Final Examination: Suggested Answers To Questions

SUGGESTED ANSWERS_SYL2016_DECEMBER2019_PAPER 16
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
SUGGESTED ANSWERS TO QUESTIONS

DECEMBER - 2019
Paper-16 : DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Time Allowed : 3 Hours Full Marks : 100
Wherever required, the candidate may make suitable assumptions and

state them clearly in the answers.
Working notes should form part of the relevant answers.
All questions relate to Income Tax Assessment Year 2019 – 20, and the provisions
referred to are the Income-Tax Act, 1961, unless stated otherwise.
Answer Question No. 1 which is compulsory and
five questions out of Question Nos. 2 to 8.
Section – A
1. Choose the most appropriate alternative and give justification in brief/brief working for
your answer: 2x10=20
(i) Martin (age 62) resident in India received interest on fixed deposit with SBI of Rs.
45,000 for the year ended 31.03.2019. He does not have PAN. At what rate the bank
must deduct tax at source?
(A) Nil
(B) 10%
(C) 20%
(D) 30%
(ii) Damage (P) Ltd. filed an application in March, 2019 for corporate insolvency
resolution process, which was admitted by the adjudicating authority under
Insolvency and Bankruptcy Code, 2016. The company has two full-time directors and
a managing director. Who must sign the return of income of the company for the
assessment year 2019-20?
(A) Any one of the full-time directors.
(B) The professional appointed by the said adjudicating authority.
(C) Liquidator of the company
(D) Managing director
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(iii) Shri Rajiv paid Rs. 1,20,000 by cheque on 05.01.2019 towards medical insurance
premium for his parents who are senior citizens and not dependent on him. The
premium was to provide health insurance cover for 3 years. How much is deductible
under section 80D for the assessment year 2019 – 20?
(A) Nil
(B) Rs. 25,000
(C) Rs. 40,000
(D) Rs. 50,000
(iv) Mahasakthi Sugars Co-operative Society is engaged in manufacture of jiggery from

sugarcane cultivated by its members. What is the ‘due date’ for filing the return of
income for the assessment year 2019-20 in order to be eligible for deduction under
section 80-P?
(A) Due date specified in section 139(1)
(B) No specific date
(C) 31st March, 2020
(D) 31st December, 2019
(v) During the course of survey in the premises of Jagan & Co. on 10.01.2019, stocks of
goods purchased for Rs. 10 lakhs were found to be not recorded in the books of
account. The firm has brought forward loss of Rs. 5 lakhs and incurred business loss of
Rs. 2 lakhs for the year ended 31.03.2019 without considering the unaccounted stock.
The tax liability of the firm including the said unaccounted purchase would be
_________ (including surcharge and cess).
(A) Rs. 3,12,000
(B) Rs. 7,80,000
(C) Nil
(D) Rs. 93,600
(vi) ABC Ltd. declared interim dividend in August, 2018 of Rs. 100 lakhs. The amount
payable by way of dividend distribution tax would be
(A) Rs. 31,20,000
(B) Rs. 26,00,000
(C) Rs. 17,47,200
(D) Rs. 20,55,600
(vii)A certificate issued by a registered valuer contained incorrect information. The CIT
(Appeals) while giving appellate order can
(A) Impose penalty of Rs. 1 lakh on registered valuer.
(B) Not impose penalty on registered valuer
(C) Impose penalty of Rs. 10,000 on registered valuer
(D) Direct registered valuer to rectify the error.
(viii)Tripti Charitable Trust registered under Section 12AA paid rent for premises at Rs.
30,000 per month by cash. It also did not deduct tax on salary paid to its manager
amounting to Rs. 4,80,000 for the previous year 2018-19. The total income of the
assessee would be increased by ___________ because of the above said transactions.
(A) Rs. 3,60,000

(B) Rs. 5,04,000
(C) Rs. 8,40,000
(D) Rs. 2,52,000
(ix) X Co. Ltd. paid interest to its holding company Y Inc. of USA at 15% amounting to Rs.
200 lakhs. The total interest paid by X Co. Ltd. for the previous year 2018-19 was Rs.
500 lakhs. In determining arm’s length price interest paid to Y Inc. was added back
to the extent of Rs. 100 lakhs in the hands of X Co. Ltd. The EBITDA of X Co. Ltd. is Rs.
700 lakhs for the year ended 31st March, 2019. The amount of interest liable for
disallowance in the hands of X Co. Ltd. would be _____________.
(A) Rs. 500 lakhs
(B) Rs. 300 lakhs
(C) Rs. 190 lakhs
(D) Nil
(x) Madan Traders Ltd. Jaipur received Rs. 200 by way of dividend declared by Botham
Co. Ltd. of UK in January, 2019. Madam, Traders Ltd. has 26% shareholding in Botham
Co. Ltd. The tax liability of Madam Traders Ltd. on the dividend income would be
(A) Nil
(B) Rs. 62.4 lakhs
(C) Rs. 34.944 lakhs
(D) Rs. 43.0976 lakhs
Answer:
1. (i) (A) NIL
Brief answer: Since interest on SB and / or fixed deposit below Rs. 50,000 is not
chargeable to tax in the case of senior citizens because of section 80TTB, no tax is
deductible at source by the payer regardless of whether the recipient senior
citizen has PAN or not.
(ii) (B) The professional appointed by the said adjudicating authority

Brief answer: As per sub-clause (c) of the proviso to section 140(c), in the case of
a company which has made an application for corporate insolvency resolution
process and which has been admitted by the adjudicating authority, the return
of income must be signed by the professional who has been appointed by the
said adjudicating authority.
(iii) (C) Rs. 40,000

Brief answer: As per section 80D(4A) when payment is made in lump sum to keep
an insurance on the health of any person specified therein for more than a year,
there shall be allowed for each of the relevant previous year, a deduction equal
to the appropriate fraction of the amount. The proportionate fraction is Rs.40,000
i.e. Rs.1,20,000 /3.
(iv) (A) Due date specified in section 139(1)

Brief answer: As per section 80AC from assessment year 2018-19 any deduction
admissible under any provision of Chapter VI-A under the heading “C-
Deductions in respect of certain incomes” shall not be allowed unless the
assessee furnishes the return of income for such assessment year on or before the
due date specified in section 139(1) of the Act.
(v) (B) Rs. 7,80,000

Brief Answer: As per section 115BBE any addition under sections 68, 69, 69A, 69B
69C or section 69D is chargeable to tax @ 60% plus surcharge @ 25% and HEC @
4%. The effective rate is 78%. Further, sub-section (2) to section 115BBE says no
deduction in respect of any expenditure or allowance or set off of any loss shall
be allowed against such income.
(vi) (D) Rs. 20,55,600

Brief answer: As per section 115-O the dividend distribution tax is payable by ABC
Ltd. on grossing up of dividend paid 100/85×100 lakhs = 117.647 lakhs minus Rs.
100 lakhs = Rs. 17.647 lakhs. Add surcharge @ 12% = Rs. 2.118 lakhs. Add Health
and Education cess @ 4% on 19.765 = Rs. 0.791 lakhs. Total liability = 17.647 lakhs +
Rs. 2.118 lakhs + 0.791 lakhs = Rs. 20.556 lakhs.
(vii) (C) impose penalty of Rs. 10,000 on registered valuer.

Brief answer: As per section 271J the Assessing Officer or the CIT (Appeals) finds
that the registered valuer has furnished incorrect information in any report or
certificate, he may impose a penalty of Rs. 10,000 for each such report or
certificate.
(viii)(B) Rs. 5,04,000

Brief answer: On rent paid exceeding Rs. 10,000 in contravention of section
40A(3) the entire expenditure so incurred will not be treated as application.
Similarly, salary paid to manager of the trust Rs. 4,80,000 without tax deduction at
source under section 192 would attract 30% disallowance. Thus rent Rs. 3,60,000
and salary Rs. 1,44,000 will not be treated as application of income by the trust.
Thus the total income of the assessee would get enhanced by Rs. 5,04,000 for the
above said transaction.
(ix) (D) Nil

Brief answer: Total interest paid Rs.500 lakhs including interest of Rs.200 lakhs paid
to associated enterprise. The EBITDA of the company is Rs.700 lakhs. 30% thereon
being Rs.210 lakhs. As the interest paid to associated enterprise is less than 30% of
EBITDA, no interest is liable for disallowance. The correction option is (D).
(x) (C) Rs. 34.944 lakhs

Brief answer: In the case of an Indian company having income by way of
dividend declared, distributed or paid by a specified foreign company, it is
chargeable to tax at 15% plus surcharge @ 12% and cess @ 4%. The condition is
that the Indian company must have 26% or more in normal value of the equity
share capital of the foreign company. Since Madam Traders Ltd has 26%
shareholding in Botham Co Ltd., it is eligible to pay concessional rate of tax.
Section – B
2. (a) Vittal & Co. is a partnership firm deriving income from an industrial undertaking whose
income is eligible for deduction u/s 80-IA (8th year). During the year ended 31-03-
2019, the firm derived an income of Rs. 5,00,000 from the industrial undertaking. The
firm omitted to file the return of income on the ground that its total income being nil,
no tax was payable by it.
The assessment was later completed on the basis of AMT provisions u/s 115JC, the
income from the industrial undertaking being taken as Rs. 5,00,000.
Discuss whether any penalty leviable in this regard, and if so, specify the quantum.
Will your answer remain the same if the assessable entity is an AOP instead of a firm?
The AOP is one wherein the members and their shares are determinate and known. 8
(b) State whether “business connection” is established as envisaged by section 9 of the

Income – tax Act, 1961, in the under-mentioned situations:
(i) Jupiter Pty Ltd., London (JPL), a non-resident company, has set up a liaison office
at Kolkata, with the permission of the RBI, Indian customers, who are briefed of the
products of JPL by the liaison office, interact directly with JPL for placing and
processing of their orders. 2
(ii) Madan & Co. (MC), is acting on behalf of Nelson Inc., Sydney, a non-resident
company. MC can accept the order, negotiate the price and coordinate with MC
for delivery of product to the Indian clients. MC is paid commission in this regard. 2
(c) On 20th Feb., 2019, Vaamana Textiles Pvt. Ltd., has given a trade advance of Rs. 50
lakhs to Ms. Poorvisha, a shareholder holding 30% of the equity shares and voting
power in the company. On this date, the company has credit balance of Rs. 35 lakhs
in the profit and loss account.
Ascertain the quantum of deemed dividend which is assessable in the hands of Ms.
Poorvisha. 4
Answer:
2. (a) Levy of penalty u/s 270A

Penalty becomes leviable u/s 270A
It is a case of under-reporting of income.
Under-reporting is the amount of deemed total income assessed as per the

provisions of section 115JC. In this case, it is Rs. 5,00,000.
Since there is no basic exemption limit, the whole of Rs. 5,00,000 will be taken as
under reported income.
Taxable on the same is 31.2% of Rs. 5,00,000 i.e., Rs. 1,56,000.
Penalty leviable for under-reporting of income is 50% of above Rs. 78,000.
When the assessee is an AOP

If the assessee were an AOP, the answer will be different.
Basic exemption limit of Rs. 2,50,000 has to be reduced to arrive at the amount of
under reported income.
Under-reported income will be Rs. 5,00,000 – 2,50,000 = Rs. 2,50,000.

Tax on the same will be 10.4% of 2,50,000 = Rs. 26,000.
Penalty u/s 270A is 50% of above i.e., Rs. 13,000.
(b) Business connection

(i) When a liaison Office is maintained solely for the purpose of carrying out activities
which are preparatory or auxiliary in character, and such activities are approved
by the Reserve Bank of India, then, no business connection is established.
Indian customers, who are briefed of the products of JPL by the liaison office,
interact directly with JPL for placing and processing of their orders. The liaison
office does not procure orders or process them. Hence there is no business
connection as envisaged by section 9.
(ii) ‘Business connection’ shall include any business activity carried out through a
person acting on behalf of the non-resident. For a business connection to be
established, the person acting on behalf of the non-resident –
➢ must have an authority which is habitually exercised in India to conclude
contracts on behalf the non-resident or;
➢ in a case where he has no such authority, but habitually maintains in India a
stock of goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the non-resident, or
➢ habitually secures orders in India, mainly or wholly for the non-resident.
Here, MC can accept the order, negotiate the price and coordinate with MC for
delivery of product to the India clients. Hence there exists a business connection
in this situation.
(c) Deemed dividend

Section 2(22)(e) provides that “dividend” includes any payment by a company in
which public are not substantially interested, of any sum by way of
• advance or loan
• to a shareholder who is the beneficial owner of shares holding not less than 10%
of the voting power,
or to any concern in which such shareholder is a member or a partner and in which

he has a substantial interest or any payment by any such company on behalf, or for
the individual benefit, or any such shareholder, to the extent to which the company
in either case possesses accumulated profits.
Some Courts in the recent past has held that trade advances in the nature of
commercial transactions would not fall within the ambit of the provisions of section
2(22)(e).
In view of the above, the CBDT has, vide circular 19/2017, dated 12.06.2017, clarified
that it is a settled position that trade advances, which are in the nature of
commercial transactions, would not fall within the ambit of the word ‘advance’ in
section 2(22) (e) and therefore, the same would not to be treated as deemed
dividend.
Hence, in the given situation there will not be any amount which is assessable as
deemed dividend.
3. Barun Co. Ltd. is engaged in the business of manufacture of chemicals since June, 2005.
The Statement of Profit and Loss for the year ended 31.03.2019 shows a Net Profit of Rs.
35,60,000 and aggregate turnover which never exceeded Rs. 25 crores. The following
additional information is provided:
(a) Depreciation debited in the books Rs. 19,40,000 (it includes depreciation on revalued
plant and machinery of Rs. 3,00,000). Amount of depreciation deductible under
Income-tax Rules Rs. 13,15,000.
(b) Interest payable to financial institutions Rs. 5,20,000 debited in the books but Rs.
3,90,000 was actually paid during the previous year and up to the date of filing the
return of income under section 139(1).
(c) Provision for doubtful debts Rs. 8 lakhs being 5% on debtors debited to Statement of
Profit and Loss.
(d) Expenditure towards issue of bonus shares Rs. 2 lakhs and alteration of memorandum
of association for increasing the authorized capital Rs. 1 lakh. Both have been
debited in the books as expenditure.
(e) Purchase of agricultural produce being raw material for manufacture by making
cash payment on 15.08.2018 Rs. 60,000 and on 26.01.2019 Rs. 40,000. Also, cash
payments of Rs. 50,000 made for purchases of the previous year 2017-2018 on
03.05.2018.
(f) Contract payments made during the year Rs. 5,10,000 to ABC Ltd., Chennai. Tax was
not deducted at source in respect of the payments of Rs. 1,50,000.
(g) Dividend from subsidiary company credited to Statement of Profit and Loss Rs. 90,000.
(h) Provision for taxation Rs. 2 lakhs and proposed dividend Rs. 80,000 debited to
Statement of Profit and Loss.
Compute Total income and tax liability as per regular provision and under section 115JB
(MAT Provision) for the assessment year 2019-20. 16
Note: You have to deal with each and every item given above and provide brief reasons
for treatment given.
Answer:
3.
Computation of Income of Barun Co Ltd. for the Assessment Year 2019 -20
Net Profit as per Statement of Profit and Loss 35,60,000

Add:
Depreciation debited 19,40,000
Interest payable to financial institutions is disallowed to the 1,30,000
extent it is not paid up to the date of filing the return under
section 139(1)
Provision for doubtful debts 8,00,000
Expenditure towards issue of bonus shares is allowed as Nil
there is no fresh inflow of funds or increase in capital
employed. [CIT v. General Insurance Corpn. (2006) 286 ITR
232 (SC)]
Expenditure towards increasing the authorized capital is a 1,00,000
capital expenditure to be disallowed (Punjab State
Industrial Development Corpn Ltd. v. CIT (1997) 225 ITR 792
(SC)].
Purchase of agricultural produce on independence day Nil
and Republic Day are allowable and no disallowance
under section 40A(3)
Cash payment made for purchases/expenditures claimed 50,000
in the earlier year is liable for disallowance under section
40A(3A)
Contract payments without deduction of tax at source 45,000
liable for disallowance @ 30% of Rs. 1,50,.000
Provision for taxation and proposed dividend debited to 2,80,000
Statement of Profit and Loss –added back.
69,05,000
Less:
Depreciation allowable as per Income tax rules 13,15,000
Dividend from subsidiary company credited to profit and 90,000
loss account – to be considered under the head ‘other
sources’ and hence deducted now.
It is exempt under section 10(34)
14,05,000
Total Income 55,00,000
Tax thereon @ 25% + 4% HEC 14,30,000
Computation of Book Profit of Barun Co. Ltd. u/s 115 JB for the Assessment Year 2019 – 20
Net Profit as per Statement of Profit and Loss 35,60,000

Add:
Depreciation debited in the books to the extent it is attributable to 3,00,000
revalued assets is liable for disallowance
Interest payable to financial institutions is not to be adjusted while Nil
computing book profit.
Provision for doubtful debts liable for add back under section 115JB 8,00,000
Expenditure towards issue of bonus shares is not liable for any adjustment Nil
under section 115JB
Expenditure towards increasing the authorized capital though a capital Nil
expenditure is not liable for any adjustment under section 115 JB.
Purchase of agricultural produce on independence day and Republic Nil
Day – on adjustment under section 115 JB
Cash payment made for purchases / expenditures claimed in the earlier Nil
year – not liable for any adjustment under section 115JB
Contract payments without deduction of tax at source liable for Nil
disallowance @ 30% of Rs. 1,50,000 under section 40(a)(ia) but no
adjustment under section 115JB
Provision for taxation and proposed dividend debited to Statement of 2,80,000
Profit and Loss – added back.
49,40,000
Less:
Dividend from subsidiary company credited to profit and loss account is 90,000
exempt under section 10(34) and hence to be excluded while
computing book profit under section 115JB
Book Profit under section 115JB 48,50,000
Tax thereon @ 18.5% 8,97,250
Add: Health and Education cess @ 4% 35,890
9,33,140
4. (a) Vishwa & Co., a partnership firm has entered a net profit of Rs. 6.2 lakhs after debiting
the following items:
(Rs. in lakhs)
(i) Depreciation as per books for the current year 2
(ii) Interest to partners at 15% 9
(iii) Remuneration to working partners 7
Additional information:
(i) Depreciation for the current year as per Income-tax Rules, 1962 4
(ii) Unabsorbed depreciation of AY 2018-19 pertaining to a business 3
which was discontinued
(iii) Brought forward business loss of AY 2018-19 5
(iv) Remuneration as per partnership deed to working Partners 8
(v) Interest to partners as per partnership deed 15%
You are required to compute the total income for the firm, when the firm files its return
of income on 30.07.2019.
Assuming that a best judgment assessment under section 144 is made, what will be
the total income assessed? 8
(b) Padmaja Textiles Ltd., (PTL) has two separate divisions J and K. Division K was stated
on 14.05.2010. The summarized financial position of the company as on 1 st October,
2018 was as under:
(Rs. in lakhs)
Share capital 1,200
Reserves and surplus 500
Loan creditors:
Division J 400
Division K 300
Total 2,400
Represented by
Fixed assets:
Division J 800
Division K
Goodwill 30
Vacant Land (Purchased on 02.03.2011) 170
Plant and Machinery (WDV) 400
Current assets:
Division J 550
Division K 450
Total 2,400
On 01.10.2018, Division K was acquired by Virat Kohli Textile Pvt. Ltd., in a slump sale,
the entire sale consideration of Rs. 310 lakhs being paid through RTGS.
The following additional information are available relating to the fixed assets of
Division K:
(i) All the plant and machinery were acquired 11 months back.
(ii) The WDV of the plant and machinery of division K as per the Income-tax Act,
1961 was Rs. 350 lakhs.
(iii) Apart from these, there are plant used in scientific research for which deduction
had been availed u/s 35AD in the assessment year 2015-16. The fair market value
of these items of plant is Rs. 12 lakhs.
Cost inflation index for FY 2010-11 is 167 and for FY 2018-19 is 280.
You are required to ascertain the capital gain, if any, arising from the slump sale. 8
Answer:
4. (a)
Computation of total income of Vishwa & Co., for the AY 2019-20
Particulars Amount (Rs.)
Net profit before remuneration to working partners 6,20,000
Add: Depreciation as per books 2,00,000
Remuneration as per books 7,00,000
Adjustment for interest [Interest is allowable at 12% maximum same 1,80,000
debited at 15% in books, hence difference is added back i.e., 9 – 7.2L]
Less: Depreciation as per sec 32 7,00,000
Unabsorbed depreciation of AY 2018 – 19 has to be added to current
depreciation, as per the provisions of section 32(2).
Book profits as per section 40(b) 10,00,000
Less: Remuneration to working partners: Ceiling (First 3 lakhs 90% and 6,90,000
60% of balance). This is within the limit given in the partnership deed,
hence allowable.
Business income before considering set off 3,10,000
Less: Brought forward business loss 5,00,000
Business income / Total income (Loss) (1,90,000)
When assessment is made u/s 144
Interest and remuneration to partners will not be allowed while making the
assessment.
Total income in case of best judgment assessment

Particulars Amount (Rs.)
Net profit before remuneration to working partners 6,20,000
Add: Depreciation as per books 2,00,000
Remuneration as per books 7,00,000
Interest to members debited 9,00,000
Less: Depreciation as per sec 32 7,00,000
Unabsorbed depreciation of AY 2018-19 has to be added to current
depreciation, as per the provisions of section 32(2).
Business income before b/wd losses 17,20,000
Less: Brought forward business loss 5,00,000
Business income/Total income 12,20,000
(b) Computation of capital gains arising from slump sale

Particulars (Rs. in lakhs)
Sale consideration 310
Less: Net worth [See working below] 700
Long-term capital loss [Division K was stated on 14-05-2010] 390
Working Note: Computation of net worth

Particulars (Rs. in lakhs)
Goodwill (at book value) 30
Land (at book value) [Indexation benefit not available] 170
Plant & machinery (at WDV) 350
Plant & machinery used in special business covered by sec 35AD Nil
[As per section 50B, the value of such plant for which deduction
u/s 35AD had been availed in nil]
Current assets 450
Total value of assets of Division K 1,000
Less: Creditors 300
Net worth 700
5. In the light of decided case laws, answer any four of the following:
[Your answer should be under the following heads: (i) Issue involved (ii) Brief discussion
on provisions applicable to the issue (iii) Analysis of the issue involved, and (iv)
Conclusion [Citation of the case law is NOT required]: 4×4=16
(a) Sagoserve Cooperative Society was a cooperative society deriving income of Rs. 2
crore, for which deduction was allowed under section 80P(2)(d). The total income of
the assessee was Rs. 3 crore. The Assessing Officer disallowed 40% of interest
expenditure, invoking the provisions of section 14A. According to the AO, out of the
aggregate income of Rs. 5 crore, Rs. 2 crore did not form part of the same.
Is the disallowance made by the AO justified?
(b) Lavanya Syndicates Pvt. Ltd., owns several house properties, let out on commercial
basis to various kinds of people like business houses, corporate entities, etc. One of
the objectives of the company is to own and derive income from letting out various
kinds of immovable property. The rental income derived was offered by the
company as its business income. Various deductions for earning such income was
claimed, as also depreciation on the buildings owned by the company.
The Assessing Officer treated the rental income as income from house property and
granted deduction only u/s 24.
Discuss whether the treatment of the impugned income made by the company is
correct.
(c) Mr. Pandurang sold a residential house property and invested whole of the long-term
capital gain for purchasing of residential flat. The possession was not handed over by
the builder to the assessee even after 3 years, even though the entire sale
consideration had been paid.
The Assessing Officer refused to grant exemption u/s 54 on the ground that the
prescribed condition for purchase of a residential house had not been complied
with, in as much as the possession had not been handed over.
Judge the correctness of the action of the Assessing Officer.
(d) Bluesky Airlines, the assessee – company was operating an airlines in India. Payment
of Rs. 34 lakhs was made during the year to the Airport Authority of India. The
assessee deducted tax at source at 2% u/s 194-C. The AO contended that the same
was for parking charges and being payment made for use of land, section 194-I will
apply.
Is the contention of the Assessing Officer correct in law?
(e) The assessee was dealing in Indian Made Foreign Liquor (IMFL). It was purchasing
IMFL in wholesale from the State Govt., and selling it for higher price in the market.
The Department recovered documents during survey which showed that the
assessee had sold IMFL at price higher than what had been sold. Addition was made
u/s 68 for suppressed sales. The assessee objected to the same.
Is the objection sustainable?
Answer:
5. (a) Applicability of Section 14A
Issue involved
The issue under consideration in this case is whether section 14A can be invoked to
disallow expenditure relating to income covered by deduction under Chapter VIA.
Provisions applicable
Section 14A enjoins that no deduction shall be allowed in respect of expenditure
relating to income which does not form part of the total income of the assessee.
Analysis of the given issue

In the given situation the income in question was not covered by any exemption
under any of the clause of section 10.
This was an income which formed part of the gross total income of the assessee, for
which deduction was availed u/s 80P(2)(d).
Section 14A is applicable only in respect of expenditure relating to income which is
exempt under section 10 and not where the impugned income is one for which
deduction is available under Chapter VIA.
Conclusion
The action of the Assessing officer invoking the provisions of section 14A in the given
situation is incorrect.
Reference may be made to the decision in CIT vs Kribhco 349 ITR 18 (Del)
(b) Business income or income from house property
Issue involved
The issue under consideration whether the income derived by the company by
letting out the properties owned by it is assessable as business income or as income
from house property.
Where the income in question is one earned as a mere owner of the property, it will
be income from house property covered by section 22. If the income is one derived
from the business of the company, which included letting out the properties owned.
It would be business income covered by section 28, for which various deduction
sunder sections 29 to 44 will be available.
Analysis
Where there is a letting out of premises and collection of rents the assessment on
property basis may be correct but not so, where the letting or sub-letting is part of a
trading operation. The directing line is difficult to find; but in the case of a company
with its professed objects and the manner of its activities and the nature of its
dealings with its property, it is possible to say on which side the operations fall and to
what head the income is to be assigned.
In the given case, the objects of the company include carrying of business of letting
out properties. The income has not been earned as mere owner of the let out
properties.
Conclusion
The contention of the assessee-company is hence correct.
Reference may be made to the decisions of the Apex Court the case of Chennai
Properties and Investments Ltd. v. CIT [2015] 373 ITR 673 (SC), reiterated by the Apex
Court in Rayala Corporation (P) Ltd. v. ACIT (2016) 72 taxmann. Com 149 (SC)
(c) Exemption under section 54
Issue involved
The issue involved is whether the exemption u/s 54 can be denied to the assessee on
the ground that the possession of the new residential flat had not been handed over
to him by the builder.
Exemption will be available under section 54, where the long-term capital gain
derived by a resident individual/HUF is invested, inter alia, in purchase of another
residential house within a period of 2 years from the date of transfer.
Analysis of the issue

In the given case the assessee had paid the entire sale consideration to the builder
for purchase of the new residential house/flat. Thus he had complied with the
required condition stipulated u/s 54 for grant of exemption.
There is no provision which prohibits exemption u/s 54 where the possession of the flat
is not handed over to the assessee.
Conclusion:
The Assessing Officer is not justified in denying exemption u/s 54 to the assessee.
Reference may be made to the decision of the Karnataka High Court in CIT vs
Sakuntala Devi 389 ITR 366 (Kar).
(d) TDS u/s 194-C or 194-I?
Issue involved
The issue involved is whether in respect of the payments made by the assessee
(operating its airlines) to the AAI, tax deducted u/s 194-C or u/s 194-I?
As per section 194-C, where any payment is made by a company to another
company for contractual services, tax has to be deducted at source at 2% of the
payments.
As per section 194-I, in simple terms, where the payment is made for lease of land,
tax has to be deducted under that section at the applicable rate, where such
payment exceeds Rs. 1.8 lakhs per annum.

The payment made by the assessee – airlines was not just for use of land alone, but
for number of services like parking space, aero bridge, customer support services for
passengers, etc. It was for a bundle of contractual services and not merely for use of
the land for landing or parking.
Section 194-I can have applicable only where the payment is made, inter alia, for
lease of land/building and not where variety of services are provided to the
assessee.
Conclusion
As a result, section 194C will govern the issue and not section 194-I. The contention of
the AO is incorrect.
Reference may be made to the decision of the Apex Court in Japan Airlines Co. Ltd.
vs. CIT (2015) 60 taxmann. Com 71 (SC).
(e) Unexplained cash credit
Issue involved
The issue involved is whether the addition u/s 68 is justified in law.
Section 68 enjoins that where any sum is found credited in the books of an
assessment maintained for any previous year, and the assessee offers no explanation
about the nature and source thereof or the explanation offered by him is not, in the
opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to
income-tax as the income of the assessee of that previous year.

During survey it was found that the assessee – had sold ‘IMFL’ in excess of price
shown in books of account and return. The Assessing Officer on basis of documents
recovered made addition of income of the assessee on account of suppressed
sales.
There was no restriction with respect to price for which liquor had to be sold by a
person holding licence to run bars under the Aabkari Act. Since, the price was
variable and sale suppression detected during survey was actual price for which
liquor was sold, the addition made on account of sale suppression was to be
sustained.
Conclusion
The assessee’s contention is therefore incorrect and is not sustainable.
Reference may be made to the decision of the Kerala High Court in CIT v. Archana
Trading Co. [2018] 257 Taxman 386 Ker).
6. (a) Bharat Cellphones Ltd. (BCL) of Mumbai and Japan Mobiles Ltd. (JML) of Tokyo are
associated enterprises. BCL imported 10,000 mobile handsets from JML for Rs. 15,000
per handset which are sold to unrelated parties in India for Rs. 20,000 per handset.
BCL also imported similar mobile sets from Europe Ltd. (EL) of London which was sold
with a gross profit margin of 25% on cost. JML offered quantity discount @ Rs. 2,000
per unit and whereas EL offered discount @ Rs. 800 per unit as quantity discount. The
freight and customs duty paid for imports from EL had cost BCL Rs. 1,500 per unit. In
respect of purchases from EL, the expenditure towards freight and customs duty was
Rs. 500 per unit.
State the most appropriate method applicable in this case and determine the arm’s
length price and amount of increase in total income of BCL. 8
(b) Compute the interest income to be disallowed under section 94B in the following
cases: 5
Particulars Case I Case II Case III
Rs. in lakhs
Net Profit after deduction of the following items: 1,000 1,000 1,000
Interest to SBI 70 50 200
Interest to associated enterprise 200 110 320
Interest to unrelated parties 500 190 300
Depreciation 90 80 110
Provision for taxation 340 170 70
Proposed dividend 300 150 100
(c) State briefly whether the following actions would lead to establishment of PE in India: 3
(i) A foreign company having a warehouse for storage of goods procured from
suppliers in India for the purpose for export to various countries.
(ii) Display of goods by a reputed car manufacturer in a trade fair at Delhi for the
purpose of booking orders and supplying directly to the customers in India.
(iii) Extracting oil in a river bed by a foreign company Elegant Inc. by entering into
contract with a public sector undertaking in India.
Answer:
6. (a)
Computation of arm’s length price of BCL for the Assessment Year 2019-20
Since BCL is engaged in purchase of mobile handsets from associated enterprise

and sale of those handsets in India without any value addition, resale price method
is the most appropriate method for computation of arm’s length price.
Resale price of goods purchased from associated enterprise JML 20,000
Less: Adjustment for differences
Normal gross profit margin @ 20% of sale price (25% on cost) 4,000
Incremental quantity discount by JML (Rs. 2,000 – Rs. 800) 1,200
Difference in purchase related expenses (Rs. 1,500 – Rs. 500) 1,000 6,200
Arm’s length price 13,800
Computation of Increase in total income of BCL
Price at which actually bought from JML 15,000

Less: Arm’s length price per unit under resale price method 13,800
Decrease in purchase price per unit 1,200
Number of units purchased from JML 10,000
Increase in total income Rs. 1,200 × 10,000 120 lakhs
(b) Computation of interest liable to be disallowed under section 94B
Particulars Case I Case II Case III

Rs.in lakhs
Net Profit after deduction of the 1,000 1,000 1,000
following items:
Add:
Interest to SBI 70 50 200
Interest to associated enterprise 200 110 320
Interest to unrelated parties 500 190 300
Depreciation 90 80 110
Provision for taxation 340 170 70
Proposed dividend 300 150 100
EBITDA 2,500 1,750 2,100
Less:
Maximum amount of interest
deductible under section 94B @ 30%
of EBITDA or the actual interest paid
whichever is less
30% of EBITDA 750 525 630
Actual amount of interest paid to AE 200 110 320
Disallowance u/s 94B Nil Nil Nil
(c) Taxability of certain income in India

(i) A foreign company maintaining a warehouse solely for the purpose of storage
of goods shall not be deemed to have a permanent establishment in India.
Thus the activity will not lead to taxation of income in India.
(ii) Display of goods belonging to the enterprise in a trade fair in Delhi will not lead
to establishment of PE in India. The display of goods in trade fair cannot lead to
taxation of income in India for the supply of goods made subsequently.
(iii) Extracting oil or gas in India will lead to establishment of PE in India. The
extraction of oil in accordance with an agreement with PSU is liable to tax in
India.
7. (a) Mr. Rupesh is a resident and ordinary resident has furnished following particulars of
income earned during the previous year relevant to the assessment year 2019-20:
In Rs.
(i) Income from agriculture in Pakistan, received there but latter on Rs. 3,41,000
86,000 is remitted to India.
(ii) Income from property in USA received outside India (out of this Rs. 3,40,000
92,000 is used in Canada for meeting education expenses of his
son and Rs. 2,48,000 is latter remitted to India.
(iii) Income from business in Iran which is controlled from New Delhi (Rs. 4,05,000
70,000 is received in India)
(iv) Dividend paid by Indian Company on May 10, 2018 but received 1,95,800
outside India
(v) Profits from a business in New Delhi and managed from outside 92,000
India (60% of profit is received outside India)
(vi) Profits on sale of a building in India but received in Nepal 8,74,000
(vii) Pension from a former employer in India, received in Iran 2,55,000
(viii) Gift in foreign currency from a friend received in India on 80,000
September 6, 2018.
Find out gross total income for the assessment year 2019 – 20. 8
(b) Mr. Ron, a nonresident, is engaged in business of shipping and operating its ships in
Indian ports during the previous year ending on March 31, 2019 had collected freight
Rs. 100 lakhs (collected in US dollars) for the cargo booked for Paradeep Port from
London and Rs. 45 lakhs for shipping goods from Mumbai. Besides above demurrages
Rs. 20 lakhs and handling charges Rs. 10 lakhs also collected. The expenses of
operating its fleets during the year for Indian ports were Rs. 110 lakhs (out of which two
lakhs paid in cash). He has brought forward loss of Rs. 2 lakhs from trading business in
India which is discontinued during the year 2017-18. He has opted for payment of tax
under section 44B (presumptive scheme).
Compute taxable income and explain the basis taken for computation of such
income. 8
Answer:
7. (a)
Computation of gross total income of Mr. Rupesh, a resident and ordinary resident of
India for the AY 2019-20
In Rs.
Income accrued and received outside India – Income from agriculture 3,41,000
in Pakistan even if only Rs. 86,000 has been received.
Income from property in USA received outside India: Income received 3,40,000
outside India (even if Rs. 92,000 spent in Canada the entire amount is
taxable in India)
Income from business in Iran which is controlled from New Delhi: 4,05,000
Taxable on receipt basis – Rs. 70,000 + Balance of Rs. 3,35,000 is also
taxable as the assesse is resident
Dividend paid by India Company on May 10, 2018 but received ---
outside India: Income deemed to accrue or arise in India is exempt
from tax
Profits from a business in New Delhi and managed from outside India 92,000
(60% of profit is received outside India): total amount is taxable as
accrued outside India
Profits on sale of a building in India but received in Nepal: 8,74,000
Income deemed to accrue and arise in India and taxable in India
Pension from a former employer in India, received in Iran: Income 2,15,000
deemed to accrue and arise in India. Taxable after standard
deduction of Rs. 2,15,000 (Rs. 2,55,000 – Rs. 40,000)
Gift in foreign currency from a friend received in India on September 6, 80,000
2018 is taxable an income from other sources and taxable
Gross Total Income 23,47,000
(b)
Computation of Total Income Mr. Ron, a non-resident, for
AY 2019-20 under section 44B.
Rs. in lakhs
Freight collected for cargo booked for paradeep port from London 100.00
Freight collected for shipping goods from Mumbai 45.00
Demurrages and handling charges 30.00
Total receipt 175.00
Income from shipping business (7.5% of the amount received including 13.125
demurrages and handling charges is deemed to be taxable income
under section 44B) – Note – 1
Add: Disallowances of expenses under section 43A(3) – not applicable – ---
refer Note – 1
Total Income from business 13.125
Less: Brought forward business loss 2.00
Net Income 11.125
Note: 1: Section 44B overrides section 28 to 43A. it should be noted that accordingly
deduction under this provisions are not applicable. So expenses are not deducted.
However other provisions those relating to carry forward and set off of losses will be
applicable. Hence, carry forward of Loss of Rs. 2 lakhs is deducted to arrive the
taxable income.
8. Write Short Notes on any Four: 4x4=16
(a) Capitalisation of Borrowing Costs under ICDS - IX

(b) Consequences of Impermissible Avoidance Arrangement (section 98)
(c) Assessment procedure under Black Money and Imposition of Tax Act.
(d) Secondary adjustments in books of accounts under section 92CE in certain cases.
(e) Filing of documents along with settlement petition before Settlement Commission.
Answer:
8. (a) Capitalisation of Borrowing Costs under ICDS-IX
ICDS-IX provides for capitalisation of borrowing cost which are as follows.
Eligible for Capitalisation:
Specific Borrowing: The extent to which funds are borrowed specifically for the
purposes of acquisition, construction or production of a qualifying asset, the amount
of borrowing costs to be capitalised on that asset shall be the actual borrowing costs
incurred during the period on the funds so borrowed.
Other than specific borrowing: The amount of borrowing costs to be capitalised shall
be computed in accordance with this formula: A × B / C
A) Borrowing costs incurred during the previous year except on specific borrowings
B) i) the average of costs of qualifying asset as appearing in the balance sheet of

a person on the first day and the last day of the previous year
ii) in case the qualifying asset does not appear in the balance sheet of a person
on the first day, half of the cost of qualifying asset; or
iii) in case the qualifying asset does not appear in the balance sheet of a person
on the last day of the previous year, the average of the costs of qualifying
asset as appearing in the balance sheet of a person on the first day of the
previous year and on the date of put to use or completion, as the case may
be, excluding the extent to which the qualifying assets are directly funded
out of specific borrowings
C) the average of the amount of total assets as appearing in the balance sheet of a
person on the first day and the last day of the previous year, other than assets to
the extent they are directly funded out of specific borrowing Commencement of
Capitalisation
The capitalisation of borrowing costs shall commence

• In case of specific borrowing: from the date on which funds were borrowed
• In case of other borrowing: from the date on which funds were utilised
Cessation of Capitalisation: Capitalisation of borrowing costs shall cease:

• In case of asset other than inventory: When such asset is first put to use
• In case of inventory: When substantially all the activities necessary to prepare
such inventory for its intended sale are complete.
(b) Consequences of Impermissible Avoidance Arrangement (section 98)
If an arrangement is declared to be an impermissible avoidance arrangement, then,

the consequences, in relation to tax, of the arrangement, including denial of tax
benefit or a benefit under a tax treaty, shall be determined, in such manner as is
deemed appropriate in the circumstances of the case, including by way of but not
limited to the following:
(i) disregarding, combining or recharacterising any step in, or a part or whole of, the
impermissible avoidance arrangement;
(ii) treating the impermissble avoidance arrangement as if it had not been entered
into or carried out;
(iii) disregarding any accommodating party or treating any accommodating party
and any other party as one and the same person;
(iv) deeming person who are connected persons in relation to each other to be one
and the same person for the purposes of determining tax treatment of any
amount;
(v) reallocating amongst the parties to the arrangement – (a) any accrual, or
receipt, of a capital nature or revenue nature; or (b) any expenditure,
deduction, relief or rebate;
(vi) treating – (a) the place of residence of any party to the arrangement; or (b) the
situs of an asset or of a transaction, at place other than the place of residence,
location of the asset or location of the transaction as provided under the
arrangement; or
(vii) considering or looking through any arrangement by disregarding any corporate
structure.
For this purpose:

(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature
or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised
(c) Assessment procedure under Black Money and Imposition of Tax Act.
Sec. 10 and 11 of the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act provides the provisions related to assessment which are as
follows.
A. The Assessing Officer may, on receipt of an information from an income-tax

authority or any other authority under any law for the time being in force or on
coming of any information to his notice, serve on any person, a notice requiring
him, on the specified date, to produce such accounts or documents or evidence
as the Assessing Officer may require for the purposes of this Act.
• No separate return is required to be filed under this Act
• There is no time limit for issuance of the aforesaid notice. The Assessing Officer
may issue such notice any time on the basis of information.
B. The Assessing Officer may, from time to time, serve further notices requiring the
production of such other accounts or documents or evidence as he may require.
C. The Assessing Officer may make such inquiry, as he considers necessary, for the
purpose of obtaining full information in respect of undisclosed foreign income
and asset of any person for the relevant financial year or years.
D. The Assessing Officer, after considering such accounts, documents or evidence,
as he has obtained, and after taking into account any relevant material which
he has gathered and any other evidence produced by the assessee, shall by an
order in writing, assess the undisclosed foreign income and asset and determine
the sum payable by the assessee.
E. Such order shall be made within 2 years from the end of the financial year in
which the notice was issued by the Assessing Officer [Sec. 11]
F. Best Judgment Assessment: If any person fails to comply with all the terms of the
notice, the Assessing Officer shall, after taking into account all the relevant
material which he has gathered, make the assessment of undisclosed foreign
income and asset to the best of his judgment and determine the sum payable by
the assessee. [Sec.10(4)]. Before making such an assessment, an opportunity of
being heard is required to be given to the assessee.
(d) Secondary adjustments in books accounts under section 92CE in certain cases
“Secondary adjustment” means an adjustment in the books of account of the

assessee and its associated enterprise to reflect that the actual allocation of profits
between the assessee and its associated enterprise are consistent with the transfer
price determined as a result of primary adjustment, thereby removing the imbalance
between cash account and actual profit of the assessee. The provisions are
enumerated here-in-below:
• Where a primary adjustment to transfer price,:
(i) Has been made suo motu by the assessee in his return of income;
(ii) Made by the Assessing Officer has been accepted by the assessee;
(iii) Is determined by an advance pricing agreement entered into by the
assessee u/s 92CC;
(iv) Is made as per the safe harbour rules framed u/s 92CB; or
(v) Is arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered into u/s 90 or 90A for
avoidance of double taxation, - the assessee shall make a secondary
adjustment.
• Exception: Nothing contained in this section shall apply, if:

(i) the amount of primary adjustment made in any previous year does not
exceed Rs. 1 crore; and
(ii) the primary adjustment is made in respect of an assessment year
commencing on or before 01-04-2016.
• Where, as a result of primary adjustment to the transfer price, there is an increase

in the total income or reduction in the loss, as the case may be, of the assessee,
the excess money which is available with its associated enterprise, if not
repatriated to India within the time as may be prescribed, shall be deemed to be
an advance made by the assessee to such associated enterprise and the
interest on such advance, shall be computed in such manner as may be
prescribed.
➢ Excess money means the difference between the arm’s length price
determined in primary adjustment and the price at which the international
transaction has actually been undertaken;
➢ Primary adjustment to a transfer price, means the determination of transfer

price in accordance with the arm’s length principle resulting in an increase in
the total income or reduction in the loss, as the case may be, of the assesse.
(e) Filling of documents along with settlement petition before Settlement Commission.
The application in the prescribed form (Form No. 34B) to the Settlement Commission
should be accompanied by the following statements etc.
• Statement(s) containing computation of total income of the application for the
assessment year or year(s) to which the application relates.
• Copies of manufacturing and/or trading account, statement of profit and loss /
income and expenditure account/ any other similar account and balance sheet
in respect of the relevant year(s).
• In the case of proprietary business or profession copies of personal account of
proprietor in respect of the relevant year(s)
• In the case of a firm/AOP/BOI, copies of the personal accounts of the
partners/members in respect of the relevant year(s).
• In the case of a partner of a firm/member of an AOP/BOI copies of the personal
accounts of such partner/member in the firm/AOP/BOI in respect of the relevant
year(s).
• Proof of payment of Settlement Application fee of Rs. 500/-.
Seven copies of the application along with the accompaniments as mentioned

above have to be filed in the office of Settlement Commission. The application in
Form No. 34B, the verification appended thereto, he Annexure and statements and
documents enclosed therewith must be signed by the person authorised under
section 140 to sign the return of income.

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SUGGESTED ANSWERS_SYL2016_DECEMBER2019_PAPER 16

SUGGESTED ANSWERS TO QUESTIONS

Time Allowed : 3 Hours Full Marks : 100

Wherever required, the candidate may make suitable assumptions and

(iv) Mahasakthi Sugars Co-operative Society is engaged in manufacture of jiggery from

(A) Rs. 3,60,000

1. (i) (A) NIL

(ii) (B) The professional appointed by the said adjudicating authority

(iii) (C) Rs. 40,000

(iv) (A) Due date specified in section 139(1)

(v) (B) Rs. 7,80,000

(vi) (D) Rs. 20,55,600

(vii) (C) impose penalty of Rs. 10,000 on registered valuer.

(viii)(B) Rs. 5,04,000

(ix) (D) Nil

(x) (C) Rs. 34.944 lakhs

(b) State whether “business connection” is established as envisaged by section 9 of the

2. (a) Levy of penalty u/s 270A

Under-reporting is the amount of deemed total income assessed as per the

When the assessee is an AOP

Under-reported income will be Rs. 5,00,000 – 2,50,000 = Rs. 2,50,000.

(b) Business connection

(c) Deemed dividend

or to any concern in which such shareholder is a member or a partner and in which

Net Profit as per Statement of Profit and Loss 35,60,000

Net Profit as per Statement of Profit and Loss 35,60,000

When assessment is made u/s 144

Total income in case of best judgment assessment

(b) Computation of capital gains arising from slump sale

Working Note: Computation of net worth

5. (a) Applicability of Section 14A

Analysis of the given issue

(b) Business income or income from house property

(c) Exemption under section 54

Analysis of the issue

(d) TDS u/s 194-C or 194-I?

Analysis of the issue

(e) Unexplained cash credit

Analysis of the issue

Since BCL is engaged in purchase of mobile handsets from associated enterprise

Computation of Increase in total income of BCL

Price at which actually bought from JML 15,000

(b) Computation of interest liable to be disallowed under section 94B

Particulars Case I Case II Case III

(c) Taxability of certain income in India

8. Write Short Notes on any Four: 4x4=16

(a) Capitalisation of Borrowing Costs under ICDS - IX

8. (a) Capitalisation of Borrowing Costs under ICDS-IX

ICDS-IX provides for capitalisation of borrowing cost which are as follows.

Eligible for Capitalisation:

B) i) the average of costs of qualifying asset as appearing in the balance sheet of

The capitalisation of borrowing costs shall commence

Cessation of Capitalisation: Capitalisation of borrowing costs shall cease:

(b) Consequences of Impermissible Avoidance Arrangement (section 98)

If an arrangement is declared to be an impermissible avoidance arrangement, then,

For this purpose:

A. The Assessing Officer may, on receipt of an information from an income-tax

“Secondary adjustment” means an adjustment in the books of account of the

• Exception: Nothing contained in this section shall apply, if: