CA Final May 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 May 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 2026-27, unless stated otherwise in the ag l
PART – I Multiple Choice Questions
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All lquestions
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Integrated Case Study - I
Mr. Krishan, a resident Indian, is engaged in retail business in Delhi. The
turnover of his business for FY 24-25 was ` 9.90 crores. The aggregate payments
made by Mr. Krishan to Mr. Anil (a resident wholesaler in Delhi) during the
FY 25-26 towards consideration for purchase of goods were ` 90 lakhs

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(` 20 lakhs on 5th June 2025, ` 25 lakhs on 27th Sep. 2025, ` 20 lakhs on 20th

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Nov. 2025 and ` 25 lakhs on 15th Feb. 2026). The business turnover of Mr. Anil

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for FY 24-25 was ` 10.10 crores.

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Mr. Anil paid ` 6 lakhs on 5th Sep. 2025 to Mr. Albert (a seller of overseas tour

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program package) for booking one week overseas holiday tour package to
Singapore. Mr. Anil for his daughter's MBA education in USA State University,
USA remitted ` 13 lakhs on 10th Feb. 2026, out of his personal savings, through
Bank of India, Laxmi Nagar branch, Delhi. The Bank of India is an authorised
foreign exchange dealer, under LRS and a financial institution for the purpose of
Section 80E of the Income-tax Act. Mr. Anil also took an education loan of ` 18
lakhs on 15th Feb. 2026 from State Bank of India, Shakarpur Branch, Delhi for

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his son's two-year Master of Public Administration program in Lynn University,

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c. o Branch in the bank account of Lynn University, USA maintained with a foreign
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bank in USA. The remittance was made under Liberalised Remittance Scheme of

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RBI (LRS). Mr. Anil during the FY 25-26 also remitted ` 6.5 lakhs on 21st March

ag 2026, out of his personal savings, under LRS through Bank of India, Laxmi
Nagar Branch, Delhi as gift to his sister residing in London in her bank account
located in London. The amount was gifted by Mr. Anil on the occasion of
52nd birthday of his sister. Mr. Anil has furnished undertakings containing the

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FINAL EXAMINATION: MAY 2026

details in respect of earlier foreign remittances made during FY 25-26 through
Bank of India, Laxmi Nagar Branch at the time of requesting for making
remittance to his sister's account.
The Income-tax department has received information from foreign Jurisdiction
in respect of the investment in the shares of a foreign company made in the FY
24-25 and the dividend credited in foreign bank account of Mr. Albert in the
said financial year. The said investment in the shares of the foreign company
and dividend income have not been disclosed by Mr. Albert in his return of
income for AY 25-26.
From the facts given above, choose the most appropriate answer to the
following Multiple-Choice Questions (MCQs No 1 to 5): -
1. Which one of the following statement is correct in respect of business
transactions entered between Mr. Krishan and Mr. Anil during FY 25-26?
(A) TDS and TCS provisions are not applicable on the said transactions.

(B) Mr. Krishan was required to make TDS @ 0.1% on ` 40 lakhs.
(C) Mr. Krishan was required to make TDS @ 0.1% on ` 90 lakhs
(D) Mr. Anil was required to make TCS @ 0.1% of ` 40 lakhs. (2 Marks)
2. In respect of amount received from Mr. Anil for one week overseas holiday
tour package to Singapore, Mr. Albert was:
(A) required to collect ` 3,000 as tax at source
(B) required to collect ` 6,000 as tax at source
(C) required to collect ` 30,000 as tax at source
(D) not required to collect any tax at source (2 Marks)

3. In respect of the remittance made by Mr. Anil for his daughter's education,
the Bank of India, Laxmi Nagar branch, Delhi. was -
(A) required to collect tax at source at the rate of 5% on ` 3 lakhs
(B) required to collect tax at source at the rate of 5% on ` 13 lakhs
(C) required to collect tax at source at the rate of 0.5% on ` 13 lakhs

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(D) not required to collect tax at source as the amount was remitted for the
higher education of daughter. (2 Marks)

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4. In respect of amount remitted as gift to sister by Mr. Anil ________.
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(A) TCS provisions are not applicable as the gift from brother is exempt
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from tax under Section 56(2)(x).
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(B) TCS provisions are not applicable as the amount remitted is less than
` 10 lakhs and out of personal savings.
(C) TCS of `1,30,000 was to be made by the Bank of India, Laxmi Nagar
branch, Delhi.
(D) TCS of ` 32,500 was to be made by Bank of India, Laxmi Nagar branch,
Delhi. (2 Marks)
5. In respect of investment in the shares of the foreign company and the

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foreign dividend income not disclosed in the return for AY 25-26, subject to

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fulfillment of the other conditions prescribed for filing an updated return,
Mr. Albert _________.
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(A) has an option to file an updated return for AY 25-26, at any time
before 31st March 2030. a
(B) has an option to file an updated return for AY 25-26 upto 31st March
2030 or before the date on which the information in respect of
investment in shares of foreign company and foreign dividend has been
communicated to him by the Assessing Officer, whichever is earlier.
(C) has an option to file an updated return for AY 25-26 upto 31st March

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2030 even after the information in respect of investment in shares of

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foreign company and foreign dividend has been communicated to him

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and foreign income not disclosed in the returngfiled u/s 139(1) or
(D) cannot file an updated return for AY 25-26 as the foreign investment

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a 139(4) or 139(5) is charged to tax under the Black Money Act.
(2 Marks)

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FINAL EXAMINATION: MAY 2026

Integrated Case Study - II
Mr. Nitin a citizen of India, who lives in Singapore and a non-resident for the AY
26-27 for the purpose of taxation under the Indian Income-tax Act has furnished
the following information in respect of the said assessment year:
(i) Dividend from TLT Ltd., an Indian Company (gross) of ` 3,60,000
(ii) Interest on debentures of SLL Pvt. Ltd., an Indian Company, (subscribed in
convertible foreign exchange) of ` 3,70,000 (gross).
(iii) Interest expenses of ` 60,000 and ` 40,000 respectively incurred on loan
taken for purchase of shares of TLT Ltd. and for purchase of debentures of
SLL Pvt. Ltd.
(iv) On 15th March 2026, he sold shares of Tix Ltd. (an Indian public company)
for ` 18,25,000 which were subscribed in convertible foreign exchange on
10th June 2004 in dollars equivalent to ` 4,65,000. Expenditure of ` 7,000
were incurred in connection with sale of the said shares at the time of sale.
Out of the sale proceeds of shares, he invested ` 4,80,000 on 30th April
2026 for purchases of listed shares of an Indian Company Next High Ltd.
[Cost Inflation Index: FY 04-05-113; FY 25-26-376]

(v) ` 4,00,000 Interest on Income Tax Refund for FY 24-25 credited in his
designated Bank Account.
From the facts given above, choose the most appropriate answer to the
following Multiple-Choice Questions (MCQs No 6 to 8):
6. Ignoring the provisions of the DTAA and cess and surcharge, state which of
the following statement is correct in respect of taxability of dividend in the
hands of Mr. Nitin and TDS was to be made by TLT Ltd. on the dividend
distributed to Mr. Nitin
(A) Taxable dividend in the hands of Mr. Nitin is ` 3,60,000 and ` 36,000 is
the amount of which TDS was to be made by TLT Ltd.
(B) Taxable dividend in the hands of Mr. Nitin is ` 3,00,000 and ` 30,000 is
the amount of which TDS was to be made by TLT Ltd.

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(C) Taxable dividend in the hands of Mr. Nitin is ` 3,00,000 and ` 60,000 is
the amount of which TDS was to be made by TLT Ltd.

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(D) Taxable dividend in the hands of Mr. Nitin is ` 3,60,000 and ` 72,000 is

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the amount of which TDS was to be made by TLT Ltd. (2 Marks)
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emof Tix Ltd. (without giving effect to first proviso to Section 48 and gla
7. The long-term capital gains taxable in the hands of Mr. Nitin on sale of

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lassuming that the capital gains from sale of shares of Tix Ltd. is only sourcea
shares
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a of income for AY 26-27), if he elects to be governed by the "special
provisions relating to certain incomes of Non-Residents" shall be -
(A) ` 13,53,000
(B) ` 9,95,772

(C) ` 9,97,142

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(D) ` 13,60,000 (2 Marks)

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8. In the situation, where Mr. Nitin elects to govern by special provisions

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discussed in MCQ-7 above, the long term capital gain arises from the sale
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of shares of Tix Ltd. shall be chargeable to income-tax at the rate of -
(A) ten per cent a
(B) twenty per cent
(C) Twelve and one half per cent on amount exceeding ` 1,25,000
(D) Twelve and one half per cent (2 Marks)

Integrated Case Study - III

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Asha Trust is a charitable trust set up on 1st April 2010 with the object of
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providing relief to the poor. Later on, in April 2012, it changed its object to

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medical relief. It applied for registration on the basis of its new object, i.e.,

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medical relief, on 1st Sep. 2012 and was granted registration under Section
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12AA on 1st Feb. 2013.
a Before Asha Trust applied for registration on the basis of its new object, the trust
was not allowed any benefit under Section 11 and 12 or under relevant clauses
of Section 10(23C) of the Act.

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FINAL EXAMINATION: MAY 2026

On 1st April 2025, Asha Trust merged with Upkar Trust. Upkar Trust is not
eligible for registration under Section 12AB or approval under Section 10(23C).
All the assets and liabilities of the Asha Trust became the assets and liabilities of
Upkar Trust.
The break-up of assets and liabilities of Asha Trust transferred to Upkar Trust is
given below:
(i) Land
Location Date of Stamp Value which the Book
purchase Duty land would fetch, if Value on
Value on sold in the open 1st April
1st April market on 1st April, 2025
2025 2025 as per report
of registered valuer
` `
Noida 1st Sept. 2010 75 lakhs 78 lakhs 70 lakhs
Gurugram 1st Sept.2013 120 lakhs 140 lakhs 130 lakhs

(ii) Shares
Type of Date of Face Purchase Price at which each Open
shares Purchase value Price of share is quoted on market
of each BSE as on 1st April value on
each share 2025 1st April
share Highest Lowest 2025
Price Price
` ` ` ` `
10000 1st May 100 210 420 420 NA
Quoted 2014
equity shares
of A Ltd.
4000 1st Sept. 100 100 - - *180
Preference 2015
Shares of B
Ltd.
*as per report of Merchant Banker

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DIRECT TAX LAWS & INTERNATIONAL TAXATION

(iii) Trust Fund and Liabilities
Book value of trust fund and liabilities on 1st April 2025 = ` 150 lakhs
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which includes -
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(a) Corpus fund ` 15 lakhs.
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(b) Provision
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aFrom the facts given above, choose the most appropriate answer to the
following Multiple-Choice Questions (MCQs No 9 to 12):
9. For the purpose of the calculation of accreted Income of Asha Trust, FMV of
land at Noida to be taken at -

(A) ` 75,00,000

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(B) ` 78,00,000
(C) ` 70,00,000
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(D) ` Nil
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10. For the purpose of the calculation
Total Assets shall be:

(A) ` 2,66,20,000
(B) ` 2,67,20,000
(C) `1,88,20,000

(D) ` 2,63,20,000 (2 Marks)

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11. Accreted Income of Asha trust works out to -
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a (D) ` 78,20,000 (2 Marks)

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FINAL EXAMINATION: MAY 2026

12. Additional income-tax payable by Asha Trust on accreted Income works out
to -

(A) ` 54,58,250
(B) ` 24,39,840
(C) ` 15,64,000

(D) ` 27,32,620 (2 Marks)
13. Mr. Krishnamurthy is employed with XYZ Ltd. as Marketing Manager. His
CTC details as per proposed offer for the appointment are as under:
Basic Pay - ` 30,00,000/-
HRA - ` 15,00,000/-
Other taxable allowances - ` 5,00,000/-

Mr. Krishnamurthy requested his employer to restructure salary component
of "Other taxable allowances" by including tax free perquisites such as
Health insurance and medical expenses in term of proviso to Section 17(2),
making arrangement for commuting between office to residence and
providing gift coupons to the extent of tax free limit prescribed under Rule 3
of the Income-tax Rules. He is also requested to contribute a part of the
above component in the NPS account as employer's contribution within the
limit prescribed under Section 80CCD(2).
The proposal of Mr. Krishnamurthy for restructuring of salary in your view-

(A) is a tax evasion method as it reduces tax liability of Mr. Krishnamurthy.
(B) is a tax planning method as it reduces tax liability of Mr. Krishnamurthy
in legitimate way.

(C) is a tax avoidance method as it reduces tax liability of Mr. Krishnamurthy
(D) is a colourable method to reduce tax liability of Mr. Krishnamurthy
(2 Marks)

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DIRECT TAX LAWS & INTERNATIONAL TAXATION

14. Raman is a State Government Employee. The details of his income from
salary for FY 25-26 are given below:

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• Basic Salary received during the year: ` 12,00,000

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Dearness allowance: ` 6,00,000

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eRaman
• Contribution made by the State Government to the NPS account of Mr.
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l•a Raman invested 80,000 in LIC eligible for deduction under Section 80C.a g
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• NPS contribution deducted by the employer as employee's contribution
in NPS and credited to his NPS account: ` 1,44,000
• Raman also paid Medical insurance premium ` 30,000 in terms of
Section 80D
Based on the above information deduction from the Gross Total Income

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under default tax regime in the case of Mr. Raman works out to -
(A) ` 1,44,000
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(B) ` 2,88,000
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(C) ` 3,98,000
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(D) ` 1,74,000 a (2 Marks)
15. Mr. Puneet, a citizen of India, serving in the Ministry of External Affairs in
India, was transferred to Indian Embassy in Canada on 31st March 2025. He
did not visit India any time during the FY 25-26. He has received the
following income for the FY 25-26:

S. No Particulars `

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(i) Income under the head "Income from Salaries" 8,00,000
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received from the Government of India excluding
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Foreign allowances (computed as per New Tax

s em Regime)
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gla (ii) Foreign Allowance paid by the Government of India
a 5,00,000

a (iii)
for the services rendered outside India
Interest on fixed deposit with a branch of scheduled 2,00,000
bank at Delhi (India)

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FINAL EXAMINATION: MAY 2026

Based on the above information, Gross Total Income of Mr. Puneet for
AY 26-27 under New Tax Regime works out to -

(A) ` 8,00,000
(B) ` 15,00,000
(C) ` 10,00,000

(D) ` 2,00,000 (2 Marks)
Answer Key

MCQ No. Correct Option
1. (A)
2. (C)
3. (A)
4. (C)
5. (B)
6. (D)
7. (B)
8. (D)
9. (D)
10. (C)
11. (D)
12. (D)
13. (B)
14. (A)
15. (C)

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PART – II Descriptive Questions
Question No.1 is compulsory.
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Answer any four questions out of the remaining five questions.

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All questions relate to Assessment Year 2026-27, unless stated otherwise in the
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question.
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aThe statement of the profit and loss of AB Ltd., (a domestic company) which is
Question

engaged in the business of Manufacturing, shows a Net Profit of ` 52 lakhs for
the financial year ended 31st March 2026. The following debits and credits needs
to be considered for computing total income of AB Ltd. for AY 26-27:
(a) Professional fees amounting to ` 2 lakhs debited in profit and loss account
for FY 24-25 but was paid on 30th July 2025 in cash has not been debited

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or credited in the profit and loss account for FY 25-26.

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(b) The interest amounting ` 8 lakhs payable to non-banking financial

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companies notified for the purpose of Section 43B has been debited in P&L

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for FY 25-26 even though the same is proposed to be paid after due date of
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filing return for the AY 26-27.
(c) ` 3.5 lakhs received as interest on margin money deposited with bank for
obtaining bank guarantee to carry on business was credited in profit and
loss account for FY 25-26.
(d) Loss of ` 2,60,000 incurred by way of trading in Futures and Options
(Derivatives) in BSE during the FY 25-26 and accordingly debited to P&L for
FY 25-26.

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(c) Legal fees incurred in defending Title of factory premises of the company

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` 3,70,000 debited in P&L of FY 25-26. The same was incurred and paid
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c. o during the said FY after deducting TDS as applicable and the TDS was also
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em a industrial land
deposited in the said FY.

s (f) Development charges of ` 95,000 paid to Government lon
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a to the P&L account
ag purchased in the FY 25-26 and accordingly, debited
relevant to the AY 26-27.

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FINAL EXAMINATION: MAY 2026

(g) ` 3,20,000 paid to the Indian Institute of Science, Bangalore notified for
scientific research in term of Section 35(1)(ii) during the FY and accordingly,
debited to P&L Account for the FY 25-26.
(h) A Machine which was in use since 5 years having WDV amounting ` 1.80
lakhs as on 1st April 2025 was discarded on 1st Sep. 2025 for ` 10,000. The
WDV of the Machine amounting ` 1.80 lakhs was reduced from its block of
assets of 15% (Block still exits) and ` 1.70 lakhs was debited to P&L as loss
on sale of Machinery.

Additional Information for which no adjustments has been made in the books of
accounts:
1. The Company has received Excise Duty Drawback under the Customs and
Central Excise Duty Drawback Rules, 1971 amounting to ` 6.5 lakhs during
the FY 25-26 against exports made during the earlier financial years.
2. Computer Printer amounting ` 90,000 was purchased on 1st Sep. 2025 and
put to use on the same day.
Compute Total Income of AB Ltd. for the AY 26-27 under the regular provisionS
of the Income-tax Act, with necessary explanations assuming that the AB Ltd.
has not opted for any concessional tax under special provisions of the Income-
tax Act, 1961. Total turnover of AB Ltd. for the FY 23-24 was ` 290 crores and
during the FY 24-25 was ` 410 crores. Ignore the provision of MAT.
Would it be beneficial for AB Ltd. to opt for beneficial tax rates under Section
115BAA for FY 25-26. Support your view with necessary calculations. (14 Marks)
Answer
Computation of Total Income of AB Ltd. for the A.Y. 2026-27 under
regular provisions of the Act

Particulars (`)
Profits and gains of business or profession
Net Profit as per the statement of profit and loss 52,00,000
Add: Items debited but to be considered
separately or to be disallowed

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(b) Interest to NBFC paid after ‘due date’ of 8,00,000
filing return of income

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[Interest to NBFC, not paid before the ‘due
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date’ of filing return of income, would attract

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disallowance u/s 43B in the A.Y. 2026-27. Since
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the same has been debited to the statement of

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profit and loss, it has to be added back for

a(d) Loss incurred in trading in futures and
computing business income.]
2,60,000
options
[Loss incurred by way of trading in futures and
options cannot be allowed as deduction while
computing profit from the manufacturing
activity, since it is not a loss in relation to such

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business. Since the said amount has been

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debited to the statement of profit and loss, it

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has to be added back for computing profit
from manufacturing activity.]
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(e) Legal fees in defending title of factory
premises
Nil

[Legal fees incurred in defending title of
factory premises is a revenue expenditure
since the expenditure does not result in the
acquisition of new asset nor does it increase
the value of the premises, it merely preserves
the status quo. Since the said amount has
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been debited to the statement of profit and
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loss, no adjustment is required.]
95,000 em
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(f) Development charges paid to Government

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las on industrial land
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industrial land purchased is a capital
expenditure. Since the said amount has been
debited to the statement of profit and loss, it

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FINAL EXAMINATION: MAY 2026

has to be added back for computing business
profit.]
(g) Contribution to IIS, Bangalore notified for Nil
scientific research
[As per section 35(1)(ii), 100% deduction is
allowed for amount paid to a research
institution undertaking scientific research, if
such institution is approved for this purpose
and notified by the Central Government. Since
the amount of contribution is already debited
to statement of profit and loss, no further
adjustment is required.]
(h) Loss on sale of machinery 1,70,000
[Loss on sale of machinery is not deductible
since it is capital in nature. Since the loss has
been debited to statement of profit and loss,
the same is required to be added back while
computing business income.]
13,25,000
65,25,000
Less: Items credited but not taxable or
chargeable to tax under another head
(c) Interest on margin money deposited with Nil
bank
[Interest income received on funds kept as
margin money for obtaining the bank
guarantee would be taxable under the head
“Profits and gains of business or profession” 1.
Since such interest has already been credited
to profit and loss account, no further
adjustment is required.
65,25,000

1
As decided in CIT v. K and Co. (2014) 364 ITR 93 (Del
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Add: Income to be added
(a) Professional fees paid in cash for which 2,00,000
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deduction was allowed in A.Y. 2025-26
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Since the payment for professional fees exceeding

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` 10,000 in a day has been made in cash for which

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deduction was allowed in A.Y. 2025-26, the

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payment shall be deemed to be the income of the
aAI 1. Excise duty drawback
A.Y. 2026-27
6,50,000
As per section 28, excise duty drawback against
exports made is taxable as business income
8,50,000
73,75,000

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Less: Depreciation as per Income-tax Rules,1962
- Depreciation on computer printer
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[` 90,000 x 40% since it is put to use for
more than 180 days]
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Depreciation on ` 1,70,000 [` 1,70,000 x
15%] [Since block of machinery exists,
25,500

only the sale value of ` 10,000 is to be
reduced from the WDV. However, since
the amount of ` 1,80,000 has been
reduced from WDV, depreciation on
` 1,70,000 has to be provided]
61,500
Income from manufacturing business
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73,13,500
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Less: Set-off of loss from trading in futures and 2,60,000

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options (derivatives) in recognized stock exchange

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against income from manufacturing business is

gla allowable as per section 70(1), since the same is not
a
a speculative in nature
Profits and gains from business or profession 70,53,500
Total Income 70,53,500

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FINAL EXAMINATION: MAY 2026

Computation of tax liability of AB Ltd. for the A.Y. 2026-27
under regular provisions of the Act
Particulars `
Tax on ` 70,53,500
Tax ` 70,53,500 @25%, since total turnover for P.Y. 2023-24
does not exceed ` 400 crores 17,63,375
Add: HEC @4% 70,535
Tax liability 18,33,910

Computation of total income and tax liability of AB Ltd. for the
A.Y. 2026-27 under section 115BAA
Particulars `
Total Income as per regular provisions of the Act 70,53,500
Add: Contribution to IIS, Bangalore notified for scientific
research [Not allowable as deduction u/s 115BAA] 3,20,000
Total Income as per section 115BAA 73,73,500
Tax on ` 73,73,500
Tax on balance income of ` 73,73,500 @22% 16,22,170
Add: Surcharge @10% 1,62,217
17,84,387
Add: HEC @4% 71,375
Tax liability 18,55,762
Tax liability (Rounded off) 18,55,760
Since the tax liability of AB Ltd. under section 115BAA is more than the tax
liability computed under regular provisions of the Act, it would be beneficial
for it not to opt for section 115BAA for A.Y. 2026-27.

Question 2
(a) Mr. Pawan (a resident) purchased Gold Jewellery worth ` 5,60,000 during
the FY 05-06. During the FY 11-12, he further purchased gold jewellery
worth ` 7,80,000. All the jewellery was sold by him on 15th May 2025. The
Jewellery purchased in FY 05-06 was sold for ` 21,00,000 and that
purchased in FY 11-12 was also sold for ` 21,00,000. He purchased a

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Residential House of ` 25,90,000 on 25th Dec. 2025. He owns only one
residential house as on 15th May 2025.

m
c. o
Compute the income chargeable under the head Capital Gains in

m
c. o
accordance with the provisions of the Income-tax Act, 1961, considering the

em
s
most beneficial treatment permissible to Mr. Pawan under the Act.
CII form a
s e relevant Previous Year: l
a
l2005-06: ag
a(b)g T Pvt Ltd. a Closely Held Company not being an eligible startup referred to
117, 2011-12: 184, 2025-26:376 (4 Marks)

in Section 80-IAC submits the following information:

Particulars FY 23-24 FY 24-25 FY 25-26
Business Income/ (-) ` 1,50,000 (-) ` 2,50,000 (+) ` 5,00,000
loss (before unabsorbed
depreciation and

m
business losses of FY

c o
. ` 80,000
23-24 and 24-25
Unabsorbed ` 40,000
e m -----
Depreciation
l a s
ag
Shareholding as P-35% P-35% P-35%
on last day of Q-20% Q-20% Z-20%
financial year
R-15% T-15% T-15%
S-30% U-30% U-30%

Considering the above facts, explain whether the losses of FY 23-24 and
2024-25 can be set off against the income of FY 25-26 assuming that
Income-tax Return for AY 24-25 and 25-26 were filed before the due date
applicable for relevant assessment year.
o m
(4 Marks)
m (c) NWG Cruises Ltd., a non-resident company incorporated inmSingapore.
.c
c. o operates luxury passenger cruises across Asia. During the e
s
m a
FY 25-26, the

s e company undertook multiple cruise voyages,
g
operating
lin Indian ports as

l a a
ag
well as internationally.
The particulars of the income/receipts of NWG Cruises Ltd. for FY 25-26 are
as under:

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FINAL EXAMINATION: MAY 2026

1. ` 40 crore received from passengers embarking in India for cruises
touching Indian ports.
2. ` 5 crore received from cargo services.
3. ` 15 crore received outside India for tickets sold abroad for cruises
touching Indian ports.
4. ` 10 crore received for cruises operating entirely outside India (not
touching Indian ports).
5. ` 3 crore interest earned (Gross) on fixed deposits maintained with an
Indian bank.
NWG Cruises Ltd. had taken the cruise ship on lease from TMB Cruises Ltd.,
a company registered in Singapore, and paid lease rentals of ` 8 crore
during the FY 25-26. Both NWG Cruises Ltd. and TMB Cruises Ltd. are
subsidiaries of TLO Cruise Ltd., a holding company incorporated in
Singapore.
Considering the above facts, compute the taxable income of NWG Cruises
Ltd. in India, assuming that special provisions for computing profits and
gains of business of operation of cruise ships in case of non-residents
inserted with effect from 1st April 2025 under the Income-tax Act, 1961 are
applicable and NWG Cruises Ltd. fulfils all the conditions prescribed under
the relevant rule of the Income-tax Rules, 1962. Also examine the taxability
of lease rental income in the hands of TMB Cruises Ltd. with necessary
explanations. (6 Marks)
Answer
(a) Computation of Income chargeable under the head “Capital
Gains” in the hands of Mr. Pawan

Particulars (`) (`)
On sale of Gold Jewellery purchased in F.Y.
2005-06
Full value of consideration 21,00,000
Less: Cost of acquisition 5,60,000
15,40,000
Less: Exemption u/s 54F in respect of
purchase of residential house within 2 years
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after the date of transfer [` 15,40,000 x
21,00,000 / 21,00,000] 15,40,000

m
c. o
Long term capital gains [Since asset held Nil

m
co
for more than 24 months]

. em
s
On sale of Gold Jewellery purchased in F.Y.
m
evalue of consideration l a
s
2011-12

g a
l Less: Cost of acquisition
Full 21,00,000
ag
a 7,80,000
13,20,000
Less: Exemption u/s 54F in respect of
purchase of residential house within 2 years
after the date of transfer [` 13,20,000 x
4,90,000 (25,90,000 - 21,00,000) / 21,00,000] 3,08,000
Long term capital gains [Since asset held
for more than 24 months]
o m 10,12,000
Capital gains chargeable to tax .c
em held company not being an eligible
10,12,000

(b) As per section 79, in case of a sclosely
g la80-IAC, no loss incurred in the previous year
shall be carried forwardaand set off against the income of the subsequent
start up referred to in section

previous year unless the shares carrying at least 51% of the voting power
of the company are beneficially held on the last day of the previous year
in which the loss is sought to be set off, by the same shareholders, who
beneficially held the shares carrying at least 51% of the voting power on
the last day of the previous year in which the loss was incurred.
Since shareholders holding at least 51% of the voting power (65%, in the

m
co
present case) on 31st March 2024 are not same as shareholder holding at

m .
c. o
least 51% of the voting power on 31st March 2026, the business loss of
m
se
` 1,50,000 of P.Y. 2023-24 cannot be set-off against business income of

em la
the P.Y. 2025-26.

las a
Since shareholders holding at least 51% of the voting power (80%, in theg
ag present case) are the same on 31st March 2025 and 31st March 2026, the
loss of ` 2,50,000 of P.Y. 2024-25 can be set-off against business income
of the P.Y.2025-26.

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FINAL EXAMINATION: MAY 2026

Section 79 is not applicable in case of carry forward of unabsorbed
depreciation.
Hence, unabsorbed depreciation of ` 40,000 of P.Y. 2023-24 and of ` 80,000 of
P.Y. 2024-25 can be set off against business income of P.Y. 2025-26.
(c) Computation of taxable income of NWG Cruises Ltd. for the
A.Y. 2026-27
Particulars (`) (`)
Profits and gains of business or
profession
Amount received from passengers 40,00,00,000
embarking in India for cruises
touching Indian ports
Amount received outside India for 15,00,00,000
tickets sold abroad for cruises
touching Indian ports
55,00,00,000
Lease rental of ` 8 crore not eligible
for deduction
Presumptive income [20% of ` 55,00,00,000] 11,00,00,000
Presumptive income from cargo services [@ 7.5% 37,50,000
under section 44B assuming cargo is shipped at any
port in India or amount is received in India if shipped
at any part outside India] 7.5% of ` 5 crore.
Note: Alternatively, if it is assumed that cargo is not
shipped at any port in India nor such amount is
received in India, then the amount will not be taxable in
India. In such case, total income would be ` 14 crore.
Amount received for cruises operating entirely outside -
India [Not taxable]
11,37,50,000
Income from other sources
Interest on fixed deposits maintained 3,00,00,000
with an Indian bank
Total Income 14,37,50,000

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The lease rental of ` 8 crores by NWG Cruises Ltd. to TMB Cruises Ltd.,
a foreign company is exempt by virtue of section 10(15B) in the hands
of TMB Cruises Ltd. since following conditions are satisfied:
m
o m
(1) NWG Cruises Ltd., is a foreign company which operates cruise
c. o
(2) m
.c
ships in India opts for presumptive taxation regime,
s em
s e NWG Cruises Ltd. and TMB Cruises Ltd. are subsidiaries of TLO gla
TMB Cruises Ltd. is a foreign company and

la Cruise Ltd. a
(3)
g
aQuestion 3
(a) (i) M. Foundations is a charitable trust registered under Section 12AB of IT
Act 1961. During the FY 25-26, it derived an income of ` 60 lakhs from
property held under trust. It applied a sum of ` 40 lakhs towards
charitable purposes which includes repayment of loan taken for the
construction of an orphanage amounting to ` 6 lakhs. It applied ` 5

m
lakhs at a private Ganpati Mahotsava organized by a housing society.

. co
Assuming that the return filed for AY 26-27 is subsequently taken

em
under scrutiny by issue of notice u/s 143(2) and during the assessment
s
l a
proceedings, the Assessing Officer consider that the amount of ` 5

g
a
lakhs paid for a private Ganpati Mahotsava organized by a housing
society is a violation of term of the registration granted under Section
12AB and make a reference to CIT (Exemption) to withdraw the
registration granted.
Considering the above facts, explain whether the Assessing Officer is
empowered to make such reference and what action the CIT
(Exemption) may take on such reference. (3 Marks)
(ii) Sarvseva Trust is a charitable trust registered under Section 12AB with
m
co
the main object of relief of poor. The trust received an income of ` 5
m .
c. o m
lakhs on 30th March 2026. It could not apply this amount during the FY

se
25-26 but applied it in the FY 26-27.

s em g la
la
Considering the above facts, explain whether the Sarvseva trust can

g a
claim this amount of 5 lakhs as application for charitable purpose
a during the FY 25-26, if so, whether any conditions need to be fulfilled
by Sarvseva trust. (3 Marks)

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FINAL EXAMINATION: MAY 2026

(iii) Swadeshi Electoral trust is an Electoral Trust incorporated on 1st May
2026 ∗ and approved by CBDT in accordance with the scheme made by
Central Government. It received voluntary contributions amounting to
` 1.20 crores during the FY 25-26. It invested a part of the contribution
in 6 months bank fixed deposit and received an interest of ` 1 lakh.
Being in the first year of incorporation, what is the obligation on the
Swadeshi Electoral trust regarding the distribution of these
contributions to be eligible for exemption. Explain with the relevant
provision and rule. (2 Marks)
(b) Mohan, a resident individual aged 46 years, received the following incomes
during the FY 25-26:
- Income from house property in Chennai (as computed under the head
"Income from House Property"): ` 4,30,000
- Royalty from Country X: ` 7,50,000 (Rate of tax in Country X is 10%
and tax deducted in Country X was ` 75,000). As per DTAA with
Country X, the royalty is only taxable in the source state.
- Interest (other than interest on securities) from Country Y: USD 10,000
(Interest became due on 31st Dec. 2025) and tax deducted (on 19th Feb.
2026) USD 1,000 (Rate of tax 10%). As per DTAA with Country Y,
interest can be taxed in both the contracting states and tax credit will
be available in respect of tax payable in resident state.
- Agricultural income in Country Z: ` 2,00,000; loss from house property
(computed) in Country Z-` 1,30,000 which is not eligible for set-off
against any other income in Country Z. Agricultural income is exempt
in Country Z and India does not have a DTAA with Country Z.
TTBR rate of 1 USD on various dates:
31.03.2025 - ` 75; 30.11.2025 - ` 76; 31.12.2025 - ` 77;
31.01.2026 - ` 78; 19.02.2026 - ` 79; 31.03.2026 - ` 80
Compute the total income and tax liability of Mohan for the AY 26-27,
assuming that he opted out from the taxation under the default tax regime.
(6 Marks)

∗
to be read as ‘2025’
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Answer
(a) (i) As per second proviso to section 143(3), the Assessing Officer is
m
c. o
empowered to make a reference to the Principal Commissioner or
m
co
Commissioner to withdraw the registration granted to M.

. em
s
Foundations, a charitable trust registered u/s 12AB, since it has
m
eM. Foundation has applied ` 5 lakhs at a private Ganpati Mahotsava g l a
s
committed specified violation.

g a
l organised by a housing society which is a specified violation since thea
a trust has applied its income for a private religious purpose, which
does not ensure for the benefit of the public.
On receiving such reference, the Principal Commissioner of Income-
tax or Commissioner of Income-tax can call for such documents or
information from the trust or institution, or make such inquiry as he
thinks necessary in order to satisfy himself about the occurrence of
the specified violation; pass an order in writing to cancel the
m
co
registration granted u/s 12AB after affording a reasonable
.
em
opportunity of being heard for such previous year and subsequent

s
previous year, if he is satisfied that specified violation have taken

g l a
place; forward a copy of the order cancelling the registration to the

a
Assessing Officer and to the trust.
(ii) Sarvseva Trust can claim income of ` 5 lakhs received on 30.3.2026 as
application for charitable purpose of income during the FY 2025-26 if
the income is applied for charitable purposes in India during the P.Y.
immediately following the previous year in which the income was
derived i.e., P.Y. 2026-27.
For exercising such option for availing the extended period for

m
application, Sarvseva trust has to exercise an option in writing that

m
the income applied later as prescribed may be deemed to be income
.co
c. o applied to the relevant charitable purposes during the previous year

se
m
em la
in which the income was derived.

las Such option has to be exercised at least 2 months before the due
a g
ag date for filing return of income specified under section 139(1).
The income so deemed not to be taken into account in calculating
the amount of income applied to such purposes, during the previous

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FINAL EXAMINATION: MAY 2026

year i.e. PY 2026-27 being the immediately following previous year in
which such income was derived.
(iii) As per section 13B, the voluntary contribution of ` 1.20 crores
received by Swadeshi Electoral trust would be exempt during the
previous year 2025-26, if it distributes to a registered political party
during the said previous year ` 1.14 crores, being 95% of the total
contributions received by it during the financial year along with the
surplus, if any, brought forward from earlier previous year and
functions in accordance with the rules (Rule 17CA) made by the
Central Government.
The exemption under section 13B will be available only in respect of
voluntary contribution received by Swadeshi Electoral trust. The
exemption cannot be claimed in respect of interest of ` 1 lakh
received on bank fixed deposits.
(b) Computation of total income and tax liability of resident
Mohan for the A.Y. 2026-27 (as per the optional tax regime)

Particulars ` `
Income from House Property
Income from house property in Chennai 4,30,000
(Computed)
Less: Loss from house property in Country Z 1,30,000
3,00,000
Profits and Gains of Business or Profession
Royalty from Country X [Taxable in the source -
state only, hence, not considered]
Income from Other Sources
Interest (other than interest on securities) from 8,00,000
Country Y (USD 10,000 x ` 80, being the TTBR
as on 31.3.2026)
Agricultural income in Country Z 2,00,000
10,00,000
Gross Total Income/ Total Income 13,00,000

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Tax liability on `13,00,000
Tax on total income [30% of `3,00,000 + 2,02,500
m
c. o
` 1,12,500]
m
co m
Add: Health and Education cess@4% 8,100

m . s e
e Foreign tax credit (See Working Note a
2,10,600

s l
a
l below) ag
Less: 78,000

g
a Net tax liability 1,32,600
Working Note: Calculation of Foreign tax
credit
Indian Average Rate of tax = ` 2,10,600/
` 13,00,000 x 100 = 16.20%
Doubly taxed income pertaining to Country Z

m
= Nil
Foreign tax credit
c. o Nil
Doubly taxed income pertainingmto Country Y
s e
= ` 8,00,000
l a
ag of interest (other 1,29,600
Tax paid in India in respect
than interest on securities) [` 8 lakhs x 16.20%]
Tax paid in Country Y in respect of royalty 78,000
[USD 1,000 x ` 78, being the TTBR on
31.1.2026]
Foreign tax credit = Lower of tax paid in India 78,000
and Country Y

o m
c
Question 4
m (a) (i) XYZ Pvt. Ltd. distributed Gold Coin to one of its Resident distributor
. for
c. o s
m
eof Goldby Coin
m a
achieving higher sale. The coin was purchased on 15.01.2026 XYZ

s e Pvt. Ltd. for 2,50,000 but at the time of
g l
distribution
a a
`
l
ag
(i.e., 15 Feb.
th
2026) the Fair Market Value of Gold Coin was ` 3,00,000.
Explain whether TDS provisions are applicable on the gold coin
distributed by XYZ Pvt. Ltd. If so, calculate the amount of TDS and

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FINAL EXAMINATION: MAY 2026

whether XYZ Pvt. Ltd. has to ensure that the TDS amount is paid by the
distributor before the gold coin is distributed to him. (2 Marks)
(ii) RK Garg & Company, a Partnership firm has paid Interest amounting
` 1,20,000 and ` 20,000 to its partners Ramesh Kumar Garg and Ashok
Kumar Garg respectively on 31st Mar. 2026.
Explain whether TDS provisions are applicable on R K Garg &
Company. If so, calculate the TDS to be deducted by RK Garg &
Company. (2 Marks)
(iii) PQR Ltd. has paid ` 2,70,000 to Mr. A for Professional Services
rendered by Mr. A. The agreement between PQR Ltd. and Mr. A
stipulates the tax should be borne by PQR Ltd. Explain the TDS
implications on PQR Ltd. Also state whether Mr. A is entitled to get TDS
Credit. (2 Marks)
(iv) Mr. Ramesh has deposited money under Capital Gain Accounts
Scheme, 1988 during the FY 24-25 with State Bank of India.
Mr. Ramesh has died on 30th Sep. 2025. The Total Amount of Interest
during the FY 25-26 was ` 3,00,000 (which includes interest ` 1,50,000
upto 30th Sep. 2025), Discuss the TDS implications for the FY 25-26
assuming no declaration is filed under Rule 37BA(2). (2 Marks)
(b) Company A had undertaken an international transaction in FY 25-26 and
the operating profit for the same was ` 72,975. The company selected the
following comparables with the weighted average operating profits as
under:

Name of Comparable Operating Profit (Amount in `)
A 69,750
B 79,200
C 68,850
D 83,400
E 75,000
F 1,45,500
G 1,32,938
H 1,13,760

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Compute the Arm's Length Price (ALP). Also determine the amount of
adjustment, if any, required to be made to the operating profit of
Company A. (6 Marks)
m
m c. o
co
Answer

. em
(a) (i)
em
As per section 194R, a person responsible for providing to a resident,
l a s
l a s any benefit or perquisite whether in cash or in kind, arising from
ag
ag
business or the exercise of a profession, by such resident has to,
before providing such benefit or perquisite, ensure that tax required
to be deducted has been deposited @10% on the value of such
benefit or perquisite, where the value of such benefit or perquisite
exceeds ` 20,000.
Accordingly, in the present case, XYZ Pvt. Ltd. has to ensure that TDS
of ` 25,000 i.e., 10% of ` 2,50,000 being the purchase price of the
gold coin distributed to its resident distributor has been deposited by

m
the distributor.

. co
For this purpose, XYZ Pvt Ltd. may rely on a declaration along with a

em
copy of the tax payment challan provided by the recipient, being a

a s
distributor confirming that the tax required to be deducted on the
l
a g
benefit/perquisite has been deposited.
(ii) As per section 194T, a Partnership Firm, is required to deduct tax at
source @10% on the amount of salary, remuneration, commission,
bonus or interest payment to its partner where such sum or the
aggregate of such sums exceeds ` 20,000.
In the present case, the interest paid to Ramesh Kumar Garg is
` 1,20,000 which exceed ` 20,000 but interest paid to Ashok Kimar
Garg is ` 20,000 only.
m
co
Thus, RK Garg & Company is required to deduct tax at source of
m .
c. o m
` 12,000 i.e., @10% of ` 1,20,000, being the amount of interest paid

em
to Ramesh Kumar Garg.

la se
las No TDS is attracted for interest paid to Ashok Kumar Garg as the
a g
ag interest amount is not exceeding ` 20,000.
(iii) Since as per the agreement between PQR Ltd. and Mr. A, tax on
income from professional services should be borne by PQR Ltd. then
such income is increased to such an amount as would after deduction

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FINAL EXAMINATION: MAY 2026

of tax thereon, be equal to the net amount payable under the
agreement.
Accordingly, PQR Ltd. is required to deduct tax at source @10% on
` 3,00,000 (` 2,70,000 x 100/90) and furnish a certificate to Mr. A in
the prescribed form within the prescribed time.
Mr. A can claim the credit of tax deducted at source by PQR Ltd.,
since any sum deducted is deemed to be income received while
computing the income of the payee, on the production of a certificate
furnished by the payer.
(iv) In case of deposits under the Capital Gains Accounts Scheme, 1988
where the depositor (Mr. Ramesh, in the present case) has died on
30th September 2025:
(i) TDS on the interest income accrued of ` 1,50,000 for and up to
the period of death of Mr. Ramesh i.e., from 1st April 2025 till
30th September 2025 is required to be deducted and reported
against PAN of the depositor, and
(ii) TDS on the interest income accrued of ` 1,50,000 for the period
after the death of the depositor i.e., from 1st October, 2025 till
31st March 2026 is required to be deducted and reported against
PAN of the legal heir, since no declaration is filed under Rule
37BA(2) that credit for tax deducted has to be given to another
person.
(b) In the present case, the dataset consists of eight entries and assuming the
most appropriate method is other than the profit split method or the
method prescribed by the CBDT, the ALP will be computed by applying
the range concept beginning from the thirty-fifth percentile of the dataset
and ending on the sixty-fifth percentile of the dataset would be
constructed. For this purpose, the data set is to be arranged in ascending
order as follows:

SI. No. Name of Comparable Operating profit (`)
1. C 68,850
2. A 69,750
3. E 75,000
4. B 79,200
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5. D 83,400
6. H 1,13,760
m
c. o
7. G 1,32,938
m
8.
.co F 1,45,500

s em
e m l a
l a s
Percentile/Result Value to be selected Value (`)
ag
ag 35% of 8 = 2.8 3 Value rd
75,000
65% of 8 = 5.2 6 Value
th
1,13,760
Median i.e.,50% of Arithmetic Mean of 4th and 81,300 = (79,200
8=4 5th value + 83,400) / 2

Since operating profit of ` 72,975 from the international transaction is
falling outside the range of 35 percentile and 65 percentile, the ALP shall

m
be considered to be the median of dataset.

. co
Accordingly, ALP of the international transaction would be ` 81,300 and

em
the adjustment to be made to the transaction would be ` 8,325 (` 81,300
– ` 72,975).
l a s
Question 5
a g
(a) Answer any two of the following three sub-parts.
(i) AB Ltd. is a multinational company engaged in manufacturing and
selling of soft drinks. For the AY 21-22, after being aggrieved by the
order of assessment passed in pursuance to the directions issued by the
DRP, it had filed an appeal before ITAT. In May 2024, the tax tribunal
allowed a stay for six months on the operation of order of

m
Assessing Officer which was extended till 28th May 2025. Till then the

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bench was functioning intermittently and therefore, the disputed

c. o em upon the
matter could not be disposed off.

em
Discuss whether the automatic vacation of the stay order
l s
a where the delay
las g
expiry of extended period of 365 days is valid, in a case
a assessee. (4 Marks)
ag in disposing of the appeal is not attributable to the
(ii) M/s XYZ Pvt. Ltd., aggrieved by the order of Appellate Tribunal, filed an
appeal to the High Court. The High Court without itself framing the
substantial question of law at the time of admission of appeal, issued

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notices, heard both the parties and decided the appeal affirming the
order of the Tribunal based on the questions raised by the appellant
under Section 260A(2)(c).
Discuss the validity of action taken by High Court in deciding the
appeal. (4 Marks)
(iii) Mr. Manish's total income for the AY 24-25, as per return furnished
under Section 139(1) is ` 45 lakhs. The assessment was completed on
20th Oct. 2025. Thereafter, on 10th April 2026 the Assessing Officer
noticed a mistake in computation of depreciation which increased the
income by ` 6 lakhs. The Assessing Officer issued a notice under
Section 154 for the purpose of rectifying the mistake.
Mr. Manish consults you to give an opinion whether he can opt for
dispute resolution before DRC (Dispute Resolution Committee) in
respect of order passed under Section 154 (assuming he fulfils all the
specified conditions).
Would your answer change if an order for detention has been made on
him under the provisions of the Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act, 1974, but such order has been
set aside by the court? (4 Marks)
(b) In the light of the provisions of Model tax conventions, answer the following:
(i) Discuss the taxability of 'Business profits', under both OECD and UN
Model tax conventions.
(ii) What kind of dispute resolution is addressed under Article pertaining to
Mutual Agreement Procedure? Give any two key differences between
OECD Model Convention and UN Model Convention in respect of
Mutual Agreement Procedure. (6 Marks)
Answer
(a) (i) Issue Involved: The issue under consideration is whether the stay
order can be automatically vacated upon expiry of extended period of
stay of 365 days, where the delay in disposing of the appeal is not
attributable to the assessee.
Provision applicable: As per third proviso to section 254(2A), where
the appeal filed before the Appellate Tribunal is not disposed of
within the period of stay or extended period of stay granted by the

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Tribunal, the order of stay shall stand vacated after the expiry of 365
days, even if the delay in disposing of the appeal is not attributable
to the assessee.
m
m c. o
co
Analysis: This provision would result in the automatic vacation of a

. em
s
stay upon the expiry of 365 days, even if the Appellate Tribunal could

e m
not take up the appeal in time for no fault of the assessee. Thus, the
l a
l a s vacation of stay in favour of the Department would ensue even if the
ag
ag
Department is itself responsible for the delay in hearing the appeal.
This will cause undue hardship to the assessee, even where he is not
at fault.
In this sense, the provision is arbitrary and disproportionate so far as
the assessee is concerned. Any order of stay shall stand vacated after
the expiry of the period or periods mentioned in the section, only if
the delay in disposing of the appeal is attributable to the assessee.
Conclusion: Therefore, automatic vacation of stay order upon the
m
c. o
expiry of extended period of 365 days is not valid, since the delay in

m are similar to the facts in DCIT v.
disposing of the appeal is not attributable to the assessee.
Note: The facts given in the equestion
l s
a433 ITR 295, wherein the above issue came
g
Pepsi Foods Ltd (2021)
a
up before the Supreme Court. The above answer is based on the
rationale of the Supreme Court ruling in that case.
(ii) Issue Involved: The issue under consideration is whether the High
Court is justified in not framing any substantial question of law itself
and adjudicating merely on the questions put forth by the appellant.
Relevant provision of law: Section 260A(1) provides that an appeal
shall lie to the High Court from every order passed in appeal by the

m
c. o
Appellate Tribunal, if the High Court is satisfied that the case involves

m
c. o
a substantial question of law.

emsatisfied, it
shall formulate that question and the appeal shall besheard only on
As per section 260A(3) and 260A(4), if the High Court is so

s em g la
gla the question so formulated.
a
a Analysis: There lies a distinction between the questions proposed by
the appellant for admission of the appeal to the High Court and the
questions framed by the High Court. The questions, which are

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FINAL EXAMINATION: MAY 2026

proposed by the appellant, fall under section 260A(2)(c) whereas the
questions framed by the High Court fall under section 260A(3).
Section 260A(4) provides that the appeal is to be heard on merits
only on the questions formulated by the High Court under section
260A(3) and not on the questions proposed by the appellant.
In case the High Court is of the view that the appeal did not involve
any substantial question of law, it should have recorded a categorical
finding to the effect that the questions proposed by the appellant
either do not arise in the case or/and are not substantial questions of
law so as to attract the rigour of section 260A for its admission and
accordingly, should have dismissed the appeal at the preliminary
stage itself.
Conclusion: However, this was not done in this case. Instead, the
appeal was heard only on the questions urged by the appellant u/s
260A(2)(c). Accordingly, the action taken by the High Court was not
valid, since it did not decide the appeal in conformity with the
mandatory procedure prescribed in section 260A.
Note: The facts given in the question are similar to the facts in CIT v.
A.A. Estate Pvt. Ltd. [2019] 413 ITR 438, wherein the issue came up
before the Supreme Court. The above answer is based on the rationale
of the Supreme Court in the said case.
(iii) Dispute Resolution Committee (DRC) would resolve dispute in the
case of a person who opts for dispute resolution in respect of dispute
arising from any variation in the specified order in his case and who
fulfils the specified conditions.
Specified order includes an order passed under section 154, where
the aggregate sum of variations made vide such order does not
exceed ` 10 lakh, the total income as per such return furnished by the
assessee for the assessment year relevant to such order does not
exceed ` 50 lakhs and such order is not based on search or
requisition or survey or any information received under a DTAA.
In the present case, Mr. Manish can opt for dispute resolution before
DRC in respect of order passed under section 154, since it is a
specified order and he satisfies the specified conditions.

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Specified conditions include the condition that the person should not
be a person in respect of whom an order of detention has been made
under the provisions of the Conservation of Foreign Exchange and
m
m
Prevention of Smuggling Activities Act, 1974.
c. o
.co
If detention order has been made on him then such order of
s em
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detention should have been set aside by a court of competent
l a
l a s jurisdiction in order to be eligible for DRC. Since detention order has
ag
ag
been set aside by the court, Mr. Manish can opt for dispute resolution
in respect of specified order before DRC.
(b) (i) Business profits of an enterprise can only be taxed by the Residence
State. Right of Source State to tax business profits of an enterprise
only exists if a Permanent Establishment (PE) exists in its jurisdiction.
As per the approach under the OECD Model Convention, once a PE is
proven, the Source State can tax only such profits as are attributable
to the PE.
m
c. o
The UN Model Convention amplifies this attribution principle by a

em a foreign enterprise sets up a PE in
limited Force of Attraction rule (FOA).
The FOA rule implies thatswhen

g la itself within the fiscal jurisdiction of that
a to such a degree that profits that the
State of Source, it brings
State (State of Source)
enterprise derives from State of Source, whether through the PE or
not, can be taxed by it (State of Source) if the similar goods or
services are involved.
(ii) Where a taxpayer believes that the treatment accorded by either or both
Contracting States (CSs) is not in accordance with the provisions of the
tax treaty, this Article provides for dispute resolution through bilateral

m
c. o
negotiations between competent authorities (CAS) of both CSs.

m
c. o for The taxpayer may Alternative Aem
OECD MC UN MC

em
Request
l a s - Taxpayer

las MAP
g or the country
make a request to has to approach
a
Resident

g
either CS State (RS)
a of his nationality.
Alternative B - Reference
to an arbitration process
as part of MAP. The
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FINAL EXAMINATION: MAY 2026

decision arrived at
through the process is
binding unless a person
directly affected does not
accept it.
Time limit Stipulates a time limit An arbitration may be
of 2 years from the initiated if the competent
date when all the authorities (CAS) are
information required unable to reach an
by the CAS in order agreement on a case
to address the case within 3 years from
need to be provided presentation of that case
to both CAS. [Alternative B]
Who can Arbitration must be Arbitration must be
request for requested in writing requested by the CAS of
Arbitration? by the person who one of the CS. Once such
initiated the case a request is made, the
taxpayer will be notified
[Alternative B]
Departure from No specific The CAS may depart from
arbitration by provision for the arbitration decision if
CAS departure from they agree to do so within
arbitration. 6 months after the
decision has been
communicated to them
[Alternative B]

Note: Any of the two differences above can be stated.
Question 6
(a) An enquiry under Section 133(6) of the Income-tax Act, 1961 was initiated
by the Income-tax Department on 18th Nov. 2025 in the case of XYZ
Importers Ltd., a company engaged in import and trading activities. During
the course of enquiry, the Department examined the company's financial
records, import documentation and foreign remittance details.
The investigation revealed that the company had made payments
aggregating to approximately ` 35 crores towards freight and logistics

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charges to various non-resident shipping and transport service providers
during the relevant previous year. The existence and nature of such
payments were substantiated by:
m
m c. o
co
Bills of entry and import documentation
m
•

m .
Bank remittance proofs and foreign outward remittance certificates
s e
eConfirmations obtained from foreign vendors a
•

a s g l
l a
•

ag on these payments. Consequently, the Assessing Officer proposed
It was observed that no tax had been deducted at source under Section 195

disallowance under Section 40(a)(i) under the Act.
However, in the tax audit report furnished in Form 3CD, the tax auditor had
reported the expenditure as fully allowable under Clause 21, without any
qualification or adverse remark. Upon being questioned, the tax auditor
submitted that:

m
1. The management had provided a certificate obtained from another

. co
Chartered Accountant stating that the foreign service providers did not

em
have a Permanent Establishment (PE) in India and therefore, the

a s
payments were not chargeable to tax in India.
l
2.
a g
Based on such certificate, the management represented that there was
no obligation to deduct tax under Section 195.
3. The tax auditor had conducted test checks primarily in respect of
domestic freight payments and found them to be in order.
4. Relying on the management representation and the certificate
produced, the auditor concluded that the expenditure was allowable
and no disallowance was required to be reported in Clause 21.

m
Examine the ethical implications in this case of tax auditor. (6 Marks)

m c. o
(b) State with reasons whether the following Act can be considered as Tax

c. o Planning or Tax Management or Tax Evasion:
em
(i) On 2 Jan. 2026, Mr. Darshil sold his residential housesproperty which
s em a
he had purchased on 20 May 2005, resulting ingal long-term capital
nd

la a
th

ag gain of ` 30,00,000.
He invested the entire amount of ` 30,00,000 on 15th April 2026 in
bonds issued by Indian Renewable Energy Development Agency
(IREDA) which are redeemable after 5 years.

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FINAL EXAMINATION: MAY 2026

(ii) Mrs. Varsha is engaged in business and her turnover for the PY 25-26
amounts to ` 18 crore. She has duly complied with the provisions of
Section 44AB by getting her accounts audited by a Chartered
Accountant and uploading Form 3CB and Form 3CD within the
prescribed time limit. (4 Marks)
(c) M/s XYZ Limited, an Indian company engaged in providing Engineering
Consultancy Services, entered into negotiations with M/s GTW Inc., a
non-resident company incorporated in the USA, for a proposed transaction
involving transfer of technical know-how and provision of specialized
engineering services. Since the taxability of payments to the non-resident
was uncertain, particularly with respect to characterization as royalty, fees
for technical services (FTS), or business income under the Income-tax Act,
1961 and the applicable Double Taxation Avoidance Agreement (DTAA),
XYZ Limited filed an application before the Board for Advance Ruling
seeking determination of: Whether the consideration payable to GTW Inc.
would be taxable in India and whether ΧΥΖ Limited would be required to
deduct tax at source under Section 195 the applicable rate of tax, if any.
The Board rejected the application on the ground that the issue raised in
the application was already pending before the High Court. Considering the
facts given, explain whether such rejection by the Board of Advance Ruling
is valid, what precautions the Board of Advance must take before rejecting
an application and what remedies are available to the XYZ Limited against
such rejection? (4 Marks)
Answer
(a) Section 40(a) specifies certain amounts which shall not be deducted in
computing the income chargeable under the head “Profits and gains of
business or profession”. Under section 40(a)(i), 100% disallowance
attracted with respect to sum paid or payable to a non-resident on which
tax is deductible at source and such tax has not been deducted or after
deduction has not been paid on or before the due date of furnishing
return of income under section 139(1).
Under clause 21, the tax auditor is required to report the details of
payment on which tax is not deducted at source and also the details of
payment on which tax has been deducted but not paid during the
previous year or before due date of filing return of income specified

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under section 139(1). The tax auditor is advised to give details under this
clause for each individual payee.

m
c. o
As per the Guidance Note on Tax Audit issued by ICAI, the tax auditor is

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required to report as to whether tax is deductible under any section of

. em
s
Chapter XVII-B and any amount is inadmissible u/s 40(a)(i) under clauses

e m
34(a) and 21(b), respectively.
l a
l a s ag
ag
In this case, tax has not been deducted on the basis of a certificate
obtained from a Chartered Accountant stating that foreign service
providers did not have a Permanent Establishment (PE) in India and
therefore, the payments were not chargeable to tax in India. In such case,
the tax auditor is required to disclose the same in his report so as to
enable the Income-tax Department to know the reason as to why tax was
not deducted by the assessee.
The tax auditor should exercise due diligence while reporting under
various clauses of Form 3CD. In case he has taken a view that tax is not
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deductible by virtue of a certificate obtained by Management from

em(7) of Part I of the Second Schedule to
Chartered Accountant, he should disclose the same in his report.

s
a 1949 for failure to exercise due diligence
On account of such failure, clause
the Chartered Accountants lAct,
a g
in discharging his professional responsibilities and failure to obtain
sufficient information, may be invoked.
(b) (i) Tax Planning: For the purpose of saving tax on the long-term capital
gains arising on transfer of residential house property, Mr. Darshil
invested the entire amount of capital gains in bonds issued by Indian
Renewable Energy Development Agency (IREDA) which are
redeemable after 5 years.

m
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As the investment was made within the prescribed time and in the

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bond which is notified as eligible for deduction under section 54EC,

em
he is eligible for the tax benefits.

em a
lthes
s
This act of Mr. Darshil would tantamount to “Tax Planning”.

la a g
g
(ii) Tax Management: Mrs. Varsha complied with provisions of
a section 44AB by getting her accounts audited by a Chartered
Accountant and uploading form 3CB and Form 3CD within the
prescribed time limit.

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This is in the nature of compliance with statutory obligation under the
Income-tax Act, 1961.
This act of Mrs. Varsha would tantamount to “Tax Management”.
(c) The rejection of application by the Board for Advance Rulings on the
ground that issue raised in application already pending before the Court,
is valid.
However, the Board has to give an opportunity of being heard to the
applicant before rejecting an application and the reason for rejection shall
be given in the order.
A copy of every order (even a rejection order) shall be sent to the
applicant and to the PCIT/CIT.
M/s XYZ Ltd., if aggrieved by the rejection order passed by the Board for
Advance Rulings may appeal to the High Court against such rejection
order within 60 days from the date of communication of that order.
However, where the High Court is satisfied, it may grant further period of
30 days for filing such appeal.

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