, ` 1,00,000 can be considered only for
inclusion in total income and not for computing 15%.
The consequence of this is given as note at the end of
the answer to this question.

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Capital gains on transfer of land [` 10.50 lakhs – 5,50,000
` 5,00,000]

m
c. o
2,10,50,000
m
co m
Less: 15% of income eligible for being set apart 31,57,500

m .without any condition
s e
s e l a
ag
1,78,92,500
a
l Less: Amounts applied for charitable
ag purposes
Salary to teachers and administrative staff 35,00,000
[Salary expenses of ` 5 lakhs not paid
during the P.Y. 2024-25 not treated as
application]
Other General Expenses [Payment of ` 19,40,000
60,000 made through uncrossed cheque

m
not treated as application]

. co
Capital gains of ` 5.50 lakhs [` 10.50 lakhs 5,50,000

em
– ` 5 lakhs] arising on transfer of land

l a s
treated as application of income since

a g
entire consideration is utilised for
acquiring another land for the purpose of
trust
Amount utilised in excess of net sales
consideration for acquisition of land
would also be treated as application
[` 12,00,000 – ` 10,50,000] 1,50,000
61,40,000

m
c. o
Income of the trust (before including anonymous 1,17,52,500
m
c. o
donation)
Add: Anonymous donation taxable under section em 50,000
em l a s
s ag 1,18,02,500
115BBC

gla Total income of the trust
a Note - As per the plain reading of section 13(7), it is possible to take a
view that the anonymous donations of ` 1 lakh exempt from section
115BBC is not eligible for 15% accumulations. In such case, the amount

25

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eligible for 15% accumulations would be Rs 209.50 lakhs. 15% thereon
would be ` 31.425 lakhs. The total income computation sequence
would be ` 209.50 lakhs less 15% thereon being ` 31.425 lakhs =
` 178.075 lakhs. Deducting ` 61.40 lakhs = ` 116.675 lakhs. Adding
anonymous donation (not taxable u/s 115BBC) ` 1 lakhs =` 117.675
lakhs. Adding ` 50,000 taxable u/s 115BBC the total income would be
` 118.175 lakhs.
(ii) An educational institution would be eligible for exemption under
section 10(23C)(iiiad), without the condition of approval, if the annual
receipts of the educational institution does not exceed ` 5 crore.
In this case, action of the Assessing Officer in denying the exemption
on the grounds that the institution has not made any application to
the prescribed authority for approval under section 10(23C)(iiiad) is
not correct.
(b) Computation of total income and net tax liability of Mr. Dhruv for
A.Y. 2025-26 as per the optional tax regime
` `
Income from House Property
Let out property in Country B
Rent from house property in Country B 8 2,10,000
Less: Municipal taxes paid in Country B 10,000
2,00,000
Less: Deduction under section 24(a) @30% 60,000
1,40,000
Profits and Gains of Business or Profession
Income from profession carried on in India 8,50,000
Royalty income from a literary book in country A 4,45,000
after reducing expenses [` 5,00,000 – ` 55,000]
12,95,000
Less: Set off of business loss in Country B 75,000
12,20,000

8
Rental Income has been taken as GAV in the absence of other information relating
to fair rent, municipal value etc.
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Income from Other Sources
Agricultural income in Country A 60,000

m
c. o
Dividend from a company incorporated in 1,60,000

m
co
Country B

. em
s
Interest on fixed deposits and saving accounts 55,000
m
e l a
s
with banks in India

a
l Gross Total Income a
2,75,000g
g
a Less: Deduction under Chapter VI-A 16,35,000

Under section 80QQB – Royalty income of a 3,00,000
resident from a literary book
Under section 80TTB – Interest on fixed deposits 50,000
and saving account, subject to a maximum of
` 50,000

om
3,50,000
Total Income
. c 12,85,000

Tax on total income [30%se
Tax liability on ` 12,85,000
m
la
of ` 2,85,000 + 1,95,500
` 1,10,000]
Add: Health and Education
g
a cess@4% 7,820
2,03,320
Less: Deduction u/s 91 (See Working Note below) 56,095
Net tax liability 1,47,225
Net tax liability (Rounded off) 1,47,230
Working Note: Calculation of deduction

m
under section 91

m
Indian Average Rate of tax = ` 2,03,320/
.co
c. o ` 12,85,000 x 100 = 15.82 %
se
m
em la
Average Rate of tax in Country A is 10%

las Doubly taxed income pertaining to Country A =
a g
ag Agricultural income of ` 60,000 + Royalty
income of ` 4,45,000 after deducting expenses –
Deduction under section 80QQB of ` 3,00,000
= ` 2,05,000

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Deduction u/s 91 = (Lower of average rate of 20,500
tax in Country A and Indian rate of tax) x Doubly
taxed income = [10% x ` 2,05,000]
Average Rate of tax in Country B is 20%
Doubly taxed income pertaining to Country B
Income from house property of ` 1,40,000 –
Business loss in Country B of ` 75,000 +
Dividend of ` 1,60,000 = ` 2,25,000.
Deduction u/s 91 = (Lower of average rate of 35,595
tax in Country B and Indian rate of tax) x Doubly
taxed income = [15.82% x ` 2,25,000]
Total rebate under section 91 56,095
Question 4
(a) Examine the applicability of provisions of tax deducted at source/ tax
collected at source and calculate the amount of TDS/TCS in the following
independent cases applicable for the relevant period of financial year 2024-
25 (A.Y. 2025-26):
(i) Mr. Rohan sold his Urban Agriculture Land to Mr. Sohan for a
consideration of ` 49 Lakh. The Stamp Duty Value on the date of sale
(transfer) i.e. 01.08.2024 is ` 51 Lakh. Both Mr. Rohan and Mr. Sohan
are Resident Indians. The land sold by Mr. Rohan is a Capital Asset in
term of section 2(14) of Income-tax Act. (2 Marks)
(ii) A co-operative bank has provided, the followings information relating
to cash withdrawals by its two customers during the F.Y.·2024-25:
Date of Cash Mr. A Mr. B
Withdrawal (Savings Account) (`) (Current Account) (`)
05.04.2024 45,00,000 23,00,000
10.11.2024 60,00,000 75,00,000

Mr. B has not filed his return of income for the last three assessment
years (the date of filing return u/s 139(1) has expired) whereas Mr. A
has been regularly filing his return of income. (4 Marks)

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(iii) Mr. Rohit, a resident, has received ` 9 lakhs on 30.6.2024, towards
maturity proceeds of LIC policy taken on 1.7.2021, for which the sum
assured is ` 8 lakhs and the annual premium was ` 2,50,000. (2 Marks)
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(b) Canada Ltd., (a company incorporated in Canada) holds 35% voting powers

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s
in LMN Ltd. (a company registered in Indian Companies Act,1956) through

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holding 35% shares of LMN Ltd. LMN Ltd. is engaged in providing software
l a
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development and consultancy services (both onsite and offsite). LMN Ltd.
ag
ag
during the financial year 2024-25, billed Canada Ltd. for 120 man-hours at
the rate of ` 3,600 per man hour. The total cost (direct and indirect) for
executing this work amounted to ` 4,50,000/-.
LMN Ltd. during the same financial year, for the similar services rendered
billed XYZ Ltd., India at the rate of ` 5,400 per man hour (for similar level
of manpower and resources) and earned a Gross Profit of 50% on its cost.
The transactions of LMN Ltd. with Canada Ltd. and XYZ Ltd. are
comparable, subject to the following differences:
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While LMN Ltd. derives technology support from XYZ Ltd., there is no

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such support received from Canada Ltd. The value of technology

a s
support received from XYZ Ltd. may be assumed at 4% of normal gross
l
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profits.
• a
Assuming that Canada Ltd. gives business in large volumes, LMN Ltd.
offered to Canada Ltd. a quantity discount which may be valued at
20% normal gross profits.
• In the case of rendering services to Canada Ltd., LMN Ltd. neither runs
any risk nor incurs any marketing costs. On the other hand, in case of
services to XYZ Ltd. LMN Ltd. has to assume all the risk and costs
associated with the marketing function which may be estimated at 10%
of normal gross profits.
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• LMN Ltd. offered one month's credit to XYZ Ltd. The cost of .providing
c. o s emsuch credit
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such credit may be valued at 2 % of the gross profits. No

las was given to Canada Ltd.
Compute the Arm's length Price along with income a
g
ag the Cost-Plus Method.
to be increased under
(6 Marks)

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Answer
(a) (i) Since the stamp duty value of urban agricultural land exceeds ` 50
lakhs, Mr. Sohan is required to deduct tax at source under section
194-IA @1% on ` 51 lakhs, being the higher of consideration of ` 49
lakhs and stamp duty value of ` 51 lakhs on 01.08.2024 on purchase
of urban agricultural land from Rohan. Accordingly, tax deduction at
source is ` 51,000.
(ii) Since Mr. A has regularly filed his return of income, the co-operative
bank is required to deduct tax at source @2% on the cash
withdrawals of ` 5 lakhs, being the sum exceeding ` 1 crore under
section 194N on 10.11.2024. Accordingly, tax to be deduction at
source is ` 10,000.
Since Mr. B has not filed his return of income for all the three
assessment years relevant to the previous years for which due date of
filing return of income has expired at the time of cash withdrawals,
the co-operative bank is required to deduct tax at source@ 2% on
` 3 lakhs (exceeding ` 20 lakhs) on 05.4.2024 and on ` 75 lakhs on
10.11.2024, being the sum exceeding ` 20 lakhs but does not exceed
` 1 crore. Accordingly, tax deduction at source is `1,56,000 [` 6,000 +
` 1,50,000].
(iii) Since the annual premium exceeds 10% of sum assured in respect of
a policy taken after 31.3.2012, the maturity proceeds of ` 9 lakhs
received on 30.6.2024 are not exempt under section 10(10D) in the
hands of Mr. Rohit. Therefore, tax is required to be deducted @5%
under section 194DA on the amount of income comprised therein i.e.,
on ` 1,50,000 (` 9 lakhs being maturity proceeds – ` 7,50,000, being
the aggregate amount of insurance premium paid). Accordingly, tax
deduction at source is ` 7,500.
(b)
Computation of Arm’s Length Price as per Cost Plus Method
Gross Profit mark-up on cost in case of XYZ Ltd. [an 50%
unrelated party]
Less: Adjustments for functional and other
differences
Quantity discount to Canada Ltd. [Quantity 10
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discount is allowed to Canada Ltd. as it gives %
business in large volumes, but the same is not
provided to XYZ Ltd. Therefore, it shall be adjusted]
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[20% of 50%, being gross profit]
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Risk and cost associated with marketing [LMN Ltd. 5%
s em
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has to bear all the risk and costs associated with
l a
l a sthe marketing function in case of XYZ Ltd., while
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there is no such risk in case of services to Canada
Ltd. Therefore, market risk and cost shall be
adjusted] [10% of 50%, being gross profit]
Cost of credit to XYZ Ltd. [LMN Ltd has provided 1%
credit of 1 month to XYZ Ltd. but not to the
Canada Ltd., a related party. Therefore, adjustment
for the cost of such credit has to be carried out to
arrive at the ALP] [(2% of 50%, being gross profit]

om
16%

. c [XYZ Ltd. 34%

m Canada Ltd. does
ebut
Add: Value of technology support 2%
s
la Therefore, value of
provides technology support,
g
a be adjusted] [4% of 50%,
not provide such support.
technology support shall
being gross profit]
Arm’s length gross profit mark up to cost 36%
Cost incurred by LMN Ltd. for executing Canada Ltd.’s 4,50,000
work
Add: Adjusted gross profit (` 4,50,000 x 36%) 1,62,000
Arm’s length billed value 6,12,000
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Less: Actual Billed Income from Canada Ltd. (` 3600 x 120 4,32,000
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manhours)

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Total Income of LMN Ltd to be increased by
l a se 1,80,000
las Question 5
a g
ag (a) Answer any two out of the following 3 sub-parts, viz. (i), (ii) & (iii) Your
answer should cover:
• Issue involved

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• Provisions applicable
• Analysis and application
• Conclusion
(i) On 15th October, 2024, M/s D Pvt. Ltd. filed its return of income for the
AY 2024-25. The return was found to be defective and on 02/04/2025,
the Assessing Officer issued an intimation to correct the defect within a
period of 15 days from the date of the notice. The company rectified
the defects on 10/04/2025.
Whether, the Assessing Officer is empowered to issue a notice under
Section 143(2) upto 30/06/2026 in such situation.
D Pvt. Ltd. contended that the notice u/s 143(2) can only be issued
within 3 months from the end of the financial year in which the return
was furnished.
Discuss whether the contention of the D Pvt. Ltd. is correct?
(ii) Mr. Chauhan furnished his return of income for the FY 2023-24, on
23/07/2024 declaring a total income of ` 16 lakhs. The Assessing
Officer passed an order under section 154 and determined total income
at ` 19 lakhs.
Mr. Chauhan claimed that the action of the Assessing Officer of
enhancement in the total income is not in accordance with the
provisions of the Income-tax Act. He wishes to file an application
before the Dispute Resolution Committee to get the issue resolved.
Discuss-
• Whether order under section 154 is a "specified order" in terms of
section 245MA?
• If yes, are there any monetary limits prescribed? Does
Mr. Chauhan's case fall within the monetary limit criteria?
(iii) Mr. Roy, an Indian resident liable to collect tax under section 206C,
failed to pay to the Central Government the tax collected by him from
customers during the FY 2023-24. The Assessing Officer initiated
prosecution proceedings against Mr. Roy on 24/07/2024 under section
276BB. Mr. Roy applied for Compounding of Offences on 17/08/2024
which was rejected due to non-payment of outstanding tax. Mr. Roy

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also filed an appeal with CIT(A) against the penalty imposed by the
Assessing Officer. On 08/10/2024, Mr. Roy paid all outstanding tax
demand including interest and penalty thereon.
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He again wishes to apply for Compounding of Offences under the new

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guidelines issued on 17/10/2024. You are required to answer the
m
e(A) Can Mr. Roy apply for Compounding of Offences under the new g
following questions in this regard:
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ag guidelines, when the compounding application was already rejected
under the old guidelines? Also, is he eligible to apply for
compounding of offences when the appeal against the penalty is
pending before the CIT(A)?
(B) By which date Mr. Roy needs to file the application for
compounding under the revised (New) guidelines?
(4 x 2 = 8 Marks)

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(b) Answer following questions-

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(A) Explain the terms "Most Favored Nation" and "Base Erosion and Profit

s
Shifting (BEPS)" with reference to the international tax treaties.

g l a (3 Marks)
a
(B) "Article 14 of the UN Model Convention gives exclusive rights to the
source country to tax Independent Services." Examine the correctness of
the above statement. (3 Marks)
Answer
(a) (i) Issue Involved: The issue under consideration is whether, for the
purpose of computing limitation period under section 143(2), the

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relevant date is the date of filing of the original return of income or

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the date of removal of defects in response to a notice issued under

c. o section 139(9).

s emof a return
em la provides an
Provision applicable: Section 139(1) mandates the filing

las of income by an assessee, while section 139(9)
g
a a prescribed time
ag opportunity to rectify defects in the return within
frame without filing a fresh return.

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Section 143(2) requires the Assessing Officer to issue a notice for
scrutiny assessment within three months from the end of the financial
year in which the return was filed.
Analysis: Since the return was defective, M/s D Pvt. Ltd. was called
upon to remove such defects, which were removed on 10th April,
2025, and it is within the time allowed by the Assessing Officer.
Therefore, upon such defects being removed, the return would relate
back to the date of filing of the original return i.e., 15th October, 2024.
Consequently, the limitation for issuance of notice under section
143(2) would be 30th June, 2025 i.e., three months from the end of the
financial year in which the return under section 139(1) was filed.
Conclusion: In the present case, the Assessing Officer is empowered
to issue a notice under section 143(2) up to 30th June, 2025 and not
up to 30th June, 2026. Accordingly, the contention of D Pvt. Ltd. is
correct.
Note – The facts given in the question are similar to the facts in DCIT vs
Travel Designer India Pvt. Ltd. v. (2025) 482 ITR 283 (SC). The above
answer is based on the rationale of the Apex Court ruling in the said case.
(ii) Yes, a rectification order made under section 154 having the effect of
enhancing the assessment or reducing the loss is a specified order in
terms of section 245MA subject to the fulfillment of certain
conditions.
Yes, the following monetary limits are prescribed for specified order.
(i) the aggregate sum of variations proposed or made in such order
should not exceed ` 10 lakhs; and
(ii) the return has been furnished by the assessee for the assessment
year relevant to such order and the total income as per such
return should not exceed ` 50 lakhs.
Yes, Mr. Chauhan’s case falls within the monetary limit criteria since
the variation of ` 3 lakhs in the order under section 154 does not
exceed ` 10 lakhs; and the total income as per return of income does
not exceed ` 50 lakhs.
Thus, Mr. Chauhan is eligible to file an application before the Dispute
Resolution Committee to get the issue resolved.

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(iii) (A) Yes, Mr. Roy can apply for compounding of offences under the
new guidelines even if the compounding application was already
rejected under the old guidelines since it was rejected due to
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non-payment of outstanding tax which is a curable defect.
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Yes, Mr. Roy is eligible to apply for compounding of offences
s em
e m when the appeal against the penalty is pending before CIT(A)
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however, he must undertake to withdraw appeal filed by him.
g
ag (B) Mr. Roy can file application for compounding under the revised
(New) guidelines at any time after committing the offence,
regardless of whether the same has come to the notice of the
department or prosecution proceedings have been launched.
(b) (A) Most Favoured Nation clause is usually found in Protocols and Exchange
of Notes to Double Taxation Conventions. Under this clause a country
agrees to extend the benefits to the residents of the other country,
which it had (first country) promised to the residents of third country. It

o m
c
tries to avoid discrimination between residents of different countries.

m . (BEPS) refers to tax planning
sepurposes
Base Erosion and Profit Shifting

a
strategies that exploit gaps and mismatches in tax rules to make
profits ‘disappear’ for ltax
g
or to shift profits to locations
where there is little aor no real activity, but the taxes are low, resulting
in little or no overall corporate tax being paid.
(B) The statement is not correct.
Article 14 of the UN Model Convention does not give exclusive rights
to the source country to tax Independent Services.
It gives an exclusive right to the residence country to tax Independent
Services except in the following two circumstances when such

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Independent Services may also be taxed in the source country:
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(i) If he has a fixed base regularly available to him in the
country for the purpose of performing his activities.e
em (ii) If his stay in the source country is for a l a s or periods
las ag183 days in any 12
period

ag amounting to or exceeding in the aggregate
months period commencing or ending in the fiscal year
concerned.

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Question 6
(a) M/s P Associates, a partnership firm (liable for tax audit under section
44AB) engaged in the business of food processing, provided following
relevant information to you during your tax audit examination in respect of
purchases made from various entities:
Name of Turnover Investment Date of Date of Date of
the entity in plant and purchase payment as actual
machinery per the payment
agreement
Teal Pvt. ` 34 crores ` 15 crores 11/01/2025 01/03/2025 28/02/2025
Ltd.
Cyan Pvt. ` 3 crores ` 45 lakhs 21/11/2024 01/12/2024 28/02/2025
Ltd.
Rust Pvt. ` 25 crores ` 5 crores 01/03/2025 20/04/2025 18/04/2025
Ltd.

Discuss whether P Associates is in compliance with the relevant provisions
of Income-tax Act, 1961 and other related Act relevant to your tax audit?
List out, the points to be kept in mind while conducting the audit of P
Associates for the purpose of clause 22 of Form 3CD. (3 x 2 = 6 Marks)
(b) Discuss whether the provisions of General Anti-Avoidance Rules can be
invoked in the following scenarios:
(i) Red Ltd., an Indian company, incorporates Brown Ltd., as a wholly
owned subsidiary in country Y, a no-tax jurisdiction. Brown Ltd. is
engaged in manufacturing of cement, raw material for which is
available at a lower price in Country Y. Brown Ltd. has not paid any
dividend to Red Ltd.
(ii) Yellow Ltd. (an Indian company) is a wholly owned subsidiary of Pink
Ltd., a company incorporated in Country H. Pink Ltd. gave a loan to
Yellow Ltd. during the FY 2024-25. The DTAA between India and
Country H gives the exclusive right to tax interest to the resident state.
Country H provides tax exemption of interest receivable by a resident
company from any entity in which the resident company holds not less
than 10% of equity shares. Pink Ltd. does not have a PE in India. Yellow
Ltd. is able to claim interest deduction from its total income and thus,

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enjoyed a tax benefit of ` 1.50 crores in India. Pink Ltd. also earned a
tax benefit equivalent of ` 2 crores in Country H. (2 x 2 = 4 Marks)

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(c) Analyse whether the following persons fall under the definition of

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"applicant" under section 245N(b)(A) to apply for advance ruling with the

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Board for Advance Ruling under the Income-tax Act 1961.
m India Pvt. Ltd. a closely held Indian company needs to pay ` 75 la
ecrores
s to BIK Inc. of USA for some services provided by BIK Inc. on g
(i) TBF

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a the definition of technical service and thus determine the amount of
12.04.2024. TBF India wants to know whether such services fall under

tax to be deducted on the payment to be made to BIK Inc. The
estimated tax liability arising out of this transaction is ` 15 crores in
the hands of BIK Inc.
(ii) Figtree Ltd., an Indian private sector company is considering entering
into an export contract with Lamou Inc. of China. Figtree Ltd. is
expected to earn an income of ` 500 crores and expected tax liability
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would be ` 150 crores. However, Figtree Ltd. wants. to know if it is

empublic-sector undertaking, undertook a
eligible for section 10AA deduction on such export?

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a of Singapore. The expected tax liability in
(iii) Universe India Ltd., an Indian
transaction with Moon lPte.
a
the hands of Universe g
India Ltd. involved in this transaction is expected
to be ` 56 crores.
(iii) BNHJ Ltd. is an Indian public-sector undertaking. For the AY 2023-24,
it has a matter pending with the Income Tax Appellate Tribunal which
involves a question of fact in respect of a transaction it entered into
with a non-resident company. The tax liability involved in this
transaction is expected to be ` 105 crores. (4 Marks)

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Answer

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(a) As per section 43B(h) any sum payable by the assessee to a micro or small

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enterprise beyond the time limit specified in section 15 of the Micro,

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Small and Medium Enterprises Development (MSMED) Act shall be

gla allowed as deduction only on actual payment.
a
a Section 15 of the MSMED Act, 2006 mandates payment of goods or
services to supplier, being a micro or small enterprise by the buyer on or
before the date agreed upon between them in writing i.e., as per the

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written agreement, which cannot be more than 45 days from the day of
acceptance.
M/s P Associates, a partnership firm made purchases from Teal Pvt. Ltd.,
Cyan Pvt. Ltd. and Rust Pvt. Ltd. Cyan Pvt. Ltd. is a micro enterprise and
Rust Pvt. Ltd. is a small enterprise.
Cyan Pvt. Ltd. is a micro enterprise as its investment in plant & machinery
does not exceed ` 1 crore and turnover does not exceed ` 5 crores. Rust
Pvt. Ltd. is a small enterprise, since investment in plant & machinery does
not exceed ` 10 crore and turnover does not exceed ` 50 crores.
Teal Pvt. Ltd. is not a micro or small enterprise. Hence, provisions of
section 43B(h) are not applicable in respect of payment to it.
In the present case, payment to Cyan Pvt. Ltd. is to be made by
1.12.2024 but such payment was made on 28.2.2025. Since such amount
is actually paid during the P.Y. 2024-25 such sum is eligible for
deduction during the P.Y. 2024-25.
Payment to Rust Pvt. Ltd. is to be made on 14th April 2025, within 45 days
from the date of purchase even if the agreed date was 20.4.2025.
However, in the present case, payment was made on 18.4.2025, which is
beyond the specified time limit of 45 days. Such payment is not allowed
to be deducted during the P.Y. 2024-25 but is allowable on actual
payment basis in the P.Y. 2025-26.
Since payment to Cyan Pvt. Ltd. and Rust Pvt. Ltd. are made after the
specified time limits, M/s P Associates is liable to pay compound interest
from the appointed date or from the date immediately following the date
agreed upon, at three times of the bank rate notified by the Reserve Bank.
Such interest being of penal nature is not allowed to be deducted while
computing business income as per section 23 of MSMED Act, 2006.
While conducting the audit of P Associates, the following points are to be
kept in mind:
• seek information regarding status of the enterprise i.e., whether the
same is covered under the MSMED Act, 2006.

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• Obtain a full list of suppliers of the assessee which fall within the
purview of the definition of “Supplier 9” It is the responsibility of the
auditee to correctly classify and identify those suppliers who are
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covered by this Act.
c. o
•
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verify from the books of account whether any interest payable or paid
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to the buyer in terms of section 16 of the MSMED Act has been
l a
l a s debited or provided for in the books of account.
a g
ag • verify the additional information provided by the auditee relating to
• verify the interest payable or paid as mentioned above on test check basis.

interest under section 16 in his financial statement.
• verify that only interest paid or payable in terms of section 16 of the
MSMED Act which has been debited to the Profit & Loss account is
reported under clause 22(i). Such interest is not allowable as
deduction for the purposes of computation of income under the
Income-tax Act, 1961 in terms of section 23 of the MSMED Act.
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verify the payments which are required to be made to a micro or

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small enterprise during the relevant previous year and then the

a s
amount actually paid or not paid within the time limit specified under
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section 15 of the MSMED Act and also the amount which are
a
inadmissible as deduction during the relevant previous year.
(b) (i) In Country Y, the raw material is available at lower price and
incorporation of Brown Ltd., a wholly owned subsidiary in Country Y,
to reduce the cost of manufacturing of cement does not lack
commercial substance even if Country Y is a no-tax jurisdiction.
Further, the main purpose of the arrangement is not to obtain tax
benefits, GAAR would not be attracted even if Brown Ltd. has not

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paid any dividend to Red Ltd.

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(ii) For GAAR provisions to be invoked, the tax benefits arising from the

c. o em what can
transaction to all the parties together should be more than ` 3 crores.
The application of tax laws is jurisdiction specific and s
s em g a
be seen and examined is the tax benefit enjoyed inlIndian jurisdiction
hence

gla a
a
due to the arrangement or part of the arrangement.

9
under section 2(n) of the MSMED Act, 2006.
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Thus, in the present case, since tax benefit in Indian jurisdiction does
not exceed ` 3 crores, GAAR cannot be invoked.
(c) (i) TBF India Pvt. Ltd. would fall under the definition of applicant for
advance ruling in relation to tax liability of BIK Inc. USA, being a non-
resident arising for providing services to TBF India Pvt. Ltd. for
determining whether such services fall under the definition of
technical services and subject to tax deduction at source.
(ii) Figtree Ltd., an Indian private sector company would fall under the
definition of applicant for advance ruling since its tax liability arising
out of the transaction value with Lamou Inc. of China, being a non-
resident is ` 500 crores, which is more than ` 100 crores.
(iii) Universe India Ltd., an Indian public sector company would fall under
the definition of applicant for advance ruling since the value of the
transaction with Moon Pte. of Singapore, being a non-resident is
` 100 crores or more, as its tax liability itself is ` 56 crores.
Note – The public sector company is notified for the purpose of section
245N(b)(A)(IV). Since in this sub-sub-clause (IV) there is no linking or
reference with any of the sub-clause of clause (a), it is possible that a
public sector company is an applicant for advance ruling without any
monetary limit. In such case, Universe India Ltd., being a public sector
undertaking, can apply for advance ruling for its own tax liability.
(iv) BNHJ Ltd., an Indian public sector undertaking would fall within the
definition of applicant for advance ruling, even if the matter is
pending with the Income-tax Appellate Tribunal which involves a
question of fact in respect of a transaction it entered with a non-
resident company.

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