30 All

243
YEARS OF
India
EXCELLENCE
Ranks

DIRECT TAX
(ASSESSMENT YEAR – 2023-2024)

CMA & CS FINAL

( CHARTERED ACCOUNTANT )

www.rracademy.in RR Academy Institute

RR Academy therracademy@gmail.com
 CONTENTS
Income tax material for CMA FINAL
Assessment Year - 2023-24
Chapter No. Chapter Page No.
1. Computation of Tax Liability 1
2. PGBP 12
3. Assessment of Companies 49
4. Advance Tax, TDS & TCS 71
5. Double Taxation Avoidance 116
6. Transfer Pricing 124
7. SEZ u.s.10AA 155
8. AMT 159
9. Assessment of Partnership Firms 164
10. Taxation of Non-residents 173
11. Dividend Rules 183
12. MAT 190
13. Set-off & Carry Forward of Losses 202
14. Capital Gains 211
15. Charitable Trusts 236
16. Case Laws 250
17. Tax Planning, Tax Evasion 258
18. Filing of Returns 260
19. Chapter Via Deductions 267
 1

CHAPTER – 1: TAX RATES – A.Y.2023-24

Tax rates for Assessment Year 2023-24:
Up to Rs.2,50,000 : Nil
Rs.2,50,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.12,500
Above Rs.10,00,000 : 30% plus Rs.1,12,500

Tax rates for RESIDENT SENIOR CITIZEN for Assessment Year 2023-24:
Up to Rs.3,00,000 : Nil
Rs.3,00,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.10,000
Above Rs.10,00,000 : 30% plus Rs.1,10,000

Note: In case of a non-resident senior citizen, basic exemption is restricted to Rs.2,50,000.

Tax Rates for RESIDENT SUPER SENIOR CITIZEN for Assessment Year 2023-24:
Up to Rs.5,00,000 : Nil
Rs.5,00,000 to Rs.10,00,000 : 20%
Above Rs.10,00,000 : 30% plus Rs.1,00,000

Note: In case of a non-resident very senior citizen, basic exemption is restricted to Rs.2,50,000.

Important points:
 Total income and tax should be rounded off to the nearest ten rupee.

 A maximum rebate of Rs.12,500 under section 87A for RESIDENT INDIVIDUALS in case
TAXABLE INCOME does not exceed Rs.5,00,000 during the previous year.

 A SURCHARGE of 10% in case taxable income exceeds Rupees Fifty lakhs

 A SURCHARGE of 15% in case taxable income exceeds Rupees ONE CRORE
 A higher SURCHARGE of 25% in case taxable income exceeds Rupees TWO CRORES
 A higher SURCHARGE of 37% in case taxable income exceeds Rupees FIVE CRORES

 HEALTH & EDUCATION CESS of 4% to be charged. Cess is to be calculated on the total tax
including surcharge.

 MAXIMUM MARGINAL TAX RATE: 42.744% (30% + 37% + 4%)

 SENIOR CITIZEN: An Individual who has attained the age of 60 years or more

 VERY SENIOR CITIZEN: An Individual who has attained the age of 80 years or more
 2

 “Marginal relief” is available in case taxable income exceeds Rupees FIFTY LAKHS but
does not exceed Rs.51,95,900 (Rs.51,95,520 in the case of a senior citizen and
Rs.51,94,030 in the case of a very senior citizen).

 “Marginal relief” is also available in case taxable income exceeds Rupees ONE CRORE but
does not exceed Rs.1,02,14,700 (Rs.1,02,14,500 in the case of a senior citizen and
Rs.1,02,13,740 in the case of a very senior citizen).

 A person born on 1st April would be considered to have attained a particular age on 31 st
March, the day preceding the anniversary of his birthday. CBDT Circular

(e.g. A person born on 1st April, 1943 would be considered to have attained 80 years on 31st
March, 2023 and shall be treated as “Very Senior Citizen” for P.Y.2022-23).

 If basic exemption is not fully exhausted against slab rate income, the unexhausted
exemption can be adjusted against incomes taxable at special rates. This benefit is not
available for a non-resident individual.

 In addition to basic exemption of Rs.2,50,000; long-term capital gain on sale of listed

shares through the stock exchange shall be taxed at a special rate of 10% u.s.112A after
availing an exemption of Rs.1,00,000.

 Incomes taxed at special rates:

Long term capital gains (all capital assets except listed shares): 20% u.s.112
Long term capital gain on sale of listed shares above Rs.1 lakh: 10% u.s.112A
Short term capital gain on sale of listed shares: 15% u.s.111A
Casual Incomes (e.g. winnings from lottery): 30% u.s.115BB

 Alternative Minimum Tax (AMT):

Individuals who claim deduction u.s.10AA or u.s.35AD or deduction u.s.80JJAA or
u.s.80QQB to u.s.80RRB are subject to AMT. AMT is payable @ 18.5% of adjusted total
income.

 Unexplained cash credit or unexplained investments or unexplained expenditure shall be

taxed @ 60% plus surcharge @ 25% and cess @ 4% (effective rate 78%).

Important:
Higher surcharge of 25% and 37% does not apply:
a) for any long-term capital gain (both section 112 and 112A) (AMENDMENT);
b) short-term capital gain on sale of listed shares u.s.111A; and
c) on dividend income.

Thereby, higher surcharge applicable on other income (e.g. salary, hp, business income) is as
follows:
 3

If total income after excluding (a, b, c) given above:

a. Is above Rs.2 crores: 25%
b. Above 5 crores: 37%

1. Find out the tax liability in each case separately of Mr.X (age 30) if his total income for the
previous year 2022-23 (Assessment Year 2023-24) is as follows:-

 Rs.2,10,000 Rs.3,50,000 Rs.5,00,000

 Rs.9,99,995 Rs.50,00,000 Rs.1,00,00,000

Ignore provisions of Section 115BAC.

2. Find out tax liability in each case separately of Mr.Y (a resident senior citizen) if his total income
for the previous year 2022-23 (Assessment Year 2023-24) is:-

 Rs.2,90,000 Rs.5,00,000 Rs.10,00,000

 Rs.70,00,000 Rs.1,40,00,000 Rs.3,50,00,000

Ignore provisions of Section 115BAC.

3. Compute tax liability in each separately of Mr.B (a resident) (age 40 years) if his taxable income for
the previous year ending 31st March 2023 (Assessment Year 2023-24) is:

 Rs.50,10,000 Rs.50,40,000 Rs.51,00,000

 Rs.1,01,00,000 Rs.2,01,00,000 Rs.5,01,00,000

Ignore the provisions of Section 115BAC.

Additional Problems:
1. What is section 111A and section 112A of the IT Act?
Short-term capital gain on sale of listed shares through the stock exchange is taxed at 15% u.s.111A

Long-term capital gain on sale of listed shares through the stock exchange is taxed at 10% u.s.112A
after claiming exemption of Rs.1 lac.

The above gains are not subject to higher surcharge of 25% and 37% respectively.

2. Mr.X an individual furnishes the following for the previous year 2022-23. He wants to know the
applicable surcharge rate on his income:
 4

Case A: Other income Rs.60,00,000

LTCG u.s.112A Rs.51,00,000
STCG u.s.111A Rs.60,00,000
Total Income Rs.1,71,00,000

Case B: Other income Rs.2,50,00,000

LTCG u.s.112A Rs.3,01,00,000
STCG u.s.111A Rs.1,00,00,000
Total Income Rs.6,51,00,000

I. COMPUTATION OF GROSS TOTAL INCOME & TOTAL INCOME OF AN ASSESSEE:

Income from salaries xxx

Income from house property xxx
Profits and gains of business or profession xxx
Capital gains xxx
Income from other sources xxx
Gross Total Income xxx
Less: Deductions under section 80C to 80U xxx
Total Income xxx

II. COMPUTATION OF TAX LIABILITY:

Tax on total income xxx
Add: Surcharge (if applicable) xxx
xxx
Add: Health and education cess xxx
Total tax xxx
Less: TDS & TCS xxx
Less: Advance tax xxx
xxx
Add: Interest u.s.234A, 234B & 234C xxx
Add: Late fee (for delay in filing return of income) xxx
xxx
Less: Self-assessment tax paid xxx
Final tax payable nil
 5

Section 115BAC: NEW TAX REGIME:

Income tax rates for Individuals (optional) (new scheme & reduced rates)
Effective AY 2021-22 there are two alternative personal income tax regimes available for
Individuals and HUFs. Such Individual and HUF taxpayers can either continue with the old
regime or choose to shift to new regime. The new income tax regime is completely optional and
every Individual or HUF can decide basis what is beneficial for them.

Old regime is essentially the existing income tax rates with all the available deductions from
income tax. New regime aims to tax income at lower rates with fewer deductions.

Net tax rates for Assessment Year 2023-24 u.s.115BAC:

Up to Rs.2,50,000 : Nil
Rs.2,50,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.7,50,000 : 10% plus Rs.12,500
Rs.7,50,000 to Rs.10,00,000 : 15% plus Rs.37,500
Rs.10,00,000 to Rs.12,50,000 : 20% plus Rs.75,000
Rs.12,50,000 to Rs.15,00,000 : 25% plus Rs.1,25,000
Above Rs.15,00,000 : 30% plus Rs.1,87,500

Important: The above tax rates are same for all individuals irrespective of their age (senior
citizen / super senior citizen / general category)

Surcharge rates:
Surcharge rates shall be the same as discussed earlier (10%, 15%, 25% and 37%).

Rebate u.s.87A:
A maximum rebate of Rs.12,500 under section 87A for resident individuals in case taxable
income does not exceed Rs.5,00,000 during the previous year.

Cess:
HEALTH & EDUCATION CESS of 4% to be charged.

Important: Exemptions or deductions not available:

The option to pay tax at lower rates shall be available only if the total income of an assessee is computed
without claiming specified exemptions or deductions.

Exemptions & Deductions not available under the new scheme:

House Rent Allowance
Leave Travel Allowance
Conveyance or Travelling Allowance
Helper Allowance
Relocation Allowance
Children Education Allowance
 6

Tribal Area Allowance

Transport Allowance for employees working in transport system
Free lunch provided to employees not exceeding Rs.50 per meal
Daily allowance received by MP / MLA
Standard deduction
Entertainment allowance
Professional tax
Interest on housing loan u.s.24 in respect of a self-occupied property
Additional depreciation, Section 35, Section 35AD
Deduction from family pension
Income of minor child u.s.10(32)
Set-off of bfd losses, if such loss is attributable to the above deductions
HP loss cannot be set off against any other head of income
Exemption u.s.10AA
Chapter VIA deductions (except 80CCD (2) & 80JJAA)

Example of old tax regime and new tax regime:

Mr.X furnishes the following details for the previous year ended 31.03.2023:
Basic pay Rs.1,00,000 p.m.; HRA Rs.40,000 p.m. (hra exempt is Rs.30,000 p.m.); children education
allowance Rs.12,400 for two children (amount exempt is Rs.2400); Leave Travel Concession
Rs.30,000 (amount exempt is Rs.25,000); Professional tax paid Rs.2,500.

He owns a house in his native place occupied by his parents. Interest on home loan paid during the
year is Rs.2,00,000.

Interest on savings account with SBI Rs.15,000.

Interest on fixed deposit in the name of his minor son with a bank Rs.21,500

Deduction in respect of Section 80C Rs.1,50,000

Deduction in respect of Section 80D Rs.25,000
Deduction in respect of Section 80CCD(2) Rs.50,000
Deduction in respect of Section 80TTA Rs.10,000

Compute his total income and tax liability for A.Y.2023-24 as per the old regime. What will be your
answer if he has opted for the new tax regime.

Answer:

As per the old regime:

Income from salary:

Basic pay 12,00,000
HRA 480000
(-) Exempt 360000 1,20,000
Education allowance 12400
(-) Exempt 2400 10,000
LTC 30000
(-) Exempt 25000 5000
 7

Gross Salary 13,35,000

Less: Standard deduction 50,000
Less: Professional tax 2,500
Income from salary 12,82,500

Income from house property:

Annual Value nil
(-) Section 24
Interest on home loan (max dedn) 200000
Loss from house property 200000

Income from other sources:

Interest on savings account 15000
Interest on fixed deposit 21500
Less: Section 10(32) 1500 20000
35000

Computation of total income:

Income from salary 1282500
Income from house property (200000)
Income from other sources 35000
Gross total income 1117500
Less: Section 80C 150000
Less: Section 80CCD (2) 50000
Less: Section 80D 25000
Less: Section 80TTA 10000
Total Income 882500

Computation of tax liability:

Tax on total income: (882500-500000)*20% + 12500 = 89000
Add: Cess @ 4% 3560
92560

As per the new regime:

Total income as per the old regime 882500

Add: HRA exemption 360000
Add: LTA exemption 25000
Add: Education allowance 2400
Add: Std deduction 50000
Add: Professional tax 2500
Add: Interest on housing loan 200000
Add: Section 10(32) exemption 1500
Add: Section 80C 150000
Add: Section 80D 25000
Add: Section 80TTA 10000
Total Income as per new regime 1708900
 8

Computation of tax liability:

Tax on total income (1708900-1500000) x 30% + 187500 250170
Add: Cess @ 4% 10067
Tax liability 260177 or Rs.260180

Conclusion:
It is suggested to the assessee not to opt for new tax regime and continue with the old tax regime.

1. Compute tax liability of an assessee under the new tax regime u.s.115BAC in the following cases if
total income for the previous year ending 31st March, 2023 is as follows:

Rs.4,00,000; Rs.7,00,000; Rs.10,00,000; Rs.12,00,000

Rs.14,00,000; Rs.15,00,000; Rs.20,00,000

TAX RATES OF A COMPANY:

Existing tax rates for A.Y.2023-24:

A. Domestic company:

Total turnover or Gross receipts Tax rate

Does not exceed Rs.400 crores for the P.Y.2020-21 25% of total income
Exceeds Rs.400 crores 30% of total income

B. Foreign company (irrespective of turnover) 40% of total income

C. Surcharge rates:

Domestic company:
(a) Total income > Rs.1 crore but is ≤ Rs.10 crore: Surcharge 7%
(b) Total income is > Rs.10 crore: Surcharge is 12%

Foreign company:
(a) Total income > Rs.1 crore but is ≤ Rs.10 crore: Surcharge 2%
(b) Total income is > Rs.10 crore: Surcharge is 5%

MINIMUM ALTERNATIVE TAX – MAT: U.S.115 JB

Every company shall pay tax at normal rate (30% or 25%) on its total income (or) at 15% of its
“book profits” (whichever is higher). In addition to this surcharge and cess is also payable. The
excess tax paid on account of MAT shall be carried forward as MAT credit to be set-off against
future tax liability.
 9

SECTION 115BAA – New tax regime:

Who can opt section 115BAA: Any domestic company (existing or new companies engaged
in any type of business) (MAT not applicable).

Tax rate: 22% + 10% surcharge (irrespective of income) + 4% cess

(25.168% effective rate) irrespective of turnover.

Conditions: Should be opted before due date of filing return of income.

Once option is exercised, it cannot be withdrawn for same or

subsequent assessment years

Note: A company eligible to exercise option u.s.115BAA can defer

exercise of such option to a future year, if it is availing sizable
profit-linked or investment-linked deductions or additional
depreciation or MAT credit in the relevant previous year.

SECTION 115BAB for new companies:

Who can opt section 115BAB: A domestic company set up and registered on or after
01.10.2019 engaged in manufacturing activity or generating
electricity.

Tax rate: 15% + 10% surcharge (irrespective of income) + 4% cess

(17.16% effective rate) irrespective of turnover.

Condition: Should commence manufacturing or generating electricity

before 31.03.2024 (AMENDMENT).

Should be opted before due date of filing return of income.

Option should be exercised in the very first year in which it is
set up, failing which it cannot exercise such option in future
years.

Common points for both section 115BAA and section 115BAB:

a. Such companies are not subject to MAT

b. The following deductions are not available:

- Section 10AA (units in SEZ)
- Additional depreciation
- Section 35
- Section 35AD
- Section 35CCC
- Section 35CCD
- Chapter VI-A deductions (except section 80JJAA & section 80M)
- Set-off of unabsorbed depreciation and losses on account of above deductions
 10

TAX RATES FOR PARTNERSHIP FIRM/LLP

Basic tax rate: 30% of taxable income
Surcharge: 12% of basic tax if total income > 1 crore

Note: Firms claiming deduction u.s.10AA or u.s.35AD or u.s.80IA to 80JJAA are subject to
AMT provisions. AMT is payable @ 18.5% of Adjusted Total Income.

TAX RATES OF CO-OPERATIVE SOCIETY:

Old Scheme:
Up to Rs.10,000 10%
Rs.10,000 to Rs.20,000 20%
Above Rs.20,000 30%

Surcharge rates:
(a) Total income > Rs.1 crore but is ≤ Rs.10 crore: Surcharge 7%
(b) Total income is > Rs.10 crore: Surcharge is 12%

New Tax Regime: Section 115BAD

Tax @ 22% + surcharge 10% + cess 4% (effective rate – 25.168%)

AMT rate for co-operative societies reduced from 18.5% to 15% from AY 2023-24 (amendment)

Other sections and tax rates:

Section 115BAA: Tax on income of certain domestic companies 22%

Section 115BAB: Tax on income of new manufacturing domestic companies 15%
Section 115BAC: New tax regime for individuals and huf slab rates
Section 115BB: Tax rates on casual income 30%
Section 115BBA: Tax on non-resident sportsmen 20%
Section 115BBC: Anonymous donations 30%
Section 115BBD: Dividend from specified foreign companies (AMENDMENT) normal rates
Section 115BBE: Tax on unexplained investments, expenditure, money, cash credit 60%
Section 115BBF: Tax on income from patent 10%
Section 115BBG: Tax on income from transfer of carbon credits 10%

1. Mr.Ajay is found to be the owner of two gold chains of 50 gms each (market value of which is
Rs.1,45,000 each) during the financial year ending 31.03.2023 but he could offer satisfactory
explanation to the Assessing Officer for Rs.50,000 spent on acquiring these gold chains. As per
section 115BBE, Mr.Ajay would be liable to pay a tax of Rs………………
 11

2. What is the amount of marginal relief available to S Ltd., a domestic company on the total income of
Rs.10,03,50,000 for PY 2022-23 (comprising only of business income) whose turnover in PY 2020-
21 is Rs.450 crore, paying tax as per regular provisions of Income-tax Act? Assume that the
company does not exercise option u.s.115BAA.

(a) Rs.9,98,000
(b) Rs.12,67,600
(c) Rs.3,50,000
(d) Rs.13,32,304

3. The tax payable by Dharma LLP on total income of Rs.1,01,00,000 for PY 22-23, is:-

(a) Rs.35,29,340
(b) Rs.32,24,000
(c) Rs.33,21,500
(d) Rs.31,51,200

4. The total income of ABC Pvt Ltd (a domestic company) for the p.y.22-23 is Rs.15 crores. The
company has not opted for Section 115BAA or not eligible for Section 115BAB. The book profit
u.s.115JB for the p.y.22-23 is Rs.30 crores. Compute tax liability of the company assuming that the
turnover for the previous year 2020-21 is (a) Rs.140 crores; or (b) Rs.410 crores.
 12

CHAPTER – 2: P/G/B/P

SECTION 44 AA: COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS

1. Who are required to maintain books of accounts?
Professionals notified by CBDT and others on fulfillment of certain conditions

2. Professionals notified by CBDT?

Specified Professionals include: Legal, medical, engineering or architectural profession, or
accountancy or technical consultancy or interior decoration or any other profession notified by
CBDT (notified profession includes: authorized representative, film artist, company secretary
and information technology)

3. When are Professionals required to maintain books as per Rule 6F?

Books are required to be maintained as per Rule 6F:
If GROSS RECEIPTS from such profession exceed Rs.1,50,000 in all the three years
immediately preceding the previous year (OR) is likely to exceed Rs.1,50,000 during the
current previous year if the profession is newly setup.

4. What are the books that are prescribed under Rule 6F?

Books that are prescribed under Rule 6F are:

 Cash book;
 Journal (if books are maintained on mercantile basis);
 Ledger;
 Carbon copies of bills issued for an amount exceeding Rs.25;
 Original bills / vouchers in respect of an expenditure exceeding Rs.50

In case where a person is carrying on medical profession: In addition to the above books he
has to maintain
 a daily case register and
 an inventory register

5. Place at which and period for which the books are to be kept and maintained:
Place where the person is carrying on the profession or at the principal place of his profession
in case where there is more than one place. The books of account and documents are required
to be maintained for a minimum of 6 years from the end of the relevant assessment year.

6. When other assessees (business) are required to maintain books?

Where TURNOVER or GROSS RECEIPTS exceeds Rs.10,00,000 in ANY one year out of the
three years immediately preceding the previous year; or is likely to exceed Rs.10,00,000
during the current previous year in case of newly setup business; (OR)
 13

Where INCOME FROM SUCH BUSINESS exceeds Rs.1,20,000 in ANY one year out of the three
years immediately preceding the previous year; or is likely to exceed Rs.1,20,000 during the
current previous year in case of newly setup business.

Important: However, in the case of Individuals and HUF, the above “turnover” limit is
Rs.25,00,000 and “income” limit is Rs.2,50,000.

7. Books that are required to be maintained by others?

“SUCH BOOKS OF ACCOUNT AND DOCUMENTS” as would enable the A.O. to compute the total
income of the assessee.

SECTION 44 AB: COMPULSORY TAX AUDIT

1. When is Tax Audit Compulsory?

An assessee carrying on Business: If his total sales, turnover or gross receipts from such
business during the previous year exceed Rs.1 crore.

If cash receipts does not exceed 5% of total receipts and

if cash payments does not exceed 5% of total payments
then audit is compulsory only if turnover exceeds Rs.10
crores during the year.

An assessee carrying on Profession: If his gross receipts from such profession exceed
Rs.50,00,000 during the previous year.

Assessee covered u.s.44AD or 44ADA: Where a person who is covered u.s.44AD or u.s.44ADA,
but claims that income from such business or
profession is lower than the presumptive rate and his
total income exceeds basic exemption.

Assessee covered u.s.44AE, etc.: Where a person who is covered by Section 44 AE and
claims that income from such business is lower than the
presumptive rate.

2. Time limit for completion of audit and filing of audit report.

Audit shall be completed and audit report shall be filed on or before the “specified date” which
shall be the date one month prior to the “due date” of filing return of income. “Due date” for filing
return of income shall be 31st October and hence “specified date” shall be 30th September.
 14

3. What is required to be furnished?

Tax Audit Report has to be furnished duly signed and verified by a C.A.
Form 3CA and 3CD for assesses subject to audit under any other law (e.g. companies)
Form 3CB and 3CD for assesses not subject to audit under any other law (e.g. individuals, firms)

PRESUMPTIVE INCOME SCHEME:

SECTION 44 AD: INCOME ON PRESUMPTIVE BASIS IN THE CASE OF A
RESIDENT-ASSESSEE ENGAGED IN ANY BUSINESS:

1. Eligibility: Individuals, HUF and Firms having a gross turnover not

exceeding Rs.2 crores (Rs.200 lakhs)

2. How is income estimated: Income is computed @ 8% of turnover or a higher

percentage as claimed by the assesse

Income is computed @ 6% of turnover if the gross

receipts or turnover is received by way of account
payee cheque (or by account payee bank draft or by use
of electronic clearing system) during the previous year
or before due date of filing return of income

3. Advantages of this scheme: No need to maintain books of accounts

No need for tax audit
Advance tax (whole amount – one instalment) should be
paid on or before 15th March.

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been
allowed. However, bfd business losses from earlier
assessment years can be set-off.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of account and gets them audited if total income
exceeds basic exemption.

6. Important condition: An assessee who declares income as per section 44AD

for any previous year has to offer income as such for
five consecutive years. If this condition is violated, the
assessee shall not be eligible for this scheme for next 5
Assessment Years.
 15

Example: For the assessment years 2020-21, 2021-22 and 2022-23, the assessee claims the
benefit of presumptive income u/s.44AD. For A.Y.2023-24, he offers a lower income. In this case,
he will not be eligible to claim the benefit of this section for the next five assessment years starting
from A.Y.2024-25. Such assessee, if his total income is above the basic exemption, shall maintain
books and get them audited.

7. Due dates for filing I.T. return: If the assessee opts for presumptive scheme then audit
is not required, therefore 31st July will be the due date.

If the assessee does not opt for presumptive scheme

then audit is required and therefore 31st October.

8. Who cannot avail this scheme:

 A person carrying on any profession notified u.s.44AA
 A person earning income in the nature of commission or brokerage
 A person carrying on any agency business
 A person engaged in plying of goods carriages
 LLPs & Company-assessee

1. Mr.Praveen engaged in retail trade, reports a turnover of Rs.1,98,50,000 for the financial year
2022-23. His income from the said business as per books of account is computed at Rs.13,20,000.
Retail trade is the only source of his income. A.Y.22-23 was the first year for which he declared his
business income in accordance with the provisions of presumptive taxation u.s.44AD.

 Is Mr.Praveen eligible to opt for presumptive income scheme for the AY 2023-24?
 If so, determine his income from retail trade as per the applicable presumptive provision
assuming that whole of the turnover represents cash receipts.
 In case he does not opt for presumptive income scheme, what are his obligations.
 What is the due date for filing his return of income under both the options?

2. Mr.A, engaged in retail business, has made a turnover of Rs.1,75,00,000 during the previous year
2022-23. Out of the total turnover, amount received by cash till the due date of filing tax return is
Rs.1,00,00,000 and amount received through electronic clearing system till the due date of filing
tax return is Rs.50,00,000. Compute his income as per section 44AD of the Income-tax Act.

3. Real Builders (a partnership firm) admitted income u.s.44AD up to the assessment year 2022-23
resorted to determination of income as per regular provisions by getting the books of account
audited for the assessment year 2023-24. The assessee firm cannot revert to presumptive
provisions contained in section 44AD up to the assessment year ………………………………..

(A) 2028-29 (B) 2029-30 (C) Indefinitely (D) 2024-25

 16

4. AB & Co. a partnership firm engaged in the manufacturing business has a gross receipt of
Rs.59,00,000 from such business. The partnership deed provides for payment of salary of
Rs.20,000 p.m. to each of the partners i.e. A & B. The firm uses machinery for the purpose of its
business and the WDV of the machinery as on 01.04.2021 is Rs.2,00,000. The machinery is eligible
for depreciation @ 15%. Compute the profits from the business for the A.Y.2023-24, if the firm
opts for the scheme u.s.44AD and has received the following amount by account payee cheques:

a. Rs.25,00,000 till 31.03.2023

b. Rs.6,00,000 between 31.03.2023 and 31.07.2023
c. Rs.5,00,000 after 31.07.2023

SECTION 44 ADA: PRESUMPTIVE INCOME SCHEME FOR RESIDENT

PERSONS ENGAGED IN SPECIFIED PROFESSION:

1. Eligibility: Professionals notified (resident) under section 44AA.

having gross receipts not exceeding Rs.50 lakhs.

2. Presumptive income: 50% of gross receipts or a higher % as claimed in the

tax return by the assessee

3. Advantages of this scheme: Not required to maintain books of accounts

Audit not required
Advance tax (whole amount – one instalment) should be
paid on or before 15th March

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been allowed.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of accounts and gets them audited if total income
exceeds basic exemption limit.

1. Mr.Roy, a Doctor by profession has earned gross receipts of Rs.48 lakhs from such profession during
the previous year 2022-23. His does not maintain any books of account. Mr.Roy wants to offer
income as per the presumptive income scheme u.s.44ADA. Also state the due date for payment of
advance tax and due date for filing his return of income.
 17

SECTION 44 AE: BUSINESS OF PLYING, HIRING OR LEASING

OF GOODS CARRIAGES

1. Eligible for this scheme: An assessee who owns not more than 10 trucks at any
time during the previous year. Assessee can be an
Individual, Huf, Firm or a Company.

2. How is income computed: A. Heavy goods vehicle:

Rs.1,000 per ton per month or part of a month

B. Other than heavy goods vehicle:

Rs.7,500 p.m. or part of a month

Important: Heavy Goods Vehicle means the gross vehicle weight of which exceeds 12,000 kilograms

3. Eligibility of further deductions: No further deductions are allowed. All expenses

including depreciation are deemed to have been allowed.
However, salary and interest paid by a firm to its partners
shall be allowed subject to limits u.s.40(b).

4. Is it possible to declare income Yes the assessee can declare income at a rate lower than
at a lower rate: the presumptive income provided, the assessee
maintains books of accounts and gets them audited.

1. Mr.Prakash is in the business of operating goods vehicles. As on 01.04.2022, he had the following
vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f. y. 2022-23
A 8500 2.4.2021 yes
B 13000 15.05.2021 yes
C 12000 4.08.2021 no (as under repairs)

During P.Y.2022-23, he purchased the following vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f.y. 2022-23
D 11000 30.04.2022 10.05.2022
E 15000 15.05.2022 18.05.2022

Compute his income under section 44AE for A.Y.2023-24.

 18

2. M/s.MN & Co. a partnership firm is engaged in the business of plying and hiring goods vehicles. It
owns following vehicles as on 1st April 2022:

Gross vehicle weight (in kgs.) Number of vehicles

7000 2
9000 2
12000 3
15000 2

It purchased a vehicle weighing 15000 kg on 6th June, 2022 which was put to use only on 10th July,
2022. Net profits of the firm [after claiming partners remuneration of Rs.1,50,000 and within the
limits prescribed under section 40(b)] from the above business as per books of accounts amounted to
Rs.6,50,000. The firm has declared its income for the Assessment Year 2023-24 in accordance with the
provisions of presumptive income under section 44AE.

i. Compute the income of the firm if it opts for the provisions of section 44AE for the AY 2023-24.
ii. If the firm wants to claim its income as per books of accounts for the Assessment Year 2023-24,
what are its obligations under the Income-tax Act 1961?
iii. What is the due date for filing its return of income under both the options?

3. State whether Tax Audit is applicable in the following cases:

Case Sale/ In cash Other than Total % of cash receipts/

purchase cash payments to total
receipts/ payments

A Sales 1,00,000 89,00,000 90,00,000 1.11%

Purchases 10,00,000 1,60,00,000 1,70,00,000 5.88%

B Sales 25,00,000 1,25,00,000 1,50,00,000 16.67%

Purchases nil 1,25,00,000 1,25,00,000 0%

C Sales nil 4,00,00,000 4,00,00,000 0%

Purchases 1,00,00,000 2,50,00,000 3,50,00,000 28.57%

D Sales 50,00,000 4,30,00,000 4,80,00,000 10.42%

Purchases 1,00,00,000 2,50,00,000 3,50,00,000 33.33%

E Sales 40,00,000 9,35,00,000 9,75,00,000 4.10%

Purchases 35,00,000 9,10,00,000 9,45,00,000 3.70%

F Sales 0 15,00,00,000 15,00,00,000 0%

Purchases 0 12,00,00,000 12,00,00,000 0%
 19

SECTION 40 (b): REMUNERATION AND INTEREST TO PARTNERS:

1. Maximum remuneration allowed u/s.40 (b) is as follows:

On first Rs.3,00,000 of book profit: 90% of book profit or Rs.1,50,000 (weh.)
On the balance of book profit: 60% of book profit

“BOOK-PROFIT” is computed after adjusting all admissible expenses, depreciation

including unabsorbed depreciation (if any) and interest on capital to the extent allowed
except remuneration.

Remuneration should be paid only to working partner.

Remuneration should be authorized by the partnership deed.

2. Interest on capital to partners will be allowed subject to a maximum of 12% p.a.

Interest can be paid to any partner but should be authorized by the partnership deed.

Salary received by partners & interest on capital (to the extent allowed in the hands of the
firm) shall be taxed in the hands of the partners under the head “business or profession”.

The firm pays tax on its total income and therefore, share of profit received by each partner
is EXEMPT from tax u.s.10(2A).

1. The profit and loss account of ABC & Co. (a firm of chartered accountants & LLP) for the year
ended 31st March, 2023 is given below:

Expenses 3,00,000 Receipts from clients and audit fees 14,36,000

Depreciation 60,000 Dividend from companies 45,000

Remuneration to partners
Partner X 4,20,000
Partner Y 2,80,000

Interest to partners
Partner X @ 15% 60,000
Partner Y @ 15% 45,000

Net profit 3,16,000

Other information:
a) Depreciation as per IT Rules is Rs.52,000.
b) Payment to partners (remuneration and interest) are authorized by the deed
c) Other incomes of the partners: X: Rs.12,00,000 and Y: Rs.8,00,000

Compute total income of the firm and its partners clearly indicating the tax treatment of partner’s
salary, interest on capital and share of profit received in their hands.
 20

2. A firm has paid Rs.7,50,000 as remuneration to its partners for the previous year 2022-23, in
accordance with its partnership deed and it has a book profit of Rs.10,00,000. What is the
remuneration allowable as deduction?

3. Rao and Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000
before deduction of the following items:

a. Salary of Rs.20,000 each per month payable to working partners of the firm (as authorized
by the deed of partnership)
b. Depreciation on plant and machinery computed under section 32: Rs.1,50,000
c. Interest on capital @ 15% p.a. (as per the deed of partnership). The amount of capital
eligible for interest Rs.5,00,000.

Compute book-profit u.s.40(b) and allowable working partner salary for the A.Y. 2023-24.

SECTION 40A(3): PAYMENT EXCEEDING Rs.10,000 BY WAY OF CASH

Any payment exceeding Rs.10,000 by way of cash or bearer cheque or crossed cheque will be fully
disallowed. Payment should be made only by an account payee cheque or by an account payee
bank draft or use of ECS through a bank account or through other prescribed electronic modes.

Payment exceeding Rs.10,000 in aggregate in a day made to a person against an expenditure shall
also be disallowed.

The limit of Rs.10,000 has been increased to Rs.35,000 in the case of payment made to transport
operators for plying, hiring or leasing goods carriages.

Deduction allowed on ‘due’ basis in one year for which cash payment is made in a subsequent year:
Any payment by cash exceeding Rs.10,000 for which deduction was already allowed on “due
basis”, the payment so made in any subsequent year shall be deemed as income in the year in
which such payment is made.

Note: Section 40A (3) is attracted where: bill amount should exceed Rs.10,000 and payment
should also exceed Rs.10,000 at a time.

Other prescribed electronic modes: Credit card, debit card, net banking, IMPS (Immediate
Payment Service), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Fund
Transfer) and BHIM (Bharat Interface for Money) Aadhar Pay
 21

Cases where payment can exceed Rs.10,000 by way of cash: Rule 6DD Exceptions

1. Payment made to Banks, LIC

2. Payment made to Government which is required to be made in legal tender

3. Payment through the banking system, i.e. use of credit card or debit card or use of ECS, etc.
4. Payment by book entry (adjustment in accounts)

5. Payment made for purchase of agricultural or forest produce or produce of animal husbandry
or dairy or poultry farming or fish or fish products to the cultivator, grower or producer.

6. Payment is made for the purchase of products manufactured or processed without the aid of
power in a cottage industry, to the producer of such products;

7. Payment to a person in a village not served by any bank

8. Payment made on a day where banks were closed either on account of holiday or strike (removed)

9. Payment of terminal or retirement benefits (e.g. gratuity) provided such payment < Rs.50,000

10. Where the payment is made by way of salary to an employee after tds and when such employee
is temporarily posted for a continuous period of 15 days or more in a place other than his
normal place of duty or on a ship; and does not maintain any bank account at such place or ship.

1. An assessee has incurred an expenditure of Rs.14,000 for purchase of raw material from Mr.B. He
makes separate payments of Rs.3,000; Rs.5,000 and Rs.6,000 all by cash in a single day. Advice
whether the above are admissible.

2. A bill is raised for an expenditure of Rs.32,000.

Cash payment is made as follows:

1.10.2022 5,000
2.10.2022 5,000
3.10.2022 5,000
4.10.2022 5,000
5.10.2022 12,000 What will be the amount of disallowance under section 40A (3)

3. Bill raised for Rs.65,000 by a transporter for hiring of trucks for carriage of goods. Payments made to
him in cash as under: What would be the amount of disallowance?

1.12.2022 38,000
2.12.2022 12,000
3.12.2022 15,000
 22

4. When a cash payment of Rs.15,000 is made on 10.11.2022 towards purchase of raw material effected
in the earlier year, i.e., on 5.2.2022, the amount liable for disallowance would be…………
a. Nil c. 20% of such payment
b. 100% of payment d. 30% of such payment

5. The following are details of Mr.X, state whether the following payments are admissible or not?

 Payment of Rs.50,000 by using credit card for fire insurance

 Purchase of oil seeds of Rs.15,000 in cash from a farmer on a banking day
 X purchases goods in cash for Rs.14,000 from R, a villager and makes payment to R in his village
where no banking facility is available.
 Purchase of stock amounting to Rs.27,000 due for payment on the day when the banks were
closed due to floods in Bangalore during September, 2022.
 Payment of Rs.12,000 and Rs.13,000 in cash on 03.12.2022 and 10.12.2022 respectively for
purchase of crabs, lobster & squid to Mr.R, a fisherman and Mr.K, a middleman for these
products respectively.

6. U/s.40A(3) which of the following payment for an expenditure incurred would not be admissible as
deduction from business income:-
a. Rs.15,000 paid in cash to a transporter
b. Rs.5,000 paid in cash to a dealer in the morning and Rs.5,000 paid in cash to the same dealer in
the evening
c. Rs.40,000 sent through NEFT to the bank account of the dealer for goods purchased
d. Rs.19,000 paid through bearer cheque to the dealer for goods purchased

7. Mr.Sandeep, a sales executive stationed at HO at Delhi, was on official tour to Bangalore from
31.05.2022 to 18.06.2022 for business development. The company has paid Mr.Sandeep’s salary in
cash, from its local office at Bangalore for the month of May, 2022 (payable on 1st June) amounting to
Rs.75,000 (net of TDS), as Sandeep has no bank account at Bangalore. This was included in the
amount of “salary” debited to P and L A/c.

Answer: Where the payment is made by way of salary to an employee after tds and when such employee is
temporarily posted for a continuous period of 15 days or more in a place other than his normal place of
duty & does not maintain any bank account at such place. EXPENDITURE SHALL BE ALLOWED – Rule 6DD
 23

SECTION 35 D: AMORTISATION OF PRELIMINARY EXPENSES:

To whom allowed: Indian companies and resident non-corporate assessees

Purpose: Expenses incurred for establishment of business concerns;

Expenses in connection with expansion of an existing business

Meaning: Expenditure in connection with preparation of feasibility report,

project report, conducting market survey, engineering services, legal
charges for drafting and printing of memorandum and articles of
association, registration fees, expenses incurred on issue of shares or
debentures, underwriting commission, brokerage and expenditure on
printing and advertising of prospectus.

Amount of deduction: FIVE equal installments

Amount that qualifies for deduction:

A. Non-corporate assessee: Actual preliminary expenses (or) 5% of cost of project

whichever is less will qualify

B. Indian Company: Actual preliminary expenses

(or)
5% of (cost of project or capital employed)
at the option of the assessee
(whichever is less will qualify)

“Cost of project” means cost of fixed assets as on the last day of the previous year in which the business
commences.

“Capital employed” means the aggregate of share capital, debentures and long term borrowings as on the
last day of the previous year in which the business commences.

1. J Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the following
expenditure in connection with the new unit:

Preparation of project report Rs.1,00,000

Market survey expenses Rs.1,00,000
Legal and other charges for issue of additional
capital required for the new unit Rs.1,00,000

Cost of the project Rs.30,00,000

Capital employed in the new unit Rs.40,00,000

What is the deduction admissible to the company under section 35 D.

 24

2. Rama Cements Ltd., is a company engaged in the manufacturing of cement. The company issued
20 lakh equity shares of Rs.100 each to the general public. The shares were issued at a premium
of Rs.150 per share. The assessee claimed deduction u.s.35D in respect of preliminary expenses at
5% of capital employed and added the amount of share premium to the capital employed to arrive
at 5% as eligible amount of deduction under section 35D. The Assessing Officer, however,
disallowed the said expenditure on the basis that capital employed does not include the share
premium amount. Is the action of the Assessing Officer tenable in law? CA Final

Answer:
The facts of the case are similar to Berger Paints India Ltd (Supreme Court).

Facts: The assessee is a company engaged in the manufacture of paints. For the relevant assessment years,
the assessee claimed deduction u.s.35D of a sum representing share premium as being part of the capital
employed. The said deduction was allowed by the Assessing Officer.

Decision: Section 35D allows deduction of preliminary expenses to the extent of 5% of “Capital
Employed”. “Capital Employed” is defined as aggregate of the issued share capital, debentures and long
term borrowings. The Supreme Court observed that the share premium collected by the assessee on its
subscribed issued share capital could not be part of “capital employed in the business of the company” for
the purpose of section 35D. If it were the intention of the legislature to treat share premium as being
“capital employed in the business of the company”, it would have been explicitly mentioned.

The Supreme Court held that the assessee is not entitled to claim deduction in relation to the premium
amount received from shareholders at the time of share subscription. In view of the above judgement, the
action of Assessing Officer is correct.

SECTION 40 (a) (ia): Payment to residents without tds:

Any payment made to a RESIDENT shall be disallowed to the extent of 30% of the expenditure if:

DEFAULT ONE: Failure to deduct tax at source before the end of the previous year; or

DEFAULT TWO: Tax has been deducted at source before the end of the previous year but not paid
before the due date of filing ROI.

Note: Once the expenditure gets disallowed, the same shall be allowed as deduction only in the year
in which the tax is paid to the Government.

Note: No disallowance shall be made if the following conditions are satisfied:

a. The resident payee has taken into account such receipts in computing his total income;
b. The resident payee has paid tax due on such income;
c. The resident payee has filed his return of income within the due date; and
d. The payer (assessee) furnishes a certificate to this effect from a Chartered Accountant
 25

1. State whether disallowance u/s.40 (a) (ia) is attracted in the following cases:

 X Ltd pays a sum of Rs.7,20,000 as rent of office building during the previous year 2022-23.
No tax is deducted at source.

 K Ltd pays salary Rs.10,00,000 to an employee after deduction of tax at source. However,
tax was not deposited by K Ltd with the Government before 31.10.2023.

 A consultancy fees of Rs.40,000 is credited by Y Ltd to the account of payee on 01.10.2022

without deduction of tax at source. Tax is not deducted up to 31.03.2023. Tax is deducted
on 05.04.2023 and deposited on 05.05.2023.

 Interest of Rs.80,000 on company deposit is credited by Z Ltd to the account of payee on

10.12.2022. Tax is deducted on the same day. Tax is deposited with the Government
through internet banking on 10.08.2023. Due date of filing return of income is 31.10.2023.

2. Varun Ltd paid fees for technical services of Rs.6 lakhs, omitted to deduct tax at source and such
omission continued till the ‘due date’ for filing the return of income specified in Section 139(1).
The amount of expenditure liable for disallowance would be ………………………

3. Andhra Traders a partnership firm paid Rs.80,000 as contract charges to AKP & Co (firm). No tax
was deducted at source for the above said payment. The amount liable for disallowance
u.s.40(a)(ia) for the A.Y.2023-24 is………………………….

SECTION 43CA: SALE OF IMMOVABLE PROPERTY FOR INADEQUATE

CONSIDERATION
Land or Building held as stock in trade:
Where the actual sale price of land or building is less than the stamp duty value (guideline value),
SDV shall be deemed to be the full value of the consideration.

However, from A.Y.21-22: If SDV exceeds 110% of actual sale price, then stamp duty value shall
be taken as the full value of consideration. Gap cannot be more than 10%. If gap is > 10% then
SDV shall be taken as full value of consideration.

Situation 1 Situation 2 Situation 3

Stamp duty value 25 lacs 22 lacs 29.4 lacs
Actual sale price 20 lacs 20 lacs 28 lacs
% of SDV to actual sale price 125% > 110% 110% = 110% 105% < 110%
Full value of consideration SDV Actual sale price Actual sale price
 26

SDV on the date of agreement and SDV on the date of registration are not same:
Normally, stamp duty value on the date of registration/sale shall be considered. However, stamp
duty value as on the date of the agreement can be opted by the assessee:

if advance or down payment has been received by way of an account payee cheque or account
payee bank draft or use of ECS on or before the date of the agreement.

Other prescribed electronic modes: Credit card, debit card, net banking, IMPS (Immediate Payment
Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Fund Transfer) and BHIM
(Bharat Interface for Money) Aadhar Pay

1. R Ltd. a developer of real estate, sold a residential house property to Mr.S for Rs.40,00,000 on
15.11.2022, whereas its stamp duty value is Rs.48,00,000. The cost of the residential property is
Rs.36,00,000. Compute the business income of R Ltd.

2. Mr.Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is
a dealer in automobile spare parts, for Rs.90 lakh on 1.1.2023, when the stamp duty value was
Rs.150 lakh.

The agreement was, however, entered into on 1.9.2022 when the stamp duty value was Rs.140
lakh. Mr.Hari had received a down payment of Rs.15 lakh by A/c payee bank draft from Rajesh on
the date of agreement.

Discuss the tax implications in the hands of Hari assuming that Mr.Hari had purchased the
building for Rs.75 lakh on 12th July, 2021.
 27

SECTION 43 B: DEDUCTION ONLY ON “PAYMENT” BASIS

Irrespective of the method of accounting, the following items of expenditure shall be allowed as
deduction only on “PAYMENT” basis.

a) Any sum payable to Government by way of tax, duty or cess

b) Employer’s contribution towards provident fund, approved gratuity fund
c) Bonus or commission or leave salary payable to employees
d) Interest on loans borrowed from any bank or public financial institution or from “deposit
taking NBFCs” or from “systemically important non-deposit taking NBFCs”
e) Any sum payable to the Indian Railways for the use of Railway assets.

Note: Payment should be made before the “due date” of filing return of income. If payment is made
after the “due date”, then deduction shall be allowed only in the year of payment.

Note: Any amount due by way of interest on loan, is subsequently converted by the bank, etc. into a
fresh loan, the interest so converted shall not be deemed as ‘actual payment’ and no deduction
is allowed.

Note: Any amount due by way of interest is subsequently converted into debentures or any other
instrument by which the liability to pay is deferred to a future date, such conversion shall not
be deemed as ‘actual payment’ and no deduction is allowed. (AMENDMENT)

Note: “Deposit taking NBFC” means a non-banking financial company which is accepting or holding
public deposits and is registered with the RBI.

Note: “Systemically important non-deposit taking NBFC” means a NBFC which is not accepting or
holding public deposits and having total assets of not less than five hundred crore rupees as per
the last audited Balance Sheet and is registered with RBI.

1. X Ltd is a manufacturing company. P & L A/c for the year ending 31.03.2023 is given below:

Sales tax 50,000 Sales 25,00,000

Other expenses 14,15,000
Net Profit 5,45,000

Out of sales tax of Rs.50,000 only Rs.47,000 is paid. The payment is made as follows:
a) Rs.40,000 on 02.12.2022
b) Rs.4,000 on 05.10.2023
c) Rs.3,000 on 02.12.2023

Return of income is submitted on 10.12.2023.

 28

During the previous year 22-23, the following payments are made in respect of expenses pertaining to
earlier years:
 Bonus to employees pertaining to the previous year 20-21 is paid on 30.04.2022 Rs.15,000
 Customs duty pertaining to the previous year 20-21 is paid on 01.12.2022 Rs.25,000
 Electricity bill payable to TNEB pertaining to previous year 20-21 is paid on 03.05.2022 Rs.35,000
 Interest on bank loan pertaining to the previous year 21-22 is paid on 20.05.2022 Rs.40,000

These payments do not pertain to the previous year 22-23. Consequently, these are not recorded in
the profit and loss account. Compute net income of X Ltd.

2. Saraswathi Ltd made provision of Rs.12 lakhs for bonus payable for the year ended 31.03.2023. It paid
Rs.7 lakhs on 31.07.2023; Rs.3 lakhs on 31.10.2023 and Rs.2 lakhs on 15.12.2023. The amount eligible
for deduction u.s.43B would be …………………..

3. Appu Ltd contributed Rs.8,70,000 towards provident fund of its employees. It actually remitted
Rs.5,00,000 up to 31st March and Rs.2,50,000 up to the due date for filing the return specified in
section 139(1). The amount liable for disallowance would be……………………

4. Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation and Indian
Bank and has not paid interest as detailed hereunder:-

i. Andhra Pradesh State Financial Corporation (P.Y.2021-22 & 2022-23) 15,00,000

ii. Indian Bank (P.Y.2022-23) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2022-23,
converted the above interest payable by Hari to them as a loan repayable in 60 equal installments.

During the year ended 31.03.2023, Hari paid 5 installments to APSFC and 3 installments to Indian
Bank. Hari claimed the entire interest of Rs.45,00,000 as an expenditure while computing the income
from business. Discuss whether his claim is valid and if not what is the amount of interest, if
any, allowable.

Answer: Conversion of unpaid interest in to a fresh loan cannot be treated as “actual payment” for the
purpose of section 43B. Deduction shall be allowed only in the year in which the converted loan is actually
paid. Hence the claim made by Mr.Hari is not valid.

Deduction shall be allowed to the extent of installments paid by Mr.Hari.

Deduction for A.Y.23-24 is computed as shown below:

APSFC (15 lacs / 60 x 5) 1,25,000

Indian bank (30 lacs / 60 x 3) 1,50,000
Amount allowed as deduction 2,75,000
 29

SECTION 35 AD: TAX INCENTIVES FOR SPECIFIED BUSINESS:

1. List of Specified Business:

a) Setting-up and operating a cold chain facility

b) Setting-up and operating a warehousing facility for storing agricultural produce

c) Laying and operating pipeline network for distribution including storage of:
i. natural gas; ii. crude; iii. petroleum

d) Building and operating, anywhere in India, a hospital with at least 100 beds for patients

e) Building and operating, anywhere in India, a hotel of two star or above category

f) Developing and building a housing project under a scheme for Slum Redevelopment or
Rehabilitation framed by the Central or State Government.

g) Developing and building a housing project under a scheme for affordable housing framed by
the Central Government or State Government.

h) Production of fertilizer in India

i) Setting up and operating an Inland Container Depot or a Container Freight Station notified
under the Customs Act, 1962.

j) Bee-keeping and production of honey and beeswax.

k) Setting up and operating a warehousing facility for storage of sugar.

l) Laying and operating a slurry pipeline for the transportation of iron ore

m) Setting up and operating a semiconductor wafer fabrication manufacturing unit.

n) Developing or maintaining and operating or developing, maintaining and operating a new

infrastructure facility.

II. AMOUNT OF DEDUCTION:

100% of any expenditure of CAPITAL NATURE shall be allowed as deduction.

However, any expenditure incurred prior to commencement of operations, such expenditure shall
be allowed in the year of commencement of such operations provided such expenditure is capitalized
in the books of account as on the date of commencement of operations.

Note: No deduction for expenditure incurred on LAND, GOODWILL OR FINANCIAL INSTRUMENT.

 30

Note: Any capital expenditure in respect of which payment exceeding Rs.10,000 made by
cash/bearer cheque would not be eligible for deduction.

Note: Assessee cannot claim any deduction u.s. 10AA or under chapter VI A under the heading “C.-
Deductions in respect of certain incomes” for the year or any other AY.

Note: Loss from a specified business can be set-off only against income from another specified
business.

Note: Where an assessee builds a star hotel and, subsequently, while CONTINUING TO OWN the
hotel, TRANSFERS THE OPERATION thereof to another person (say under an outsourcing
arrangement), the assessee shall be deemed to be carrying on the specified business and is
eligible for section 35AD benefit.

1. R Ltd. constructed a building and started operating a hotel of 3 star category w.e.f. 01.04.2022.
The company incurred the following expenditure in this connection:

a. Capital expenditure (including cost of land Rs.50 lakhs) incurred during December, 2021 to
March 2022 which were capitalized in the books of account as on 31.03.2022
Rs.1,10,00,000

b. Capital expenditure incurred during the previous year 2022-23 (it includes Rs.20 lakhs
paid for goodwill) Rs.1,40,00,000

Compute the deduction available under section 35AD in the A.Y.2023-24.

Answer:

Amount of deduction u.s.35AD for A.Y. 23-24 is computed as follows:

A. Expenditure incurred prior to commencement of operations

and capitalized in books of account excluding land Rs.60 lakhs

B. Capital expenditure incurred during the previous year 2022-23

excluding payment for goodwill Rs.120 lakhs
Amount of deduction u.s.35AD Rs.180 lakhs
 31

2. Mr.Suraj, commenced operations of the business of a new three-star hotel in Chennai on

April 1, 2022. He incurred capital expenditure of Rs.50 lakhs during the period January
2022 to March 2022 exclusively for the above business and capitalized the same in his
books of account as on 01.04.2022.

Further, during the previous year 2022-23, he incurred a capital expenditure of Rs.2 crore
(out of which Rs.1.5 crore was for acquisition of land) exclusively for the above business.

Compute the income under the head “Profits and Gains of business or profession” for the
assessment year 2023-24, assuming that he has fulfilled all the conditions specified for
claim of deduction under section 35AD and opted for claiming deduction under section
35AD and he has not claimed any deduction under Chapter VI-A under the head “C -
Deductions in respect of certain incomes”.

The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the assessment year 2023-24 is Rs.25 lakhs.

Assume that he also has another existing business of running a four-star hotel in
Coimbatore, which commenced operations fifteen years back, the profits from which are
Rs.120 lakhs for assessment year 2023-24. Also, assume that expenditure incurred were
paid by account payee cheque or use of ECS. Assume that Mr.S has not opted for Section
115BAC provisions.

Answer:

Computation of profits and gains of business or profession for A.Y.2023-24

A. Profit from the existing business of running a hotel in Coimbatore 120 lakhs

B. New three-star hotel in Chennai:

Profit before claiming deduction u.s.35AD 25 lakhs
Less: Deduction u.s.35AD (see note below) 100 lakhs 75 lakhs

Income from business after set-off of losses of specified business

against profits of another specified business 45 lakhs

Note: Deduction u.s.35AD in respect of the new hotel:

Expenditure incurred prior to commencement of business
and capitalized in the books of account 50 lakhs

Capital expenditure incurred during the previous year 22-23

excluding land 50 lakhs

Amount of deduction u.s.35AD for A.Y.2023-24 100 lakhs

 32

Asset shall be used only for Specified Business:

Any asset in respect of which a deduction is claimed and allowed shall be used only for the
specified business for a period of 8 years beginning with the previous year in which such
asset is acquired.

If the above condition is violated:

In case the asset is used for a purpose other than the specified business within the period of
8 years, the total amount of deduction so claimed and allowed as reduced by the amount of
depreciation u.s.32 shall be deemed to be the income under the head “Profits and gains of
business or profession” of the previous year in which the asset is so used.

3. DAS Pvt Ltd. fulfilling all the conditions as being specified in section 35AD of the Income Tax Act,
1961 has incurred capital expenditure of Rs.30 lakhs on purchase of land, Rs.80 lakhs (Rs.75 lakhs
by cheque and Rs.5 lakhs in cash) on construction of building and Rs.10 lakhs on the plant and
machinery during the previous year 2022-23 for setting up and operating a warehouse for the
storage of sugar. The warehouse became operational on 01st March, 2023. The amount of
deduction which the company can claim for such capital expenditure as per section 35AD in AY.
2023-24 shall be …………………..

SECTION 35: EXPENDITURE ON SCIENTIFIC RESEARCH:

Scientific research may be carried on:
a. by the assessee himself in his business (in-house research); or
b. by making payment to outside agencies engaged in scientific research work

A. Revenue expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure shall be allowed as deduction

Revenue expenditure incurred BEFORE COMMENCEMENT OF BUSINESS on:

a. salary to employees excluding perquisites; and
b. purchase of raw materials used in scientific research

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business. Deduction is allowed to the extent these are
approved by the prescribed authority.

B. Capital Expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure (excluding land) shall be allowed as
deduction
 33

Capital expenditure (excluding land) incurred BEFORE COMMENCEMENT OF BUSINESS

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business.

Note: Since entire cost is allowed as deduction, depreciation is not allowed.

C. Contribution to RESEARCH ASSOCIATIONS engaged in research activities:

Contribution made to Type of research % of deduction

Research Association Scientific Research 100

National Laboratory, Programmes in 100

University or IIT. scientific research

Company (registered in Scientific research 100

India and having research
as its main object)

Research Association Social science or

Statistical research 100

Note: Deduction u.s.35 shall NOT be available to the DONOR if such research association,
university, college, fails to file statement of donations to the prescribed authority
(amendment).

Note: A ‘research association’ can be a university or a college or any other institution

approved by prescribed authority.

Note: The Research carried on by the Institution need not be related to the business of the
assessee.

1. XYZ Ltd. has contributed the following amounts to various research institutions. The research
carried on by the institutions are not related to the business of the assesse (XYZ Ltd). Compute
the amount of deduction u.s.35.

a. The company pays Rs.80,000 to the Indian Agricultural Research Institute, being an
approved research institution for the purpose of carrying out scientific research in
natural science.

b. The company also pays Rs.70,000 to the IIM, Ahmedabad, being an approved institute for
the purpose of carrying out research in social or statistical science.

c. The company also pays Rs.46,000 to an approved National Laboratory for carrying out
programmes of scientific research.
 34

2. Where the assessee does not himself carry on scientific research but makes contributions to an
approved university, college or institution, to be used for scientific research related or
unrelated to the business of assessee, then the amount of deduction from income of business
shall be allowed on such contribution to the extent of ………….%

3. Mr.A furnishes the following particulars for the previous year 2022-23. Compute the deduction
allowable under section 35 for A.Y.2023-24, while computing his income under the head
“business or profession”.

a. Amount paid to notified approved Indian Institute of Science, Bangalore, for Scientific
Research Rs.1,00,000

b. Amount paid to IIT, Delhi for an approved scientific research programme Rs.2,50,000

c. Amount paid to X Ltd., a company registered in India which has as its main object of
scientific research, as is approved by the prescribed authority Rs.4,00,000

d. Expenditure incurred on in-house research and development facility as approved by the

prescribed authority:
 Revenue expenditure on scientific research Rs.3,00,000
 Capital expenditure (including cost of acquisition of land
Rs.5,00,000)on scientific research Rs.7,50,000

SALE OF AN ASSET USED FOR SCIENTIFIC RESEARCH:

A. Sold without having been used for other purposes:

The sale price to the extent of deduction allowed u.s.35 shall be treated as business
income & the sale price in excess of business income shall be treated as capital gains

B. Brought into business use after having been used for research:
The actual cost of such asset shall be taken as nil. Hence, no depreciation is allowed.

4. An asset was purchased for Rs.6,00,000 on 17.11.2021 for conducting scientific research
and the deduction was claimed under section 35 of the Income-tax Act, 1961. This asset
was sold on 05.09.2022 for a consideration of Rs.8,00,000. Discuss the tax treatment.
 35

Section 35 DD: Expenditure on amalgamation or demerger:

Such expenditure shall be allowed over a period of FIVE years from the year in which the
amalgamation or demerger took place.

Section 35 DDA: Expenditure incurred on VRS:

Where an assessee incurs an expenditure in any previous year in respect of the above, such
expenditure is deductible in FIVE equal installments from the year in which the PAYMENT is
made.

Section 36(1)(iii): Interest on borrowed capital

Interest on capital borrowed for acquiring a capital asset:

Interest paid up to the date the asset is first put to use shall be capitalized and added to the
cost of the asset. Interest paid after the asset is put to use is an admissible expenditure.

Section 36(1)(iiia): Discount on zero coupon bond:

Amount of deduction: Allowed over the maturity period of such bond (pro rata basis)

‘Discount’ means the difference between the maturity amount and amount received on issue
of such bonds by the infrastructure capital company.

Section 36 (1) (iva): Employer’s contribution to notified pension scheme:

Amount of deduction: 10% of salary of employees

Note: Excess contribution made by the employer shall be disallowed

while computing business income u.s.40A(9)

Note: Salary = Basic + dearness allowance (forming)

Section 40 (a) (i): Payment made to a non-resident without tds

Failure to deduct tax at source on payment made to a non-resident:

Entire (100%) expenditure shall be disallowed. The same shall be allowed only in the year in
which such tax is remitted to the Government.
 36

Section 36 (1) (va): Employees’ contribution towards provident fund:

Amount recovered towards PF: First treated as INCOME in the hands of the Employer

At the time of deposit by the The same shall be allowed as deduction while computing
Employer before “due date”: business income of the assessee.

For this purpose “due date” means the date by which the employer is required to deposit such
contribution under the Provident Fund Act. (15 days from the end of the month)

Section 36 (1) (xv): Securities Transaction Tax

STT shall be allowed as deduction like any other business expenditure only if:
a. Securities are held as stock-in-trade; and
b. Profit on sale of such securities is taxed as business income

Section 36 (1) (xvi): Commodities Transaction Tax

Commodities transaction tax (CTT) shall be allowed as deduction while computing income
from the business of purchase and sale of commodities in a commodities exchange.

Section 36 (1) (vii): Bad debts:

The following conditions are to be satisfied for claiming deduction:

a. There must be a debt

b. The debt must be incidental to the business of the assessee
c. The debt must have been taken into account while computing the income of the assessee.
d. Debt must be written off in the books of account of the assessee

Note: It is not necessary for the assessee to establish that the debt, has become irrecoverable. SC
Note: Condition ‘c’ is not applicable for an assessee engaged in money-lending business.

Section 40 (a) (v): Tax on non-monetary perks paid by employer

Tax treatment: In the hands of the employer: Expenditure shall be disallowed

In the hands of the employee: Tax free perk
 37

Section 37(1): GENERAL DEDUCTION

1. The following conditions are to be fulfilled for the allowability of an expenditure: -

 The expenditure should not be covered by any of the section between 30 to 36;
 Should have been spent wholly and exclusively for the purpose of business;
 Should not be in the nature of personal expenditure of the assesse;
 Should not be in the nature of a capital expenditure

Explanation 1:
 Should not be incurred for any purpose which is an offence or prohibited by law.
e.g. Incentives (or freebies) given by pharmaceutical company to doctors is
clearly “prohibited by law”.

Explanation 2:
 It is not an expenditure incurred by the assessee on CSR activities (corporate social
responsibility) referred to in section 135 of the Companies Act, 2013.

 Explanation 3:
To compound an offence under any law for the time being in force (compounding fee)

2. No deduction for an expenditure incurred on advertisement in any souvenir, brochure,

tract, pamphlet, etc. published by a political party – Section 37(2B)

Section 41: Deemed Income

Where any deduction was allowed in respect of a loss or expenditure or trade liability for any
year and subsequently during any previous year the assessee or successor of the business:

has obtained any amount in respect of such loss or expenditure or some benefit in respect
of such trade liability by way of remission or cessation thereof,

the amount obtained or the value of benefit accrued shall be deemed to be income.

Section 36 (1) (ix): Family Planning Expenditure

To whom available: Only for company-assessee

Amount of deduction: Revenue expenditure is fully allowed

Capital expenditure is allowed in five equal installments
 38

PROBLEMS:
Section 35DD: Expenditure on amalgamation or demerger
1. X Ltd., a manufacturing company, was marketing its products through another company Y Ltd.,
which enjoyed the sole distribution rights. It was decided to amalgamate Y Ltd with X Ltd. and
to take over its establishment so that the distribution, marketing and selling could be carried
on by X Ltd. itself. A sum of Rs.50,000 was incurred by way of legal expenses in connection
with the amalgamation which was claimed by X Ltd. as a revenue expenditure for the
assessment year 2023-24. Is the claim justified?

Section 35DDA: Expenditure on VRS comepensation:

2. X Co. Ltd paid Rs.120 lakhs as compensation as per approved Voluntary Retirement Scheme
(VRS) during the financial year 2022-23. How much is deductible under section 35DDA for the
assessment year 2023-24?

Section 36(1)(iii): Interest on borrowed capital:

3. X Ltd., purchased a machinery on 01.04.2022 for Rs.10 lakhs by availing a 80% loan facility
from Bank. This machinery was put to use on 01.01.2023 into effective production. The
interest on loan works out to 10% p.a. Advise X Ltd, on the treatment of interest payments
made on this loan.

4. Swan Pvt Ltd acquired machinery for Rs.5,75,000 which included GST of Rs.75,000 eligible for
input tax credit. It borrowed Rs.3,00,000 from a bank for purchase of the said machine.
Interest on the bank loan up to the date of usage of machine was ascertained as Rs.25,000. The
machine was put to use from 15th September, 2022. Assume the rate of depreciation at 15%.
The eligible amount of depreciation will be ………………

5. A company, incorporated for the manufacture of steel, had not commenced production. The
plant and machinery was in the stage of erection. During the previous year ending 31 st March,
2023, it paid interest on borrowings, amounting to Rs.20 lakh. It also received interest of
Rs.1.50 lakhs on investments in short-term deposits of money not immediately required for
business. The Assessing Officer assessed the interest income under “Income from other
sources”. Discuss the correctness of the assessment.

Section 36(1)(iva): Employer contribution to Notified Pension Scheme:

6. X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness allowance is 40% of basic salary and it forms part of
pay of the employees.

Compute the amount of deduction allowable u.s. 36(1)(iva), if the basic salary of the employees
aggregate to Rs.10,00,000. Would disallowance u.s. 40A(9) be attracted, and if so, to what
extent?
 39

Section 36(1)(va): Employee’s contribution to Provident Fund:

7. The profit and loss account of Mr.X for the year ending March 31, 2023 is as follows:

Cost of goods sold 75,000 Sale proceeds of goods 2,30,000

Salary to employees 99,000
Other expenses 10,000
Net profit 46,000

The salary of Rs.99,000 comprises Rs.9,000 as employee’s contribution towards recognized

provident fund. Out of Rs.9,000, Rs.6,000 is credited in the employees’ provident fund within
“due date” and Rs.3,000 is credited after “due date”. Compute net income of X.

8. Employees contribution to EPF of Rs.3 lakhs recovered from their salaries for the month of
March 2023 and shown in the balance sheet under the head sundry creditors was remitted on
31.05.2023. Discuss the admissibility.

Section 36(1)(vii): Bad debts:

9. Malick & Co engaged in trading activity could not recover Rs.5 lakhs from a customer. It
claimed the entire amount as bad debt by writing off in the books of account. The aggregate
sale made during the year to the party amounts to Rs.30 lakhs. The amount eligible for
deduction by way of bad debt is:
a. Nil c. Rs.5 lakhs
b. Rs.3 lakhs d. Rs.60,000

10. The business of RB & Co., a firm, was sold as a going concern with all assets and liabilities to M
& Co. in 2015. Out of the book debts which were transferred, a sum of Rs.1,00,000 was found
to be irrecoverable by M & Co in F.Y.2022-23 and it was consequently written off as bad debt.
The Assessing Officer declined to allow the claim on the ground that the debt related to the
business when it was being carried on by RB & Co. Discuss.

Answer:
The Supreme Court held that a successor to a business will be entitled to claim an allowance for
bad debt even though the debt did not relate to the business of the assessee but to the business it
has succeeded. The Court held that even if the relevant debt had been taken into account in
computing the income of predecessor only and had been written off as irrecoverable by the
successor assessee, the assessee will be entitled to the deduction of bad debt. In the present case
Rs.1 lakh is deductible as bad debt in the hands of the company.

Section 37(1): General Deduction:

11. Discuss the admissibility of the following expenses:

a. Expenses on Corporate Social Responsibility activities
b. Expenditure on advertisement in a souvenir published by a Political Party
c. Fine paid for violation of provisions of GST Act
d. Expenditure incurred to compound an offence under any law (compounding fee) (amendment)
e. Pharmaceutical companies gifting freebies to doctors (amendment)
 40

12. Sakshita Pvt Ltd., has spent a sum of Rs.30 lakhs towards meeting its Corporate Social
Responsibility (CSR) obligation. The amount of deduction available while computing the
business income is Rs………………..

Section 36(1)(xv): Securities Transaction Tax

13. State with reasons, whether the following statement is true or false:
For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.

Section 36(1) (ix); Family Planning Expenditure:

14. When ABC Ltd incurred Rs.10 lakhs in financial year 2022-23 as capital expenditure for the
purpose of family planning amongst the employees, the expenditure allowable for the
A.Y.2023-24 would be:……………..

Section 41: Deemed Income:

15. Mr.G, a businessman, paid sales tax of Rs.1,50,000 in financial year 2018-19 and the entire
amount was allowed as deduction. In October 2018, he died and the business was continued to
be carried on by his wife Ms.S. In March 2023, she is refunded Rs.60,000 by the Commercial
taxes department being the excess of sales tax paid by her husband. Assessing Officer wants to
treat the amounts as taxable. Is he correct in doing so?

Answer:
Yes. The Assessing Officer is correct in treating the sum of Rs.60,000 as taxable income in the case
of Ms.S as the provisions of Section 41(1) apply even to the successor of the business.

Trade liability allowed as deduction earlier; now partial waiver (remission):

16. Sundry creditors include an amount of ₹ 10 lakhs payable to A & Co, towards supply of raw
materials, which remained unpaid due to quality issues. An agreement has been made on
31.03.2022, to settle the amount at a discount of 75% of the outstanding. The amount waived is
credited to Profit and Loss account. Is the amount credited to Profit and Loss account chargeable
to tax?

Answer:
Remission or cessation of trade liability: Rs.7,50,000 to be treated as deemed income under section
41(1), hence taxable.

Loss allowed as deduction earlier; now recovered:

17. Sameer sold goods worth Rs.50,000 at credit on 1 st April, 2021. However, he has written off
Rs.10,000 as bad debts and claimed deduction for the same during the year 2021-22. On 10th
October, 2022, the defaulting debtor made payment of Rs.45,000. The taxable amount of bad
debts recovered for the year 2022-23 would be:………………
 41

Section 32: DEPRECIATION

Conditions for claiming depreciation:
 Should be the owner of the asset (fractional or joint ownership is also recognized)
 The asset must be put to use in business (not active use but passive use)
 The assets should fall within the eligible classification of assets

Important points:
 Depreciation claim is mandatory (not an option)
 Registration is not compulsory to claim depreciation
 Allowed on the system of “block of assets”
 Allowed on the basis of “written down value” method
 No depreciation is allowed on land
 No depreciation for assets purchased by way of cash exceeding Rs.10,000

Block of Assets:
“Block of Assets” means a group of assets falling within a class of assets comprising,
a) tangible assets, being building, machinery, plant or furniture;

b) intangible assets, being know-how, patents, copyrights, trademarks, licences,

franchises or any other business or commercial rights of similar nature, in
respect of which the same percentage of depreciation is prescribed.

note: An assessee may have 9 different blocks of assets as under

Buildings ------ 3 blocks (5%, 10%, and 40%)
Furniture and fittings ------ 1 block 10%
Plant and machinery ------ 4 blocks (15%, 20%, 30%, 40%)
Intangible assets ------ 1 block 25%

Plant includes ships, vehicles, books, scientific apparatus and surgical equipments.
Building includes roads, bridges, culverts, wells and tube wells.
Goodwill does not qualify for depreciation (new amendment)

How to compute depreciation?

Written down value as on 1.4.2022 xxx
Add: Purchases to the block xxx
xxx
Less: Amount realized through sale, etc. xxx
Less: Depreciation as per section 32 xxx
Written down value as on 1.4.2023 xxx
 42

If the asset is acquired during the previous year (first year) and put to use for:
a. Less than 180 days: Only 50% of the depreciation is allowed
b. 180 days or more: Full depreciation is allowed

note: The above provision is only for year of purchase and not for subsequent years. For
subsequent years, full depreciation is allowed.

note: No depreciation if WDV is reduced to zero or where the block ceases to exist.

In other words, depreciation is allowed only if the following two conditions are satisfied:
a) Block should exist (i.e. there should be an asset in the block)
b) Written down value of the block should not be zero.

On sale of entire block or part of the block:

A.Where ENTIRE block is sold: The result is either STCG or STCL

If the sale value > the opening w.d.v. plus additions: STCG
If the sale value < the opening w.d.v. plus additions: STCL

B.Where PART of the block is sold:

If sale value is less than w.d.v. of the block: Depreciation is allowed
If sale value is more than w.d.v. of the block: Short-term capital gain

Depreciation on Actual Cost:

Revaluation of assets does not have any impact under the IT Act. Depreciation is allowed only
on the actual cost of the asset and not on the revalued figure.

Is it mandatory to claim depreciation or is it an option?

Yes it is mandatory for the assessee to claim depreciation. Depreciation shall be allowed
whether or not the assessee has claimed depreciation in computing his total income.

note: GST paid on purchase of an asset shall not be included in the cost if ITC is availed.

note: Any subsidy or grant received from the Government in connection with purchase of an
asset shall not be included / reduced in the cost of such asset.

Rates of depreciation:
Computers: 40%; Cars: 15%; Buildings (commercial): 10%;
Furniture: 10%; Ships: 20% Residential quarters: 5%;
Aeroplanes: 40%; Books: 40% Plant and machinery (generally): 15%
Books (annual publication): 40%
 43

note: Motor cars acquired during the period from 23.08.2019 to 31.03.2020 and put to use
before 31.03.2020 shall qualify for 30% depreciation.

note: Motor buses, motor lorries, motor taxis used in a business of running them on hire,
acquired during the period from 23.08.2019 to 31.03.2020 and put to use before
31.03.2020 shall qualify for 45% depreciation.

ADDITIONAL DEPRECIATION on new plant and machinery:

Conditions for claiming additional depreciation – Section 32(1)(iia)

 It should be:
 a manufacturing unit; or
 an assessee engaged in the business of generation or transmission or
distribution of power.

 Rate of additional depreciation is 20% of cost of new plant and machinery acquired
and installed in a previous year

Additional Depreciation is NOT available in the following cases:

 Not available for assets like building or furniture
 Not available for assets like ships or aircrafts
 Should not be a second-hand machinery
 Machinery or plant used in any office premises or any residential premises
 Office appliances or road transport vehicles.
 Machinery or plant where whole of the cost is allowed as deduction in one year.

note: If the new machinery is put to use for less than 180 days: Additional depreciation is
allowed @ 10% (50% of 20%) and balance 10% shall be allowed in the next year.

note: Additional depreciation is allowed every year on the new investment made.

CBDT Circular: Business of printing or printing and publishing amounts to manufacture or

production of any article or thing and is therefore eligible for additional depreciation.
 44

Problems:
1. The following are the assets owned by X as on 1.4.2022:
Asset Rate of Depreciation
Building A 10%
Building B 10%
Building C 5%
Building D 40%
Machinery A 15%
Machinery B 15%
Machinery C 40%
Machinery D 15%
Car X 15%
Furniture and fixtures 10%
Patent rights 25%
Technical know-how 25%

Classify the assets into different block of assets.

2. A company was a lessee of an old building under an agreement with the lessor. It demolished
the old building and built a new building on the same site at a cost of Rs.10 lakhs and was
permitted to reoccupy the new building for a further period of 20 years at the old rent. It
claimed the expenditure of Rs.10 lakhs as revenue expenditure. Discuss.

3. A corporation was set up by the State Government transferring all the buses owned by it for a
consideration of Rs.75 lakhs, which was discharged by the corporation by issue of equity
shares. The corporation in this assessment claimed depreciation. Can the depreciation be
denied in the corporation hands on the ground that there was no registration of the buses in
favour of the corporation.

Answer: Since the possession of the buses have been taken over by the corporation and
consideration paid to the State Government, the corporation is entitled for depreciation.
Registration is not the condition for the purpose of claiming depreciation.

4. The w.d.v. of a block (machinery, rate of depreciation 15%) as on 31.03.2022 is Rs.3,20,000. A

machinery costing Rs.50,000 was acquired on 01.09.2022 but put to use on 01.11.2022. During
January, 2023, part of this block was sold for Rs.2,00,000. The depreciation for A.Y.23-24
would be:-

A. 21,750 B. 25,500 C. 21,125 D. None of these

 45

5. Mr.X furnishes the following details pertaining to the financial year 2022-2023:-

Description Plant Building Patents

Rate of depreciation 15% 10% 25%

Opening balance as on 01.04.2022 14,50,000 25,00,000 15,00,000

Acquired before 30.09.2022 12,00,000 nil 5,00,000
Acquired after 01.12.2022 4,00,000 18,00,000 nil
One of 2 patents transferred in March 2023 nil nil 3,00,000

A machinery acquired in July 2022 (original cost Rs.1,50,000) was destroyed by fire and the
assessee received compensation of Rs.50,000 from the insurance company. Newly acquired
building given above includes value of land of Rs.3,00,000. Calculate the eligible
depreciation claim for the assessment year 2023-24.

6. A newly qualified Chartered Accountant Mr.Dhaval, commenced practice and has acquired the
following assets in his office during F.Y. 2022-2023 at the cost shown against each item.
Assume that all the assets were purchased by way of account payee cheque. Calculate
depreciation that can be claimed from his professional income for A.Y. 2023-24:

Sl. Description Date of Date when Amount

No. acquisition put to use
1. Computer including
computer software 27.09.2022 1.10.2022 35,000

2. Computer UPS 02.10.2022 8.10.2022 8,500

3. Computer printer 1.10.2022 1.10.2022 12,500

4. Books (other than

annual publications
are of Rs.12,000) 1.04.2022 1.04.2022 13,000

5. Office furniture
(acquired from a
practising CA) 1.04.2022 1.04.2022 3,00,000

6. Laptop 26.09.2022 8.10.2022 43,000

 46

SHARING OF DEPRECIATION IN THE CASE OF CONVERSION OR TAKE OVER:

Total depreciation allowable in the year of SUCCESSION to the PREDECESSOR and the
SUCCESSOR is to be restricted to depreciation allowable as if succession had not taken
place, and such depreciation is to be apportioned on the basis of NUMBER OF DAYS
used by each of them.

7. M/s.R & Co., a sole proprietary concern is converted into a company, R Ltd. with effect from
29.11.2022. The written down value of assets as on 01.04.2022 is as follows:

Item Rate of depreciation WDV as on 01.04.2022

Building 10% 3,50,000
Furniture 10% 50,000
Plant and Machinery 15% 2,00,000

Further, on 15.10.2022, M/s.R & Co. purchased a plant for Rs.1,00,000 (rate of depreciation
15%). After conversion, the company added another plant worth Rs.50,000 (rate of
depreciation 15%). Compute the depreciation available to: (i) M/s.R & Co. & (ii) R Ltd. for
A.Y.2023-2024.

Problems on Additional Depreciation:

8. X Ltd, a manufacturing concern, furnishes the following particulars:

Opening WDV of the block of plant and machinery Rs.5,00,000

Purchase of plant and machinery (put to use before October 1, 2022) Rs.2,00,000
Sale proceeds of plant and machinery which became obsolete
(it was purchased on 01.04.2020 for Rs.5,00,000) Rs.5,000

Further, out of purchase of plant and machinery, machinery of Rs.20,000 has been installed in
office and another machinery of Rs.20,000 was used previously for the purpose of business by
the seller. Compute depreciation and additional depreciation for the A.Y. 2023-24.

9. Mr.A is engaged in the business of generation and distribution of electric power. He always
opts to claim depreciation on written down value for income tax purposes. From the following
details, compute the depreciation allowable for the A.Y.2023-24:

i. Opening WDV of block (15% rate) 42,00,000

ii. New machinery purchased on 12.10.2022 10,00,000
iii. Machinery imported from China on 12.04.2022. This
machine had been used only in China earlier and
the assessee is the first user in India 9,00,000
iv. New computer installed in generation wing of the unit on 15.07.2022 2,00,000

All assets were purchased by A/c payee cheque.

 47

10. Mr.Gamma, a proprietor started a business on 01.01.2021 for manufacture of tyres and tubes
for motor vehicles. The manufacturing unit was set up on 01.05.2021. He commenced his
manufacturing operations on 01.06.2021. The total cost of the plant and machinery installed in
the unit is Rs.120 crore. The said plant and machinery included second hand machinery
bought for Rs.20 crore and new machinery for scientific research relating to the business of the
assesse acquired at a cost of Rs.15 crore.

Compute the amount of depreciation allowable under section 32. Assume that all the assets
were purchased by of account payee cheque.

11. Compute the quantum of depreciation available u.s.32 in respect of the following items of Plant
and Machinery purchased by PQR Textile Ltd., by paying through account payee cheque, which
is engaged in the manufacture of textile fabrics, for the year ended 31.3.2023. Assume
company does not opt for the provisions of section 115BAA or section 115BAB:

(₹ in Crores)
New machinery installed on 1.5.2022 84
New Windmill purchased and installed on 18.6.2022 22
Lorries for transporting goods to sales depots (purchased and put 3
to use in July, 2022)

Items purchased after 30th November 2022:

Fork-lift-trucks, used inside factory 4
Computers installed in office premises 1
Computers installed in factory 2
New imported machinery 12

The new imported machinery arrived at Chennai port on 30.03.2023 and was installed on
3.4.2023. All other items were installed during the year ended 31.3.2023. The company was
newly started during the year. Also, compute the WDV of the various blocks of assets as on
1.4.2023.

Whether depreciation is allowed on ‘discarded’ machinery.

12. Mr.Janak is proprietor of M/s.Yash Textiles which is engaged in garment manufacturing
business. The entire block of Plant & Machinery chargeable to depreciation @ 15%, has 20
different machinery items as at 31.03.2022. One of the machineries used for packing had
become obsolete and was discarded by Mr.Janak in July’ 22.

Assessee filed its return for A.Y.2023-24 claiming total depreciation of ₹ 40 lacs which
includes ₹ 4 lacs being the depreciation claimed on the machinery item discarded by
Mr.Janak. The A.O. disallowed the claim of depreciation of ₹ 4 lacs during the course of
scrutiny assessment. Comment on the validity of action taken by A.O.
 48

Answer:
The Delhi High Court observed that the expression “used for the purpose of business” in section
32 when used with respect to discarded machinery would mean the use in the business, not
only in the relevant financial year, but also in the earlier financial years. Hence depreciation is
allowed on discarded machinery.

13. Mr.R resides in Delhi. As per new rule in the city, private cars can be plied in the city only on
alternate days. He has purchased a car on 21.09.2022, for the purpose of his business as per
following details:

Cost of car (excluding GST) 12,00,000

Add: Delhi GST at 14% 1,68,000
Add: Central GST at 14% 1,68,000
Total price of car 15,36,000

He estimates the usage of the car for personal purposes will be 25%. He is advised that since
the car has run only on alternate days, half the depreciation, which is otherwise allowable, will
be actually allowed. He has started using the car immediately after purchase. Determine the
depreciation allowable on car for the AY 2023-24, if this is the only asset in the block. Rate of
depreciation may be taken at 15%.
 49

CHAPTER – 3: ASSESSMENT OF COMPANIES

INCOME COMPUTATION AND DISCLOSURE STANDARDS - ICDS

1. Features of ICDS:
ICDS are to be followed by all assesses, except Individuals or HUF who are not covered under tax
audit provisions, following Mercantile System of accounting.

The above standards are followed while computing:

a) Income from business; and
b) Income from other sources
and not for the purpose of maintenance of books of accounts.

In case of conflict between the provisions of the Income-tax Act and the notified ICDS, the
provisions of the Act shall prevail to that extent.

Central Government has issued the following ten ICDS:

ICDS No. Name of the ICDS AS Ind AS

ICDS I Accounting Policies AS 1 Ind AS 1
ICDS II Inventories AS 2 Ind AS 2
ICDS III Construction Costs AS 7 Ind AS 115
ICDS IV Revenue Recognition AS 9 Ind AS 115
ICDS V Tangible Fixed Assets AS 10 Ind AS 16
ICDS VI Effects of Changes in
Foreign Exchange Rates AS 11 Ind AS 21
ICDS VII Government Grants AS 12 Ind AS 20
ICDS VIII Securities AS 13 Ind AS 32, 107, 109
ICDS IX Borrowing Costs AS 16 Ind AS 23
ICDS X Provisions, Contingent
Liabilities and Contingent Assets AS 29 Ind AS 37

As per section 2(24)(xviii), “income” includes: Any subsidy or grant or waiver or reimbursement
by the Central or State Government or any authority or body or agency in cash or kind other than,
subsidy or grant or reimbursement which is taken into account for determining the actual cost of the
asset. Therefore, waiver of loan is an income u.s.2(24)(xviii). Since the same has been credited to
P&L A/c, no adjustment is required.
 50

1. XYZ Private Limited is engaged in manufacturing and selling ceramic tiles. The net profit of
the company as per its profit and loss account for the year ended 31st March, 2023 is Rs.150
lakhs after debiting or crediting the following items:

i. One-time license fee of Rs.20 lakh paid to a foreign company for obtaining franchisee on
1st June, 2022.

ii. Rs.29,000 paid to A & Co., a goods transport operator in cash on 31 st Jan 2023 for
distribution of the company‟s products to its warehouse.

iii. Rent of Rs.6 lakh received from letting out a part of its office premises. Municipal tax in
respect of the said part of the building amounting to Rs.15,000 remains unpaid due to
court litigation.

iv. Rs.2 lakhs being contribution to a University approved and notified u/s.35(1)(ii).

v. Rs.3 lakh, being loss due to destruction of machinery caused by a fire due to short
circuit. The insurance company did not admit the claim of the company.

vi. Rs.4 lakhs and Rs.1 lakh being amounts waived by a bank out of principal and arrear
interest, respectively, in an one-time settlement. The loan was obtained for meeting
working capital requirement four years back.

vii. Rs.1 lakh, being amount payable to a contractor (who does not have PAN) for repair
work at the company‟s factory. Tax of Rs.2,000 was deducted and paid in time.

viii. Depreciation on tangible assets Rs.1,00,000.

Additional Information:
a) Depreciation on tangible fixed assets as per Income tax Rules Rs.1.75 lakhs

b) The company has obtained a loan of Rs.2 lakh from ABC (P) Ltd in which it holds 16%
voting rights. The accumulated profits of ABC (P) Limited on the date of receipt of loan
was Rs.50,000.

Compute the total income of XYZ (P) Limited for the AY 2023-24 indicating the reasons of
treatment of each item. Ignore the provisions relating to Minimum Alternate Tax.

Answer:
Waiver of PRINCIPAL amount taken for trading activity (working capital) is a benefit, hence,
taxable u.s.41(1). Since it is credited to P & L A/c, no further adjustment is required.

Waiver of INTEREST is also a benefit. This amount would have been disallowed earlier u.s.43B.
Hence, the same cannot be taxed again. Therefore, excluded from computation.
 51

2. XYZ Ltd is engaged in the business of manufacturing fertilizers. Its P&L A/c shows a net profit
₹ 500 lakhs for the year ended 31.03.2023 after debiting & crediting the following items:

i. Depreciation provided in the books as per straight line basis is ₹ 30 lakhs.

ii. Normal depreciation allowable is Rs.28 lakhs. The company has made addition to
machinery during the year to the extent of Rs.100 lakhs in June, 2022.

iii. The company has made cash payments for purchases and expenditure as below:
On 04.06.2022 ₹ 2 lakhs (due to strike by bank staff)
On 05.06.2022 ₹ 4 lakhs (due to cash demanded by supplier)
On 30.09.2022 ₹ 1 lakh (half yearly closing for bank; a bank holiday)

Cash payments made to transport operator for hiring of lorry as follows:

07.05.2022 ₹ 50,000; 08.01.2023 ₹ 75,000; 02.03.2023 ₹ 32,000.

iv. ₹ 7.5 lakhs contribution to a University approved and notified u/s.35(1)(ii).

v. The company has imported 1000 kgs raw materials from a supplier in US @ $75/kg on
29.03.2022. The exchange rate was Rs.75/$ when the imports were made. The
payment to the supplier was made on 20.01.2023 when the exchange rate was Rs.78/$.
The company had not entered into a forward contract to hedge the risk.

vi. Rent paid and professional charges paid to a consultant including GST was Rs.5,61,600
and Rs.2,24,720 respectively. TDS was not deducted on the GST portion for both the
payments.

vii. The company has also purchased goods of ₹ 55 lakhs from M/s.ABC Ltd in which
Directors have substantial interest. The market value of goods is ₹ 54 lakhs.

viii. Donation paid to a political party is ₹ 25 lakhs by way of cheque.

ix. The company has incurred legal expenses for the following:
a) Issue of bonus shares ₹ 10 lakhs.
b) Alteration of MOA ₹ 2 lakhs (in connection with increased authorized capital).

Additional Information:
GST of ₹ 1.45 lakhs, pertaining to the year ended 31.03.2022, was paid on 10.03.2023.

Compute the total income and tax payable by the company for the AY 2023-24.

Answer:
 No tds required on GST component if shown separately in the Invoice. CBDT circular.

 Exchange loss (3 x $75,000: Rs.2,25,000) on account of purchase of raw material has to be

recognized as revenue expenditure, hence allowed u.s.37(1). Supreme Court decision.
 52

 Legal expenses in connection with issue of bonus shares is a revenue expenditure as there is no
increase in the capital base, hence allowed. Supreme Court decision.

 Legal expenses in connection with increase in authorized capital is a capital expenditure,

hence disallowed. Supreme Court decision.

 GST pertaining to previous year 2021-22 shall now be allowed in previous year 2022-23 in the
year of payment.

3. The Profit & Loss Account of ST Private Limited for the year ended 31 st March, 2023 shows a
profit of ₹ 75 lakhs after debiting the following items:

i. ₹ 7.80 lakhs paid towards course fee and hostel expenses for MBA course of a close
relative of a director. The relative is not in employment with the company.

ii. ₹ 3.50 lakhs, being expenses incurred on installation of a traffic signal, so as to facilitate
its employees coming to office to overcome traffic jam and save office time.

iii. ₹ 3 lakhs spent on gift items distributed to various dealers under the company's sales
incentive scheme.

iv. ₹ 6 lakhs, being expenses incurred on the travelling of the wife of MD, who accompanied
him on tour to Singapore on invitation of Trade and Commerce Chamber, Singapore.

v. ₹ 3 lakhs, being amount paid in March 2023 consequent upon change in currency rate
due to exchange fluctuation in excess of the amount due to the supplier of machinery.
Machinery was put to use in July 2022.

vi. ₹ 18,000 and ₹ 9,000 paid in cash on 25th October, 2022 by two separate vouchers to a
contractor who carried out certain repair work in the office premises.

vii. Interest of ₹ 2 lakhs was paid in March, 2023 to a company on a loan taken from a
company. Tax deducted at source from such interest was deposited in July, 2023.

Additional information:
a. Provision for audit fee of Rs.6 lakhs was made in the books for the year ended 31 st
March, 2022 without tds. Such fee was paid to the auditors in September, 2022 after
deducting tax u.s.194J and the tax so deducted was deposited on 7 th November, 2022.

b. During the year, the company purchased 10,000 shares of VK Pvt Ltd at Rs.40 per share.
The f.m.v of such shares on the date of transaction was Rs.60 per share.

Compute total income of ST Private Limited for Assessment Year 2023-24 and tax payable on
such income indicating reasons for treatment of each item. Ignore MAT provisions.
 53

Answer:
 Expenses on course fee and hostel expense for MBA course of a close relative of a director,
who is not in employment of ST Pvt Ltd., is not deductible u.s.37(1) – Case law. Such
expenditure is not incurred wholly and exclusively for the purpose of business.

 Expenses on installation of traffic signal, to facilitate its employees to overcome traffic jam
and be on time, is in the interest of the business, hence an allowable expense u.s.37(1).

 Expenses on distribution of gift items to dealers under sales incentive scheme would
promote goodwill and is made in the interest of business. Hence allowed. Case law CIT.

 Expenses on travelling to Singapore of the wife of MD on the invitation of Trade and

Commerce Chamber, Singapore, is an allowable expense on the grounds of commercial
expediency and business considerations. Case Law CIT

 Exchange loss in respect of amount paid for purchase of machinery is a capital expenditure,
hence disallowed. However, depreciation is allowed. Additional depreciation is not allowed
assuming that assessee is not engaged in manufacturing activities.

 Shares purchased for inadequate consideration is taxable under the head “IFOS”. Rs.2 lakhs
(60-40)*10,000.

4. XYZ LTD., is engaged in business of manufacturing plastic bottles. Its P&L account shows a
net profit of ₹ 60 lakhs for the year ended 31st March, 2023 after debiting / crediting the
following items:

i. ₹ 5 lakhs, being expenses incurred on travelling of the wife of Managing Director, who
accompanied him on tour to Beijing on invitation of Trade & Commerce Chamber,
China.

ii. ₹ 8,000, ₹ 9,000 & ₹ 8,000 paid in cash on 15.12.2022 by three separate vouchers to a
contractor who carried out repair work in the office premises.

iii. One-time license fees of ₹ 10 lakhs paid to a foreign company for obtaining franchise on
1st July 2022.

iv. Rs.5 lakhs paid to S Ltd towards feasibility study conducted for examining proposal for
technological advancement relating to existing business, where the project was
abandoned without creating a new asset.

v. Dividend of ₹ 3,50,000 received from a foreign company in which XYZ Ltd., holds 28%
in nominal value of equity share capital of the company. Rs.25,000 was spent on
earning this income.

vi. Depreciation on tangible fixed assets ₹ 1,50,000

 54

vii. ₹ 5,00,000 and ₹ 1,50,000 being amounts waived by a bank out of principal and arrear
interest, respectively in one–time settlement. The loan was obtained for meeting working
capital requirement two years back.

viii. Provision for gratuity based on actuarial valuation of ₹ 5,00,000. Actual gratuity paid
₹ 1,50,000 was debited to provision for gratuity account.

ix. The opening & closing stock of the year were ₹ 18,00,000 & ₹ 18,72,000 respectively
and were undervalued by 10% on cost.

Additional Information:
a) Provision for audit fee of ₹ 1,00,000 was made in the books for the year ending
31.03.2022 without deducting tax at source. Such fee was paid to the auditors in
September, 2022, after deducting tax u/s.194J and the tax so deducted was deposited on
7th November, 2022.

b) During the year, the company purchased 5000 shares of RK Private Ltd, at ₹ 20 per
share. The f.m.v. of such shares on the date of transaction was ₹ 40 per share.

c) Depreciation on tangible fixed assets as per Income Tax Rules ₹ 1.75 Lakhs

d) A debt of ₹ 8 lakhs was claimed as bad debt in the previous year 2020-21. A sum of Rs.2
lakhs was recovered during the previous year 2022-23. The effect of recovery of bad debt
was not given in books of account.

Compute total income giving reasons for treatment of each item, for A.Y.2023-24.

Answer:
The feasibility study was conducted by XYZ Ltd. for the existing business and the study was
abandoned without creating a new asset, the expenses is a revenue nature, hence allowed. If there is
no creation of a new asset, then the expenditure incurred would be of revenue nature. Case Law:
Delhi High Court. It was held, whether or not a new asset comes into existence would become a
relevant factor.

Provision for gratuity is not allowed even though it is based on actuarial valuation. However,
gratuity paid to the employees before the „due date‟ of filing return is an allowable deduction.
Section 43B.

Dividend from a specified foreign company (Amendment from AY 2023-24):

Dividend received by an Indian company from a foreign company in which it holds 26% or more
equity share capital of the company, was subject to a concessional tax rate of 15%. However from
A.Y.2023-24, such dividends shall be subject to tax at normal rates applicable to the company.
 55

5. Ind Bharat Ltd., is engaged in manufacturing of textiles. Its statement of Profit and Loss
shows a net profit of ₹ 108 lakhs for the year ended 31.03.2023, after debiting and crediting the
following items:

i. Depreciation debited as per SLM basis ₹ 10 lakhs

ii. Normal depreciation allowable ₹ 21 lakhs. The company has made addition to
machinery, a new twisting machine on 12th June, 2022 of ₹ 15 lakhs. The new machine
was put to use on 30th June, 2022.

iii. The company made cash payment for purchases on 05.06.2022 (bank holiday) ₹
2,00,000.

iv. A bad debt written off in financial year 2020-21 of ₹ 5,00,000 was allowed in the
assessment. ₹ 2,00,000 was recovered this year and is credited to general reserve.

v. Cash payment of ₹ 80,000 to a transporter on 04.06.2022, who furnished his PAN.

vi. Rent paid ₹ 2,40,000 inclusive of GST of ₹ 28,000. Tax was not deducted on the GST
portion on rent paid.

vii. Expenditure incurred on alteration of Memorandum of Association for increase in

authorized share capital ₹ 1 lakh.

viii. Legal expenses for issue of bonus shares ₹ 5,00,000

ix. Donation paid to a political party ₹ 4,50,000 by cheque and ₹ 2,70,000 by cash.

x. Purchase of raw material from a company in which the directors are interested for ₹
32,00,000 and the market value of the goods is ₹ 30 lakhs.

xi. Expenditure incurred towards complying with corporate social responsibility obligation
under the Companies Act, 2013 ₹ 3 lakhs.

Additional information:
Sales tax of ₹ 1,50,000 for the financial year 2021-22 was paid on 10.01.2023.

Compute the total income for A.Y. 2023-24. CMA Final

Answer:
Bad debts recovered is now taxable.

Sales tax disallowed in p.y.21-22 is now allowed as deduction.

Expenditure incurred on alteration of MOA for increase in authorized share capital is a capital
expenditure, hence disallowed.

Legal expenses for issue of bonus shares is a revenue expenditure, hence allowed.
 56

6. S Ltd. is engaged in the business of manufacturing, shows a net profit of ₹ 4,77,50,000 for the
financial year ended 31.03.2023, after debiting/crediting the following items:

i. On EPABX and mobile phones (exclusively used for business purpose) purchased during
the year, on which depreciation amounting to ₹ 21.60 lakhs was claimed at higher rate
of 40% treating them at par with computer.

ii. ₹ 50 lakhs paid to N Ltd, towards feasibility study conducted for examining proposals
for technological advancement relating to existing business, where the project was
abandoned later without creating a new asset.

iii. ₹ 35 lakhs paid on the higher studies of the director‟s son abroad, with a stipulation that
he would be appointed as a trainee in the company under “Apprentice Training
Scheme” where there was no evidence of existence of such scheme.

iv. Dividend of ₹ 10 lakhs received from a foreign company in which company holds 28%
in nominal value of the equity share capital of the company. ₹ 0.25 lakhs expended on
earning this income.

v. A machine in use since past 7 financial years having WDV amounting to ₹ 1.50 lakhs
on 01.04.2022 was discarded on 3rd September, 2022. The depreciation on the block at
15% has been provided and charged to P & L A/c for the previous year ended 31st
March, 2023. The entire block is used for the purpose of business.

vi. ₹ 45 lakhs was paid on 3rd June, 2022 to a National Laboratory with a stipulation that
the said contribution shall be used for the purpose of an approved scientific research
programme only.

vii. Secret commission of ₹ 13 lakhs was paid not for legal purposes and debited under
commission account.

viii. Purchased a brand new bus for Rs.15 lacs and donated to a school where the employees‟
children were studying and debited the same to Workmen and Staff Welfare Account.

Additional information:
A debt of ₹ 10 lakhs was claimed as bad debt in the previous year 2021-22. However, the A.O.
allowed only a sum of Rs.5 lakhs as bad debts. In the previous year 2022-23 a sum of Rs.4 lakhs
is recovered ultimately in respect of this debt. Compute total income of S Ltd.

Answer:
EPABX and mobile phones are not computers and therefore, not entitled to higher depreciation @
40%. Applicable rate is 15%. Case law.

Since there is no nexus between the education expenditure of the Director‟s son with business, such
expenditure is not allowed as deduction.

Any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited
by law, shall not be allowed. Secret commission is in the nature of bribe, hence disallowed.
 57

It was held that the expenditure met by the assessee was wholly and exclusively for the welfare of its
employees and also for carrying on the business of the assessee-company. Therefore, S Ltd will get
the deduction u.s.37(1) in respect of the new bus donated to a school where the employees‟ children
were studying. It is neither a donation nor a capital expenditure. Case Law

7. PARIK HOSPITALITY LIMITED is engaged in the business of running hotels of 3-star

category. The Company‟s Statement of Profit and Loss for the previous year ended 31st March,
2023 shows net profit of ₹ 152 lakhs after debiting or crediting the following items:

a) Payment of ₹ 0.25 lakh and 0.30 lakh in cash on 3rd December, 2022 and 10th
December, 2022 respectively for purchase of crab, lobster, and squid to Mr.Raja, a
fisherman and Mr.Khalid, a middleman for these products respectively.

b) Contribution towards employee pension scheme notified by the Central Government u/s
80CCD for a sum of ₹ 3 lakhs calculated at 12% of basic salary and DA payable to the
employees.

c) Payment of 6.50 lakhs towards transportation of various materials procured by one of its
hotels to M/s.Bansal Transport, a partnership firm without deduction of tax at source.
The firm opts for presumptive taxation u.s.44AE and has furnished a declaration to this
effect. It also furnished its PAN in the tender document.

d) Profit of ₹ 12 lakhs on sale of a plot of land to ABC Limited, a domestic company, the
entire shares of which are held by the assessee company. The plot was acquired by the
assessee on 1st June 2021.

e) Expenses of ₹ 10 lakhs on foreign travel of two directors for a collaboration agreement

with a foreign company for a brewery project to be set up. The negotiation did not
succeed and the project was abandoned.

f) Fees of ₹ 1 lakh paid to independent directors for attending board meeting without
deduction of tax at source under section 194J.

g) ₹ 10 lakhs, being the additional compensation received from the State Government
pursuant to an interim order of Court in respect of land acquired by the State
Government in the PY 2019-20.

h) Dividend received from a foreign company ₹ 5 lakhs.

i) Depreciation charged Rs.10 lakhs. Note: Depreciation as per IT Act, 1961 Rs.15 lakhs

Additional information:
i. As a corporate debt restructuring, the bank has converted unpaid interest of ₹ 10 lakhs
up to 31st March, 2022 in to a new loan repayable in five equal annual installments. The
first installment of ₹ 2 lakhs was paid March, 2023 by debiting new loan account.

Compute total income of Parik Hospitality Limited for the AY 2023-24 indicating the reason
for treatment of each item. Ignore provisions relating to MAT.
 58

8. Moon India Ltd., engaged in manufacturing activity furnishes the following details:

Net profit as per Profit and Loss Account ₹ 50,00,000

i. It incurred ₹ 2,50,000 as expenditure for public issue of shares. The public issue could
not materialize on account of non-clearance by SEBI. This amount is charged to Profit
and Loss Account.

ii. Depreciation charged to profit and loss account is Rs.16,00,000. Depreciation as per
Income tax Act, 1961 amounts to Rs.28,00,000 which includes the following:

Depreciation rate meant for computers have been adopted for (i) accessories like printers
and scanners; and (ii) EPABX. The w.d.v. of these as on 01.04.2022 is given below:
(a) Printers and Scanners Rs.50,000
(b) EPABX Rs.3,60,000

iii. It incurred an expenditure of ₹ 2,00,000 towards issue of debentures. This amount has
been capitalized in the books.

iv. The company paid ₹ 1,00,000 as compounding fee for violations in the pollution control
regulations. This has been charged as revenue expenditure.

v. The company lost cash of ₹ 25,00,000 due to theft when it was withdrawn from bank
and taken to administrative office. It is not insured and hence fully charged as revenue
expenditure.

vi. ₹ 5,00,000 was spent during the year towards permitted CSR activities as per 135 of the
Companies Act, 2013. This is charged to Profit and Loss Account.

vii. It paid Rs.2,00,000 to share broker for transacting shares listed in stock exchange and
₹ 1,00,000 to commodity broker for commodity transactions at MCX. Both the amounts
are debited to P&L A/c and no tax was deducted at source on these payments.

viii. It paid ₹ 50,000 to an electoral trust by cash and ₹ 1,00,000 by cheque to a registered
political party. Both these are debited to Profit and Loss Account.

Compute the total income of the company for the assessment year 2023-24. Give reasons in
brief for treatment of each of the above items. Ignore MAT provisions.

Answer:
Share issue expenses incurred is a capital expenditure, even though it could not go in for the public
issue on account of non-clearance by SEBI. Though the efforts failed, the fact remains that the
expenditure incurred was only for the purpose of raising capital. Case law.

The amount paid for compounding an offence is inevitably a penalty and the mere fact that it has
been described as compounding fee cannot, in any way, alter the character of the payment which is
in the nature of penalty. Case law.
 59

The expenditure on issue of debentures is not in the nature of capital expenditure and is laid out or
expended wholly and exclusively for the purpose of the assessee‟s business and is therefore,
allowable as deduction. Supreme Court.

9. BG (P) Ltd. is engaged in multiple businesses. The Net Profit as per the statement of profit and
loss was ₹ 52 lakhs for the year ended 31.03.2023. A scrutiny of the statement of profit and loss
revealed the following items which were debited/credited therein:

Share income @ 25% from a partnership firm ABC & Co. of Pune ₹ 9,50,000.

The company paid ₹ 1 lakh as service charges to a call centre for attending the calls of
customers and suppliers. Tax was deducted at source on such payment @ 2%.

Expenditure incurred ₹ 8 lakhs for digging of wells near the factory for use by public under
Corporate Social Responsibility Scheme as per the Companies Act, 2013.

Grant received from State Government for acquisition of generator ₹ 10 lakhs. The generator
was acquired on 01.06.2022 for ₹ 35 lakhs. A sum of ₹ 5 lakhs was paid as advance by cash to
the supplier of generator. The grant amount received is credited to statement of profit and loss.

Note : Assume that the company is not eligible for additional depreciation.
During the year, the company bought textile goods from local suppliers. Cash payment was
made exceeding ₹ 10,000 but below ₹ 20,000 in a day to 15 suppliers aggregating to ₹
2,00,000.

Depreciation debited to statement of profit and loss ₹ 10 lakhs (it includes ₹ 8 lakhs being
depreciation on assets revalued).

Provision for deferred tax debited to statement of profit and loss ₹ 6,50,000.

Trade creditors ₹ 5,00,000 were outstanding for more than 5 years and there is no business
relationship with them. The amount was unilaterally transferred to credit of statement of profit
and loss.

Royalty income in respect of patents chargeable under section 115BBF ₹ 12,00,000.

Depreciation eligible under section 32 (including depreciation on purchase of generator @ 15%
on Rs.35 lakhs) ₹ 12,25,000.

Additional information:
The assessee executed only one civil construction contract of the value of ₹ 15 lakhs. The
contractee withheld 20% of the contract amount which would be released only after 2 years. The
amount withheld has not been credited to statement of profit and loss.

During the year, 1,00,000 equity shares of ₹ 10 each was issued for ₹ 25 per share. The fair
market value of the shares as per rule 11UA of the Income-tax Rules 1962 was determined @ ₹
17 per share.
 60

During the year, the company advanced Rs.5,50,000 to one of the directors (having 22% of
equity shares and equivalent voting rights in the company) to meet his personal expenses. The
company has accumulated profit of Rs.25 lakhs as on 31.03.2022.

You are required to compute the total income for the assessment year 2023-24.

Answer:
 Tds rate on call centre services is 2% u.s.194J (refer tds chapter)

 As per section 2(24)(xviii), the following is treated as income:

Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement by the Central Government or a State Government or any
authority or body or agency in cash or kind to the assessee except any subsidy or grant or
reimbursement which is taken into account for determination of the actual cost of the asset.

As per ICDS VII, since the grant is received for acquisition of generator, the same has to be
adjusted in actual cost.

 Royalty income in respect of patents chargeable under section 115BBF is treated as business
income as the company is carrying on multiple businesses. The tax rate is 10%.

 Retention money: ICDS III requires recognition of contract revenue, including retention
money, on percentage of completion method. Since the contract is fully completed, the entire
retention money of Rs.3 lakhs has to be recognized as income.

10. M/s.Diamond Industries Ltd., an Indian company, is engaged in assembling and

manufacturing of automobiles and auto components in Indore, Madhya Pradesh. The net profit
after debit/credit of the following amounts to its Statement of Profit and Loss for the year ended
31.03.2023 was Rs.9,50,00,000.

i. Depreciation calculated as per useful life of its assets Rs.2,80,00,000.

ii. Donation of Rs.12,00,000 given to a political party by way of account payee cheque.

iii. The company has paid Rs.50,00,000 on 15.08.2022 to a research institution recognized
and notified by Central Govt which has as its object, undertaking of scientific research.

iv. Dividend received from foreign company of Rs.15 lakhs in which it holds 30% of the
equity share capital.

v. Long-term capital gain of Rs.4,00,000 on sale of equity shares on which STT was paid at
the time of acquisition and sale.

vi. Interest at 10% p.a. on Rs.4,20,00,000 being amount borrowed from State Bank of India
on 01.06.2022 for purchase of machinery. The interest outstanding as on 31.03.2023
was paid on 01.12.2023.
 61

vii. Profit of Rs.8,00,000 on sale of a plot of land to PQR Limited, an Indian company, the
entire shares of which are held by the Diamond Industries Ltd. The plot was acquired
on 30th June, 2021.

viii. Salary of Rs.1,00,00,000 to foreign technicians for installation of machinery at the

factory premises was paid.

ix. The company sold automobile parts for Rs.22,00,000 to M/s.ABC Co Engineers, a sole
proprietary concern, on 01.11.2020. On 01.02.2023 Rs.12,00,000 was written off in the
books as bad debts. The sole proprietor died on 01.03.2023 and the company managed
to collect Rs.11,00,000 towards full and final settlement on 30.03.2023. The entire
amount collected was shown as bad debts recovered and credited to Statement of P&L.

Additional Information:
1) Depreciation computed as per Income-tax Rules, 1962 is Rs.1,50,00,000 other than on
the additions in assets made during the year.

2) Additions made to the assets were as follows:

i. Office Building Rs.3,00,00,000 - Put to use from 15.12.2022.
ii. Computers Rs.25,00,000 - Put to use on 11.05.2022.
iii. Plant & machinery Rs.5,00,00,000 - Installed and put to use on 01.01.2023.

3) The company declared and distributed dividend for the financial year 2022-23 on
31.5.2023 for Rs.12,00,000.

Compute the total income of the company and tax liability for the assessment year 2023-24,
assuming company opts for concessional tax regime under section 115BAA. Total turnover of
the company for the P.Y. 2020-21 was Rs.402 crores.

11. Preetam Motors Limited is engaged in manufacturing and selling of cars, having annual
turnover of ₹ 5000 lakhs. The net profit of the company as per Profit and Loss account for the
year ended March, 2023 is ₹ 150 lakhs, after debiting or crediting the following items:

i. Dividend of ₹ 12 lakhs received from a foreign company in which the company holds
32% of equity of the company. ₹ 50,000 was also expended on earning this income.

ii. Payments due to railways for use of the assets for transportation of cars in F.Y. 2022-23,
the company is likely to make the payment in the month of December 2023 ₹ 2 lakhs.

iii. Deprecation charged to the statement of profit and loss account ₹ 20 lakhs.

iv. The opening and closing stock for the year were ₹ 90 lakhs and ₹ 68 lakhs, respectively.
They were overvalued by 10%.

v. Legal fees incurred in defending title of factory premises of the company ₹ 3 lakhs.
 62

vi. Profit of ₹ 3 lakhs from hedging contracts entered into for meeting out the loss in foreign
currency payment towards an imported machinery purchased from Germany for ₹ 90
lakhs, which was installed on 20.12.2022.

vii. Profit on sale of land ₹ 27 lakhs.

Additional Information:
a) Normal depreciation allowable as per the Income-tax Act, 1961 ₹ 22 lakhs.

b) Additional depreciation on plant and machinery imported and installed during

December 2022 has not been considered while calculating depreciation as per the
Income-tax Act, 1961 as above. The company is not eligible for any deduction under
section 35AD of the Income-tax Act, 1961.

c) The land sold during the year for ₹ 82 lakhs (Guideline Value as per stamp valuation
authority ₹ 60 lakhs) was purchased by the company during F.Y. 2013-14. This was
the only land available with the company as on 01.04.2021. CII F.Y. 2013-14: 220,
F.Y. 2022-23: 331.

Compute the total income of Preetam Motors Ltd. (giving reasons for treatment of each
item) for the A.Y.2023-24. Ignore MAT provisions.

Answer:
Legal fees incurred in defending title to factory premises is a revenue expenditure incurred for the
purpose of business and is, therefore, allowable as deduction. SC

Hedging contract is entered into for safeguarding against any loss that may arise due to currency
fluctuation. Hedging profit is taxable as business income.

12. PQR Co. Ltd. engaged in manufacturing activity, reports a net profit of Rs.15 lakhs for the year
ended 31.03.2023. The below said items are debited/credited to statement of profit and loss.

a) CSR expenditure incurred during the year Rs.5 lakhs.

b) Non-compete fee paid to DEF Ltd for not marketing their products in North-Eastern
States Rs.10 lakhs. The non-compete agreement bars DEF Ltd for a period of 5 years
ending 31.03.2028. No tax was deducted at source on the said payment.

c) A building was constructed on the leasehold land for 30 lakhs and it was completed on
30.11.2022. The lease agreement is for 10 years and after the lease period, the building
must be handed over to the lessor.

d) The company during the year paid donation of Rs.1 lakh to Dalmia Research Centre
Ltd. which is engaged in an approved scientific research.
 63

e) The company introduced VRS scheme during the financial year 2019-20 and paid Rs.60
lakhs as VRS compensation. The company transferred the entire unamortized amount of
Rs.24 lakhs to statement of profit and loss.

f) Paid Rs.2 lakhs to Registrar of Companies as fee for issue of bonus shares.

g) It incurred Rs.25 lakhs towards feasibility study for new business which eventually was
aborted.

h) Compounding fee paid for violation of municipal laws in construction of buildings

Rs.1,20,000.

i) Depreciation debited Rs.24,60,000 including depreciation on EPABX and mobile

phones @ 40%. Cost of EPABX and mobile phones acquired on 01.06.2022 for use by
executives Rs.10 lakhs.

j) Royalty from patent developed by the company credited to P&L A/c Rs.22 lakhs.

k) Dividend received from foreign company in which the assessee company holds 26%
shares Rs.8 lakhs.

Additional Information:
Eligible depreciation Rs.32,30,000 u.s.32 without considering item (iii) and (ix) given above.
Compute the total income for A.Y. 2023-24. CMA final

Answer:
Non-compete fee is subject to tds u.s.194J @ 10%.

Building constructed on leasehold land is a capital expenditure on which the assessee is eligible for
depreciation. Hence disallowed

Expenses on feasibility study not in connection with existing business shall be disallowed.

Compounding fee paid for violation of local laws is expenditure for violation of law, hence not
deductible.

Royalty received from patents developed and registered in India shall be taxable @ 10%

13. King Metals (P) Ltd. reports a Net Profit Rs.10,20,000 as per Statement of Profit and Loss
for the year ended 31.03.2023. The following additional information is provided:

Opening stock as on 01.04.2022 was Rs.9,90,000 and the closing stock as on 31.03.2023 was
Rs.13,50,000. The opening stock was overvalued by 10% and the closing stock was
undervalued by 10%.

Dividend received from a foreign company credited to Statement of Profit and Loss Rs.31,000.
The company has 2% shareholding in the foreign company.
 64

The company sold a vacant land for Rs.23 lakhs on 05.07.2022. The original cost of acquisition
is Rs.12 lakhs. The indexed cost of acquisition is Rs.16,17,000. Profit on sale of vacant land has
been credited to Statement of Profit and Loss. The company subscribed to REC bonds for
Rs.5,30,000 on 20.12.2022.

The company made a provision for bad and doubtful debts @ 5% of debtors on the closing date.
The debtors outstanding as on 31.03.2023 was Rs.62 lakhs.

Depreciation debited to Statement of Profit and Loss Rs.7,50,000. Depreciation allowable as

per Income-tax Rules Rs.6,55,000.

Salary includes Rs.3,60,000 paid to son of managing director who was in no way connected
with the business of the company. It also includes commission paid to a director„s son 3% being
Rs.2,40,000 and whereas for other commission agents it was paid @ 2%.

The company has paid term loan interest to SBI relating to p.y. 2021-22 Rs.2,10,000 in January,
2023. It has not paid term loan interest of Rs.1,90,000 of the previous year 2022-23 during the
year and proposes to make the payment only in December, 2023.

The company took factory premises on lease and paid lease rent of Rs.60,000 p.m. for 2 months
to Mr.Akhil. No tax was deducted on such rent payment.

Directors sitting fee of Rs.50,000 was paid to 5 directors during the year. Tax was deducted for
2 directors and for the balance no tax deduction was made.

Provision for loss of subsidiary included in administrative expenses Rs.2 lakhs.

Amount credited to Statement of Profit and Loss by transfer from revaluation reserve amounts
to Rs.1,10,000.

Provision for gratuity debited to Statement of profit and loss Rs.7 lakhs. Actual gratuity paid
during the year debited to provision account Rs.4 lakhs.

A bad debt claim of Rs.1,60,000 relating to the assessment year 2019-20 allowed in assessment
was recovered and was credited to general reserve account.

You are required to compute the income of King Metals (P) Ltd. by giving brief explanations
for each of the adjustments given above. CMA Final – June 2019
 65

14. XYZ LTD. is engaged in the manufacture of pumps since 01.04.2013. Its Statement of Profit &
Loss shows a net profit of ₹ 700 lakhs after debit/credit of the following items:

a) Depreciation calculated on the basis of useful life of assets as per provisions of the
Companies Act, 2013 is ₹ 48 lakhs.

b) Normal depreciation calculated as per Income-tax Rules is Rs.80 lakhs

c) Employer‟s contribution to EPF of ₹ 2 lakhs together with the Employees‟ contribution

of ₹ 2 lakhs for the month of March, 2023 was remitted on 8th May 2023.

d) The company appended a note to its Income Statement that industrial power tariff
concession of ₹ 2.5 lakhs was received from the State Government and treated the same
as capital receipt.

e) The company had provided an amount of ₹ 25 lakhs being sum estimated as payable to
workers based on agreement to be entered with the workers union towards periodical
wage revision once in 3 years. The provision is based on a fair estimation on wage and
probable revision.

f) The company had made a provision of 10% of its debtors towards bad and doubtful
debts. Total sundry debtors of the company as on 31.03.2023 was₹ 200 lakhs.

g) A debtor who owed the company an amount of ₹ 40 lakhs was declared insolvent and
hence, was written off by debit to Profit and loss account.

h) Sundry creditors include an amount of ₹ 50 lakhs payable to A & Co, towards supply of
raw materials, which remained unpaid due to quality issues. An agreement has been
made on 31.03.2023, to settle the amount at a discount of 75% of the outstanding. The
discount has not been credited to profit and loss account.

i) The opening and closing stock for the year were ₹ 220 lakhs and ₹ 253 lakhs,
respectively. They were overvalued by 10%.

j) Provision for gratuity based on actuarial valuation was ₹ 500 lakhs. Actual gratuity paid
debited to gratuity provision account was ₹ 300 lakhs.

k) Commission of ₹ 1 lakh paid to a recovery agent for realization of a debt. Tax has been
deducted and remitted as per Chapter XVIIB of the Act.

l) The company has purchased 500 tons of industrial paper as packing material at a price of
₹ 30,000/ton from PQR, a firm in which majority of the directors are partners. PQR‟s
normal selling price in the market for the same material is ₹ 28,000/ton.
 66

Additional Information
1) There was an addition to P & M amounting to Rs.50 lakhs on 10-06-2022.

2) The company has collected ₹ 10 lakhs as sales tax from its customers and paid the same
on the due dates. However, on an appeal made, the High Court directed the Sales Tax
Department to refund ₹ 3 lakhs to the company. The company in turn refunded ₹ 2
lakhs to the customers from whom the amount was collected and the balance of ₹ 1 lakh
is still lying under the head “Current Liabilities”.

3) The company had credited a sub-contractor an amount of ₹ 8 lakhs on 31.03.2022

towards repairing a machinery component. The tax so deducted was remitted on
31.12.2022. Compute total income.

Answer:
Since employees‟ contribution to EPF is not been deposited before the „due date‟ as given under the
PF Act, the same is not allowable as deduction.

Normally, any provision made shall be fully disallowed. However, if the provision is based on fair
estimate and with reasonable certainty, then provision is allowable as deduction, as per ICDS X.
There has been wage revision every three years. ICDS X requires a reliable estimate of the amount
of obligation and reasonable certainty for recognition of a provision, which is present in this case,
hence allowed. Supreme Court and later became ICDS X.

As per section 2(24)(xviii), income includes: Any subsidy or grant or cash incentive or waiver or
concession or reimbursement by the Central or State Government or any authority or body or
agency in cash or kind to the assessee other than, subsidy or grant or reimbursement which is taken
into account for determining the actual cost of the asset shall be treated as income.

Industrial power tariff concession of ₹ 2.5 lakhs received from the State Government is to be treated as
income u.s.2(24)(xviii). To be added to profit as it is not credited to P&L A/c.

The amount of sales tax refunded to the company by the Government is a revenue receipt
chargeable to tax u.s.41(1). Deduction can be claimed to the extent of amount refunded to
customers. Amount not refunded to customers shall be chargeable to tax. Supreme Court.
 67

15. SDK Ltd., engaged in the manufacture of textile since 01.04.2014. Its statement of Profit and
Loss for the previous year ended 31st March, 2023 shows a profit of Rs.600 Lakhs after
debiting or crediting the following items:

i. Depreciation charged on the basis of useful life of assets as per Companies Act is Rs.40
lakhs.

ii. Industrial power tariff concession of Rs.3.5 lakhs, received from State Government was
credited to P & L Account.

iii. The company had provided Rs.25 lakhs being sum fairly estimated as payable with
reasonable certainty, to workers on agreement to be entered with the workers union
towards periodical wage revision once in every three years.

iv. Dividend received from a foreign company Rs.10 lakhs.

v. Loss of Rs.25 lakhs, due to destruction of a machine worth Rs.30 lakhs by fire due to
short circuit and Rs.5 lakh received as scrap value. The insurance company did not
admit the claim of the company on charge of gross negligence.

vi. Provision for gratuity based on actuarial valuation was Rs.400 lakhs. Actual gratuity
paid debited to gratuity provision account was Rs.275 lakhs.

vii. The company has purchased 500 tons of industrial paper as packing material at a price
of Rs.30,000 per ton from M/s.Shivbramha, a firm in which majority of the directors of
SDK Ltd. are partners. The firm's normal selling price of the same material in market is
Rs.28,000 per ton.

viii. Advertisement charges Rs.1.5 lakhs, paid by cheque for advertisement published in the
souvenir of a political party registered with the Election Commission of India.

ix. Long term capital gain Rs.4.5 lakhs on sale of equity shares on which Securities
Transaction Tax (STT) was paid at the time of acquisition and sale.

Additional Information
(i) Normal depreciation as per Income Tax Rules is Rs.65 lakhs.

(ii) The sales tax Rs.11 lakhs collected from its customers was paid by the company on the
due dates. On an appeal, the High Court directed the sales tax department to refund
Rs.4 lakhs to the company. The company in turn refunded Rs.3 lakhs to the customers
from whom it was collected and balance Rs.1 lakh is still lying under the head "Current
Liabilities".

Compute the total income of SDK Ltd for the Assessment Year 2023-24 by analyzing and
applying the relevant provisions of Income tax law. Briefly explain the reasons for treatment of
each item. Ignore the provisions relating to Minimum Alternate Tax.
 68

16. Statement of Profit and Loss account of BAS Industries Ltd. engaged in production and
marketing of diversified products, shows a net profit (before tax) of Rs.72,00,000 for the
financial year ended 31st March, 2023 after charge of the following items:

A: Items debited to the Statement of Profit and Loss:

i. Depreciation as per Companies Act, 2013: Rs.24,00,000

ii. Interest amounting to Rs.60,000 for short payment of advance tax paid as per section
234B relating to the assessment year 2021-22.

iii. Interest and borrowing costs amounting to Rs.9,50,000 and Rs.7,00,000 though not
meeting the criteria for recognition as a component of cost, included in cost of opening
and closing inventory, respectively.

iv. Expenditure of Rs.41,000 paid in cash comprising of Rs.22,000 directly paid to producer
of dairy farming products and Rs.19,000 paid towards printing and stationery items to a
trader.

v. Rs.3,50,000 paid to a contractor for carrying out repair work at factory premises. Tax
was not deducted at source on this payment.

vi. Rs.35,000 towards expenditure for earning income from transfer of carbon credits.

vii. Contribution to electoral trust Rs.3,00,000 paid by way of cheque.

viii. Expenditure towards advertising charges in a brochure of a political party registered

u.s.29A of Representation of People Act, 1951: Rs.40,000 paid by way of cheque.

ix. Interest on term loans obtained from Co-operative Bank not paid before the due date of
filling return of income (due date being 31.10.2023): Rs.2,60,000

x. Actual contribution to the pension scheme of employees : Rs.1,50,000

B: Items credited to the Statement of Profit and Loss:

i. Unrealised rent of Rs.3,80,000 pertaining to financial year 2019-20 & 2020-21 recovered
during the year in respect of a commercial property owned by the company, which was
sold by the company on 23.03.2022.

ii. Dividends from a specified foreign company including the expenditure of Rs.20,000
incurred on earning such dividends Rs.1,60,000.

iii. Profit of Rs.3,00,000 received from hedging contract entered into for meeting out loss in
foreign currency payments towards an imported printing machinery valued at Rs.95
lakhs, installed on 15th December, 2022 and put to use from that date.

iv. Interest from banks on fixed deposits net of TDS at 10% :Rs.1,35,000
 69

Additional Information:
1. Depreciation as per income-tax Rules: Rs.28,00,000 exclusive of depreciation on the
imported printing machine referred to in item B (iii)

2. Expenditure pertaining to previous financial year allowed on due basis, but paid in current
financial year in cash on 18.01.2023: Rs35,000

3. Audit fee for the previous year 2021-22: Rs.75,000. TDS deducted but not paid in the
relevant previous year. However, TDS was paid on 31.12.2022.

4. Income from transfer of Carbon Credits amounting to Rs.4,00,000 included in Net Profit
(before tax).

5. The eligible salary and dearness allowance for the pension scheme referred to under section
80CCD is Rs.10,00,000.

Compute the total income of BAS Industries Ltd., for assessment year 2023-24. Give brief
reasons for the treatment given to each of the items taken into consideration in computation of
income of the company. 2019 CA

17. Barun Co. Ltd is engaged in the business of manufacture of chemicals since June, 2006. The
statement of Profit and Loss for the year ended 31.03.2023 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 authorised capital Rs.1 lakh. Both have been debited in
the books as expenditure.

e) Purchase of agricultural produce being raw material for manufacturing by making cash
payment on 15.8.2022 Rs.60,000 and on 26.01.2023 Rs.40,000. Also, cash payments of
Rs.50,000 made for purchases of the previous year 2021-2022 on 03.05.2022.

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.
 70

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 2023-24.

Note: You have to deal with each and every item given above and provide brief reasons for
treatment given. DEC 2019 CMA F
 71

CHAPTER – 4A: ADVANCE TAX PROVISIONS, TDS & TCS

The total income of an assessee for the previous year is taxable in the relevant assessment
year. For example, the total income for the P.Y. 22-23 is taxable in the A.Y. 23-24. However,
income-tax is recovered from the assessee in the previous year itself through:-

a. Tax deduction at source (TDS);

b. Tax collection at source (TCS);
c. Advance tax

Advance tax is payable by every person where the final tax payable after adjusting TDS is
Rs.10,000 or more. Advance payment of tax is also known as “Pay as you Earn” scheme.

The assessee is required to estimate his CURRENT INCOME for the year under various heads
and pay advance tax on due dates. However, in the case of, income by way of CAPITAL GAINS
and CASUAL INCOME, assessee is required to pay advance tax only after such income is earned.

Note: Tax paid before 31st March of the relevant previous year is called “Advance Tax”.
e.g. tax paid between 01.04.2022 and 31.03.2023 shall be treated as advance tax paid for the
previous year 2022-23. Any tax paid after 31st March is to be treated as Self-assessment tax.

What is self-assessment tax?

Self Assessment Tax means any balance tax paid by the assessee on the assessed income after
taking TDS and Advance tax into account before filing the Return of income.

Important: Tds credit can be taken only if it is deducted by the payer. If tax is not
deducted at source then no credit can be taken by the assessee.

Advance tax payable by the assesse covered u.s.44AD & 44ADA:

The assessee who has opted Section 44AD or Section 44ADA, shall pay the whole amount of
Advance Tax in one installment on or before 15th March.

NOT APPLICABLE FOR SENIOR CITIZENS:

Advance tax provisions are NOT applicable in the case of a SENIOR CITIZEN RESIDENT in
India NOT having income by way of business or profession.

For all assesses:

Advance tax is payable as follows: For all assesses
 On or before June 15 15% of advance tax
 On or before September 15 45% of advance tax
 On or before December 15 75% of advance tax
 On or before March 15 100% of advance tax
 72

1. Discuss whether the following assesses are liable to pay advance tax for AY 2023-24:

 Where the total income of Mr.Y (a resident) is Rs.6,00,000 (tds: Rs.23,800)

 Turnover of Mr.A Rs.1,50,00,000; He has opted for section 44 AD.
 Gross receipts of a Doctor Rs.34,00,000. He has opted for section 44ADA.
 A senior citizen having pension income of Rs.3 lakhs and property income of Rs.5 lakhs
 Total income of Mr.R (a resident), aged 64 years is Rs.15,00,000 (having business income)

2. Mr.Raj (a non-resident and aged 65 years) is a retired person, earning rental income of Rs.40,000
per month from a property located in Delhi. He is residing in Canada. Apart from rental income,
he does not have any other source of income. Is he liable to pay advance tax in India?

(a) Yes, he is liable to pay advance tax in India as he is a non-resident and his tax liability in
India exceeds Rs.10,000.
(b) No, he is not liable to pay advance tax in India as his tax liability in India is less than
Rs.10,000.
(c) No, he is not liable to pay advance tax in India as he has no income chargeable under the
head "Profits and gains of business or profession" and he is of the age of 65 years.
(d) Both (b) and (c)

3. The following details are provided by Mr.P, an individual, for the assessment year 2023-24.
Total estimated tax payable Rs.2,00,000
TDS (estimated but not deducted) Rs.55,000

Determine the advance tax payable with their due dates for the assessment year 2023-2024.

4. Mr.K furnished the following information for the year ended 31.03.2023:
Income from business Rs.40,000
Lottery winnings (gross) Rs.6,00,000
Income by way of salary (computed) Rs.90,000
Loss from house property Rs.20,000

Compute his total income, tax liability and advance tax obligations.

5. Mr.Mani, a resident individual, sold a plot of land on 20 th March, 2023. Long term capital gain on
such sale amounted to Rs.5,00,000. Since he had no other income during the previous year 2022-
23, he did not pay any advance tax instalment. You are required to calculate the amount of
advance tax payable by Mr.Mani, if any.

Base your answer on the relevant provisions relating to the payment of advance tax on income
from capital gain and advise Mr.Mani suitably, so that the liability on late payment does not arise.
 73

INTEREST UNDER SECTION 234 A, B & C:

Interest u.s.234 A:
a. When interest is charged: If return is not filed before due date and tax is still due
b. Rate of interest: 1% p.m. or part of a month on the tax due
c. Period of interest: From 1st day immediately following the due date till taxes
are paid

note: Self-assessment tax paid before the due date and return submitted after due date:
If entire amount of taxes are paid before the due date of filing return, no interest shall be
charged for mere delay in filing the tax return.

note: Interest is to be calculated on the amount of tax due rounded off in multiples of Rs.100
ignoring fraction. For eg. Tax due Rs.35730 or Rs.35,780; Interest will be computed on
Rs.35,700.

6. Taxable income of Mr.A for the year ending 31.03.2023 is Rs.60,00,000. Tax deducted at source is
Rs.8,44,700. Advance tax paid is Rs.4,00,000. Due date of filing return of income is 31st October,
2023. Self-assessment tax including interest was paid on 25th February 2024 and return was filed
by Mr.A on the same day. Compute the interest payable u.s.234 A.

Would your answer differ if he had paid the self-assessment tax on 31.10.2023 but filed his return
of income on 25.02.2024.

Interest u.s.234 B:
a. When interest is charged: Failure to pay advance tax (or) advance tax paid is less than 90%
of the “assessed tax”.

b. Rate of interest: 1% p.m. or part of a month of the tax due commencing from 1 st
April of the relevant asst year and ending till the entire tax is paid.

Note: For A.Y.2023-24, interest will be charged from 01.04.2023, if

advance tax is not paid before 31.03.2023.

Note: “Assessed tax” means Original tax (-) TDS

Interest u.s.234 C:
a. When interest is charged: If the installments paid are not proper (i.e. amount paid is less
than the installment due)

b. Rate of Interest: 1% p.m. or part of a month

note: Interest u.s.234 C will be charged only up to 31 st March of the relevant previous year.
Interest u.s.234 B will be charged from 1 st of April of the relevant assessment year.
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Note: An assessee is required to pay first two installments of 15% and 45% of the “assessed
tax” in advance on the due dates. However, interest u.s.234C shall not be charged if the
assessee had paid atleast 12% and 36% of the “assessed tax”.

7. Tax on total income of Mr.X for the previous year 2022-23 is Rs.24,00,000. Tax deducted at source
Rs.4,00,000. Compute interest under section 234B in the following situations if:

a. No advance tax is paid by Mr.X and self-assessment tax is paid on 10.09.2023; or

b. Advance tax paid on 31.03.2023 is Rs.18,75,000; or
c. Advance tax paid on 31.03.2023 is Rs.15,00,000 and balance Rs.5,00,000 is paid on 10.09.2023.

8. Original tax due Rs.1,00,000; Tax deducted at source Rs.40,000; Compute interest payable under
section 234C in the following situations if:

a. No advance tax is paid by the assesse; or

b. Advance tax paid on:

15.06.2022 Rs.5,000
15.09.2022 Rs.10,000
15.12.2022 Rs.15,000
15.03.2023 Rs.20,000

c. Advance tax paid on:

15.06.2022 Rs.8,000
15.09.2022 Rs.14,000
15.12.2022 Rs.18,000
15.03.2023 Rs.14,000

9. From the details given below, you are required to calculate interest payable under section 234C:

A Ltd. made the following payments of advance tax during the financial year 2022-23:

Paid on Rs. in lakhs

June 12, 2022 3.60
September 14, 2022 4.15
December 10, 2022 10.50
March 20, 2023 9.80

The return of income is filed on 31st July, 2023 showing – Business income of Rs.90 lakhs.
Long term capital gain taxable @ 20% (as on 05.12.2022) is Rs.15 lakhs.

Note: The company has not opted for any concessional rate of tax.
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10. PA Consulting Ltd has a total income of Rs.14,00,000 during the previous year ended 31.03.2023.
Tax deducted at source by different payers amounted to Rs.54,000 and tax paid in foreign country
on a doubly taxed income amounted to Rs.10,000 for which the company is entitled to relief under
section 90 as per the double tax avoidance agreement.

During the year the company paid advance tax as under:

Date of payment Advance tax paid

15.06.2022 Rs.40,000
12.09.2022 Rs.70,000
15.12.2022 Rs.90,000
15.03.2023 Rs.60,000

The company filed its return of income for the Assessment Year 2023-24 on 15.12.2023. Compute
interest, if any payable by the company under section 234A, 234B and 234C. Assume applicable
tax rate for the company is 25%.

11. Dr.Juhi reports to you that her gross receipts from her medical profession for the year ended
31.03.2023 is Rs.49,20,000. Her net income as per income and expenditure account is
Rs.26,40,000 before adjustment of depreciation of Rs.2,10,000. She did not pay any amount by
way of advance tax during the financial year 2022-23. She has two residential house properties, of
which one is self-occupied for residence and another is let out for monthly rent of Rs.10,000
during the financial year 2022-23.

Advise Dr.Juhi with reference to Section 44ADA on filing of return with optimal tax liability
besides compliance cost. Assume that she approached you in April, 2023 and you have given your
advise then. CA final May 2018 (new)

12. Bhola & Co., a firm, failed to pay the advance tax as required by the provisions of Income-tax Act,
1961. The assessment was done under section 143(3) and the assessment order issued by the
Assessing Officer stated that interest is payable under section 234B of the Income-tax Act, 1961.
The order did not contain any direction for the payment of interest, it merely stated that interest
is payable. The assessee’s contention is that since the direction for payment of interest is absent
in the assessment order, it could not be fastened with liability to interest under section 234B.
Examine the validity of assessee’s contention. CA Final

Solution:
As per Section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or
where the advance tax paid by the assessee is less than 90% of the assessed tax, the assessee becomes
liable to pay simple interest @ 1% per month or part of a month.

The Supreme Court upheld that the levy of interest u.s.234B is automatic when the conditions of section
234B are met and Assessing Officer is not required to give a direction for payment of interest.

The contention of the firm, Bhola & Co., that it could not be fastened with the liability to interest u.s.234B
in the absence of the direction for payment of such interest in the assessment order is, therefore, not valid.
 76

CHAPTER 4B: TAX DEDUCTED AT SOURCE

1. When tax is required to be deducted at source?
Tax is required to be deducted at source either at the time of making the payment (or) at the time of
giving credit, whichever is earlier. However, in few cases, tax shall be deducted only at the time of
making the payment.

2. State whether an “individual” is required to comply with tds provisions.

Companies & Firms have to compulsorily comply with TDS provisions. Individuals are required to
deduct tax at source only if Turnover/Sales/Gross receipts during the immediately preceding
financial year has exceeded Rs.1 crore in case of business or Rs.50 lakhs in case of profession.

3. When tds is required to be remitted to the Government?

The TDS amount has to be remitted within ONE WEEK FROM THE END OF THE MONTH during
which such tax was liable to be deducted. However, tds relating to the month of MARCH, can be
remitted before 30th of April.

4. Failure to furnish PAN will attract higher rate of tds – Section 206AA.
Every person shall furnish his PAN to the person responsible for deducting such tax. In case there
is a failure to do so, tax shall be deducted at the HIGHER of the following rates:

 at the rate prescribed in the Act; or

 at the rate of 20% (5% in case of section 194O and section 194Q)

5. Higher rate of tds for non-filers of income-tax return – Section 206AB.

TDS on amount payable to a specified person shall be at HIGHER of the following rates:

 at twice the rate prescribed in the relevant provisions of the Act; or

 at 5%

Important:
If both sections are applicable (section 206AA and 206AB); the higher of the two rates shall apply.
Section 206AB is not applicable for section 192, 192A, 194B, 194BB or 194N

Specified person: A person who has not filed income-tax returns for last two previous years
preceding the previous year in which the tax is required to be deducted and the aggregate of tds
and tcs in his case is Rs.50,000 or more in each of these two previous years.

6. What are the due dates for filing e-tds returns.

Quarter ending Due date
30th June On or before 31st July
30th September On or before 31st October
31 December
st On or before 31st January
31st March On or before 31st May of the following financial year
 77

OTHER POINTS:
a. Tax shall be deducted only on business payments and not on personal payments
(also refer Section 194M)
b. No TDS shall be made on payments made to Government, Banks
c. TDS is only on the INCOME portion excluding GST

Section 192: TDS ON SALARIES:

Time of deduction: At the time of payment
Rate of TDS: Slab rates
Limit: If salary exceeds basic exemption

Note: The employee can also declare his other incomes, if any, to the
employer for the purpose of tax deduction.

Note: No loss can be declared to the employer except loss from house
property.

Section 192A: PREMATURE WITHDRAWAL FROM PROVIDENT FUND:

Time of deduction: At the time of payment
Rate of TDS: 10% (42.744% if PAN is not furnished)
Limit: Rs.50,000 or more

Note: Tax shall be deducted on the amount withdrawn only in case

where the employee has not completed five years of continuous
service (NO TDS in cases of termination due to ill health,
contraction or discontinuance of business, cessation of
employment).

Section 193: INTEREST ON SECURITIES

Rate of TDS: 10%
Limit: If income exceeds Rs.5,000

Section 194: DIVIDEND TO RESIDENT SHAREHOLDERS

Rate of TDS: 10%
Limit: If income exceeds Rs.5,000

Section 194A: TDS ON INTEREST OTHER THAN INT ON SECURITIES

Time of deduction: Payment or credit (whichever is earlier)
Rate of TDS: 10%
Limit: If the amount of interest exceeds Rs.5,000
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Note: “Time” deposits with (banks, post office or co-operative banks) are
required to deduct tax only if the interest exceeds Rs.40,000
(Rs.50,000 for senior citizen). “Time” deposits include “fixed”
deposits and “recurring” deposits.

Note: TDS is not attracted in the following cases:

a. Interest on savings account;
b. Interest paid by a firm to its partner;
c. Interest on the compensation amount awarded by the Motor Accidents Claims
Tribunal where interest payment does not exceed Rs.50,000.

Section 194B: TDS ON CASUAL INCOME

Time of deduction: At the time of payment
Rate of TDS: 30% with or without PAN
Limit: If income exceeds Rs.10,000

Note: In a case where the winnings are in kind, the person responsible for paying shall, before
releasing the winnings, ensure that tax has been paid in respect of the winnings.

Section 194BB: TDS ON WINNINGS FROM HORSE RACE

Time of deduction: At the time of payment
Rate of TDS: 30% with or without PAN
Limit: If income exceeds Rs.10,000

Section 194C: PAYMENT TO CONTRACTORS & SUB-CONTRACTORS

1. Contract of WORK: Payment to a contractor or to a sub-contractor for carrying out

any WORK (including supply of labour for carrying out any
work), in connection with a contract or a sub-contract.

2. Rate of TDS: 1% in case payment is made to an individual or huf

2% in case payment is made to others (eg. firm or company)

No tds in case payment is made to a truck operator, if he furnishes

PAN and also gives a declaration that he does not own more than
ten trucks.

3. Limit for deduction: Single contract exceeding Rs.30,000 or the aggregate of all the
contracts exceeds Rs.1,00,000 in a year

4. Time of deduction: Payment or credit (whichever is earlier)

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Note: “Work” includes:

 advertising;
 broadcasting and telecasting including production of programmes;
 catering;
 carriage of goods or passengers by any mode of transport other than by railways;
 manufacturing or supplying a product according to the requirement or specification of
the customer by using material purchased from such customer or its associate, being a
person related to the customer.

Explanation:
However, “WORK” does not include manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased from a person other than
such customer or associate of such customer. Such a contract is a contract for ‘SALE’.

Note: Where any sum paid to the contractor by an individual and such sum is incurred
exclusively for PERSONAL PURPOSES, tax shall not be deducted at source.

Section 194D: TDS ON INSURANCE COMMISSION

Time of deduction: Insurance companies on payments made to insurance agents
Rate of TDS: 5%
Limit: If payment exceeds Rs.15,000

Section 194DA: MATURITY AMOUNT FROM INSURANCE COMPANY

Time of deduction: Insurance companies at the time of payment
Rate of TDS: 5% on the amount of “INCOME”
Limit: Maturity amount is Rs.1,00,000 or more

Note: Maturity amount received from Insurance company is exempt

u.s.10(10D) if certain conditions are satisfied. No tax shall be
deducted if the maturity amount is exempt.

Note: ‘INCOME’ means: Amount received on maturity (-) total premium paid

Section 194E: TDS ON PAYMENTS MADE TO NON-RESIDENT SPORTSMAN

Who will deduct tax: Any person making payment to any non-resident sportsman
(including an athlete) who is not a citizen of India.

Rate of TDS: 20.8% (including cess) of such payments. If payment exceeds

Rs.50 lacs or one crore then surcharge is also applicable.
 80

Note: Income received by a non-resident sportsman (including an athlete) by way of:

 participation in any game or sport in India; or
 advertisement; or
 contribution of articles relating to any game or sport in India in newspapers, magazines
or journals.

Section 194G: COMMISSION ON THE SALE OF LOTTERY TICKETS

Time of deduction: Payment or credit (whichever is earlier)
Limit for deduction: Commission exceeding Rs.15,000
Rate of TDS: 5%

Section 194H: TDS ON COMMISSION OR BROKERAGE

Time of deduction: Payment or credit (whichever is earlier)
Limit for deduction: Commission exceeding Rs.15,000
Rate of TDS: 5%

Section 194I: TDS ON RENT

Time of deduction: Payment or credit (whichever is earlier)
Limit for deduction: Rent exceeding Rs.2,40,000 p.a. for each co-owner
Rate of TDS: 10% in case land and building or furniture
2% in case of plant and machinery

Note: Rent means any payment under any lease or sub-lease

CBDT Circular: Payments made by the customers on account of cooling charges

to the Cold Storage owners cannot be treated as rent. In such
cases, tds is required to be deducted u.s.194C and not u.s..194I.

Note: No tds if the house owner furnishes declaration in Form 15G/15H

to the tenant

SECTION 194-IA: TDS ON TRANSFER OF IMMOVABLE PROPERTY

Time of deduction: Payment or credit (whichever is earlier)
Limit for deduction: Rs.50 lakhs or more payment to a resident
Rate of TDS: 1%

Note: This section is not applicable if immovable property is an

agricultural land situated in a rural area.

Note: Consideration includes all charges of the nature of club

membership fee, car parking fee, electricity or water facility fee,
maintenance fee, etc.
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SECTION 194IB: TDS ON RENT PAID ON IMMOVABLE PROPERTY

Applicable for: Individuals & HUF (other than those whose turnover or sales or
gross receipts during the immediately preceding financial year has
exceeded Rs.1 crore in case of business or Rs.50 lacs in case of
profession. Such assesses are required to deduct tax at source
u.s.194I)

Rate of tds: 5%

Limit: Rent should exceed Rs.50,000 per month or part of the month

Time of deduction: Last month of the previous year or the last month of tenancy, if
the property is vacated (whichever is earlier)

Important: The amount of tds shall not exceed last month rent.

Deposit of tds: Within 30 days from the end of the month

Section 194IC: TDS on payment made under “Specified Agreement”

To whom applicable: Any person paying to a resident any consideration under a

specified agreement.

Rate of TDS: 10% on monetary consideration

Note: This section refers to TDS payments covered under Joint

Development Agreements covered u.s.45 (5A) (refer Cap Gains)

Section 194J: TDS ON PROFESSIONAL OR TECHNICAL SERVICES

1. Payments covered: a. Fees for professional services; or
b. Fees for technical services; or
c. Royalty; or
d. Non-compete fees; or
e. Remuneration to a director; or
f. Call centre services

2. Limit for deduction: Amount exceeding Rs.30,000 in aggregate in a year. The limit of
Rs.30,000 is applicable separately for each of the payments
mentioned above.

However, there is no such exemption limit for deduction of tax on

any remuneration payable to a director.
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3. Rate of TDS: 10%

2% in case of:

a) fees for technical services; or

b) royalty in the nature of consideration for sale, distribution or
exhibition of cinematographic films; or
c) an assessee engaged ONLY in the business of call centre
services.

Important: Individuals and huf are required to deduct tax at source only if
Turnover or Sales or Gross receipts during the immediately
preceding financial year has exceeded Rs.1 crore in case of
business or Rs.50 lakhs in case of profession respectively.

Important: Where any sum paid by an individual and such sum is incurred
exclusively for PERSONAL PURPOSES of such individual, tax
shall not be deducted at source.

Section 194LA: PAYMENT OF COMPENSATION BY GOVERNMENT

ON ACQUISITION OF IMMOVABLE PROPERTY
When to deduct tax: Payment or credit (whichever is earlier)
Limit for deduction: Should exceed Rs.2,50,000
Rate of TDS: 10%

Section 194M: Contract payments, Professional payments or

Commission payments:
Who will deduct tax: Individuals or HUF (if not subject to tds u.s.194C or 194J or 194H)
Limit: Should exceed Rs.50 lakhs
Rate of Tds: 5%

Note: If the turnover of the assessee in his business exceeds Rs.1 crore or
gross receipts in his profession exceeds Rs.50 lacs during the
immediately preceding previous year 21-22 and such expenditure is
not a personal payment then Section 194C or Section 194J or
Section 194H shall be applicable.
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Section 194N: TDS on CASH withdrawal:

Who will deduct tax: Banks, Post Office or a Co-operative society

Limit: Cash withdrawal exceeds Rs.1 crore in aggregate from one or

more accounts maintained with a bank by any person
Rate of TDS: 2% on the amount exceeding Rs.1crore.

Important: For recipients who have not filed returns of income for last 3
years, the tds rate is 2% for cash withdrawal exceeding Rs.20
lakhs and 5% for cash withdrawals exceeding Rs.1 crore.

Section 194-O: Payment made by E-commerce operator to

resident E-commerce participant:

Tds rate: 1% of gross amount of sales or services

Time of deduction: Payment or credit, whichever is earlier

Limit: No tds if gross amount paid does not exceed Rs.5 lacs to an
e-commerce participant, being an individual or HUF and such
e-commerce participant has furnished PAN or Aadhaar to e-
commerce operator. (If PAN or Aadhar no. is not furnished, tds
rate shall be 5%).

Important: Tds is attracted even if payment is directly made to the e-

commerce participant by the purchaser which is facilitated by
e-commerce operator.

Terms: E-commerce operator: A person who owns, operates or

manages digital or electronic facility or platform for e-commerce.

E-commerce participant: A person RESIDENT in India selling

goods or providing services or both, including digital products,
through digital or electronic facility or platform for e-commerce.

Services: It includes both technical and professional services

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Section 194P: In case of a specified senior citizen and exemption

from filing of IT return:

Who should deduct: Specified Bank (pension and interest income received with the
same bank).

Limit and tds rates: Basic exemption limit and applicable slab rates (after chapter VIA
deductions and rebate u.s.87A)

Specified Senior Citizen: - Should have completed 75 years of age

- Having income by way of Pension; and
- Income by way of Interest on any account maintained with the
specified bank in which he is receiving pension income
- Should have no other income except pension and interest
- Has furnished declaration to the Specified Bank

Section 194Q: Tds on purchase of goods

Who should deduct: “Buyer” of goods whose total sales, gross receipts or turnover
from business carried on by him exceed Rs.10 crore during the
financial year immediately preceding the financial year in which
the purchases are made.

Limit: Aggregate value of purchases should exceed Rs.50 lakhs

Rate of tds: 0.1% of sum exceeding Rs.50 lakhs (5% if PAN not furnished)

Time of deduction: Payment or credit, whichever is earlier

Non-applicability of tds: if tds is deductible under any other provisions of this Act; or
if tcs is collectible u.s.206C, other than section 206C(1H)
(refer ‘tcs’ chapter)

Important: In case of a transaction to which both section 194Q and section

206C(1H) applies, tax is required to be deducted u.s.194Q.
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Section 194R: Tds on benefit or perquisite in respect of PGBP

Who should deduct: Any person who provides any benefit or a perquisite whether
convertible into money or not, arising from business or the
exercise of a profession. (w.e.f. 01.07.2022)

Rate of tds: 10% of value or aggregate of value of such benefit

Note: Before providing such benefit or perquisite, ensure that tax has
been deducted in respect of such benefit or perquisite

Non-applicability of tds: a) Value or aggregate of value does not exceed Rs.20,000

b) In case of individuals/huf where turnover < Rs.100 lacs from

business or gross receipts < Rs.50 lacs from profession during the
immediately preceding the relevant previous year.
 86

1. Mr.Y, an individual whose total sales in business during the year ending 31.03.2022 was Rs.3.20
crores, pays Rs.9 lakhs by cheque on 1.1.2023 to a contractor for construction of his business
premises in full and final settlement. Whether Mr.Y has to deduct tds?

Answer: Turnover of Mr.Y exceeds Rs.1 crore during the previous year 2021-22. Hence tds
provisions are attracted for P.Y. 2022-23. Mr.Y is required to deduct tax at source on the payment
made to a contractor for construction of his business premises.

2. Mrs.Rakshita, a Cost Accountant has raised a fees bill on LMN P Ltd., for Rs.3,00,000 and in
addition, has charged separately GST of 18% i.e. Rs.54,000, the total amount of the bill being
Rs.3,54,000. The amount of tax to be deducted at source by LMN P Ltd. is:

A) Rs.30,000 C) Rs.35,400
B) Rs.31,200 D) none of the above

Answer: Payment to a Cost Accountant attracts tds u.s.194J (professional services) @ 10% if the
amount exceeds the limit of Rs.30000. Tax is required to be deducted on the income portion excluding
GST. Tax is required to be deducted on Rs.300000 @ 10% which is Rs.30,000.

3. Mrs.K, the GM of M/s.Gold Ltd. receives a salary of Rs.4,50,000 p.m. The above salary includes
non-monetary perquisite of Rs.50,000 p.m. As per the terms of employment, tax on non-
monetary perquisite is to be borne by M/s.Gold Ltd. Mrs.K’s contribution towards RPF is
Rs.1,50,000. What would be the amount of tax to be deducted by M/s.Gold Ltd. from salary of
Mrs.K if she intimated M/s.Gold Ltd. to opt for provisions of section 115BAC for A.Y.2023-24?

(a) Rs.13,80,427 (c) Rs.15,52,980

(b) Rs.12,54,936 (d) Rs.13,88,970 Ans: Option A

4. Mr.M is regular in deducting tax at source and depositing the same. In respect of the quarter
ended 31st December, 2022 a sum of Rs.80,000 was deducted at source from the contractors. The
statement of tax deducted at source under section 200 was filed on 23rd March, 2023 for the
quarter ended 31.12.2022.

a. Is there any delay on the part of Mr.M in filing the statement of TDS?
b. If the answer to (i) above is in the affirmative, how much amount can be levied on Mr.M for
such default under section 234E?
c. Is there any remedy available to him for reduction/waiver of the levy?

Answer:
TDS return for the quarter ended 31.12.2022 should be filed on or before 31st January, 2023.
However, the tds return was actually filed on 23rd March, 2023. Hence there is a delay in filing.

Total no. of days delay is 51 days (28 + 23). Therefore, late fee @ Rs.200 per day is Rs.10,200
(Rs.10,200 or Rs.80000 whichever is less). Late fee shall not exceed the tds amount.

The assessee can file an application to CBDT for waiver of the fee under section 234E.
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5. Mr.Sharma, an employee of M/s.ABC Ltd. since 10.04.2019 resigned on 31.03.2023 and

withdrew Rs.60,000 being the balance in his EPF account. State whether the provisions of
Chapter XVII-B are attracted and if so, what is the net amount receivable by Mr.Sharma?
Would your answer differ if the termination of employment was due to his ill health?

Answer:
Section 192A: Limit Rs.50000 or more: tds rate with PAN is 10%; tds amount Rs.6000. Net amount
receivable by Mr.S is Rs.54000. If the termination of employment was due to his ill health; no tds.

6. X won first prize in a lottery on 15.01.2023 and the prize was a Car worth Rs.5 lakhs. According to
section 194B, tax has to be deducted at source from the winnings of lottery at the time of payment
of prize money. What is the procedure to be adopted before handing over the car to X?

Answer:
In a case where the winnings are in kind, the payer shall, before releasing the winnings, ensure that tax
has been paid. Failure to deposit tax, shall prompt the A.O. to treat the payer as assessee-in-default
and thereby legal consequences shall follow.

Section 194B; Limit Rs.10,000; Tds rate with or without PAN is 30%; tds amount Rs.150000

7. Examine the applicability of Section 194DA in the following cases:

a. Mr.X, a resident, is due to receive Rs.4,50,000 on 31.3.2023, towards maturity proceeds of

LIC policy taken on 1.4.2020, for which the sum assured is Rs.4,00,000 and the annual
premium is Rs.1,25,000.

b. Mr.Y, a resident, is due to receive Rs.3,25,000 on 31.3.2023 on LIC policy taken on

31.03.2012, for which the sum assured is Rs.3,00,000 and annual premium is Rs.35,000

c. Mr.Z, a resident, is due to receive Rs.95,000 on 1.10.2022 towards maturity proceeds of LIC
policy taken on 1.10.2016 for which the sum assured is Rs.90,000. The annual premium
was Rs.12,000.

Answer:
A. Policy issued after 01.04.2012. (i.e. on 01.04.2020)
Premium paid is Rs.1,25,000 which is more than 10% of sum assured (Rs.40,000)
Therefore, maturity amount is taxable.
Tds @ 5% on income of Rs.75,000 as the maturity amount exceeds Rs.1,00,000.
Income = Rs.4,50,000 (-) Rs.3,75,000 (1,25,000 x 3) = Rs.75,000
TDS amount u.s.194DA is Rs.3,750.

B. Policy issued before 01.04.2012. (i.e. on 31.03.2012)

Premium paid is Rs.35,000 which is less than 20% of sum assured (Rs.60,000)
Therefore, maturity amount is exempt u.s.10(10D). No Tds
 88

C. Policy issued after 01.04.2012. (i.e. on 01.10.2016)

Premium paid is Rs.12,000 which is more than 10% of sum assured (Rs.9,000)
Therefore, maturity amount is not exempt u.s.10(10D). It is taxable.
Maturity amount, however, does not exceed Rs.1,00,000.
TDS amount u.s.194DA is Nil.

8. Mr.R sells his house property in Chennai as well as his agricultural land in rural area for a
consideration of Rs.60 lakhs and Rs.15 lakhs respectively to Mr.S on 1.8.2022. He purchased the
house property and land in 2021 for Rs.40 lakhs and Rs.10 lakhs respectively. The Stamp Duty
Value on the date of transfer was Rs.85 lakhs and Rs.20 lakhs. Determine the tax implications in
the hands of Mr.R and Mr.S and the TDS implications, assuming both are resident Indians.

Answer:

In the hands of Mr.R (seller):

A. Capital Gains on sale of house at Chennai:

Sale consideration (as per section 50C) 85 lakhs (85 / 60 x 100 > 110%)
Less: Cost of acquisition 40 lakhs
Short term capital gain (<24 months) 45 lakhs

B. On sale of agricultural land in rural area:

Not a capital asset. No capital gain tax

In the hands of Mr.S (buyer):

A. Income from other sources:

The house is acquired for an inadequate consideration. Hence the difference between stamp
duty value and purchase price is taxable under the head “IFOS”.
Taxable amount Rs.25 lakhs (85 – 60) (difference is > 10% and also > Rs.50,000)

B. TDS provisions:
U/s.194IA tax has to be deducted at source @ 1% if the purchase price is Rs.50 lakhs or more.
Therefore, tds amount Rs.60,000 (60 lakhs x 1%)

C. Agricultural land in rural area is not a capital asset. Gift provisions are not applicable.

9. Param Construction Ltd. sells a flat to Mr.Mani for Rs.48 lakhs on 15.01.2023. The agreement
to sell provides that in addition, Mr.Mani has to pay maintenance charges (Rs.5,000 per
month) for 24 months in advance, Rs.2,00,000 for car parking to be used exclusively by him
and Rs.1,00,000 for club membership fees to Param Construction Ltd. before the flat is
registered in the name of Mr.Mani. The flat is registered on 30.03.2023.

Answer:
Section 194IA; Limit Rs.50 lacs or more; Tds rate is 1% on the entire consideration paid including
maintenance charges, car parking fees and club membership fees. Total consideration paid is
Rs.52,20,000 and tds @ 1% is Rs.52,200.
 89

10. Mr.A, a CA employed as CFO with Google India Ltd draws a salary of Rs.5,00,000 p.m. He has taken
on rent an independent house from Mr.B. With this information, determine the amount of TDS
u.s.194-IB for the financial year 2022-23 under the following situations:

a. If the amount of rent is Rs.55,000 p.m.

b. If the amount of rent is Rs.55,000 p.m. and Mr.B does not furnish PAN;

c. If the amount of rent is Rs.55,000 p.m. and Mr.A vacates the property by 31 st July, 2022 and
Mr.B does not furnish PAN;

d. In case Mr.A is carrying on the profession of Chartered Accountancy (instead of

employment) and his gross receipts from the practice for the year ended 31 st March, 2022 is
Rs.60,00,000 and the rent paid for his residence to Mr.B is Rs.55,000 p.m.

Answer:
Tds Rs.33,000 (55,000 x 12 x 5%) shall be deducted in the month of March, 2023
being the last month of the previous year.

Tds Rs.55,000 (55,000 x 12 x 20% = Rs.1,32,000; but cannot exceed rent payable for the last month)

Tds Rs.44,000 (55,000 x 4 x 20%) to be deducted at the time of vacating the property being July 2022.

Gross receipts from such profession exceeds Rs.50 lakhs, Section 194I is applicable (not 194IB). TDS
shall be deducted @ 10%.

11. When Mr.Gautam doing business paid hall rent of Rs.80,000 for 3 days for doing diwali sales, the
amount of tax deductible at source under section 194IB would be:

A) Rs.8,000 @ 10% C) Nil

B) Rs.16,000 @ 20% D) Rs.4,000 @ 5%

12. Mr.A, who has a piece of land, has entered into an agreement with XYZ Ltd., a real estate
developer. As per the terms of the agreement, Mr.A is entitled to receive 5 flats whose stamp duty
value as on the date of completion is Rs.70,00,000 and a monetary consideration of Rs.30,00,000.
Compute the tax to be deducted for A.Y.2023-24.

Answer:
i. In respect of non-monetary consideration: Nil.
ii. In respect of monetary consideration: TDS Rs.3,00,000 being 10% of Rs.30,00,000

13. Godrej Ltd. gives cloth to Mr.X and asks Mr.X to stitch shirts as per the specifications given by
Godrej Ltd. Mr.X charges in his invoice Rs.200 per shirt for stitching 10,000 shirts and raises a bill
for Rs.20,00,000. Discuss whether Godrej Ltd. has to deduct tax at source.
 90

Answer:
Godrej Ltd has to deduct tax u.s.194C. The material (cloth) is supplied by Godrej Ltd. Mr.X has to do
only the stitching job. Hence it is a contract of work. Tax will be deducted @ 1% on the payment made
as the contractor is an individual. Tds amount Rs.20,000. (20 lacs x 1%).

14. Alap Ltd. has made following payments on various dates in financial year 2022-23 to Vilambit
Ltd. towards work done under different contracts:

Contract Number Date of payment Amount (₹)

1. 5.5.2022 20,000
2. 6.6.2022 15,000
3. 8.8.2022 25,000
4. 10.12.2022 25,000
5. 29.01.2023 17,000

Alap Ltd. claims that it is not liable for deduction of tax at source under section 194C. Examine the
correctness of the claim made by the company. What would be the position if the value of the
contract no.5 is ₹ 14,000 only and there was no further contract during the year?

15. Deer Co Ltd is engaged in the business of manufacture of furniture items on contract basis. It sub-
contracted the production of cushion for the chairs to M/s.Lion & Co, a sole proprietary concern.
The sub-contractor M/s.Lion & Co procured the raw materials for production of cushions,
performed further labour works and supplied the same to Deer Co Ltd, showing the cost of raw
materials Rs.4,00,000 and labour charges Rs.1,50,000, separately. Explain briefly the tax
deduction requirement in the hands of Deer Co Ltd.

Answer:
Material is not supplied by the customer (Deer Co Ltd). It is a contract of sale. Hence, no tds u.s.194C.

16. Beta Ltd, gave a contract to Alpha Ltd. for the supply of 2000 pens on which the logo of Beta Ltd.
was printed. The raw materials were purchased by Alpha Ltd. from C Ltd., which is not related to
Beta Ltd. The consideration paid for the pens was Rs.1,50,000.

Answer:
Material is not supplied by the customer (Beta Ltd). It is a contract of sale. Hence no tds u.s.194C.

17. M/s.Taba Ltd. enters into a contract with Mr.Babu for the transportation of its products from its
plant to warehouses. It pays a lump-sum amount of Rs.2,50,000 to Mr.Babu for the year at the
year end. Mr.Babu is engaged in the business of plying goods carriages on hire. Mr.Babu is not an
assessee under Income-tax Act and thus did not provide PAN to Taba Ltd.
 91

Answer:
As per section 194C, payment to a transport operator can be made without tds. The transport
operator is required to furnish a declaration stating that he does not own more than ten trucks and
also furnishes PAN. In the present situation, Mr.Babu has not provided PAN to M/s.Taba Ltd. Hence,
tax is required to be deducted @ 20% (pan not furnished) on the payment made.

18. Rs.19,50,000 credited to the account of Digitec Studios (a partnership firm) on 31.03.2023 by B-
TV, Television channel towards part consideration for shooting of Tele Episode for 10 weeks as
per the storyline, contents and specifications of B-TV channel.

Answer:
Tds u.s.194C. “Work” includes broadcasting and telecasting including production of programmes.
Hence tds is required to be deducted @ 2% on the payment made. Tds liability would be Rs.39,000
(being 2% of Rs.19,50,000).

19. X Ltd credited Rs.28,000 towards fees for professional services and Rs.22,000 towards fees for
technical services to the account of ABC Ltd in its books of account on 6.9.2022. The total sum of
Rs.50,000 was paid by cheque to ABC Ltd on 18.12.2022. Examine whether tds is applicable.

Answer:
Section 194J; Limit Rs.30,000 should be considered separately for each item. Tds rate 10% for
professional services and 2% for technical services. Fees for professional services does not exceed
Rs.30,000 and fees for technical services does not exceed Rs.30,000; tds nil.

20. XYZ Ltd is a back office engaged as a call centre for ICICI with effect from 01.04.2022. During the
financial year 2022-23, ICICI has paid a sum of Rs.2 crores towards call centre services provided
by XYZ Ltd. Determine the amount of TDS u.s.194J. Would your answer differ if XYZ Ltd is also
engaged in the business of providing cab services to HDFC Ltd.

Answer:
If XYZ Ltd is engaged in providing call centre services only:
Tds @ 2% u.s.194J on Rs.2 crores is Rs.4,00,000

If XYZ Ltd is also engaged in providing CAB services (multiple businesses):

Tds shall be deducted @ 10% u.s.194J on Rs.2 crores which is Rs.2,00,000

21. Examine whether tds provisions would be attracted in the following cases, and if so, under which
section. Also specify the rate of tds applicable in each case. Assume that all payments are made to
residents.

Mr.GANESH, an individual carrying on retail business with turnover of Rs.2.5 crores in the
previous year 2021-22 made the following payments:

A. Contract payment for repair of residential house Rs.5 lakhs.

B. Payment of commission to Mr.Vinodh for business purpose Rs.80,000
 92

Mr.RAJESH, a wholesale trader whose turnover was 95 lakhs in P.Y.2021-22 made contract
payment for reconstruction of residential house Rs.20 lakhs in January, 2023; Rs.15 lakhs in
February, 2023 and Rs.20 lakhs in March, 2023.

Mr.SATISH, a salaried individual paid brokerage for buying a residential house in March, 2023
amounting to Rs.51 lakhs.

Mr.DHEERAJ, a pensioner made contract payment during October-November, 2022 for

reconstruction of residential house amounting to Rs.48 lakhs.

Answer:

Mr.Ganesh: Turnover exceeded Rs.1 crore during P.Y.21-22. Hence, tds provisions are
attracted for A.Y.23-24

Contract payment for residential house:

Section 194C is not attracted as it is a personal payment
Section 194M is not attracted as the amount does not exceed Rs.50 lakhs. Hence tds: nil

Payment of commission to Mr.Vinodh for business purpose

Section 194H: Tds is required to be deducted @ 5% on Rs.80,000. Tds Rs.4,000

Rajesh: Turnover of PY 21-22 does not exceed Rs.1 crore, Section 194C is not applicable:
Section 194M: The aggregate amount exceeds Rs.50 lacs. Tds @ 5% on Rs.55 lacs: Rs.2,75,000
Section 194C is not applicable as turnover of Mr.Rajesh does not exceed Rs.1 crore in the P.Y.2021-22
and payment made is also a personal payment.

Satish: Payment of brokerage for buying a residential house:

Section 194M: Amount exceeds Rs.50 lacs. Tds @ 5% on Rs.51 lacs: Rs.2,55,000
Section 194H is not applicable as Mr.Satish is a salaried employee

Dheeraj: Contract payment made during Oct-Nov. 2022 for reconstruction of res house:
Section 194M: Amount does not exceed Rs.50 lacs. Hence no tds
Section 194C is not applicable as Mr.Dheeraj is a pensioner

22. Mr.A has two bank accounts maintained with ICICI Bank and HDFC Bank. From 01.04.2022 till
31.03.2023, Mr.A withdrew the following amounts as cash from both the said accounts:

HDFC Bank: Rs.50 lakhs

ICICI Bank: Rs.120 lakhs

Compute the amount of tax to be deducted at source u.s.194N by HDFC Bank and ICICI Bank,
respectively, while making payment in cash to Mr.A.

a) Rs.1,00,000 and Rs.2,40,000

b) Nil and Rs.40,000
c) Nil and Rs.2,40,000
d) Rs.50,000 and Rs.1,20,000
 93

What will by your answer if Mr.A had not filed his returns of income for last 3 years and the time
allowed for filing belated returns has expired?

Answer: HDFC Bank will deduct 2% of Rs.30 lakhs Rs.60,000 (withdrawal exceeds Rs.20 lakhs); and
ICICI Bank will deduct 2% of Rs.80 lakhs; & at 5% on Rs.20,00,000. Tds Rs.2,60,000

23. Mr.Nihar maintains a Savings a/c and a Current a/c with Axis Bank Ltd. The details of
withdrawals on various dates during the previous year 2022-23 are as follows:

Date of cash Savings account Current account

05.04.2022 15 lacs
10.05.2022 22 lacs
25.06.2022 20 lacs
17.07.2022 5 lacs
28.10.2022 35 lacs
10.11.2022 38 lacs
12.12.2022 25 lacs

Mr.Nihar regularly files his return of income. Is Axis Bank Limited required to deduct tax at
source on the withdrawals made by Mr.Nihar during the p.y. 22-23? If yes, what would the
amount of tax deducted at source?

(a) Tds of Rs.4,60,000 is required to be deducted

(b) No, tds is not required to be deducted as the cash withdrawal does not exceed Rs.1 crore
neither in savings account nor in current account
(c) Tds of Rs.3,00,000 is required to be deducted
(d) Tds of Rs.1,20,000 is required to be deducted

Problem on Section 194P:

24. Mr.Sharma, a resident Indian aged 77 years, gets pension of Rs.52,000 p.m. from the UP-State
Government. The same is credited to his savings account in SBI, Lucknow Branch. In addition, he
gets interest @ 8% on fixed deposit of Rs.20 lakh with the said bank. Out of the deposit of Rs.20
lakh, Rs.2 lakh represents five-year term deposit made by him on 1.4.2022 Interest on savings
bank credited to his SBI savings account for the P. Y.2022-23 is Rs.9,500.

1) From the above facts, compute the total income and tax liability of Mr.Sharma for the A.Y.
2023-24, assuming that he has not opted for section 115BAC.

2) What would be the amount of tax deductible at source by SBI, assuming that the same is a
specified bank? Is Mr.Sharma required to file his return of income for A.Y.2023-24, if tax
deductible at source has been fully deducted? Examine.

3) Would your answer to Q.2 be different if the fixed deposit of Rs.20 lakh was with Canara
Bank instead of SBI, other facts remaining the same?
 94

1. Income from salary 574000 (after std deduction)

Income from other sources
a) Interest on fixed deposit 160000
b) Interest on savings account 9500
Gross total income 743500
Less: Section 80C 150000
Less: Section 80TTB 50000
Total Income 543500

Tax on the above Rs.19,450 (rounded off)

2. SBI, being a specified bank, is required to deduct tax at source u.s.194P (after considering the tax, if
any, deducted on pension u.s.192) and remit the same to the Central Government. In such case,
Mr.Sharma would not be required to file his return of income u.s.139.

3. If the fixed deposit of Rs.20 lakhs is with a bank other than SBI, which is the bank where his pension
is credited, then, Mr.Sharma would not qualify as a “specified senior citizen”, consequent to which SBI
would not be liable to deduct tax u.s.194P. In this case, Mr.Sharma would have to file his return of
income u.s.139, since his total income (without giving effect to deduction under Chapter VIA) exceeds
the basic exemption limit.

It may be noted that in this case, TDS provisions u.s.192 would, in any case, be attracted in respect of
pension income. Further, Canara Bank would, be liable to deduct tax @ 10% u.s.194A on interest on
fixed deposit, since the same exceeds Rs.50,000.

Problem on Section 194Q:

25. Mr.Gupta, a resident Indian, is in retail business and his turnover for f.y.2021-22 was Rs.12
crores. He regularly purchases goods from another resident, Mr.Agarwal, a wholesaler, and the
aggregate payments during the F.Y.2022-23 was Rs.95 lakhs (Rs.20 lakhs on 01.06.2022, Rs.25
lakhs on 12.08.2022, Rs.22 lakhs on 23.11.2022 and Rs.28 lakhs on 25.03.2023). Assume that the
said amounts were credited to Mr.Agarwal’s account in the books of Mr.Gupta on the same date.
Mr.Agarwal’s turnover for F.Y.2021-22 was Rs.15 crores.

1. Based on the above facts, examine the TDS/TCS implications, if any, under the IT Act, 1961
2. Would your answer be different if Mr.Gupta’s turnover for F.Y.2021-22 was 8 crores, all other
facts remaining the same?
3. Would your answer to (1) and (2) change, if PAN has not been furnished by the buyer or
seller, as required?

Answer:
1. Since Mr.Gupta’s turnover for F.Y.2021-22 exceeds Rs.10 crores and payments made by him to
Mr.Agarwal, a resident seller exceeds Rs.50 lakhs in the P.Y.2022-23, he is liable to deduct tax @ 0.1%
of Rs.45 lakhs (being the sum exceeding Rs.50 lakhs) in the following manner:-

No tax is to be deducted u.s.194Q on the payments made on 01.06.2022 and 12.08.2022, since the
aggregate payments till that date i.e. Rs.45 lakhs, has not exceeded the threshold of Rs.50 lakhs.
 95

Tax of Rs.1,700 (i.e. 0.1% of Rs.17 lakhs) has to be deducted u.s.194Q from the payment/credit of
Rs.22 lakhs on 23.11.2022 (22 lakhs – 5 lakhs, being the balance unexhausted threshold limit).

Tax of Rs.2,800 (i.e. 0.1% of Rs.28 lakhs) has to be deducted u.s.194Q from the payment/credit of
Rs.28 lakhs on 25.03.2023.

NOTE: In this case, since both section 194Q and 206C(1H) applies, tax has to be deducted u.s.194Q.

2. If Mr.Gupta’s turnover for the F.Y.2021-22 was only Rs.8 crores, TDS provisions u.s.194Q would not
be attracted. However, TCS provisions u.s.206C(1H) would be attracted in the hands of Mr.Agarwal,
since his turnover exceeds Rs.10 crores in the F.Y. 2021-22 and his receipts from Mr.Gupta exceed
Rs.50 lakhs.

No tax is to be collected u.s.206C(1H) on 01.06.2022 and 12.08.2022, since the aggregate receipts till
that date i.e. Rs.45 lakhs, has not exceeded the threshold of Rs.50 lakhs.

Tax of Rs.1,700 (i.e. 0.1% of Rs.17 lakhs) has to be collected u.s.206C(1H) on 23.11.2022 (22 lakhs – 5
lakhs, being the balance unexhausted threshold limit).

Tax of Rs.2,800 (i.e. 0.1% of Rs.28 lakhs) has to be collected u.s.206C(1H) on 25.03.2023.

3. In case (1), if PAN is not furnished by Mr.Agarwal to Mr.Gupta, then, Mr.Gupta has to deduct tax @
5%, instead of 0.1%. Accordingly, tax of Rs.85,000 (i.e. 5% of Rs.17 lakhs) and Rs.1,40,000 (5% of
Rs.28 lakhs) has to be deducted by Mr.Gupta u.s.194Q on 23.11.2022 and 25.03.2023 respectively.

In case (2), if PAN is not furnished by Mr.Gupta to Mr.Agarwal, the Mr.Agarwal has to collect tax @ 1%
instead of 0.1%. Accordingly, tax of Rs.17,000 (i.e. 1% of Rs.17 lakhs) and Rs.28,000 (1% of Rs.28
lakhs) has to be collected by Mr.Agarwal u.s.206C(1H) on 23.11.2022 and on 25.03.2023, respectively.

26. Discuss the liability of tds under the Income-tax Act, 1961 with reference to AY 2023-24:

XY a partnership firm is selling its product ‘R’ through the E-commerce Platform provided by
AB Ltd. (E-commerce Operator). AB Ltd., credited in its books of account, the account of XY on
28th February, 2023 by sum of Rs.4,90,000 for the sale of product ‘R’ made during the month
February, 2023. Mr.Rai who purchased product ‘R’ through the platform provided by AB Ltd
made payment of Rs.60,000 directly to XY on 21st February, 2023.

Answer:
AB Ltd (ECO) and XY a partnership firm (resident ECP). ECO is required to deduct @ 1% u.s.194-O on
Rs.5,50,000 (i.e. Rs.4,90,000 credited plus deemed payment of Rs.60,000 being payment directly made
by Mr.Rai to ECP). Hence, tds Rs.5,500.
 96

27. Discuss the liability of tds under the Income-tax Act, 1961 with reference to AY 2023-24:

Mr.P, a resident Indian, dealing in hardware goods has a turnover of Rs.12 crores in the
previous year 2021-22. He purchased goods from Mr.Agarwal a resident seller, regularly in
the course of his business. The aggregate purchase made during the previous year 2022-23
on various dates is Rs.80 lakhs which are as under:

10.06.2022 Rs.25,00,000
20.08.2022 Rs.27,00,000
12.10.2022 Rs.28,00,000

He credited Mr.Agarwal’s account in the books of accounts on the same date and made the
payment on the 28.02.2023 Rs.80 lakhs. Mr.Agarwal’s turnover for the financial year 2021-
22 is Rs.20 crores.

Answer:

Section 194Q is applicable as the turnover of Mr.P during the p.y.21-22 > Rs.10 crores. Tds has to be
deducted @ 0.1% on the amount exceeding Rs.50 lakhs. Liability to deduct tax arises at the time of
credit or at the time of payment whichever is earlier. Tds Rs.3,000 (80 lacs – 50 lacs) x 0.1% which
shall be deducted as follows:

Date Purchases tds

10.06.2022 25,00,000 nil
20.08.2022 27,00,000 Rs.200 (52 lacs – 50 lacs) x 0.1%
12.10.2022 28,00,000 Rs.2,800 (28 lacs x 0.1%)

Note: Turnover of Mr.Agarwal during the p.y. 21-22 > Rs.10 crores. TCS u.s.206C(1H) is attracted @
0.1%. However, if both Section 194Q and Section 206C(1H) are attracted, tds shall be deducted
u.s.194Q.

28. State in brief the applicability of provisions of tax deduction at source, the rate and amount of
tax deduction in the following cases for the financial year 2022-23 under Income Tax Act,
1961. Assume that all payments are made to residents:

i. Mr.Mahesh has paid Rs.6,00,000 on 05.10.2022 to M/s.Fresh Cold Storage Pvt. Ltd, for
preservation of fruits and vegetables. He is engaged in the wholesale business of fruits
& vegetable in India having turnover of Rs.3 Crores during the previous year 2021-22.

ii. Mr.Ramu, a salaried individual, has paid rent of Rs.60,000 per month to Mr.Shiva from
1st July, 2022 to 31st March, 2023. Mr.Shiva has not furnished his PAN.
 97

29. Bhargav doing textiles business furnishes you the following information:

Turnover for the financial year:

2021-22 Rs.2,05,00,000
2022-23 Rs.95,00,000

State whether the provisions of tax deduction at source are attracted for the following expenses
incurred during the financial year 2022-23:

a. Interest paid to Indian Bank on Term Loan Rs.92,800

b. Advertisement expenses to Mr.R (two individual payments of
Rs.24,000 and Rs.34,000) Rs.58,000
c. Factory rent paid to C Rs.2,50,000
d. Brokerage paid to Mr.B, a sub-broker Rs.16,000

Answer:
Turnover during the immediately preceding previous year 21-22 exceeds Rs.1 crore. Tds provisions
are applicable for A.Y.2023-24.

a. Payment to banks are not subject to tds.

b. Section 194C; Limit Rs.30,000 in case of a single contract or Rs.1,00,000 in case of all the
contracts; Tds rate 1%; Tds amount Rs.340 (34000 x 1%)

c. Section 194I; Limit Rs.2,40,000; Tds rate 10%

d. Section 194H; Limit Rs.15,000; Tds rate 5%; Tds amount Rs.800

30. State the applicability of TDS provisions and TDS amount in the following cases:

a. Rent paid for hire of machinery by B Ltd. to Mr.Raman Rs.2,50,000

b. ABC Ltd paid Rs.19,000 to one of its Directors as sitting fees on 01.01.2023
c. Mr.X sold his house to Mr.Y on 01.02.2023 for Rs.60 lakhs (SDV Rs.72 lakhs)
d. Payment of Rs.2,00,000 made to Jacques Kallis, a South African Cricketer, by an Indian
newspaper agency on 02.12.2022 for contribution of articles in relation to the sport of
cricket.

Answer:
a. Section 194I; Limit Rs.240000; tds rate 2%
b. Section 194J; Limit not specified; tds rate 10% and tds amount Rs.1,900
c. Section 194IA; Limit Rs.50 lakhs or more; tds rate 1% and tds Rs.60,000. SDV not relevant
d. Section 194E; Limit not specified; tds rate 20.8% and tds amount is Rs.41600
 98

31. Examine the applicability of provisions relating to deduction of tax at source and compute the
liability, if any, for tds in the following cases for the financial year ended 31-03-2023:

(i) ₹ 80,000 towards interest on compensation credited to the account of the payee by Motor
Accidents Claim Tribunal on 30-11-2022.

(ii) ₹ 9,00,000 paid on 30-09-2022 as consideration to Mr.B, a resident in India, on account of

compulsory acquisition of his residential building acquired for laying railway tracks.

(iii) Ram gave a building on sub-lease to M Ltd. with effect from 1-7-2022 on a rent of ₹
25,000 per month. The company also took on hire machinery from Ram with effect from
1-11-2022 on hire charges of 10,000 per month. The rent for building and hire charges
of machinery for the year 2022-23 were credited by the company to the account of Ram
in its books of account on 31-3-2023.

Answer:

i. Section 194A; Limit Rs.50000; tds rate 10% and tds amount Rs.8,000

ii. Section 194LA; Limit Rs.2,50,000; tds rate 10% and tds amount Rs.90,000

iii. Section 194I; Limit Rs.240000; tds rate 10% of building and 2% for plant and machinery
Rent for building (25000x9) 225000
Rent for machinery (10000x5) 50000
Total rent payable to Ram 275000 > Rs.240000

Tds on building (225000 x 10%) 22500

Tds on machinery (50000 x 2%) 1000
23500

32. Compute the amount of tax deduction at source on the following payments made by M/s.S Ltd
during the financial year 2022-23 as per the provisions of the Income-tax Act, 1961.

S. No. Date Nate of Payment

1. 01.10.2022 Paid Rs.2 lacs to Mr.R a transporter who owns 6 trucks and having
PAN. Declaration is also given by Mr.R.

2. 01.11.2022 Payment of fee for technical services of Rs.25,000 and Royalty of

Rs.20,000 to Mr.Shyam who is having PAN

3. 01.01.2023 Payment of Rs.2,00,000 made to Mr.A for purchase of diaries made

according to specifications of S Ltd. However, no material was supplied
for such diaries to Mr.A by S Ltd.

4. 01.01.2023 Fees paid to Mr.K Rs.25,000 who is a Director of S Ltd. Mr.K is not an
employee in S Ltd.
 99

Answer:
a. No tds (PAN and declaration is furnished) u.s.194C
b. No tds (limit Rs.30,000 should be applied for each and every item separately) u.s.194J
c. Contract of sale. No tds (not a contract of work) u.s.194C
d. Tds u.s.194J @ 10% Rs.2,500

33. Discuss the TDS/TCS applicability in context of A.Y. 2023-24 in the following cases and state the
amount of the TDS/TCS as per Income-tax Act 1961. (All issues as under are independent)

i. Mr.Shan, an individual, whose turnover from the business carried on by him during the
financial year immediately preceding the financial year 2022-23 exceeds ₹ 100 lakhs paid
fee to an architect of ₹ 50,000 for furnishing his residential house.

ii. Mr.Shyam purchased a house in Mumbai for consideration of ₹ 90 lakh by cheque from the
builder for the use of his residence.

iii. Mr.Soham purchased licensed copy of computer software from the software vendor
(resident of India) along with all right to use it for ₹ 50,000 to be used for business
purposes.

Answer:
i. Turnover of Mr.Shan in the immediately preceding financial year 2021-22 has exceeded Rs.1
crore. Hence, tds provisions are attracted. U/s.194J, tds is not required to be deducted on
personal payments. However, if the payment exceeds Rs.50 lakhs, tds is required to be
deducted @ 5% u.s.194M.

ii. Tds u.s.194IA; Limit Rs.50 lacs or more; Tds 1% and Tds amount Rs.90,000.

iii. Any payment for transfer of all or any rights to use a computer software including granting of a
license for computer software is “Royalty”. Hence tds u.s.194J @ 10% on Rs.50,000.

34. State whether the TDS provisions are attracted in the following cases: CMA DEC - 2017

i. Mr.Mahadevan engaged in trading business with a turnover of ₹ 80 lakhs for the previous
year 2021-22 and turnover of ₹ 125 lakhs in the financial year 2022-23 paid interest of ₹
30,000 to Mr.Swami.

ii. Mr.Singhvi engaged in manufacturing activity paid salary of ₹ 8,50,000 to Mr.Ghosh

during the previous year 2022-23 which is the first year of commencement of business.

iii. Cure well Hospitals Ltd. paid professional charges to Dr.Sakthikanal ₹ 40,000.

iv. Garg & Co. a firm of Cost Accountants paid rent of ₹ 2,70,000 (₹ 22,500 per month) to a
partner’s son by cash.

v. Ramnath & Co. paid interest on term loan taken for car of ₹ 31,000 to UCO Bank.
 100

vi. Mr.Rajan resigned from MT Pharma after rendering service for 4 years. He received ₹
60,000 from recognized provident fund account.

vii. Padmaja & Co. made contract payments of ₹ 7,500 per month aggregating to ₹ 90,000 to
CD & Co. during the year 2022-23.

viii. Shiva industries Ltd. paid brokerage of ₹ 18,000 to Sanvitha Ltd. on 30.01.2023.

Answer:
i. No tax is deductible at source as the turnover of Mr.Mahadevan during the financial year 2021-
22 did not exceed Rs.100 lakhs. He is not required to deduct tax at source under section 194A
for the interest paid to Mr.Swami.

ii. When the employer pays salary to an employee and the salary income exceeds the limit
(Rs.2,50,000) which is not chargeable to tax, the responsibility of deducting tax at source lies
on the employer. In this case regardless of the turnover of Mr.Singhvi, tax is deductible at
source on salary paid to Mr.Ghosh as the salary exceeds the basic exemption.

iii. As the payment of professional charges exceeded the threshold limit of Rs.30,000, tax is
deductible at source on professional charges paid at 10% u.s.194J.

iv. When the rent paid exceeds Rs.2,40,000 the liability to deduct tax at source under section 194-I
would get attracted. Merely because the payment was made by cash will not provide any
exception for the reason that such cash payment is liable for disallowance u.s.40A(3).
Additionally penal consequences for non-deduction will follow.

v. Interest on loan paid to UCO Bank is not subject to tds.

vi. Section 192A; Limit Rs.50,000 or more; tds rate 10%; tds amount Rs.6,000 (no covid rate)

vii. As the aggregate payment does not exceed Rs.1 lakh, tax need not be deducted under section
194C.

viii. Section 194H; Limit Rs.15,000; tds rate 5%; tds amount Rs.900

35. Pradhan (P) Ltd. gives you the following information for the financial year 2022-23:

i. It paid a refundable deposit of ₹ 5 lakhs to the landlord where the company has
commenced manufacturing activity during the year.

ii. It paid ₹ 3 lakhs to a hotel accommodation where the training programme for the
marketing force was conducted.

iii. Paid non-compete fee of ₹ 10 lakhs to a director who was associated with the company for
the last 15 years.

iv. It filed the quarterly statement of TDS for the quarter ended 30.09.2022 on 05.01.2023.
The amount of tax deducted and remitted in the quarter is ₹ 60,000.
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v. It engaged a famous tennis player Mr.Mahesh as Brand Ambassador for promoting its
product and paid ₹ 2 lakhs as fee to him.

vi. It acquired a luxury car for ₹ 15 lakhs by making payment by cheque on 01.10.2022.

vii. It paid ₹ 30,000 to travel agents for purchase of train and air tickets to the company
officials during the year.

You are requested to state in brief the consequences of the above transactions as per TDS/TCS
provisions of the income–tax Act, 1961. CMA – June 2017

Answer:

i. Payment of refundable deposit to landlord would not attract TDS provisions of section 194-I (As
per CBDT Circular).

ii. Section 194I; Limit Rs.2,40,000; Tds rate 10%; Tds amount Rs.30,000

iii. Section 194J; Limit Rs.30,000; Tds rate 10%; Tds amount Rs.1,00,000

iv. Due date for filing Q2 tds return is 31st October, 2022. But tds return was filed on 05.01.2023.
There is a delay of 66 days. Therefore, late fee @ Rs.200 per day is Rs.13,200 (66x200). Late fee
shall not exceed the amount of tds (i.e. Rs.60,000).

v. Payment to brand ambassador being a sports person covered by notified profession u.s.44AA, tax is
deductible at source @ 10% u.s.194J. Limit is Rs.30,000 and tds amount is Rs.20,000.

vi. Purchase of car exceeding Rs.10 lakhs is liable for tax collection at source @ 1% u.s.206(1F). Hence
the vendor/seller is required to collect Rs.15,000 from the company.

vii. CBDT Circular: Payment to travel agents for purchase of tickets would not attract the provisions of
section 194C and hence no tax is deductible at source.

Problems on Section 194-O:

36. Samsung India Ltd. has sold 1,000 television sets at ₹ 50,000 each through Reliance Digital on
01.12.2022. Reliance Digital receives payment of ₹ 5,00,00,000 from various buyers and deducts
commission of 10% and wants to remit ₹ 4,50,00,000 to Samsung India Ltd. Advise.

Answer:
Samsung India Ltd is the E-Commerce Participant and Reliance Digital is the E-Commerce Operator.
Reliance Digital shall deduct TDS of 1% on ₹ 5,00,00,000 i.e. ₹ 5,00,000. Therefore, Reliance Digital
will remit ₹ 4,45,00,000 to Samsung India Ltd after deducting TDS of ₹ 5,00,000.

There is no liability of Samsung India Ltd to deduct TDS under section 194H on the commission it pays
to Reliance Digital since:

A transaction on which tax has been deducted by e-commerce operator u.s. 194-O, shall not be liable to
tax deduction under any other section. TDS has been deducted on the entire transaction of ₹
5,00,00,000.
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37. Mr.A, a resident, manufactures perfumes and sells through Flipkart. The total sales made by Mr.A
through Flipkart are ₹ 5,00,000 for the previous year ending 31.3.2023. Flipkart deducts
commission @ 10% and remits ₹ 4,50,000 to Mr.A.

Answer:
Section 194-O shall not be applicable since the gross sales does not exceed ₹5,00,000. Hence, Flipkart
shall not deduct TDS provided that Mr.A gives his PAN or Aadhaar to Flipkart. If he does not give
PAN/Aadhaar to Flipkart, then TDS shall be deducted @ 5% on ₹ 5,00,000. TDS on commission paid to
Flipkart is also not required to be deducted.

38. M/s.ABC sells Women Apparel through Myntra and total sales of M/s.ABC through Myntra are ₹
2,00,00,000 during the previous year ended 31.3.2023. Myntra charges 10%, commission on
sales made by it. The payment gateway of Myntra is so designed that ₹ 20,00,000 comes to
Myntra from customers and ₹ 1,80,00,000 goes to M/s.ABC directly.

Answer:
As per Explanation to section 194-O, any payment by purchaser directly to E-Commerce participant
for sale of goods facilitated by an E-Commerce Operator shall be deemed to be the amount credited or
paid by E-Commerce Operator to E-Commerce Participant and shall be included in gross amount of
sale for purpose of tax deduction under section 194-O. Tds will be on 2 crores @ 1%.

39. A Chartered Accountant renders professional advices to various clients through “Consult-CA", a
website run by E-Commerce Operator. Various clients pays ₹ 1,00,00,000 to Consult-CA and
Consult-CA deducts 20% commission and remits ₹ 80,00,000 to the Chartered Accountant for the
financial year ending 31.3.2023.

Answer:
As per section 194-O, "Services" include professional services. Therefore Consult-CA will deduct 1%
TDS on ₹ 1,00,00,000 and remit ₹ 79,00,000 to the Chartered Accountant. Section 194J shall not apply
and TDS shall not be deducted @ 10%.

Problems on issues, case laws:

40. Vishal Hotels Ltd., runs a famous restaurant. Customers frequenting the same, add tips to be
given to the servers in the food bill while making the payment. The tips so collected by the hotel is
pooled and distributed to all the employees. The Assessing Officer of the TDS Ward has issued a
notice stating that the assessee should deduct tax at source from the tips distributed to the
employees, since the same is nothing but payment of salaries. Assessee seeks your advice.

41. MNC Ltd. is engaged in this business of managing and operating hotels. The assessee allowed the
employees to accept tips from customers. Some customers paid the bill and tips to the employees
through credit card. The assessee, being employer collected the amounts and disbursed tips to
the employees on monthly basis. The assessee did not deduct tax at source on the said payments
as the amounts were not in the nature of salary. Does the action of the assessee satisfy the legal
requirements?
 103

Answer: TDS on tips distributed by the employer to its employees:

Issue involved:
The issue is whether tax is required to be deducted at source u.s.192 from the tips distributed by the
employer to the employees. Whether tips distributed to be treated as salary?

Provisions applicable:
Section 192 provides that tax is to be deducted at source by the employer from salary at the time of
payment, if the amount of salary exceeds basic exemption.

Analysis of the issue:

Tips collected by Hotel from customers and paid to employees did not amount to salary and hence
employer was not liable to deduct tax at source on such payments u.s.192.

Conclusion:
Therefore, no tax was required to be deducted u.s.192 on the tips distributed by the company.
Therefore, Assessing Officer is not correct in treating the assessee as assessee-in-default. (SC)

42. Mr.Ramesh is employed in R Ltd. as senior executive. He availed leave travel assistance (LTA) of ₹
60,000 in January 2023. He did not produce any evidence for the expenditure incurred. His salary
income (computed) before allowing exemption for LTA is ₹ 24,00,000. Mr.Ramesh claimed
interest on moneys borrowed for acquisition of his residential house of ₹ 96,000 but did not
produce the name, address and PAN of the lender. As employer, how will you treat the claim of
exemption of LTA and deduction of housing loan interest claimed by Mr. Ramesh?

Answer:
Mr.Ramesh is required to furnish to his employer,
a. the evidence/proof of expenditure for claiming exemption in respect of LTA, and
b. the name, address and PAN of the lender for claiming deduction of interest under the head IFHP.

Since Mr.Ramesh has not submitted the evidence, exemption in respect of LTA and deduction in
respect of housing loan shall not be allowed by the Employer. Accordingly, tax has to be deducted at
source u.s.192 on Rs.24,00,000, being salary income (computed) without considering LTA exemption
and loss from house property.

43. M/s.Avtar Limited entered in to an agreement for the warehousing of its products with ABC
Warehousing and deducted tax at source as per the provisions of section 194C out of warehousing
charges paid during the year ended on 31.03.2023.

The A.O. while completing the assessment for Assessment Year 2023-24 of Avtar Limited, asked
the company by treating the warehousing charges as rent, as defined in section 194-I, to make
payment of difference amount of TDS with interest. It was submitted by the company that the
recipient had already paid tax on the entire amount of warehousing charges and therefore, now
the difference amount of TDS be not recovered. However, it was prepared to make the payment of
due interest of the difference amount TDS. Examine critically the correctness of the action or the
treatment given.
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Answer:
Any person who fails to deduct the tax, shall not be deemed to be an assessee-in-default in respect of
such tax if the payee has included the warehouse charges for computing its total income, paid tax
thereon and filed its return of income u.s.139(1).

Avtar Limited shall not be treated as assessee-in-default since, ABC Warehousing has paid the
difference amount of tax. Therefore, the difference amount cannot be recovered from Avtar Ltd.
However, Avtar Ltd. has to pay interest @ 1% p.m. or part of a month from the date on which such tax
was deductible to the date of furnishing of return of income by ABC Warehousing.

44. Syed & Co., a dealer in motor cycles conducted motor cycle race on the occasion of its' 25th year
anniversary. The prize was given to first 3 winners by way of a luxury motor cycle which was
worth ₹ 2 lakhs each. The assessee did not deduct tax at source on the prize given to the winners.
The AO. treated the assessee as an assessee-in-default and passed order u.s.201(1) and 201(1A).
The assessee seeks your advice on the validity of the order and other legal consequences. Advise.

Issue involved:
Where the assessee fails to deduct tax at source in respect of the winnings, can he be deemed as an
assessee-in-default.

Provisions applicable:
The payer shall deduct tax u.s.194B if the amount of winnings exceeds Rs.10,000 @ 30%. However,
where the winnings are in kind, the payer shall, before releasing the winnings, ensure that tax has
been paid in respect of the winnings. Where the payer does not deduct tax, then, such person would
be deemed to be an assessee in default.

Analysis:
If the payer either fails to deduct the tax or after deducting fails to pay the tax as required, then, such
person shall be deemed to be an assessee-in-default in respect of such tax. However, if winner has
paid the tax on the winning and Syed & Co has ensured that winner has paid the tax before releasing
the winnings, then Syed & Co. shall not be treated as assessee in default.

Conclusion:
The AO can treat the assessee Syed & Co. as assessee in default if the winner has not paid tax on the
winnings before the winnings were released to them. The AO will be justified in levying interest and
penalty.

45. India Telephones Ltd. paid ₹ 15 lakhs per annum to Bharat Mobiles Ltd. for each of the mobile
towers used by it. During the financial year 2022-23, India Telephones Ltd. paid ₹ 435 lakhs to
Bharat Mobiles Ltd. It deducted tax at source u.s.194C and whereas the Assessing Officer claimed
that the assessee must have deducted tax at 10% u.s. 194-I. Decide the correctness of the action of
assesse vis-a-vis the Assessing Officer. Discuss the liability for tax deduction at source in the
following case for the A.Y. 2023-24. cma final
 105

Answer:
The renting of mobile tower cannot be called as renting of land. The arrangement is for the use of
machinery, plant or equipment. It was necessary to house/install the equipment in some premises.
The renting of mobile tower (machinery) is liable for tax deduction under section 194-l at the rate
applicable for the payment made for use of P and M i.e. 2% and not 10%. Hence, the action of the AO.
is not correct.

46. Discuss the liability for tax deduction at source in the following case for the A.Y.23-24:
Balaji Airlines Ltd. paid ₹ 10 lakhs to Airport Authority of India (AAI) towards landing and
parking charges. The payment was towards use of land in the airport besides technical services
involving navigation, security and other ancillary services. The tax was deducted at source under
section 194C at 2%. The Income Tax Officer (TDS) held that the assessee ought to have deducted
tax under section 194-I i.e. towards rent. Discuss the consequence of the action of the A.O. and
also the correctness of such decision. CMA – June 2017

Answer:
The assessee has deducted tax at source u.s.194-C at 2% and the Assessing Officer holds that the tax
ought to have been deducted u.s.194-I @ 10%.

In this case, the assessee has not paid the amount merely for use of land. The payment is also towards
other services such as use of airport land for landing, the technical services involving navigation,
security, air traffic services, ground safety services, aeronautical communication facilities and
meteorological services at the airport. As the payment was not for use of land alone, the provisions of
section 194-I are not attracted.

The payment is for various composite services and hence the provisions of section 194C could be
applied and not section 194-I. Thus the disallowance contemplated by the Assessing Officer is not
tenable in law. (SC)

47. Maha Bank Ltd accepted fixed deposits of Rs.20 crores in the name of Registrar General of the
High Court and issued a fixed deposit receipt in compliance with a direction passed by the court in
relation to certain proceedings. The Bank did not deduct tax on the interest accrued. The A.O.
issued a notice to the bank to show cause as to why it should not be treated as an assessee-in-
default u.s.201(1) and 201(1A) for not deducting tax at source on interest accrued. Examine
whether the bank is correct in not deducting tax on the interest accrued. CA final

Answer:
The issue under consideration is whether the bank is required to deduct tax at source on the amount
of interest paid or payable on fixed deposits in the name of Registrar General of High Court.

Under Section 194A, the bank has to deduct tax on payment of interest exceeding Rs.40,000 on time
deposits. However, in this case, the actual payee is not ascertainable and the person in whose name the
interest is credited is not a person liable to pay tax under the Act. The Registrar General is recipient of
neither the amount credited to its account nor to interest accruing thereon. Therefore, he cannot be
considered as a ‘payee’ for section 194A. In the absence of a payee, tds provisions are not attracted.
 106

The credit by the bank in the name of the Registrar General would, thus, not attract the provisions of
section 194A. Therefore, the bank is correct in not deducting tax on the interest accrued. This is as
per CBDT Circular.

48. X Ltd. is a producer of natural gas. During the year, it sold natural gas worth Rs.20,50,000 to
M/s.Hawa Co., a partnership firm. It also incurred Rs.2,00,000 as freight for the transportation of
gas. It raised the invoice and clearly bifurcated the value of gas as well as the transportation
charges. Discuss whether tds is attracted on transportation charges u.s.194C. CA final

Answer:
TDS u.s.194C is attracted on any sum payable to a resident contractor for carrying out any work. Since
X Ltd., the producer of natural gas sells as well as transports the gas to the purchaser, M/s.Hawa Co., a
partnership firm, till the point of delivery, where the ownership of gas is simultaneously transferred,
the manner of raising the sale bill (whether the transportation charges are included in the cost of gas
or shown separately) does not alter the basic nature of such contract which remains essentially a
‘contract of sale’ and not a ‘works contract’.

Therefore, in such circumstances, TDS provisions u.s.194C are not applicable on the component of Gas
Transportation Charges payable by M/s.Hawa Co. to X Ltd. Consequently, there is no liability to deduct
tax at source u.s.194C in this case.

49. AKL Ltd., a third-party administrator on behalf of an Insurance Company has settled medical bills
of ₹ 5,00,000 submitted by Kay Hospitals Ltd. from a patient under a cashless scheme.

Answer:
CBDT Circular: clarified that since the services rendered by hospitals to various patients are
primarily medical services, TPAs (Third Party Administrators), who are making payment on behalf of
insurance companies to hospitals for settlement of medical/insurance claims etc. under various
schemes including cashless schemes are liable to deduct tax at source on all such payments to
hospitals. TDS u.s.194J: 500000 x 10% = Rs.50,000.

50. M/s.Sunivesh Investors is engaged in the business of stock broking, depositories, mobilization of
deposits and marketing of public issues. It is a registered member of Bombay Stock Exchange.
Every year it makes payment amounting to Rs.10 lakhs to the Stock Exchange by way of
transaction charges in respect of fully automated online trading facility. This service is available
to all members of the stock exchange in respect of every transaction that is entered into. Would it
be liable for tax deduction under section 194J? CA final

Answer:
U/s.194J, TDS is attracted in respect of fees for technical services. Technical services like managerial
and consultancy services are in the nature of specialized services made available by the service
provider to cater to the special needs of the customer (user). It is the above feature that distinguishes
or identifies a service provider from a facility offered.

However, the service provided by the BSE for which transaction charges are paid does not satisfy the
test of specialized, exclusive and individual requirement of the user or the consumer who may
approach the service provider for such assistance or service. Therefore, the transaction charges paid
 107

to BSE by its members are not for technical services but are in the nature of payments made for
facilities provided by the stock exchange. Such payments would, therefore, not attract the provisions
of tax deduction at source u.s.194J.

Accordingly, payment of transaction charges of Rs.10 lakhs by M/s.Sunivesh Investors to BSE in

respect of fully automated online trading facility would not be liable for tax deduction at source
u.s.194J
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CHAPTER 4C: TAX COLLECTION AT SOURCE

WHAT IS TCS?
Tax Collection at Source (TCS) means collection of tax at source at prescribed rates by the seller
from the buyer of certain specified

i. Goods u.s.206C(1); or
ii. Services u.s.206C(1C); or
iii. a motor vehicle u.s.206C(1F); or
iv. Overseas remittance for education and other purposes u.s.206C(1G); or
v. Overseas remittance for tour package u.s.206C(1G); or
vi. Sale of goods above Rs.50 lacs u.s.206C(1H)

Goods specified under section 206C(1):

Nature of Goods specified Rates with PAN

(a) Alcoholic liquor for human consumption 1%

(b) Tendu leaves 5%
(c) Timber obtained under a forest lease 2.5%
(d) Timber obtained by any mode other than (c) 2.5%
(e) Any other forest produce not being timber or tendu leaves 2.5%
(f) Scrap 1%
(g) Minerals, being coal or lignite or iron ore 1%

Non-applicability of TCS [Section 206C(1A)]

No TCS if the goods referred to in section 206C(1) are to be utilised for the purpose of
manufacturing, processing or producing articles or things or for the purposes of generation of
power and NOT for trading purposes.

Problem:
M/s.PMPC, a Partnership firm, is engaged in the manufacture of cardboard carton boxes used in
packaging industry. During the year, it has sold cutting waste generated amounting to Rs.30
lakhs to XYZ Ltd, a paper manufacturing company. XYZ Ltd uses such cutting waste purchased
as raw material for its production. Discuss the implication of this transaction with respect to
tax collected at source.

Answer: A seller is required to collect tax @ 1% from the buyer on sale of scrap. However, tax
is not required to be collected at source if the resident buyer furnishes a declaration in the
prescribed form that such scrap is to be utilised for the purpose of manufacturing of any article
or thing. Hence no tcs.
 109

Section 206C (1C) provides for collection of tax by every person who grants a lease or a licence
or otherwise transfers any right or interest in any:

- parking lot or
- toll plaza or
- a mine or a quarry

to another person for the use of such parking lot or toll plaza or mine or quarry for the
purposes of business. The applicable TCS rate is 2%. (5% without PAN).

Problem:
KLS Ltd. gives a multilevel parking building in front of a shopping mall in Delhi to PQR Ltd. on a
lease of 90 years. PQR Ltd. is liable to pay Rs.3 crores as one time lease premium.

Answer:
Every person who grants a lease in respect of a “parking lot” to another person for the use of
such parking lot shall collect tax at source @ 2%. (5% if PAN not furnished). KLS Ltd shall
collect 2% of Rs.3 .

a. MOTOR CAR - Section 206C(1F) provides that every person, being a seller, who receives any
amount as consideration for sale of a MOTOR VEHICLE of the value exceeding Rs.10 lakhs,
shall collect tax from the buyer @ 1% of the sale consideration. (5% without PAN).

OTHER PROVISIONS IN RESPECT OF TCS ON SALE OF MOTOR VEHICLE:

a. TCS is applicable only at retail level and not on sale of motor vehicles by manufacturers
to dealers or distributors.

b. It is applicable on sale of any motor vehicle (luxury or non-luxury) of the value

exceeding Rs.10 lakhs.

c. It is applicable on each sale of a Motor Vehicle and not on aggregate value of sale
during the year.

d. Provisions are applicable whether the payment is made in cash or by any other mode.

e. An individual, if his turnover in business exceeds Rs.1 crore or gross receipts exceeds
Rs.50 lakhs in profession in the immediately preceding financial year, is also liable to
collect tax at source @ 1% on sale of motor car by him.

1. When a motor car is sold for Rs.12 lakhs by a dealer to a buyer holding PAN, the amount of tax
collectible at source shall be:
(a) Rs.12,000 (1%) (c) Rs.24,000 (2%)
(b) Rs.1,20,000 (10%) (d) Nil
 110

2. What are clarifications made by CBDT with respect to Section 206C (1F) relating to the
following issues:

i. Whether TCS on sale of motor vehicle is applicable only to luxury car?

ii. Whether TCS is applicable on each sale or aggregate value of sale of motor vehicle,
exceeding Rs.10 lakhs?
iii. Whether TCS is applicable in case of an individual?
iv. Whether TCS on sale of motor vehicle is at retail level also or only by manufacturer to
distributor or dealer?

Answer:
i. It is applicable on sale of any motor vehicle (luxury or non-luxury)

ii. It is applicable on each sale and not on aggregate value of sale.

iii. An individual, if his turnover in business exceeds Rs.1 crore or gross receipts in
profession exceeds Rs.50 lakhs in the immediately preceding financial year, is also liable
to collect tax at source @ 1% on sale of motor car by him.

iv. TCS is applicable only at retail level and not on sale of motor vehicles by manufacturers
to dealers or distributors.

REMITTANCE UNDER LIBERALISED REMITTANCE SCHEME (LRS) - Section 206C (1G):

Purpose of Remittance Rate of TCS collected Threshold limit

by an Authorised Dealer

With PAN No PAN

b. Overseas tour programme/package
(seller of tour programme from the
buyer) 5% 10% no exemption limit

c. Other remittances 5% 10% Rs.7 lakhs

(education; medical treatment; (in excess of Rs.7 lakhs)
investment in shares; immovable
property; gift)

d. Remittances out of a loan 0.5% 5% Rs.7 lakhs

borrowed from any financial instn (in excess of Rs.7 lakhs)
for education

Note: TCS shall not be applicable if the buyer is liable to deduct tax at source.
 111

Section 206C (1H): TCS on sale of goods:

Who will collect TCS: Seller from buyer provided the turnover of the Seller
exceed Rs.10 crores during the immediately preceding
previous year.

Limit: Above Rs.50 lakhs

TCS rate: 0.1% on consideration received exceeding Rs.50 lakhs

If PAN not furnished tcs rate is 1%

Section 206C(1H) not applicable: If TCS is collected u.s.206C(1); 206C(1F) and 206C(1G)
If buyer has deducted tds u.s.194Q
On goods exported out of India

Provisions of Section 194Q and Section 206C(1H) in brief:

Particulars Section 194Q Section 206C(1H)
When tds/tcs? On purchase On sale
Liability on: Buyer Seller

Turnover of PY 20-21: > Rs.10 crores > Rs.10 crores

Tds / tcs rate: 0.1% 0.1%
Without PAN: 5% 1%

Liability to deduct or collect: payment or credit (wel) At the time of “receipt”

Limit: > Rs.50 lakhs > Rs.50 lakhs
excluding GST including GST

a) If both Sec.194Q and Sec.206C(1H) are attracted; tds will be u.s.194Q

b) TCS u.s.206C(1H) not be applicable if tcs is collected under any other section [(e.g. section
206C(1) or 206(1F)].

5. Examine the following transactions with reference to applicability of the provision of tax
collected at source and the rate and amount of the TCS for the Assessment year 2023-24.

i. Mr.Kalpit bought an overseas tour programme package for Singapore for himself and
his family of Rs.5 lakhs on 01.11.2022 from an agent who is engaged in organizing
foreign tours in course of his business. He made the payment by an account payee
cheque and provided PAN to the seller. Assume Kalpit is not liable to deduct tax at
source under any other provisions of the Act.
 112

ii. Mr.Anu doing business of textile as a proprietor. His turnover in the business is 11
crores in the previous year 2021-22. He received payment against sale of textile goods
from Mr.Ram Rs.75 lakhs against the sales made to him in the previous year and
preceding previous years. (Assuming all the sales are domestic sales and Mr.Ram is not
liable to deduct tax on the purchase from Mr.Anu).

Answer:
i) Under section 206C(1G); tcs @ 5% on the amount collected by the seller. Amount of tcs (5
lacs x 5%) Rs.25,000. No exemption limit is provided for overseas tour programme.

ii) Under section 206C(1H); Turnover of Mr.Anu exceeded Rs.10 crores during the p.y.2021-22.
He is required to collect tax @ 0.1% on the amount received in excess of Rs.50 lacs from
Mr.Ram. Amount of tcs (75 lacs – 50 lacs) x 0.1% is Rs.2,500.

Higher rates of TCS for non-filers of income-tax return and non-furnishers of PAN
(Section 206CC and 206CCA)

Section 206CC: If PAN is not furnished: TCS will be twice the normal rates or 5% (1%
u.s.206C(1H) (whichever is higher).

Section 206CCA: (non-filers of ITR): TCS from a “specified person” will be twice the normal
rates or 5% (whichever is higher).

In case both the above sections are applicable, tcs will be the higher of the two rates provided
in section 206CC and section 206CCA.

Specified person:-
A person who has not filed income-tax returns for last two previous years preceding the
previous year in which the tax is required to be collected and the aggregate of tds and tcs in his
case is Rs.50,000 or more in each of these two previous years.

Examples:

Section Normal rates PAN not furnished Non-filer of ITR

206C(1) 5% (tendu leaves) 10% or 5% (weh) 10% or 5% (weh)

206C(1F) 1% (motor car) 2% or 5% (weh) 2% or 5% (weh)

206C(1H) 0.1% 0.2% or 1% (weh) 0.2% or 5% (weh)

Important: In the above section 206C(1H), if a person has not furnished PAN and also has
not filed income-tax returns; highest of the two rates shall apply (i.e. 1% or 5%)
5%.
 113

1. Tulsi Private Ltd., a company engaged in ship breaking activity, sold some old and used plates,
wood, etc., in respect of which it did not collect tax from the buyer. The company claimed that
such items are usable as such. Hence these are not ‘scrap’ to attract the provisions for
collection of tax at source. The Assessing Officer treated such items in the nature of ‘scrap’ and
raised a demand u.s.201(1) and interest u.s.201(1A). Is the action of the Assessing Officer in
treating such items as ‘scrap’ tenable in law? Discuss. CA final

Answer: The High Court held that any material which is usable as such would not fall within the
ambit of ‘scrap’ and therefore, no TCS is required to be collected on the same. Therefore, in view of
the above-mentioned judgement, the action of the Assessing Officer in treating the item as scrap is
INCORRECT. The demand raised by the Assessing Officer is not valid.

4. State Government of Madhya Pradesh grants a lease of coal mine to ABC Co. Ltd., an Indian
company, on 01.10.2022 and charged Rs.8 crores for the lease. ABC Co. Ltd. sold coal for Rs.2
crores to Mahapower Ltd., another Indian company, during the previous year 2022-23.
Mahapower Ltd furnishes a declaration to ABC Co. Ltd. that the coal is to be utilized for the
purpose of generation of power. The turnover of ABC Co. Ltd. and Mahapower Ltd. for the F.Y.
2021-22 amounted to Rs.11 crores and Rs.12 crores, respectively. What is the amount of tax
required to be deducted or collected at source in respect of the above transactions, if any?

Answer:
State Government of MP is required to collect tcs @ 2% on granting of lease of coal mine to ABC Co.
Ltd. TCS @ 2% on Rs.8 crores is Rs.16 lacs. Section 206C(1C).

U/s.206C(1), tcs is required to be collected by ABC Co. Ltd. on sale of coal @ 1% on Rs.2 crores.
However, Mahapower Ltd has furnished a declaration to ABC Co. Ltd that the coal is to be utilized
for the purpose of generation of power. Hence, ABC Co. Ltd. shall not collect tax u.s.206C(1).

Since declaration is furnished by Mahapower Ltd, tcs is not required to be collected u.s.206C(1H).

However, Mahapower Ltd (buyer turnover > Rs.10 crores during p.y. 21-22) is required to deduct
tds u.s.194Q @ 0.1% on the amount exceeding Rs.50 lacs. Amount of tds u.s.194Q is Rs.15,000.

5. ABC Ltd., an Indian company, purchases coal from XYZ Ltd., another Indian company, for Rs.60
lakhs during the P.Y.2021-22, to manufacture steel. ABC Ltd. furnishes a declaration that such
coal is used to manufacture steel and not for trading. What are the TCS/TDS implications on
such transaction, if the purchases were spread evenly throughout the year and ABC Ltd.’s
annual turnover was ranging between Rs.12 crores and Rs.15 crores; and XYZ Ltd.’s annual
turnover was ranging between Rs.15 crores and Rs.20 crores in the last few years?

a) Tax @ 1% has to be collected by XYZ Ltd. on Rs.60 lakhs u.s.206C(1).

b) Tax @ 0.1% has to be collected by XYZ Ltd. on Rs.10 lakhs u.s. 206C(1H)
c) No tax has to be collected at source by XYZ Ltd.; however, tax @ 0.1% has to be
deducted u.s.194Q by ABC Ltd. on Rs.10 lakhs.
d) No tax has to be collected at source by XYZ Ltd.; ABC Ltd. also does not have to deduct
tax at source.
 114

Answer: XYZ Ltd is required to collect 1% tax from ABC Ltd on sale of coal u.s.206C(1).
However, ABC Ltd furnishes a declaration that such is used for manufacturing purposes. Hence
XYZ Ltd is not required to collect tax from ABC Ltd u.s.206C(1).

Since declaration is furnished by ABC Ltd, no tax shall be collected by XYZ Ltd u.s.206C(1H).
Hence, no tax shall be collected by XYZ Ltd both u.s.206C(1) and u.s.206C(1H).

Alternatively, ABC Ltd (buyer) is required to deduct tax at source u.s.194Q on purchases made
> Rs.50 lacs @ 0.1% (turnover of p.y. 2021-22 has > Rs.10 crores). Option C.

6. Examine the applicability of provisions relating to deduction/collection of tax at source and

compute the liability, if any, for deduction/collection of tax at source in the following cases for
financial year ended 31st March, 2023 as per provisions contained under the IT Act, 1961:

a) Mr.Devansh, an Indian Citizen, residing in New York, came to India on a visit on

15.2.2023. He paid Rs.6 lakhs to a tour operator, M/s Journey Trip, based in Mumbai for
a tour package to Malaysia for 1 week. He left for Malaysia on 1.3.2023 and returned to
India on 8.3.2023. Thereafter, he was in India up to 5.4.2023 on which date he took his
return flight to New York. He does not have any source of income in India.

b) XYZ Ltd. was incorporated on 1.4.2022 for trading goods. Its turnover for the P.Y. 2022-
23 is Rs.12 crores. During the P.Y.2022-23, it purchased goods from M/s. White Ride,
the details of which are as follows:

On 1.8.2022 for Rs.25,00,000;

On 15.9.2022 for Rs.30,00,000 and
On 15.12.2022 for Rs.15,00,000.

The above dates represent the date of credit to the account of M/s. White Ride.
Payment is made after one month (i.e., on the same date in the immediately following
month). M/s White Ride’s turnover for the F.Y. 2021-22 and F.Y. 2022-23 was Rs.11
crores and Rs.9.7 crores, respectively.

Answer:
a) U/s.206C(1G), the tour operator is required to collect tax from the purchaser of
overseas tour package @ 5% on the amount paid. Threshold limit of Rs.7 lakhs is not
applicable in this case.

CBDT Circular: Mr.Devansh, an Indian Citizen came to India and has stayed for 39
days during the p.y.22-23. He is a non-resident for A.Y.2023-24. He has no income in
India for the p.y.2022-23. Hence, the tour operator is not required to collect tax from
Mr.Devansh.
 115

b) Section 194Q is applicable only if turnover of XYZ Ltd (buyer) has exceeded Rs.10
crores during the immediately preceding f.y. 2021-22. Since XYZ Ltd was incorporated
on 01.04.2022, it is not required to deduct tax at source u.s.194Q. CBDT Circular.

TCS u.s.206C(1H) shall be applicable if the turnover of M/s.White Ride’s (seller) during
the immediately preceding f.y. 2021-22 has exceeded Rs.10 crores. Turnover was Rs.11
crores during the p.y. 2021-22 and therefore, tcs is attracted @ 0.1% on the amount
received (“receipt” basis) exceeding Rs.50 lakhs.

Amount received Date of receipt TCS

Rs.25 lakhs 01.09.2022 nil (does not exceed Rs.50 lakhs)
Rs.30 lakhs 15.10.2022 Rs.500 (Rs.55 lacs – Rs.50 lacs) x 0.1%
Rs.15 lakhs 15.01.2023 Rs.1500 (Rs.15 lacs x 0.1%)
 116

CHAPTER 5: DOUBLE TAXATION RELIEF

Double taxation means same income gets taxed twice in the hands of the assessee in the
same year. An income can be taxed in two countries on the basis of two rules i.e. Residence
Rule & Source Rule.

Double taxation is possible when assessee is resident of one country & derives income from
another country. Suppose Mr.A is resident of India & deriving income from USA, then India
will tax such income on the basis of Residence rule & USA will tax such income on the basis of
Source rule.

There are two types of Double taxation relief:

1. Bilateral relief – DTAA exists – Section 90 & 90A
2. Unilateral relief – No DTAA exists – Section 91

Under Bilateral relief:

Section 90: Agreement with foreign countries (DTAA)

Central Government may enter into agreement with Government of foreign country or
specified territory outside India for granting relief for doubly taxed income.

If DTAA exists, the double taxation is avoided by providing bilateral relief which is granted
by either Exemption method or by Tax Credit method.

Exemption Method: Tax is paid in one country (source country) and no tax is paid in the
other country (country of residence).

Tax Credit Method: The tax paid in the source country shall be allowed as credit in the
country of residence and only the balance, if any shall be paid.

note: In case of conflict between DTAA and Income-tax Act:

Between the provisions of DTAA and the provisions of the Income-tax Act; the
assessee can choose the provisions which are more beneficial to him. The
provisions of DTAA can override the provisions of the Income-tax Act.

e.g. Royalty income: Case A Case B Case C

As per DTAA (tax rate) 10% 15% 10%
As per IT Act (tax rate) 15% 10% 10%

Case A: DTAA is more beneficial. Tax rate is 10%

Case B: IT Act is more beneficial. Tax rate is 10%
Case C: DTAA is more beneficial. No surcharge and cess is applicable in DTAA
 117

Problems:
1. The Income-tax Act, 1961 provides for taxation of a certain income earned by X. The
Double Taxation Avoidance Agreement, which applies to X, excludes the income earned by
X from the purview of tax. Is X liable to pay tax on the income earned by him under the
Income-tax Act, 1961? Discuss.

Answer:
As per section 90(2), where the Central Government has entered into a Double Taxation Avoidance
Agreement with a country outside India, then in respect, of an assessee to whom such agreement
applies, the provisions of the Income-tax Act 1961 shall apply to the extent they are more beneficial to
the assessee. Thus, where the provisions of DTAA are more favourable than the provisions of the
Income-tax Act, 1961, the former will prevail over the latter. Hence, Mr.X is not liable to pay tax.

2. Cosmos Limited, a company incorporated in Mauritius, has Permanent Establishment (PE)

in India. The PE has filed return of income for assessment year 2023-24 disclosing income
of Rs.100 lacs. It paid tax at the rate applicable to domestic company i.e. 25% plus
education cess on the basis of paragraph 2 of Article 24 (Non-Discrimination) of the Double
Taxation Avoidance Agreement between India and Mauritius, which reads as follows:

“The taxation on a permanent establishment which an enterprise of a contracting state has in

the other contracting state shall not be less favourably levied in that other State than the
taxation levied on enterprises of that other State carrying on the same activities in the same
circumstances”

However, the A.O. computed tax on the PE at the rate applicable to a foreign company i.e.
40% plus education cess. Is the action of the A.O. in accordance with law?

Answer:
Under section 90(2), where the Central Government has entered into an agreement for avoidance of
double taxation with the Government of any country outside India, then, in relation to the assesse
to whom such agreement applies, the provisions of the Income-tax Act, 1961 shall apply to the
extent they are more beneficial to the assesse.

Thus, in view of paragraph 2 of the Article 24 (Non-Discrimination) of the Double Taxation

Avoidance Agreement (DTAA), it appears that the PE of Cosmos Limited, incorporated in Mauritius,
is liable to tax in India at the rate applicable to domestic company (25%), which is lower than the
rate of tax applicable to a foreign company (40%).

However, EXPLANATION 1 to Section 90 clarifies that the charge of tax in respect of a foreign
company at a rate higher than the rate at which a domestic company is chargeable, shall not be
regarded as less favourable charge or levy of tax in respect of such foreign company. Therefore, in
view of this Explanation, the action of the A.O. in levying tax @ 40% on the PE of Cosmos Ltd is in
accordance with law.
 118

3. Discuss the correctness or otherwise: “The double taxation avoidance treaties entered into
by the Government of India override the domestic law”.

Answer:
The statement is correct. Where a double taxation avoidance treaty is entered into by the
Government, the provisions of the Income-tax Act, 1961 would apply to the extent they are more
beneficial to the assessee.

NO DTAA – UNILATERAL RELIEF – SECTION 91

Step 1: Compute taxable income of the assessee including foreign income.

Step 2: Compute tax on taxable income and also average rate of tax
Step3: Relief: Foreign income multiplied by (Indian tax rate or Foreign tax rate)
(whichever is lower)
Step 4: Step 2 (-) Step 3

Relief u.s.91 is allowed only if the following conditions are satisfied:

1. He is a resident in India during the relevant previous year
2. Income accrues or arises to him outside India during that previous year
3. Such income is deemed to accrue or arise outside India during the previous year
4. The income in question has been subjected to income-tax in foreign country and he
has paid tax on such income in that country
5. There is no agreement u.s.90 for the relief.

Problems: Where there is no ADT agreement:

1. The following are the particulars of income earned by Miss X, a resident Indian aged 25, for
the assessment year 2023-24:–
(Rs. in Lakh)
Income from playing snooker matches in country L 12
Tax paid in country L 1.8

Income from playing snooker tournaments in India 19.2

Life insurance premium paid .90

Medical insurance premium paid for her father aged

62 years (paid through credit card) 0.50

Compute her total income and tax payable by her for the assessment year 2023-24. There
is no Double Taxation Avoidance Agreement between India and country L. Assume Miss X
has not opted for new tax regime u.s.115BAC.
 119

2. Mr.Vikas, an individual resident in India aged 55 years, furnishes you the following
particulars of income earned in India, Foreign countries “A” and “B” for the previous year
2022-23. Compute the total income and tax payable by Mr.Vikas in India for A.Y.2023-24
assuming that India has not entered into Double Taxation Avoidance Agreement. Assume
Mr.Vikas has not opted for concessional tax regime u.s.115BAC.

Indian Income:
Income from business carried on in Mumbai Rs.9,20,000
Interest on savings bank with IDBI Bank Rs.24,000

Income earned in foreign country “A” (rate of tax 12%)

Agricultural income in country “A” Rs.72,000
Royalty income from a book on art from country “A” (gross) Rs.8,00,000
Expenses incurred for earning royalty Rs.70,000

Income earned in foreign country “B” (rate of tax 23%)

Dividend received from a company incorporated in country “B” Rs.2,25,000
Rent from a house situated in country “B” (gross) Rs.3,30,000
Municipal tax paid in respect of the above house (not allowed as
deduction in country “B”) Rs.10,000

3. Shruthi, a resident individual has derived the following incomes during the PY. 2022-23:

a) Income from profession – Rs.3,50,000;

b) Rent received from house property located in foreign country AB is Rs.20,000 p.m. received
there. Municipal taxes paid in that country is Rs.40,000. Tax paid in the foreign country in
equivalent Indian currency is Rs.25,000 on the net income of Rs.2,00,000.

c) Royalty on books from foreign country XY in equivalent Indian currency is Rs.15,00,000

(eligible for deduction u/s 80QQB). Tax is paid in country XY @ 20%. The expenses
incurred for earning royalty is Rs.1,50,000

d) Interest from savings account amounts to Rs.24,000.

Shruthi wishes to know whether she is eligible to claim double taxation relief and if so, the
quantum. India does not have DTAA with either of the two countries. Assume she has not
opted for provisions of section 115 BAC.
 120

4. Mr.Kamesh, an individual resident in India furnishes you the following particulars of income
earned in India, Country “X” and Country “Y” for the PY. 2022-23. India has not entered into
double taxation avoidance agreement with these two countries:

Particulars Rs.
Income from profession carried on in India 7,50,000
Agricultural income in Country “X” (gross) 50,000
Dividend received from a company incorporated in Country “Y” (gross) 1,50,000
Royalty income from a literary book from Country “X” (gross) 6,00,000
Expenses incurred for earning royalty 50,000
Business loss in Country “Y” (Proprietary business) 65,000
Rent from a house situated in Country “Y” (gross) 2,40,000
Mun. tax in respect of the above house (not allowed as deduction in Country “Y”) 10,000

Note: Business loss in Country “Y” not eligible for set off against other income as per law of that
country. The rates of tax in Country “X” and Country “Y” are 10% and 20% respectively.
Compute total income and tax payable by Mr.Kamesh in India for AY 2023-24.

5. Amrutha is a resident Individual. She has income from the following sources:

i. Taxable income from a sole-proprietary concern in Kochi Rs.50 lakhs

ii. Share of profit from a partnership firm in Chennai Rs.30 lakhs

iii. Agricultural income from rubber estate in country A which has no DTAA with India, USD
70,000. Withholding Tax on the above income USD 10500 (Assume 1 USD = Rs.64)

iv. Brought forward business loss in country A was USD 10,000 which is not permitted to be set
off against other income as per the laws of that country.

Compute taxable income and tax payable by Amrutha for the A.Y. 2023-24 may 18 (new)

6. Smt. Laxmi (age 70), a resident individual furnishes you the following particulars for the
previous year 2022-23.

Particulars Rs
Income from business in India (computed) 6,00,000
Loss from let out property at Chennai 4,40,000
Dividend received from a domestic company 12,00,000
Business income in country “B” (tax paid thereon at 20%) 4,00,000
Rental income from property at Mumbai (computed) 1,80,000

Note: Assume that there is no double taxation avoidance agreement between India and country
“B”. Compute the total income and tax payable by Smt. Laxmi for the A.Y.2023-24.
 121

7. Ms.Anandi, a resident in India and Singapore in previous year 2022-23, owns residential
properties at Singapore and India. She has earned income of Rs.40 lacs from business carried
on in Singapore during 2022-23. She also transferred certain capital asset in Singapore and
derived a short-term capital gain of Rs.12 lacs from such transfer. She has no permanent
establishment of business in India. However, she received rent of Rs.7.20 lacs from letting out
one house property in Kolkata. She also owns a house in Jaipur where she stays as and when
she visits India.

The Article 4 of the Double Taxation Avoidance Agreement between India and Singapore inter
alia reads as follows:

"Resident”
1. For the purposes of this Agreement, the term "resident of a Contracting State" means any
person who is a resident of a Contracting State in accordance with the taxation laws of that
State.

2. Where by reason of the provisions of paragraph 1, an individual is a resident of both

Contracting States, then his status shall be determined as follows:-

a. he shall be deemed to be a resident of the State in which he has a permanent home available
to him; if he has a permanent home available to him in both States, he shall be deemed to be a
resident of the State with which his personal and economic relations are closer (centre of vital
interests).

State with reasons whether the business income of Ms.Anandi arising in foreign country and
capital gain from transfer of capital asset situated in Singapore be liable to income tax in India.

Answer:
As per section 5(1) of the Income-tax Act, a resident is chargeable to tax in respect of his global
income. However, as per DTAA, income earned in Singapore shall be taxed in India only if she is a
resident. In the given case, Anandi is a resident both in India and Singapore as per the law of both
the countries for the previous year 2022-23. In such case it is necessary to examine the relevant
clause of the DTAA between India and Singapore to ascertain her residential status.

The Article 4 of the DTAA provides that where an individual is a resident of both the Contracting
States, then she shall be deemed to be resident of the Contracting State in which she has permanent
home available to her. Anandi stays in her house in Jaipur during her visits. So it can be said that
she has a permanent home in India.

Next rule for determination of residential status is the existence of permanent establishment.
Anandi has no permanent establishment of business in India. If she has permanent home in both
the Contracting States, she shall be deemed to be the resident of the Contracting State with which
her personal and economic relations are closer (centre of vital interests). Hence, applying the
Clause 4 of the DTAA, she shall be deemed to be resident of Singapore.

Since she is a not a resident in India based on the principle laid down in the DTAA, income earned
outside India does not form part of her total income. Hence, her business income and capital gain of
Rs.40 lacs and Rs.12 lacs respectively in Singapore are not chargeable to tax in India.
 122

8. Ms.Laxmi (age 28), a cine actress derived income of ₹ 10 lakhs from acting in a film in
foreign country with which India does not have any agreement for avoidance of double
taxation. Tax of ₹ 2,00,000 was paid on such income in the foreign country.

She earned ₹ 5,72,000 by way of income in India through acting in films. She lets out a
commercial property at Mumbai for a rent of ₹ 1 lakh per month since April, 2022. The
municipal tax on the property paid was ₹ 60,000. Interest on moneys borrowed from SBI
for acquisition of the property during the year amounts to ₹ 2,60,000. Principal amount of
loan repaid during the year was ₹ 6 lakhs.

She paid life insurance premium of her husband ₹ 60,000 and deposited ₹ 50,000 by way of
tax saver deposit in her name. Compute the tax payable by Ms. Laxmi for AY. 2023-24
assuming she has not opted for concessional tax regime u.s.115BAC.

9. Anupam Gulati, a resident in India, is a famous badminton player, who plays in several
tournaments. For the year ended 31.03.2023, he has derived income from playing in
tournaments outside India and also share of income from a firm, from nations with which
no DTAA exists. The summarized results of the income earned during the year are as
under:

Income from tournaments in India 32,50,000

Income from tournaments outside India (as converted into INR) 16,00,000

Share of loss from a partnership firm abroad

(set off permitted in that nation) 2,00,000

Residential house property purchased at Colombo

(including registration and stamp duty for ₹ 1,80,000) 4,00,00,000

On the foreign income, he has paid tax of ₹ 3,50,000.

You are required to compute the tax payable by the assessee. June 2018

10. Mr.Amin, a resident individual in India (age 42) furnishes you the following particulars of
income for the previous year 2022-23:

Particulars Rs.
i. Income from business in India (computed) 11,20,000
ii. Dividend received from Company incorporated in Country X (gross) 2,00,000
iii. Royalty income from writing text book for schools in Country Y (gross) 6,00 000
iv. Expenditure incurred for authoring text book 50,000
 123

v. Business loss in Country Y (gross) 2,50,000

vi. Health insurance premium paid by credit card for his father
(age 67) a resident in India (His father is not dependent on Mr.Amin) 51,000

The business loss in Country Y is eligible for set off against other income as per the Income-
tax law of that country.

Note: There is no DTAA between India and Country "X" and Country "Y" given above. The
rate of tax in Country "X" and Country "Y" may be taken as 10% and 25% respectively
(without any threshold exemption limit).

Compute the total income and tax payable by Mr.Amin in India for the A.Y. 2023-24.

11. Ramesh (age 61) an individual resident in India furnishes you particulars of income for the
previous year 2022-23. He earned income in country M and India has not entered into
DTAA with that country:

Income from house property in country M Rs.2,50,000

Business income in India Rs.8,00,000
Dividend from company in country M Rs.1,00,000
Royalty income in country M (see note below) Rs.4,00,000
Business income in country M Rs.2,00,000
Income from house property in India Rs.5,00,000
Donation to Prime Minister‘s National Relief Fund Rs.50,000
Incurred medical expenses for his mother aged 85 Rs.60,000
Rate of tax in country M (no basic exemption limit) 20%

Note: Ramesh disputed royalty income in country M but paid the tax on that income in
June, 2023 after the appeal was decided by the appellate authority. The royalty income is
charged to tax at concessional rate of 15% in country M. June 2019 CWA final
 124

Chapter – 6: Transfer Pricing – International taxation

1. Introduction:
India has commercial transactions with many countries. These transactions are termed as
International transactions. Such commercial transactions include, sale or purchase of
goods; providing or receiving of services; borrowing or lending of money. Such
transactions can be with unrelated parties or with related parties.

2. Transactions with Independent parties/Unrelated parties:

Transactions with unrelated parties normally happen at correct market price (i.e. arm’s
length price). The price is determined by the market forces. The parties to such
transaction do not have control over the price and are at arm’s length.

3. Transactions with related party or associated enterprise or same group:

The transactions with related parties (associated enterprise) may not happen at market
price. Such prices are manipulated by the enterprises with the intention to evade tax or
pay less tax in India by showing no profit or a negligible profit. As a result this may lead to
erosion of tax revenue.

Therefore, to prevent such practices, transfer pricing provisions have been introduced
which can lead to computation of reasonable, fair and equitable profits and tax in India, in
case of such associated enterprise.

4. Transfer Pricing:
“Transfer pricing” means determination of correct market price i.e. arm’s length price. In
the case of an international transaction between associated enterprises, income from such
transaction shall be computed having regard to the arm’s length price. Section 92(1).

5. Section 92A(2): Meaning of “Associated Enterprise”

Two enterprises shall be deemed to be “associated enterprises” if, at any time during the
previous year:

a. one enterprise holds, directly or indirectly, not less than 26% equity shares in
the other enterprise; or
e.g. Unilever U.K. holds 26% equity shares of Hindustan Lever. Therefore Unilever
and Hindustan Lever are associated enterprises

e.g. A Ltd holds 33% of voting power in B Ltd and B Ltd holds 40% voting power in C
Ltd. In this situation, A Ltd holds 33% in B Ltd directly and 40% in C Ltd indirectly
(i.e. through B Ltd). Therefore, both B Ltd and C Ltd are deemed associated
enterprises of A Ltd.
 125

b. Where loan advanced by one enterprise to the other enterprise constitutes not
less than 51% of the book value of total assets of the other enterprise; or
e.g. Alstom U.S.A. holds 8% shares in Alstom India. The book value of total assets of
Alstom India Ltd is 100 crores. Alstom U.S.A. has given a loan of Rs.65 crores to
Alstom India. Therefore, Alstom U.S.A and Alstom India are associated enterprises.

c. One enterprise guarantees not less than 10% of the total borrowings of the
other enterprise; or
e.g. P Inc has total loan of 1 million dollars from XYZ Bank of America. Out of that, A
Ltd., an Indian company, guarantees 20% of total borrowings in case of any default
made by P Inc. In such case, P Inc and A Ltd. would be deemed Associated
Enterprises.

d. More than half of the board of directors or members of the governing board, or
one or more executive directors or executive members of the governing board of
one enterprise, are appointed by the other enterprise; or

e.g. A Ltd and B Ltd will be associated enterprises if A Ltd:

i. appoints 4 out of 7 directors of B Ltd; or
ii. appoints one executive director; or
iii appoints one executive member of the Governing Board

e.g. Mr.A appointed 9 directors out of 15 directors of X Ltd and appointed 2

executive directors on the board of Y Ltd. In such case, since a common person i.e.
Mr.A appointed more than half of the directors in X Ltd. and appointed 2 executive
directors in Y Ltd., both X Ltd and Y Ltd are deemed Associated Enterprises.

e. The manufacture of goods by one enterprise is wholly dependent on the use of

know-how, patents, copyrights, trademarks of another enterprise of which the
other enterprise is the owner or in respect of which the other enterprise has
exclusive rights; or
e.g. MARUTHI manufactures cars in India using the knowhow of Suzuki, Japan.
Maruthi cars cannot be manufactured in India without such knowhow. Suzuki,
Japan has exclusive rights over the usage of such knowhow.

f. 90% or more of the raw materials and consumables required for the
manufacture of goods by one enterprise, are supplied by the other enterprise
and the prices are influenced by such other enterprise; or

g. An enterprise which owns atleast 10% share in any firm, AOP:

Mr.X is the owner of a proprietorship concern in India. There is a non-resident
partnership firm in Dubai in which Mr.X and his wife have 51% share. The
proprietorship concern of Mr.X in India and partnership firm in Dubai are
associated enterprises.
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6. What is an International transaction?

Section 92B: “International transaction” means a transaction between two or more
associated enterprises, either or both of whom are non-residents.

For a transaction to be an international transaction, it should satisfy the following two

conditions cumulatively:

1. it must be a transaction between two associated enterprises; and

2. at least one of the two enterprises must be a non-resident.

7. Transaction DEEMED to be between associated enterprises – Section 92B:

A transaction entered into by an enterprise with a person other than an associated
enterprise shall, be deemed to be an international transaction entered into between two
associated enterprises, if

 there exists a prior agreement in relation to the relevant transaction between

such other person and the associated enterprise, or

 the terms of the relevant transaction are determined in substance between such
other person and the associated enterprise

where the enterprise or the associated enterprise or both of them are non-residents
irrespective of whether such other person is a non-resident or not.

(A. E.) Holding company

Y Ltd (non-resident) USA

(A. E.) prior agreement between terms are determined

X Ltd Y Ltd and Mr.B or between Y Ltd & Mr.B
enterprise
subsidiary
India
unrelated person
Mr.B (resident/NR)

Question: In the above example, there is a transaction between X Ltd & Mr.B. Is this
transaction be deemed as international transaction between associated enterprises?

If X Ltd., an Indian company, has entered into an agreement for sale of product ‘P’ to Mr.B, an
unrelated party, on 01.06.2022 and Mr.B has entered into an agreement for sale of product ‘P’ with
Y Ltd., a non-resident entity, which is an associated enterprise of X Ltd., on 30.05.2022, then, the
transaction between X Ltd and Mr.B shall be deemed to be an international transaction entered into
between two associated enterprises (X Ltd and Y Ltd), irrespective of whether or not Mr.B is a non-
resident.
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PROBLEMS:
1. State whether the following enterprises are associated enterprises are not:

TELCO manufactures Mercedes cars in India using the knowhow of Mercedes Germany.
Mercedes cars cannot be manufactured in India without such knowhow. Mercedes Germany
has exclusive rights over the usage of such knowhow.

A Ltd U.S.A. supplies raw material for Rs.92 crores to B Ltd in India and total value of raw
materials and consumables used by B Ltd is Rs.100 crores.

2. In the context of transfer pricing provisions, discuss whether the following are associated
enterprises of R Ltd., an Indian company:

R Ltd sells goods to N & Co., a firm based in Singapore. R Ltd., is a partner in this firm with 8%
share.

There are 8 directors in N Inc., a company at USA. R Ltd holds enough clout to appoint 5
directors. Will your answer change if only 4 directors can be appointed?

3. State whether the following are associated enterprises, one of them being non-resident.

X Co. Ltd. holds 12% partnership right in X Traders (firm)

PQR Finance guarantees loan taken by A & Co. (pvt) Ltd. for a term loan of Rs.10 crores taken
from a bank. A & Co. (pvt) Ltd. has a total borrowing of 20 crores.

ABC Investments has advanced loan to DEF Ltd. which is 40% of book value of total assets of
DEF Ltd.

4. State whether the following transactions are between associated enterprises:

A Ltd of Delhi has guaranteed a bank term loan of Rs.25 crores (converted in Indian rupee)
availed by Mckinsey Inc of Hong Kong. The loan guaranteed is 11% of the total borrowings of
Mckinsey Inc.

Total value of raw materials and consumables of Kaveri Ltd. is Rs.720 crores. Of this, supplies
to the tune of Rs.650 crores are by Aurubis Inc., a German company having its place of effective
management in Germany, at prices and terms decided by the German company.

LMN Investments has advanced loan of Rs.30 crores to PQR Ltd. The book value of total assets
of PQR Ltd. is Rs.80 crores. Are LMN Investments and PQR Ltd ‘associated enterprises’?
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5. State with reasons, whether Netlon LLC., (incorporated in Singapore) and Briggs Ltd., a domestic
company, are/can be deemed to be associated enterprises for the transfer pricing regulations (each
situation is independent) of the others:

i. Netlon LLC. has advanced a loan of Rs.53 crores to Briggs Ltd. on 12.1.2023. The total book
value of assets of Briggs Ltd. is Rs.100 crores. The market value of the assets, however, is
Rs.150 crores. Briggs Ltd. repaid Rs.10 crores before 31.3.2023.

ii. Netlon LLC. has the power to appoint 2 of the directors of Briggs Ltd, whose total number of
directors in the Board is 4.

iii. Total value of raw materials and consumables of Briggs Ltd. is Rs.900 crores. Of this, Netlon
LLC. supplies to the tune of Rs.820 crores, at prices mutually agreed upon once in six
months and depending upon the market conditions. CA final

6. State with brief reasons whether the relationship of associated enterprise or deemed associated
enterprise is present in the following cases: CMA final – Jan 2023

(i) A Ltd. has 28% voting power in B Ltd. and 31% voting power in C Ltd. Both B Ltd. and
C Ltd. are independent entities engaged in different line of business. Decide the
relationship between B Ltd. and C Ltd.

(ii) Sun Ltd. is engaged in manufacture of medicines for joint pains. It is partly dependent
on Moon Ltd. for using the know-how to manufacture the same. Sun Ltd. pays royalty
to Moon Ltd as per the regular trade practice.

(iii) Ram Ltd. is engaged in manufacture of computer hardware and for this purpose it is
dependent on Laxman Ltd. During the financial year 2022-23, 88% of the raw
materials for configuring the computer were purchased from Laxman Ltd.

(iv) The total book value of assets of Plant Ltd. was Rs.52 crores when it borrowed Rs.20
crores from Tree Ltd. for expansion of its business.

(v) The total borrowings of Jupiter Ltd. was Rs.7 crores of which Venus Ltd. gave
Guarantee to the extent of Rs.2 crores.

(vi) Gautam Ltd. having major stake in many companies which in turn have majority stake
in Pluto Ltd. Gautam Ltd. has the authority (voting power) to appoint 4 out of 7
directors in Pluto Ltd.

(vii) Mukherjee Ltd. is engaged in manufacture of mobile handsets. The entire handsets so
manufactured are sold to Banerjee Ltd. The price and terms and conditions relating
thereto are decided by Mitra Ltd. being the holding company of Banerjee Ltd. Assume
the entities are geographically located in three different countries with Mukherjee Ltd.
at Kolkata.

(viii) Arjun has 90% shareholding in Bheem (P) Ltd. His brother Nakul has 85%
shareholding in Hastina P Ltd. Decide the relationship of Bheem (P) Ltd.
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ANSWERS TO ABOVE QUESTIONS:

2. To be treated as associated enterprise, R Ltd should hold a minimum of 10% share in N & Co., a
non-resident entity. Since only 8% share is held, N &Co., it is not an associated enterprise of R Ltd.

R Ltd and N Inc. are associated enterprises if more than half of the directors or members of the
governing board, or one or more of the executive directors or executive members of the governing
board of R Ltd. are appointed by N Inc. or vice versa.

Since 5 out of 8 directors can be appointed by R Ltd., they are associated enterprises. The answer
will change since the above requirement is not met. If 4 or lesser number of directors alone can be
appointed, N Inc. and R Ltd. are not associated enterprises.

3. a) Since X Co. Ltd. holds more than 10% interest in X Traders (firm) the relationship between X Co.
Ltd and X traders is that of associated enterprises.

b) Where an assessee guarantees at least 10% of the total borrowings of another entity, the
relationship of associated enterprise is established. Since the guarantee for the loan exceeds 10%
of the total borrowings, PQR Finance and A & Co. (P) Ltd are associated enterprises.

c) A loan advanced by one entity to another entity of at least 51% of book value of total assets
would result in associated enterprise relationship. In this case, the loan advanced forms part of
only 40% of book value of total assets of borrower DEF Ltd. Hence, they are not associated
enterprises.

4. (a) When one enterprise guarantees not less than 10% of the total borrowings of the other
enterprise, they are deemed to be associated enterprises. Therefore, the transaction is that of an
international transaction between associated enterprises.

(b) Since Aurubis Inc., a German company, supplies 90.27% of the raw materials and consumables
required by Kaveri Ltd., an Indian company, which is more than the specified threshold of 90%, and
the prices and terms of supply are decided by the German company, the two companies are deemed
to be associated enterprises.

(c)A loan advanced by one entity to another entity of at least 51% of book value of total assets
would result in associated enterprise relationship. In this case, the loan advanced is less than 51%
of book value of total assets of borrower PQR Ltd. Hence, they are not associated enterprises.

5. Netlon LLC, a foreign company, has advanced loan of Rs.53 crores to Briggs Ltd., a domestic
company, which amounts to 53% of book value of total assets of Briggs Ltd. Since the loan
advanced by Netlon Inc is not less than 51% of the book value of total assets of Briggs Ltd., Netlon
Inc. and Briggs Ltd. are deemed to be associated enterprises. (51% at any time during the previous
year). Market value of assets and part repayment of loan is not relevant.

Netlon LLC has the power to appoint 50% (2 out of 4) of the Directors of Briggs Ltd. In this case,
since Netlon LLC has the power to appoint exactly half (and not more than half) of the directors of
Briggs Ltd., they are not deemed to be associated enterprises.
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Even though Netlon LLC supplies 91.11% of the raw materials and consumables required by Briggs
Ltd which is more than the specified threshold of 90%, Netlon LLC and Briggs Ltd are NOT deemed
to be associated enterprises. Reason for not deemed to be associated enterprises is since the price
of supply is not influenced by Netlon LLC but is mutually agreed upon once in six months depending
upon prevailing market conditions.

Methods of computing the Arm’s Length Price (ALP)

a. Comparable uncontrolled price method
b. Resale price method
c. Cost plus method
d. Profit split method
e. Transactional net margin method

METHOD 1: COMPARABLE UNCONTROLLED PRICE (CUP)

Step 1: Price to an unrelated party (uncontrolled price)

Step 2: Adjustment on account of functional differences.

Step 3: Such Adjusted Price is the Arm’s Length Price

PROBLEMS ON “COMPARABLE UNCONTROLLED PRICE” METHOD:

1. Unilever USA holds 30% shares in Hindustan Lever, an Indian company. Hindustan Lever
manufactures compact disc writers and sells them to Unilever and Tatas Ltd. During the year
Hindustan Lever supplied 50,000 CD writers to Unilever at a price of Rs.2,000 per unit and
1,000 CD writers to Tatas at a price of Rs.3,000 per unit.

The transactions of Hindustan Lever with Unilever and TATAs are comparable subject to the
following differences:

a. While sale to Unilever is at FOB (free on board), sale to TATAs is at CIF (cost, insurance
and freight). The freight and insurance paid by Unilever for each unit is Rs.550

b. The sales to TATAs are backed by a free warranty for 6 months whereas sales to
Unilever are not backed by such warranty. The estimated cost of warranty execution
may be taken as Rs.250.

c. Since Unilever places a larger order, Hindustan Lever has offered a quantity discount of
Rs.20 per unit to Unilever. Compute the ALP and the amount of increase in the Total
Income of Hindustan Lever.
 131

2. Zenith Inc., a US company holds 30% shares in Intech Ltd. an Indian company. Zenith Inc. sells
50,000 units at Rs.12,000 per unit to Intech Ltd. Zenith Inc. also sells similar goods to Logitech
Ltd., an Indian company which is not an associated enterprise at Rs.11,000 per unit.

The warranty in the case of sale of goods to Intech Limited is handled by Intech Limited.
However, in case of sale of goods to Logitech Limited, Zenith Inc. is responsible for warranty for
6 months. Both Zenith Inc. and Intech Limited offer extended warranty at a standard rate of
Rs.1,000 per annum. Compute arm’s length price under CUP method and the amount of
increase or decrease in total income of Intech Limited.

3. X Ltd., an Indian company supplied billets to its holding company Y Ltd, UK during the previous
year 2022-23. X Ltd also supplied the same product to another UK based company Z Ltd an
unrelated entity. The transactions with Y Ltd are priced at Euro 500 per MT (FOB), whereas
the transactions with Z Ltd are priced at Euro 700 per MT (CIF). Insurance and freight amount
to Euro 200 per MT. Compute the ALP for the transactions with Y Ltd.

4. XE Ltd. is an Indian company in which Zilla Inc., a US company, has 28% shareholding and
voting power. Following transactions were effected between these two companies during the
financial year 2022-23.

(i) XE Ltd. sold 1,00,000 pieces of T-shirts at $ 2 per T-Shirt to Zilla Inc. The identical
T-Shirts were sold to unrelated party namely Kennedy Inc., at $ 3 per T-Shirt.

(ii) XE Ltd. borrowed $ 2,00,000 from a foreign lender based on the guarantee of Zilla Inc.
For this, XE Ltd. paid $ 10,000 as guarantee fee to Zilla Inc. To an unrelated party for
the same amount of loan, Zilla Inc. collected $ 7000 as guarantee fee.

(iii) XE Ltd. paid $ 15,000 to Zilla Inc. for getting various potential customer details to
improve its business. Zilla Inc. provided the same service to unrelated parties for $
10,000. Assume the rate of exchange as 1 $ = ₹ 74

XE Ltd. is located in a Special Economic Zone (SEZ) and its income before transfer pricing
adjustments for the year ended 31st March, 2023 was ₹ 1,200 lakhs. Compute the adjustments
to be made to the total income of XE Ltd. State whether it can claim deduction u.s.10AA for
the income enhanced by applying transfer pricing provisions.

5. EF Limited, an Indian company, is engaged in manufacturing electronic components. 74%

of shares of the company are held by EF Inc. incorporated in USA. EF Limited has borrowed
funds from EF Inc. at LIBOR plus 150 basis points. The LIBOR prevalent at the time of
borrowing is 4% for US $. The borrowings allowed under the External Commercial
Borrowing Guidelines issued under Foreign Exchange Management Act are LIBOR plus 200
basis points. Discuss whether the borrowing made by EF Limited is at arm’s length
(“LIBOR” means London inter-bank offer rate). CA final
 132

Hint: Both the enterprises are AEs. The interest rate permissible is LIBOR plus 200 basis points i.e.
4% + 2% = 6% which is the Arms Length Rate. The rate at which EF Ltd has borrowed is LIBOR
plus 150 basis points i.e. 4% + 1.5% = 5.5%. TP provisions are not applicable.

6. S Limited, an Indian Company supplied billets to its holding company, G Limited, Germany
during the previous year 2022-23. S Limited also supplied the same product to another
German-based company, Z Limited, an unrelated entity. The transactions with G Limited
are priced at Euro 500 per MT (FOB), whereas the transactions with Z Limited are priced at
Euro 900 per MT (CIF). Insurance and Freight amounts to Euro 300 per MT. Compute the
arm's length price for the transaction with G Limited.

During the year, 10,000 MT were supplied to G Limited. What will be the effect of the
change in the ALP on the profits of S Limited? Assuming that its export profits are covered
by exemption u/s 10AA (seventh year), will there be any increase in the quantum of
exemption u/s 10AA? Assume an exchange rate of 1 Euro = 90 INR. CMA final – June 18

Answer: ALP: Euro 600 per MT. Income to be added to the total income of S Ltd: (600-
500)x10000x90 = Rs.900 lakhs. There will be no increase in the quantum of exemption u.s.10AA.

ANSWERS TO PROBLEMS:

1. Price to unrelated party (Tatas Ltd) Rs.3,000

Less: Functional differences:

a. Insurance and freight Rs.550
b. Warranty cost Rs.250
c. Discount on account of larger order Rs.20

Arm’s Length Price Rs.2,180

Less: Price charged by Hindustan Lever, India to Unilever USA Rs.2,000
Difference Rs.180

Addition to total income of Hindustan Lever, India (50,000 x 180) 90 lakhs

2. Price charged by Zenith Inc. to Logitech Ltd (unrelated party) Rs.11,000

Less: Functional differences:

Cost of warranty (Rs.1000 x 6/12) 500
Arm’s length price without including warranty Rs.10,500

Price per unit charged by Zenith Inc to Intech Ltd (AE) Rs.12,000
Difference per unit Rs.1,500

No. of units supplied to Intech Ltd 50,000

Addition to be made in the computation of total income of Intech Ltd. Rs.750 lakhs
 133

METHOD 2: RESALE PRICE METHOD

Step 1: Determine the resale price to an unrelated party

(purchased from AE and resold to unrelated parties)

Step 2: The above resale price is reduced by the Gross Profit Margin (%) (i.e.
% profit if sold to an unrelated party).

Step 3: Adjustment for functional differences; e.g. discount, etc.

Step 4: The adjusted Price is the Arm’s Length Price

PROBLEMS ON “RESALE PRICE” METHOD:

1. Tetra Pack Austria holds 30% shares of Alfa India Ltd. Alfa India Ltd imports 1000 towel
dispensers from Tetra Pack Austria at a price of Rs.2,900 per unit and these are sold to
Hyatt Regency at a price of Rs.3,000 per unit.

Alfa Ltd has bought similar products from Ultimate Industries Ltd and sold to Taj palace at a
gross profit of 12% on sales.

Tetra Pack Austria offers quantity discount of Rs.10 per unit whereas Ultimate Industries
Ltd does not offer such quantity discount. Alfa Ltd incurred freight of Rs.10 and customs of
Rs.25 per unit in case of purchases made from Tetra Pack Austria. Determine ALP and the
amount of increase in Total Income of Alfa India Ltd.

Hint: Purchased from AE and resold to an unrelated party

Hint: ALP (purchase price) is computed after adjusting normal GP, expenses and discount.
 134

2. ADB France and R Ltd of India are associated enterprises. R Ltd. imports 3,000 compressors for Air
Conditioners from ADB France at Rs.7,500 per unit and these are sold to Carrier Cooling Solutions
Ltd at a price of Rs.11,000 per unit. R Ltd had also imported similar products from Cold Ltd and sold
outside at a Gross Profit of 20% on Sales.

ADB France offered a quantity discount of Rs.1,500 per unit. Cold could offer only Rs.500 per unit as
quantity discount. The freight and customs duty paid for imports from France had cost R Ltd
Rs.1,200 a piece. In respect of purchase from Cold Ltd, R Ltd had to pay Rs.200 only as freight
charges. Determine the ALP and the amount of increase in Total Income of R Ltd.

3. 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 JML 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. Dec 2019 CWA - Final

ANSWERS TO PROBLEMS IN RE-SALE PRICE METHOD:

1. Re-sale price to unrelated party 3,000
Less: Gross profit earned with an unrelated party @ 12% 360
Less: Expenses in connection with purchase of towel dispensers 35
Less: Discount from associated enterprise 10
ALP 2,595

Purchase price from associated enterprise (Tetra pack) 2,900

ALP 2,595
Difference 305

Income to be added to total income of Alfa India Ltd, India Rs.3,05,000 (1000 x 305)

2. Re-sale price to unrelated party 11,000

Less: Gross profit earned with an unrelated party @ 20% 2,200
Less: Freight and custom duty (difference) 1,000
Less: Discount from associated enterprise (difference) 1,000
ALP 6,800

Purchase price from associated enterprise 7,500

ALP 6,800
Difference 700

Income to be added to total income of R Ltd, India Rs.21,00,000 (3000 x 700)

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METHOD 3: COST PLUS METHOD:

Step 1: Determine the direct and indirect costs

Step 2: Determine the gross profit ratio with an unrelated enterprise

Step 3: The gross profit % should then be adjusted for functional differences

Step 4: The cost referred in step 1 shall be increased by adjusted profit mark-up
arrived in step 3

Step 5: The sum so arrived is the arm’s length price

PROBLEMS ON “COST PLUS METHOD”:

1. Alto Ltd. Germany holds 35% shares in Beta Ltd. India. Beta Ltd. develops software and does
both onsite and offsite consultancy services for various customers. Beta Ltd. during the year
billed Alto Ltd Germany for 100 man-hours @ Rs.2,000 per man-hour. Total cost (direct and
indirect) for executing this work amounted to Rs.1,80,000.

However, Beta Ltd. billed C Ltd India @ Rs.3,000 per man-hour for similar level of manpower
and earned a gross profit of 50% on its cost.

The transactions of Beta Ltd with Alto Ltd and C Ltd are comparable subject to the following
differences:

a. While Beta Ltd derives technology support from Alto Ltd, there is no such support from C
Ltd. The value of technology support received from Alto Ltd may be put at 20% of normal
gross profits.

b. As Alto Ltd gives business in large volumes, Beta Ltd offered to Alto Ltd a quantity discount
which may be valued at 10% of the normal gross profits.

c. In the case of rendering services to Alto Ltd., Beta Ltd neither runs any risk nor incurs any
marketing costs. On the other hand, in the case of services to C Ltd., Beta Ltd has to assume
all the risks and costs associated with the marketing function which may be estimated at
10% of normal gross profits.

d. Beta Ltd offered one-month credit to Alto Ltd. The cost of providing such credit may be
valued at 3% of gross profits. No such credit was given to C Ltd.
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Cost plus method:

1. Direct and Indirect cost incurred for services rendered to an AE: Rs.1,80,000

% Gross profit with an unrelated party C Ltd (given) 50% on cost

Less: Adjustment on account of functional differences:

Technology support @ 20% of gross profit 10%
Quantity discount to AE @ 10% of gross profit 5%
Risk and cost associated with marketing function @ 10% of G.P. 5%
Balance 30%

Add: No credit to C Ltd will increase profit margin @ 3% of gross profit 1.5%
ADJUSTED GROSS PROFIT (%) 31.5%

Therefore the ALP is Rs.1,80,000 + 31.5% of 1,80,000 Rs.2,36,700

Less: Amount billed by Beta Ltd (100 hrs x Rs.2000 per hour) Rs.2,00,000
Difference to be added to total income of Beta Ltd Rs.36,700

2. Branco Inc., a French Company, holds 45% of Equity in the Indian Company Chirag
Technologies Ltd (CTL). CTL is engaged in development of software and maintenance of
the same for customers across the globe. Its clientele includes Branco Inc.

During the year, CTL had spent 3,400 Man Hours for developing and maintaining software
for Branco Inc, with each hour being billed at Rs.1,000. Costs incurred by CTL for executing
work for Branco Inc. amount to Rs.20,48,000.

CTL had also undertaken developing software for Harsha Industries Ltd for which CTL had
billed at Rs.2,700 per Man Hour. The persons working for Harsha Industries Ltd and
Branco were part of the same team and were of matching credentials and caliber. CTL had
made a Gross Profit of 60% on the Harsha Industries work.

CTL’s transactions with Branco Inc. are comparable to the transactions with Harsha
Industries, subject to the following differences:

(a) Branco gives technical know-how support to CTL which can be valued at 8% of the
normal Gross Profit. Harsha Industries does not provide any such support.

(b) Since the work for Branco involved huge number of man hours, a quantity discount of
14% of normal Gross Profits was given.

(c) CTL had offered 90 days credit to Branco the cost of which is measured at 2% of the
normal billing rate, No such credit was offered to Harsha Industries Ltd. Compute ALP
and the amount of increase in Total Income of Chirag Technologies Ltd.
 137

2. Direct and Indirect cost incurred for services rendered to an AE: Rs.20,48,000

% Gross profit with an unrelated party Harsha Industries Ltd 60% on sales

Less: Adjustment on account of functional differences:

Technology support @ 8% of gross profit 4.8%
Quantity discount to AE @ 14% of gross profit 8.4%
Balance 46.8%

Add: No credit to Harsha Indus will increase profit @ 2% of normal billing 2.0%
ADJUSTED GROSS PROFIT (%) on sales 48.8%

Therefore, the ALP is Rs.20,48,000 + (Rs.20,48,000 (x) 48.8/51.2) Rs.40,00,000

Less: Amount billed by CTL Ltd (3400 hrs x Rs.1000 per hour) Rs.34,00,000
Difference to be added to total income of CTL Ltd Rs.6,00,000

METHOD 4: PROFIT SPLIT METHOD

Step 1:- Compute combined profit arising from the International Transaction.

Step 2:- Ascertain the relative contribution made by each of the associated
enterprises to the earning of the combined net profit

Step 3:- Split the combined net profit in proportion to their contributions

Step 4:- The sum (cost + profit) so arrived at is the Arms Length Price

PROBLEM ON “PROFIT SPLIT METHOD”:

1. X Ltd., UK received an order from Y Ltd., Germany for developing a software product for a sum
of US $ 1,00,000. In order to execute the same, X Ltd., Z Ltd. (a company in which X Ltd., holds
50% shares) and S Ltd., India (where Z Ltd., holds 40% shares) together develop the above
software.

X Ltd., UK pays to Z Ltd., and S Ltd., India a sum of US $ 24,000 and $ 27,000 respectively and
keeps the balance for itself.

In the entire transaction, a profit of $16,000 is earned. S Ltd., India incurred a total cost of
$24,000 in the execution of its work relating to the above project. Assume the relative
contribution of X Ltd., Z Ltd., and S Ltd., is 40%, 25%, 35% respectively. Compute the ALP and
the amount of increase in the total income of S Ltd.
 138

Answer:

1. The arm’s length price under profit split method shall be determined as under:

Price charged by X Ltd to Y Ltd. $ 1,00,000

S Ltd India’s share of revenue $ 27,000

Z Ltd share of revenue $ 24,000
X Ltd share of revenue $ 49,000

Combined total profits $ 16,000

Profit apportioned on the basis of relative contribution

X Ltd 40% of $ 16,000 $ 6,400
Z Ltd 25% of $ 16,000 $ 4,000
S Ltd 35% of $ 16,000 $ 5,600

Total cost of S Ltd. India $ 24,000

Revenue of S Ltd India on the basis of ALP (24000+5600) $ 29,600

Actual revenue of S Ltd India $ 27,000
Therefore total income of S Ltd shall be increased by $ 2,600

PROBLEM ON TRANSACTIONAL NET MARGIN METHOD

1. Beta Inc. having its business in Singapore has advanced a loan of SD 1,60,000 to Beta Ltd.
Mumbai. Book value of total assets of Beta Ltd was Rs.125 lakhs. Beta Ltd provides
software backup support to Beta Inc. Beta Ltd has spent 50,000 man-hour during the
financial year 2022-23 for the services rendered to Beta Inc. The cost for Beta Ltd is SD 75/
man-hour. Beta Ltd has billed Beta Inc. at SD 90.75/ man-hour.

Gama Ltd. in Mumbai which has a similar business model provides software backup
support to Olive Inc. in Penang, Malaysia. Gama Ltd's cost and operating profits are as
hereunder:

Particulars INR in lakhs

Direct costs 600
Indirect costs 200
Operating profits 200

i. Calculate ALP for the transaction between Beta Ltd. and Beta Inc. based on the
above data of Gama Ltd. using the Transactional Net Margin Method. Assume ISD =
Rs.45.

ii. Explain, if there is any adjustment to be made to the total income of Beta Ltd.
Note. SD = Singapore Dollars May 2019 (new)
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1. PRIMARY & SECONDARY ADJUSTMENTS IN TP:

‘Primary Adjustment’ means the determination of transfer price in accordance with the ALP
resulting in an increase in the total income of the assessee.

Secondary Adjustment: Where a Primary Adjustment to transfer price has been made suo
moto by the assessee in his return of income; or Primary Adjustment is made by the Assessing
Officer and has been accepted by the assessee, the assessee shall make a Secondary
Adjustment.

Important: Secondary Adjustment shall not be made if the amount of primary

adjustment does not exceed Rs.1 crore.

‘Secondary Adjustment’ means an adjustment in the books of account of the assessee and it’s
A.E. to reflect that the actual allocation of profits between them 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.

Effect of secondary adjustment:

As a result of primary adjustment, if there is an increase in the total income, the “excess
money” which is available with its associated enterprise, if not repatriated to India within the
time (90 days from the ‘due date’ of filing ROI or from the date of order of the AO), shall be
deemed to be an “advance”, made by the assessee to such associated enterprise and interest on
such advance, shall be computed.

“Excess money” means: ALP determined in primary adjustment

minus
price at which international transaction has actually been undertaken

Note: Computation of interest where excess money is not repatriated to India within 90 days:
a. Where the international transaction is denominated in Indian rupee: SBI rate + 3.25%
b. Where the international transaction is denominated in foreign currency: LIBOR + 3%

When secondary adjustment can be avoided or prevented?

a) If excess money is repatriated to India:

The A. E. with whom the international transaction was carried out or any other non-resident
A. E., can repatriate the excess money to India within 90 days from the prescribed date; or

b) If additional income-tax is paid:

Where the excess money has not been repatriated within 90 days, the assessee may, at his
option, pay additional income-tax @ 18% (surcharge 12% and cess 4% also applicable) on
such excess money. In such a case secondary adjustment and computation of interest shall not
be required.

Note: The above tax cannot be claimed as expenditure or claimed as credit by assessee.
 140

1. ABC Ltd is having an AE in UK, namely, JCB Plc. During the financial year 2022-23, ABC Ltd
exported goods at a price of Rs.100 crores to JCB Plc. The Arm’s length price of the
transaction is Rs.110 crores. Transaction was designated in Indian Rupees.

Solution:

Previous Year 31.03.2023:

Arm’s Length Price Rs.110 crores (primary adjustment)
Actual Export Price to AE Rs.100 crores

Primary Adjustment: Rs.110 crores (exceeds one crore)

Excess Money: Rs.10 crores (shall be treated as advance if not rep within time)

Repatriation to India within 90 days: By JCB Plc U.K. or by any other non-resident AE:
a. Repatriation to India should be made within 90 days from the ‘due date’ of filing ITR; or
(due date is 30th November, 2023; should be repatriated on or before 28.02.2024)

b. Repatriation to India should be made within 90 days from the date of assessment order
(assuming date of assessment order is 31.03.2024; should be repatriated on or before 29.06.2024)

Repatriation can also be made by any non-resident associated enterprise of the assessee to
India within the time allowed as mentioned above, then secondary adjustment can be
prevented.

If Money is not repatriated within 90 days:

Secondary Adjustment in books of account:

Assessee should record in the books of account:

Foreign Associated Enterprise A/c Dr. 10 crores

To Profit & Loss A/c 10 crores

Suppose, in the above case, if money is not repatriated to India by non-resident AE by

28.02.2024 (90 days from the ‘due date’ i.e. 30.11.2023), then for the previous year ended
31.03.2024, assessee shall compute interest.

For example: If SBI rate of interest on 01.04.2022 is 8%, then interest shall be computed @
11.25% since international transaction was designated in India Rupees. The following entry
shall be passed by the assessee:

Foreign Associated Enterprise A/c Dr. Rs.37,29,452

To Interest Income A/c Rs.37,29,452

(Being interest @ 11.25% on Rs.10 crores from 01.12.2022 to 31.03.2023)

Rs.10 crores x 11.25% x 121/365
 141

S.A. CAN BE PREVENTED IF ASSESSEE DECIDES TO PAY ADDITIONAL TAX @ 18%:

No secondary adjustment is required to be made in books of account of the assessee, if he pays
from his own pocket additional income tax by 28.02.2024 as under:

Additional tax @ 18% on Rs.10 crores Rs.1,80,00,000

Add: 12% surcharge Rs.21,60,000
Rs.2,01,60,000
Add: 4% Cess Rs.8,06,400
Rs.2,09,66,400

The above tax cannot be:

a. claimed as expenditure
b. claimed as credit by assessee or anyone else

2. Muskaan Ltd. (MK India) is an Indian company that manufactures cricket kits in India. MK
India is eligible for deduction u.s.10AA. For its UK sales, MK India has entered into a marketing
arrangement with Kits Sports (KS UK), a UK incorporated firm. MK India uses the patented
design provided by KS UK for manufacturing of cricket kits by it.

MK India supplied 30,000 sports kits to KS UK for Rs.5,000 per kit. In the assessment, the AO.,
increased the price charged by MK India from KS UK to Rs.6,000 per kit. MK India accepts such
transfer price adjustment adopted by the AO. As a result, there is an increase in the income of
MK India. You are required to answer the following questions in this respect:

i. Would MK India and KS UK be treated as associate enterprises for the purposes of

transfer pricing adjustment adopted by the Assessing Officer?

ii. What is the liability of KS UK in respect of the change in Arm's Length Price (ALP) in
respect of purchases made by it from MK India?

iii. MK India contends that since the income is increased because of the arm's length price
adopted by the Assessing Officer, the deduction claimed by it under section 10AA
should also be increased accordingly, since the amount of deduction is based upon the
amount of the export sale. Discuss whether the contention of MK India is valid.

Answer:
1. Manufacturing of cricket kits by MK India is wholly dependent on the use of patented design
provided by KS UK and therefore MK India and KS UK are deemed to be associated enterprises.

Supply of cricket kits by MK India, a resident, to KS UK, a non-resident, would be an

international transaction between associated enterprises, and hence, transfer pricing
provisions would be attracted in this case.

2. The increased amount of Rs.3 crore shall be treated as an advance given by M.K. India to KS UK
which is required to be repatriated by KS UK within 90 days or by any other non-resident AE of
MK India from the date of order of the A. O.
 142

3. No deduction under section 10AA shall be allowed to MK India in respect of the increased
income of Rs.3 crores. Hence the contention of MK India that deduction under section 10AA
should be increased is not valid.

3. Paras Ltd. is an Indian company engaged in the manufacturing of supreme quality blankets. It
has total borrowings of Rs.60 crores by way of loan as on 31.03.2023. Saksham Ltd. of
Germany imported 5 lakh blankets from Paras Ltd. for the resale in Germany @ Rs.2,000 per
unit. Paras Ltd. sold similar blankets to other dealers in Germany @ Rs.2,100 per unit. Paras
Ltd. received a bank guarantee on 01.04.2022 for availing a cash credit limit of Rs.9 crores for
which Saksham Ltd. was the guarantor. The terms of trade for other dealers was to make
payment within 1 month from the date of sale of goods by Paras Ltd., whereas for Saksham Ltd.,
the credit period allowed was 3 months from the date of sale of goods. The cost of capital was
12% per annum and the supply of goods is assumed to be uniform throughout the year.

You are required to determine whether Paras Ltd. and Saksham Ltd. are associated enterprises.
If yes, compute the ALP of the transaction between them and the amount to be added to the
income of Paras Ltd., if any, by way of an ALP adjustment.

Assuming that the above adjustments to the transfer price have been made suo-moto by Paras
Ltd. in its return of income, what is the time limit for the repatriation of such excess money?
What are the implications if the excess money is not repatriated within such prescribed time
limit?

Answer:

Guarantee by German company is 15% (9/15 x 100) > 10%. Both are associated enterprises.

Determination of ALP:
Price to unrelated party 2100
Add: Adjustment of cost of credit 42 (2100 x 12% x 2/12)
2142
Less: Price to AE 2000
Difference 142

Income to be added to the total income of Paras Ltd: 142 x 5 lacs is 710 lakhs.

The excess money of Rs.710 lakhs should be repatriated within 90 days from the due date of filing
IT return (i.e. 90 days from 30.11.2023; before 28.02.2024)
 143

3. Vishnu Polymers Ltd., is an Indian company having transactions which are subject to transfer
pricing regulations. In June, 2022, the assessments for assessment years 2020-21 and 2021-22
were concluded after the due process under law:

In both the years, in respect of the transactions with its associated enterprises, the ALP had
been determined in Euro. For the assessment year 2020-21, the primary adjustment as
translated into INR was ₹ 90 lakhs (for transactions with N Inc., Singapore) and for the AY
2021-22, the same being ₹ 2.4 crores (for transactions with PK Inc., Melbourne).

The assessment order was passed on 12.06.2022. The assessee is inclined to accept the same
and not prefer any appeal. You are required to answer the following in the light of above:

(i) How will the quantum of primary adjustment be treated in the books of the assessee vis-a-
vis secondary adjustment? How will the aforesaid completed assessments impact the
assessee?

(ii) What steps are to be taken to prevent the secondary adjustment? Will there be any
secondary adjustment in the hands of the assessee if the required steps are not taken? You are
required to outline the concept involved. June 2019 CMA final

Solution:

i. Assessment Year 2020-21:

Primary Adjustment is Rs.90 lakhs. As primary adjustment does not exceed Rs.1 crore, secondary
adjustment is not required

Assessment Year 2021-22:

Primary Adjustment is Rs.2.4 crores. Primary Adjustment exceeds Rs.1 crore, hence secondary
adjustment has to be made in the books of account of the assessee and its AE. provided, the “excess
money” is not repatriated to India by the AE or by any other non-resident AE within 90 days from
the date of the Assessment Order. If the “excess money” is not repatriated within 90 days then
interest shall be computed on the “excess money” calculated @ LIBOR + 3% since the international
transaction is denominated in foreign currency (euro).

ii. If the “excess money” is repatriated to India within the time prescribed, secondary adjustment can
be prevented and computation of interest is not required. Alternatively, secondary adjustment can
also be prevented if Vishnu Polymers Ltd pays additional income tax @ 18% on the “excess money”
including surcharge and cess. If the required steps are not taken, the assessee is required to make
secondary adjustment in the books of account.
 144

2. DISALLOWANCE OF INTEREST ON LOANS BORROWED FROM

ASSOCIATED ENTERPRISES – Section 94B:

To whom applicable: An Indian company, or

A permanent establishment of a foreign company in India,

Nature of expenditure: Assessee borrowing loans from Associated Enterprise and

INTEREST paid on such loan or debt exceeds Rs.1 crore

Amount of disallowance: Interest in excess of 30% of its EBITDA shall be disallowed

u.s.94B.

Non-applicability: Section 94-B disallowance not applicable for Banking and

Insurance companies

Carry forward of excess interest: The disallowed interest expense can be carried forward up
to eight assessment years and be claimed as deduction against business income.

Providing of guarantee & depositing of matching amount deemed to be debt issued:

Where the debt is issued by a lender which is not associated enterprise but an AE either:

a. Provides an implicit or explicit guarantee to such lender; or

b. Deposits a corresponding and matching amount of funds with the lender,

such debt shall be deemed to have been issued by an associated enterprise. (refer sum no.1)

EBITDA: Earnings before interest, tax, depreciation and amortizations.

1. X Ltd., a resident Indian Company, on 01.04.2022 has borrowed ₹ 100 crores from M/s.A Inc, a
Company incorporated in US, at an interest rate of 9% p.a. The said loan is repayable over a
period of 10 years. Further, loan is guaranteed by M/s.B Inc. incorporated in US. M/s.K Inc, a
non-resident, holds shares carrying 30% of voting power both in M/s.X Ltd. and M/s.B. Inc.
M/s.K Inc has also deposited ₹ 100 crores with M/s.A Inc.

Other information:
Net profit of M/s.X Ltd. was ₹ 10 crores after debiting the above interest, depreciation of ₹ 5
crores and income-tax of ₹ 3.40 crores.

Calculate the amount of interest to be disallowed under the head "Profits and gains of business
or profession". Substantiate your answer with reasons. CA final and CMA final
 145

Solution:
If an Indian company, being the borrower, incurs any expenditure by way of interest in respect of
any debt issued by its non-resident associated enterprise and such interest exceeds ₹ 1 crore, then,
the interest paid or payable by such Indian company in excess of 30% of its earnings before
interest, taxes, depreciation and amortization (EBITDA) shall be disallowed u.s. 94B.

Further, where the debt is issued by a lender which is not associated but an associated enterprise
either provides an implicit or explicit guarantee to such lender or deposits a corresponding and
matching amount of funds with the lender, such debt shall be deemed to have been issued by an AE
and limitation of interest deduction would be applicable.

In the present case, since M/s.K Inc holds 30% of voting power, X Ltd. and M/s.B Inc are deemed to
be associated enterprises.

Since loan of ₹100 crores taken by X Ltd., an Indian company from A Inc, is guaranteed by B Inc, an
associated enterprise of X Ltd., such debt shall be deemed to have been issued by an AE and interest
payable to M/s.A. Inc shall be considered for the purpose of limitation of interest deduction u.s.94B.

Note: Since K Inc. an associated enterprise of X Ltd., has deposited a matching amount of ₹ 100
crores with A Inc., the interest payable by X Ltd. to A Inc. on loan of ₹ 100 crores borrowed from A
Inc. would be subject to limitation of interest deduction on the basis of this line of reasoning also.

Interest to be disallowed u.s. 94B while computing business income of M/s. X Ltd.

EBITDA (10+9+5+3.4) ₹27,40,00,000

Interest paid or payable by X Ltd. 100 c x 9% ₹ 9,00,00,000

30% of EBITDA ₹ 8,22,00,000
Excess interest to be disallowed ₹ 78,00,000

2. ND Ltd., an Indian Company, has borrowed Rs.90 crores on 01.04.2022 from M/s.TM Inc, a
company incorporated in London, at an interest rate of 10% p.a. The said loan is repayable
over a period of 5 years. Further, this loan is guaranteed by M/s.TY Inc. incorporated in UK.
M/s.TD Inc, a non-resident, holds shares carrying 40% of voting power both in M/s.ND Ltd.
and M/s.TY Inc.

Net profit of M/s.ND Ltd. for P.Y. 2022-23 was Rs.11 crores after debiting the above interest,
depreciation of Rs.5 crores and income-tax of Rs.4 crores.

Calculate the amount of interest to be allowed to be claimed under the head “profits and gains
of business or profession” in the computation of M/s.ND Ltd. giving appropriate reasons. Also
explain allowability of such disallowed interest, if any.
 146

Solution:

Interest to be disallowed u.s. 94B while computing business income of M/s. ND Ltd.

EBITDA (11+9+5+4) ₹29,00,00,000

Interest paid or payable by X Ltd. 90 c x 10% ₹ 9,00,00,000

30% of EBITDA ₹ 8,70,00,000
Excess interest to be disallowed ₹ 30,00,000

3. 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 2022-23 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, 2023.

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 Dec 2019 CWA - F

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).

3. PERMISSIBLE VARIATION (or) TOLERANCE BAND

In case of more than one ALP., average should be considered. If the difference between the ALP
and the actual transfer price does not exceed such percentage as may be notified by the Central
Government, the actual transfer price shall be deemed to be the ALP.

For this purpose, the Central Government has notified 3% as Tolerance Band & 1% for
wholesale traders.

Note: Fast moving consumer goods and consumer durable companies, which buy products
from the parent company and sell them in India, could get classified as wholesale traders.

Problem:
Actual transaction price is Rs.150

ALP as per most appropriate method is:

a) Rs.145; b) Rs.152; c) Rs.157; d) Rs.160 Compute the ALP.
 147

Solution:
ALP (average) Rs.153.50
Actual transaction price is Rs.150
Difference between ALP and actual transaction price is 102.33% < 103%
Therefore, actual transaction price Rs.150 can be accepted.

4. SAFE HARBOR RULES Section 92CB:

What is ‘safe harbor’?
‘Safe Harbor’ means circumstances in which the Income Tax Authorities shall accept the
transfer price as declared by the assessee without requiring him to submit all data for
determination of transfer price.

„SAFE HARBOR‟ rules:

A. “SOFTWARE DEVELOPMENT SERVICES” &
B. “PROVISION OF INFORMATION TECHNOLOGY ENABLED SERVICES”

Aggregate value of Operating profit margin

transactions with AE. to operating expense
A. Up to 100 crore Not less than 17%
B. Above 100 crore & up to 200 crore Not less than 18%

1. Examine the following transactions and discuss whether the transfer price declared by the
following assesses, who have exercised a valid option for application of safe harbor rules, can
be accepted by the IT Authorities: -

S.No. Assessee International Aggregate Declared Operating

Transaction value of operating expense
transactions profit margin

(1) A Ltd., an Provision of Rs.95 cr Rs.12 cr Rs.75 cr

Indian Co. system support
services to X Inc
which is a spec-
fied foreign co.

(2) B Ltd., an Provision of data Rs.180 cr Rs.30 cr Rs.150 cr

Indian Co. processing services
with the use of IT
to Y Inc., its foreign
subsidiary

Would your answer differ, if in any of the cases mentioned above, the foreign entity is located
in a notified jurisdictional area?
 148

Answer:
(1) X Inc is a specified foreign company (26% equity) in relation to A Ltd. Therefore, A Ltd and X Inc
are associated enterprises. Therefore, provision of systems support services by A Ltd to X Inc is
an international transaction between associated enterprises, and hence, transfer pricing are
attracted. “Systems support services” falls within “Software development services”.

Since the aggregate value of international transactions entered does not exceed Rs.100 crores, A Ltd
should have declared an operating profit margin of not less than 17% in relation to operating
expense, to be covered within the safe harbor rules. However, since A Ltd has declared an
operating profit margin of only 16% (i.e. 12/75*100), the same is not in accordance with the rules.
Hence, it is not binding on the IT authorities to accept the transfer price declared by A Ltd.

(2) Y Inc., a foreign company, is a subsidiary of B Ltd., an Indian company. Hence they are associated
enterprises. Transfer pricing provisions are attracted. Data processing services with the use of
information technology falls within the definition of “Information Technology enabled services”,
and is hence an eligible transaction.

Since the aggregate value of transactions entered > Rs.100 crore but < Rs.200 crore, B Ltd should
have declared an operating profit margin of not less than 18% in relation to operating expense, to
be covered within the scope of safe harbor rules. In this case, since B Ltd. has declared an operating
profit margin of 20% (i.e. 30/150*100), the same is in accordance with the circumstances
mentioned in rule. Hence, the IT authorities shall accept the transfer price declared by B Ltd.

Note: The safe harbor rules shall not apply in respect of eligible international transactions entered
into with an associated enterprise located in a NJA.

5. NOTIFIED JURISDICTIONAL AREA (NJA)

In order to discourage transactions by a resident assessee with persons located in any country
which does not effectively exchange information on taxation matters with India, anti-avoidance
measures have been proposed in the IT. Act.

Section 94A has been inserted in the Act to specifically deal with transactions undertaken with
persons located in such country or area.

1. Central Government is empowered to notify any country or territory to be

Notified Jurisdictional Area (NJA) [Section 94A(1)].
The Central Government may, having regard to the lack of effective exchange of
information on taxation matters with any country or territory outside India, specify by
notification in the Official Gazette such country or territory as a Notified Jurisdictional
Area (NJA) in relation to transactions entered into by any assessee.

2. Party in NJA to be deemed as associated enterprises:-

If an assessee enters into a transaction, where one of the parties to the transaction is a
person located in a NJA, then all the parties to the transaction shall be deemed to be
associated enterprises and the transaction shall be deemed to be an international
transaction and accordingly, transfer pricing provisions shall apply.
 149

3. Payment made to a financial institution located in NJA:

No deduction in respect of any payment made to any financial institution shall be
allowed unless the assesse furnishes an authorization, in the prescribed form,
authorizing the CBDT or any other income-tax authority, to seek relevant information
from the said financial institution.

4. Deduction for other expenditure or allowance:

No deduction in respect of any other expenditure or allowance (including depreciation)
arising from the transaction with a person located in an NJA shall be allowed unless the
assessee maintains such other documents and furnishes the information as may be
prescribed.

5. No benefit of Permissible Variation (3% variation) or Safe harbor rules

6. TDS:
Any payment made to a person located in the NJA shall be liable to deduction of tax at
the higher of:
a. at the rate or rates in force; or
b. the rate specified in the relevant provision of the Act; or
c. at the rate of 30%

Problems:
4. RV Ltd., an Indian company, exports grapes to DK Inc for an amount of Rs.30 lakhs. DK Inc. is
located in a Notified Jurisdictional Area (NJA). RV Ltd., charges Rs.38 lakhs and Rs.40 lakhs for
sale of similar goods to CC Inc and MM Inc, respectively, which are not located in NJA and both
of them are not associated enterprises of RV Ltd.

Assuming that permissible variation notified by Central Government for such class of
International transactions is 3% of the transaction price, state the tax implications under
section 94A in respect of the above transaction by RV Ltd., to DK Inc.

Solution:
As per section 94A, in case an assesse enters into any transaction where one of the parties thereto
is located in NJA then all the parties to the transaction shall be treated as associated enterprises and
the transaction shall be deemed to be an international transaction. TP provisions would therefore,
be attracted.

Hence, the transaction of export of grapes between the Indian company, RV Ltd. and DK Inc. located
in NJA would be deemed to be an international transaction between associated enterprises. Since
more than one price is determined in the above case, the ALP would be the average of such prices.

Therefore, ALP = Rs.39,00,000 (i.e. 38 + 40 = 78/2)

Transfer Price = Rs.30,00,000

Hence the total income of RV Ltd shall be increased by Rs.9,00,000

Permissible variation (3%) will not be allowed for transactions with NJA.
 150

5. A person resident in India seeks to remit certain amount liable to tax in India to a company
incorporated in a notified jurisdictional area. At what rate should the tax be deducted at source
from such payment?

Answer: Refer para 6 above

6. X Ltd, an Indian company has borrowed certain sum from a financial institution, a resident of a Non
Jurisdictional Area (NJA) notified by the Central Government. During the previous year, X Ltd paid
interest of Rs.10 lacs to the financial institution. What authorization is to be furnished by X Ltd? At
what rate tax is required to be deducted at source by X Ltd from payment of such interest?

Answer: Refer para 3 & para 6 above

6. Sec 92CC: Advance Pricing Agreement (APA)

What is an Advance Pricing Agreement? An Advance Pricing Agreement (APA) is an agreement
between a taxpayer and an Income-tax authority on an appropriate transfer pricing methodology
for a set of transactions over a fixed period of time in future. They offer better assurance on
transfer pricing methods and provide certainty and unanimity of approach.

Purpose of APA:
The Board (CBDT) with the approval of Central Government may enter into an APA with any
person, either determining the ALP or specifying the manner in which ALP is to be determined.

Effect of the agreement: The ALP shall be determined as per the agreement entered into.

Period of validity:
APA is valid for a maximum period of FIVE consecutive previous years.

The APA shall be binding on:

The APA entered into shall be binding:-
a. On the Assessee; and
b. On the Commissioner and the Income-tax Authorities subordinate to him.

Not binding:
APA shall not be binding if there is change in law or facts.

Void-ab-initio:
The Board may, with the approval of Central Government, by an order, declare an agreement to
be void-ab-initio, if it finds that the agreement has been obtained by the person by fraud or
misrepresentation of facts.
 151

Roll back provisions:

The agreement entered into may provide determination of ALP during any period not
exceeding four previous years preceding the year in which the APA was obtained. The ALP
shall be determined in accordance with the said agreement. (Roll back provisions)

e.g. Therefore, if APA is entered into for the period 1.4.2022 to 31.03.2027, the assessee can opt for
Roll Back provisions for the period 1.4.2018 to 31.3.2022, i.e., the APA shall also apply for the
preceding 4 previous years. CBDT has clarified that if assessee wants to have benefit of Roll Back, then
he has to mandatorily apply for Roll Back for all the preceding 4 previous years. Assessee cannot say
that he wants Roll Back only for one or two preceding previous years. He has to either opt for none or
for all the 4 preceding previous years for Roll Back.

1. Answer the following in the context of international transactions:

Company X and Company Y who have entered into Advance Pricing Agreements (APA) and eligible
for rollback provisions merged to form Company XY. Is the Company XY eligible for roll back
provisions as it was formed on merger of Company X and Company Y?

Solution:
The agreement of APA is between the Board and a taxpayer/person. The principle to be followed is
that the person who makes the APA application alone would be entitled to enter into the agreement
and be entitled for the rollback provisions in respect of international transactions undertaken by it
in rollback years. Since Company X and Y were the APA applicants and not the new company XY
formed as a result of merger, Company XY would not be eligible for the rollback provisions.

7. Section 92BA: SPECIFIED DOMESTIC TRANSACTIONS:

“Specified domestic transaction” in case of an assessee means any of the following transactions,
not being an international transaction, namely:

i. Any transaction referred to in section 80A(6);

ii. Any transfer of goods or services referred to in section 80-IA(8);

iii. Any business transacted between the assessee and other person as referred to in
section 80IA(10);

iv. Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to
which provisions 80IA(8) or 80IA(10) are applicable; or

v. Any business transacted between the persons referred to in section 115BAB

(amendment)

and where the aggregate of such transactions entered into by the assesse in the previous year
exceeds a sum of Rs.20 crores.
 152

Only for understanding: The three sections below are not for exam preparation

Section 80A(6)
Section 80A (6) refers to internal transactions between various units / undertakings of the assessee
in respect of goods or services and the transaction value does not correspond to the market value
of such goods or services.

Note: If the market value of such goods or services exceed Rs.20 crores then it is subject to transfer
pricing provisions (specified domestic transaction).

Section 80IA(8)
Where any goods or services held for the purposes of the ELIGIBLE BUSINESS are transferred TO
NON-ELIGIBLE BUSINESS, or VICE-VERSA, the consideration, if any, for such transfer, does not
correspond to the market value of such goods or services as on the date of the transfer, then, for the
purposes of the deduction under this section, the profits and gains of such eligible business shall be
computed as if the transfer, in either case, had been made at the market value of such goods or
services as on that date.

Note: If the market value of such goods or services exceed Rs.20 crores then it is subject to transfer
pricing provisions (specified domestic transaction).

Section:80IA(10)
Where it appears to the AO that, owing to the CLOSE CONNECTION between the assessee carrying
on the eligible business and any other person, the course of business between them is so arranged
that the business transacted between them produces to the assessee MORE THAN THE ORDINARY
PROFITS in such eligible business, the AO shall, in computing the profits and gains of such eligible
business for the purposes of the deduction under this section, take the amount of profits as may be
reasonably deemed to have been derived therefrom.

Note: In case the aforesaid arrangement involves a specified domestic transaction, the amount of
profits from such transaction shall be determined having regard to arm’s length price.
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8. Section 92CA: Reference to Transfer Pricing Officer (TPO)

a. Previous approval:
If Assessing Officer considers it necessary, he may refer the computation of ALP to TPO,
with previous approval of the Commissioner.

b. Notice shall be served:

TPO shall serve a notice to the assessee and shall require the assessee to produce evidence
in support of the computation made by him of the arm’s length price.

c. Other transactions can also be considered:

During the course of proceedings before the TPO., if any other international transaction
(which was not referred by AO) comes to his knowledge, then TPO shall consider such
other transactions also.

d. On the basis of material & evidence, TPO shall compute the ALP & pass an order computing
ALP and send a copy of his order to the AO and to the assessee.

e. Order of TPO is binding on the Assessing Officer (Assessing Officer cannot complete the
assessment rejecting the order of TPO)

f. The TPO shall pass the order before 60 days prior to the last date for completion of
Assessment by the Assessing Officer. (for e.g. if last date for completion of assessment by
the AO is 31.03.2021; TPO should pass the order 60 days before 31.03.2021 i.e. before
31.01.2021) (AO should be given at least 60 days for completing the assessment)

9. Adjustment to ALP by AO – State the consequences & remedies:

1. State the CONSEQUENCES that would follow if the AO. makes adjustment to ALP in international
transactions of the assessee resulting in increase in taxable income. What are the REMEDIES
available to the assessee to dispute such adjustment? CMA final – June 18

Answer:
In case the AO makes adjustment to arm's length price in an international transaction which results
in increase in taxable income of the assessee, the following consequences shall follow:

I. No deduction u.s.10AA or Chapter VI-A shall be allowed from the income so increased.

II. No corresponding adjustment would be made to the total income of the other associated
enterprise (in respect of payment made by the assessee from which tax has been deducted
or is deductible at source) on account of increase in the total income of the assessee on the
basis of the arm's length price so recomputed.

The remedies available to the assessee to dispute such an adjustment are:-

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1. The assessee can file his objections to the variation made in the income within 30 days [of
the receipt of draft order by him] to the Dispute Resolution Panel and Assessing Officer.

2. In any other case, he can file an appeal u.s.246A to the Commissioner (Appeals) against the
order of the AO within 30 days of the date of service of notice of demand.

The assessee can opt to file an application for revision of order of the AO u.s. 264 within one year
from the date on which the order sought to be revised is communicated.

10. Penalties:
Any person fails to furnish a report from an accountant: Rs.1 lakh u.s.271BA

Failure to report any transactions would constitute

‘misreporting of income’ Penalty of 200% of taxes

Fails to furnish information & documents (Master File) Rs.5 lakhs u.s.271G

Section 271AA:
A. Failure to keep & maintain
documents as per Section 92D; or

B. Fails to report any international transaction; or 2% of the value of the

international transaction
C. Fails to maintain/furnish correct
information/document

Problems:
A Ltd has failed to report an international transaction entered by it with PQR Inc., which is
an Associated Enterprise in relation to A Ltd. What would be the penalty in this case?

Answer:
Penalty is 2% of the value of transaction and 200% of tax payable on under-reported income.

XYZ Ltd. has entered into a specified domestic transaction during the previous year 2022-
23. The company failed to obtain a report from a CA and furnish such report under section
92E. Is any penalty imposable on XYZ Ltd? If yes, what will be the quantum of penalty?

Answer:
Penalty of Rs.1 lakh is imposable. Also a penalty of 2% of value of specified domestic
transaction is leviable.
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CHAPTER 7: INCOME OF UNITS IN SEZ – SECTION 10AA:

Section 10AA: Units located in SEZ deriving profits from export:

To whom available: Any assessee engaged in manufacture or production of any article

or thing or computer software in any SEZ. This deduction is not
available under the new tax regime u.s.115BAC.

Amount of deduction: 100% of export profits for first five assessment years
commencing from the year of manufacture

50% of export profits for next five assessment years

50% of export profits (or) amount transferred to “SEZ Re-

investment Allowance Reserve Account” whichever is less shall
be allowed as deduction for another five years.

Computation of deduction u.s.10AA:

Profit of business of SEZ unit (x) Export turnover of SEZ unit

Total turnover of SEZ unit

Important points:

a. “Export Turnover” means amount brought to India in convertible foreign exchange within six
months from the end of the previous year or within the time permitted by the RBI.

b. “Export Turnover” does not include:

Freight, telecommunication charges and insurance charges for delivery of goods outside India.
The same should also be excluded from the “Total Turnover”.

c. Cash Compensatory Support (CCS), Duty Drawback and profit on sale of import entitlement
license is not eligible for deduction u.s.10AA – Supreme Court.

d. Total turnover shall include domestic sales and FOB value of exports.

e. Section 10AA is a deduction from gross total income.

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1. Mrs.V, a resident individual, is running a SEZ unit, as well as a unit in Domestic Tariff Area
(DTA). She furnishes the following details relating to the year ended 31.03.2023, pertaining to
these two units
(Rs. in lakhs)
DTA unit SEZ unit
Export turnover 100 1000
Total turnover 400 1100
Net profit 50 220

Compute the deduction available u/s.10AA:

(i) When the SEZ unit had been set up on 12.03.2015; and
(ii) When the SEZ unit had been set up on 12.08.2020.

2. XYZ Ltd. has two units, one unit at Special Economic Zone (SEZ) and other unit at Domestic
Tariff Area (DTA). The unit in SEZ was set up and started manufacturing from 12.3.2014 and
unit in DTA from 15.6.2017. Total turnover of XYZ Ltd. and Unit in DTA is Rs.8,50,00,000 and
Rs.3,25,00,000, respectively. Export sales of unit in SEZ and DTA is Rs.2,50,00,000 and
Rs.1,25,00,000, respectively and net profit of Unit in SEZ and DTA is Rs.80,00,000 and
Rs.45,00,000, respectively.

XYZ Ltd. would be eligible for deduction under section 10AA for P.Y. 2022-23 for:-
(a) Rs.38,09,524
(b) Rs.19,04,762
(c) Rs.23,52,941
(d) Rs.11,76,471

3. A company has two units developing and exporting computer software. Unit A is in a
special economic zone and qualifies for exemption u.s.10AA. Unit B does not qualify for
exemption u.s.10AA. It furnishes the following information of its 3rd year of operation
ending on 31.03.2023:

Profit and Loss Account for the year ended 31.03.2023 (in lacs)

Unit A Unit B Unit A Unit B

Salaries 270 160 Exports 600 780
Admin exps 210 260 Domestic sales 100 220
Net profit 265 675 CCS 14 60
Duty drawback 19 35
Profit on sale of
import license 12 -
 157

Unit A: Expenses of Rs.12 lakhs are disallowable u.s.43B and foreign exchange received
into India by 30.09.2023 amounts to Rs.520 lakhs. Export of Rs.600 lakhs includes
insurance and freight of Rs.100 lakhs. Export realization of Rs.520 lakhs includes
insurance and freight of Rs.70 lakhs.

Unit B: Foreign exchange received into India by 30.09.2023 amounts to Rs.690 lakhs.
Expenses of Rs.60 lakhs are disallowable under the Income tax Act. Compute total
income.

4. X company engaged in developing and exporting software is having two units, namely Unit-
A and Unit-B. Unit-A is setup in Special Economic Zone (SEZ) and Unit-B does not fall
under section 10AA. Company furnishes the following information relating to its 3rd year
of operation ended on 31.03.2023:
(in ₹ lakhs)

Items Unit-A Unit-B

Export Sales 600 780

Domestic Sales 100 220
Duty Draw Back 19 35
Profit on sale of Import Entitlement 12 NIL
Salaries paid 270 160
Other expenses 210 260
Net Profit of the year 251 615

Additional Information:

Unit-A: Expenses of ₹ 12 lakhs are disallowable u.s.43B and sales proceeds in convertible
foreign exchange received in India by 30.09.2023 amounted to ₹ 520 lakhs. Export sales of
₹ 600 lakhs include freight of ₹ 100 lakhs and realization of ₹ 520 lakhs includes amount
of insurance and freight charges of ₹ 70 lakhs.

Unit-B: Realization of export sales in convertible foreign exchange received in India by

30.09.2023 was of ₹ 690 lakhs. Expenses charged and are to be disallowed as per section
40A(3) of Act are of ₹ 60 lakhs.

Compute the total income for A.Y.2023-24 after claiming deduction u.s.10-AA.
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5. Mr.Suraj (aged 48 years) furnishes the following particulars for the previous year 2022-23 in
respect of an industrial undertaking established in "Special Economic Zone" in March 2017. It
began manufacturing in April 2017.

Particulars (Rs.)
Total sales 85,00,000
Export sales [proceeds received in India] 45,00,000
Domestic sales; 40,00,000
Profit from the above undertaking 20,00,000

Export Sales of F.Y. of 2022-23 include freight and insurance of Rs.5 lacs for delivery of goods
outside India.

Based on the facts of the case scenario given above, choose the most appropriate answer to the
following questions:

i. Compute the amount of deduction available u.s.10AA to Mr.Suraj for A.Y. 2023-24.

(a) Rs.10,00,000
(b) Rs.4,70,577
(c) Rs.5,62,500
(d) Rs.5,00,000

ii. Compute the amount of export turnover and total turnover for purpose of computing
deduction under section 10AA for A.Y. 2023-24.

(a) Rs.45,00,000 and Rs.85,00,000, respectively

(b) Rs.40,00,000 and Rs.80,00,000, respectively
(c) Rs.45,00,000 and Rs.80,00,000, respectively
(d) Rs.40,00,000 and Rs.85,00,000, respectively

iii. Assume for the purpose of this question only that Mr.Suraj established SEZ Unit and
began manufacturing in April, 2019. Compute the amount of deduction available under
section 10AA for A.Y. 2023-24.

(a) Rs.10,00,000
(b) Rs.9,41,154
(c) Rs.11,25,000
(d) Rs.5,00,000
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CHAPTER 8: ALTERNATIVE MINIMUM TAX (AMT)

1. AMT provisions shall apply to any person (individual, huf, firm) who has claimed deduction
under:
a. Section 10AA; or
b. Section 35AD; or
c. Section 80IA to Section 80RRB

2. AMT provisions are not applicable if the assesse has opted to pay tax as per the new tax regime
u.s.115BAC.

3. For Individuals and HUF, AMT provisions shall not apply if the “Adjusted Total Income” of such
person does not exceed Rs.20 lakhs.

4. AMT rate is 18.5% on “adjusted total income” plus surcharge and education cess

5. For each assessment year, two computations are required to be made:

a. Total income under the normal provisions of the Act; and
b. Adjusted Total Income under the provisions of Section 115JC

6. Tax Liability is computed as under:

a. Tax on Total Income as per the normal provisions; and
b. AMT @ 18.5% on the Adjusted Total Income (whichever is higher)

7. Adjusted Total Income is computed as follows:

Step 1: Determine taxable income as per the normal provisions of the IT. Act xxx

Step 2: Add: Deduction claimed (3 items):

u.s.80IA to 80RRB xxx
u.s.10AA xxx
u.s.35AD (net of depreciation) xxx

Step 3: Adjusted Total Income xxx

8. AMT CREDIT: Excess tax paid on account of AMT shall be cfd. as “AMT Credit” for a period of
15 years and can be set off in the year in which regular tax is more than AMT.

9. The credit allowed to be set off will be restricted to the difference between the regular income
tax computed under normal provision of IT & the AMT.

10. Credit for AMT shall be available even in a year when the “Adjusted Total Income” is not more
than Rs.20 lakhs and there is no claim for deduction u.s.10AA or u.s.35AD or under chapter VIA.
 160

1. X & Co. is a partnership firm. The firm is eligible for deduction u.s.35AD of Rs.14,00,000
(because of this deduction the firm cannot claim depreciation u.s.32 of Rs.80,000). Business
income of the firm before deduction u.s.35AD and before depreciation of Rs.80,000 is
Rs.15,00,000. Deduction available u.s.80-IB is Rs.50,000. Income from other sources is
Rs.1,00,000. The firm donates Rs.90,000 to a political party. Find out the tax liability of the
firm for the A.Y. 2023-24.

2. ABC LLP, a limited liability partnership in India is engaged in development of software and
providing IT enabled services through two units, one of which is located in a notified Special
Economic Zone (SEZ) in Chennai. The particulars relating to previous year 2022-23 furnished
by the assesse are as follows:

Total Turnover: SEZ unit Rs.120 lakhs and the other unit Rs.100 lakhs
Export Turnover: SEZ unit Rs.100 lakhs and the other unit Rs.60 lakhs
Profit: SEZ unit Rs.50 lakhs and the other unit Rs.40 lakhs.

The assesse has no other income during the year.

i. Compute tax payable by ABC LLP for the Assessment Year 2023-24.
ii. Will the amount of tax payable change, if ABC LLP is an overseas entity?

3. PQR LLP, a limited liability partnership set up a unit in SEZ in the financial year 2018-19 for
production of washing machines. The unit fulfills all the conditions of Section 10AA.

During the financial year 2021-22, it has also set up a warehousing facility in a district of Tamil
Nadu for storage of agricultural produce. It fulfills all the conditions of Section 35AD. Capital
expenditure in respect of warehouse amounted to Rs.75 lakhs (including cost of land Rs.10
lakhs), the payment of which has been made by an account payee bank draft. The warehouse
became operational with effect from 1 st April, 2022 and the expenditure of Rs.75 lakhs was
capitalized in the books on that date.

Relevant details for the financial year 2022-23 are as follows:

Profit of unit located in SEZ Rs.40,00,000

Export sales of above unit Rs.80,00,000
Domestic sales of above unit Rs.20,00,000

Profit from operation of warehousing facility (before

considering deduction u.s.35AD) Rs.1,05,00,000

Compute income tax (including AMT u.s.115JC) payable by PQR LLP for A.Y.2023-24.
 161

4. Manohar & Hari LLP is engaged in multiple business activities. The following information is
furnished for the year ended 31.03.2023:

i. Net profit as per profit and loss account ₹ 52 lakhs.

ii. Working partner salary debited to P&L A/c. ₹ 40,20,000 as authorized by the LLP
agreement

iii. Interest on capital paid to partners @ 15% ₹ 15,75,000. This is authorized by the LLP
agreement.

iv. Depreciation debited to P&L A/c ₹ 8,10,000. Eligible depreciation u.s.32 ₹ 10,35,000

v. The net profit includes profit from undertaking located in SEZ (4th year) ₹ 20 lakhs. The
total turnover is ₹ 200 lakhs and the export turnover is ₹ 150 lakhs.

vi. The unit has earned income from generation of power and the eligible deduction under
section 80-IA amounts to ₹ 8 lakhs.

You are required to compute the total income of the firm and also the alternative minimum tax
(AMT) and decide the final tax liability of the firm for the A.Y. 2023-24.

5. ACHARYA LLP, a limited liability partnership in India is engaged in development of software

and providing IT enabled services through two units, one of which is located in a notified
Special Economic Zone (SEZ) in Chennai (commenced from 01.04.2012). The particulars
relating to previous year 2022-23 furnished by the assessee are as follows:

Total Turnover: SEZ unit ₹ 120 lakhs and the other unit ₹ 100 lakhs
Export Turnover: SEZ unit ₹ 100 lakhs and the other unit ₹ 60 lakhs
Profit: SEZ unit ₹ 48 lakhs and the other unit ₹ 42 lakhs

Amount debited to Profit and Loss Account towards Special Economic Zone Re-investment
Reserve Account ₹ 21 lakhs.

The Assessee has no other income during the year.

i. Compute tax payable by ACHARYA LLP for the Assessment Year 2023-24.
ii. Will the amount of tax payable change, if ACHARYA LLP is an overseas entity?

Answer:
The provisions of alternate minimum tax would also be applicable to an overseas LLP. Hence,
the tax liability would remain the same even where ACHARYA LLP is an overseas entity.
 162

6. Mrs.M commenced the business of warehousing of food grains on 1st April, 2022. The under-
mentioned summarized data relating to the warehousing business are furnished to you:

Particulars Rs. (in lacs)

Net profit from business 126.50

Capital expenditure on Land and Building (35+20) incurred

on 19.05.2022 55

Warehouse building additional cost incurred towards

above building (completed on 20.12.2022) 50

The assessee did not derive any other income during the year. You are required to compute the
total income and the tax payable by the assessee for the A.Y. 2023-24. CMA final June 2019.

7. M/s.Fit & Fair, a partnership firm, commenced operations of the business of a new three-star
hotel in Pune, Maharashtra on 1.4.2022. The firm consisting of two working partners, with
equal shares, reports a net profit of Rs.26,00,000 after deduction of the following items:

i. Depreciation as per books of accounts Rs.15,80,000.

ii. Interest on capital @ 15% per annum (as per the deed of partnership). The
amount of interest is Rs.50,00,000.
iii. Interest on loan includes an amount of Rs.6,00,000 paid to Mr.Rajveer, a resident,
on which tax was not deducted.

The firm purchased a new motor car for the above business for Rs.7 lakh on 10 th March, 2022
and capitalized the same in its books of account as on 1st April, 2022. Further, in April, 2022, it
incurred capital expenditure of Rs.2 crores (out of which Rs.1.50 crores was for acquisition of
land and Rs.50 lakhs on building) exclusively for the above business. The firm also installed
and put to use new centralised air conditioners on 15.5.2022 costing Rs.3,20,000. The capital
expenditure incurred by the firm were paid by account payee cheque or use of ECS through
bank account.

The firm also has another existing business of running a four-star hotel in Mumbai, which
commenced operations fifteen years back, the profits from which are Rs.41,38,000 computed
as per Income-tax Act for the A.Y.2023-24.

Compute total income and tax payable by the firm for the A.Y.2023-24, assuming that the firm
has fulfilled all the conditions specified for claim of deduction under section 35AD and opted
for claiming deduction under section 35AD; and has not claimed any deduction under Chapter
VI-A under the heading “C. – Deductions in respect of certain incomes”.
 163

8. Mr.Uttam presents you following data related to his tax liability for A.Y. 2023-24:

Particulars Rs. in lakhs

Tax Liability as per regular provisions of Income-tax Act. 1961 15
Tax Liability as per section 115JC 12
AMT credit brought forward from A.Y. 2022-23 5

What shall be the tax liability of Mr.Uttam for A.Y. 2023-24?

a) Rs.12 lakhs
b) Rs.15 lakhs
c) Rs.10 lakhs
d) Rs.7 lakhs
 164

CHAPTER 9: TAXATION OF FIRMS

Under the Income tax Act, Firms are assessed to tax either as:
a) Firms assessed as such (PFAS); or
b) Firms assessed as AOP (PFAOP)

A firm is assessed as a firm (PFAS) only if it satisfies the following conditions given u.s.184:
a) There should be a partnership deed
b) Profit sharing ratio should be specified in the deed
c) A certified copy of the deed should be filed along with the return of income
d) There should not be any failure as mentioned in section 144 (Best Judgment Assessment)

If the above conditions are not satisfied then the firm will be assessed as PFAOP. In case if the
firm is assessed as AOP, the provisions of Section 40(b) shall not be applicable. Partner’s salary
and interest on capital shall be fully disallowed in the hands of AOP.

Tax rate applicable for a firm is 30% flat and education cess of 4%. Surcharge @ 12% if
taxable income exceeds Rs.1 crore. Firms are also subject to ALTERNATIVE MINIMUM
TAX (AMT) @ 18.5% on “adjusted total income”.

REMUNERATION:
Remuneration to partners allowed as deduction subject to provisions of section 40 (b).
Remuneration should be authorized by the partnership deed.
Remuneration will be allowed only if it is paid to “working partner”

Important: The payment of remuneration and interest should relate to a period falling after the
date of partnership deed. That means, the partnership deed cannot provide for payment of
remuneration and interest from retrospective effect.

INTEREST ON CAPITAL:
Interest paid to partners on their capital will be allowed up to 12% p.a. as per section 40 (b)
Interest payment should be authorized by the partnership deed.
Interest on capital can be paid to any partner (working partner or non-working partner)
No Tds shall be deducted on interest payment to partners

Important: Interest paid by the firm to its partners on their fixed capital account, current capital
account and loan account is allowable as deduction to the firm provided the partnership deed
specifically authorizes the payment of such interest.

Note: Where an individual is a partner in a firm in a representative capacity, then interest paid by the
firm to him in individual capacity, shall not be taken into account for the purposes of section 40(b).

e.g. X, Y and HUF of Z (represented by Z) are partners with equal share in a firm. The firm paid interest
amounting to Rs.2 lakhs to Z on loan provided by him in his individual capacity @ 16% p.a. Discuss whether
interest paid to Z is subject to provisions of section 40(b).

Answer: The firm pays interest on capital to Mr.Z in his individual capacity. Mr.Z is not a partner in the
firm. HUF of Z is a partner (represented by Z). Therefore, the provisions of section 40(b) are not applicable.
 165

Note: Where an individual is a partner in a firm in his individual capacity, then interest paid by the
firm to such individual shall not be taken into account for the purposes of section 40(b), if such
interest is received by him on behalf, or for the benefit of any other person.

e.g. XYZ, a firm, consisting of three partners namely, X, Y and Z, carried on the business of textiles. X, Y
and Z were partners in their individual capacity. The firm paid interest amounting to Rs.20,000 to the
HUF of partner X @ 18% per annum. Discuss whether interest paid to HUF is subject to section 40(b).

Answer: Mr.X is the partner in the firm and not HUF. Therefore, interest paid to HUF is not subject to
the provisions of section 40(b).

Format for computing business income:

Net Profit as per Profit and Loss Account xxx
Add: Disallowances (if debited) xxx
Add: Remuneration to partners debited in P & L A/c. xxx
Add: Interest on capital in excess of 12% p.a. xxx

Less: Incomes considered separately xxx

Less: Depreciation as per Income tax rules xxx
Less: Unabsorbed depreciation to the extent deductible xxx
Book Profit of the firm xxx
Less: Remuneration to working partners as per section 40 (b) xxx
xxx
Add: Unabsorbed depreciation xxx
Income from business xxx

“Book Profit” means profit computed after all admissible expenses, depreciation u.s.32 and
interest on capital to the extent allowed u.s.40(b) but before remuneration.

Provisions of section 40 (b):

On the first 3,00,000 of book profit: 90% of book profit or Rs.1,50,000 whichever is higher
On the balance: 60% of book profit

Remuneration to the extent allowed u.s.40 (b) and interest on capital to the extent of 12% p.a.
will be taxed in the hands of the partners under the head “Business or Profession.”

Share of a partner in the income of the firm is fully exempt from tax u.s. 10 (2A). Hence while
computing his individual income, his share of profit from the firm will not be included.

Important: The firm is not eligible to carry forward loss of a retired or a deceased partner

In case of a Limited Liability Partnership: All provisions applicable to a general firm will
equally apply for a LLP. LLPs cannot opt for Section 44 AD.
 166

Problems:
1. T and Co, is a firm consisting of two partners L and M, with equal shares. During the earlier year, N
was also a partner with equal share and he had retired from the firm w.e.f. 1.4.2022.

The firm has two units, one in SEZ and another in a DTA. The following details are available for the
year ended 31.03.2023:
(in lacs)
DTA unit Both units
Export sales 150 420
Domestic sales 180 210
Net profit 50 200

The firm has given the following donations:

a. Rs.50,000 to Prime Minister’s Relief Fund by an account payee cheque.
b. Rs.25,000 in cash to a public charitable trust registered under section 12AA of the IT Act.

The unit in DTA is engaged in trading activities. The SEZ unit was set up on 18.12.2016 and is
eligible for deduction u.s.10AA of the IT Act.

Compute the total income of the firm and tax payable for assessment year 2023-24, if the brought
forward losses or allowances of the DTA unit relating to assessment year 22-23 are as under:
Business loss Rs.30,00,000
Depreciation Rs.20,00,000

2. M/s.PQR & Co., a firm carrying on business, furnishes the following for the previous year 22-23:

Particulars Rs.
Book profits (before setting off unabsorbed depreciation
and brought forward business loss) 270000
Unabsorbed depreciation of previous year 2015-16 120000
Brought forward business loss of previous year 2021-22 200000

Compute the amount of remuneration allowable u.s.40(b) from the book profit.

3. A partnership firm submits the following for Assessment Year 2023-24:

Profit as per P & L A/c. 3,60,000

Depreciation as per books of a/c 20,000

Depreciation as per Income Tax Act (current year) 40,000

Unabsorbed depreciation 3,50,000

Bought forward loss 13,000

Expenditure not allowable as per IT Act debited in P & L A/c 30,000

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Interest paid to the partners debited in P & L A/c

Partner A (24%) 10,000
Partner B (24%) 16,000

Remuneration paid to the partners debited in P & L A/c

Partner A 1,40,000
Partner B 1,10,000

Other incomes of partners:

Partner A 4,20,000
Partner B 2,30,000

A & B share profits and losses equally. Compute the taxable income of the firm and its partners.

4. Vishwa & Co., a firm has earned a net profit of ₹ 6.2 lakhs after debiting the following items:-

(₹ in lakhs)
(a) Depreciation as per books for the current year 2
(b) Interest to partners at 15% 9
(c) Remuneration to working partners 7

Additional information:
(a) Depreciation for the current year as per Income-tax Rules, 1962 4
(b) Unabsorbed depreciation of AY 2022-23 pertaining to a business 3
which was discontinued
(c) Brought forward business loss of AY 2022-23 5
(d) Remuneration as per partnership deed to working Partners 8
(e) Interest to partners as per partnership deed 15%

You are required to compute the total income of the firm, when the firm files its return of income on
30.07.2023.

Assuming that a best judgment assessment under section 144 is made, what will be the total income
assessed? Dec 2019: CMA - F

5. A firm consisting of three partners R, Q, S, was engaged in the business of civil construction and
received the following amounts by way of contract receipts during the financial year 2022-23.

Particulars Amount
Contract work for supply of labour Rs.35,00,000
Value of materials supplied by the Government Rs.9,00,000

Each partner of the firm was entitled to draw Rs.3,000 per month by way of salary as authorized by the
terms of partnership deed. Interest of Rs.1,50,000 was also paid to partner R on the capital of
Rs.6,00,000 contributed by him.
 168

The profit as per books of accounts before deduction of salary to partners’ and interest to partner R
amounted to Rs.3,00,000. Compute the total income of the firm, applying the provisions of section
44AD, for A.Y.23-24.

Hint: For the purpose of section 44AD, “Gross receipts” will not include the value of materials supplied by
client (CBDT Circular). Therefore, in this case, gross receipts would be only Rs.35 lakhs.

6. The partnership deed of a firm does not specify the remuneration payable to each individual working
partner but lays down the manner of fixing the remuneration as follows:

In case the book profits of the firm are up to Rs.3 lakhs, then the partners would be entitled to
remuneration up to Rs.1.50 lakhs or 90% of book profits, whichever is more. In respect of balance
book profits, it is 60%.

“Book profits” shall be computed as defined in Section 40(b) of the Income-tax Act. In case there is a
loss in a particular year, the partners shall not be entitled to any remuneration.

Remuneration payable to the working partners should be credited to the respective accounts at the
time of closing of the accounting year and the working partners shall be entitled to equal remuneration.
Can the firm claim deduction in respect of remuneration paid to the working partners?

Answer:
As per section 40(b), payment of remuneration to a working partner which is authorized by the partnership
deed is allowable as a deduction to the extent it does not exceed the limits specified is section 40(b).

The issue under consideration is whether, in a case where the partnership deed does not specify the
amount of remuneration payable to each partner, but lays down the manner of fixing the remuneration, can
payment of such remuneration be allowed as deduction.

CBDT Circular has clarified that no deduction under section 40(b) will be admissible unless the
partnership deed either specifies the amount of remuneration payable to each individual working partner
or lays down the manner of quantifying such remuneration.

Therefore, in this case, since the partnership deed lays down the manner of fixing the remuneration payable
to working partners, the firm is entitled to claim deduction of remuneration paid to working partners,
subject to the limits specified in section 40(b)(v).

7. X & Co., a partnership firm consisting of three partners, enhanced working partner salary from ₹
25,000 per month for each partner to ₹ 50,000 per month for each partner. The increase in working
partner salary was authorized by the deed of partnership.

The Assessing Officer during the course of assessment contended that the remuneration paid to
working partners @ ₹ 50,000 per month for each partner is excessive and applied section 40A(2),
though the payment was within the statutory limit under section 40(b)(v). Decide the correctness of
action of the Assessing Officer.
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Answer:
The issue under consideration is whether remuneration paid to working partners as per the partnership
deed can be considered as unreasonable and excessive for attracting disallowance under section 40A(2) of
the Income Tax Act, 1961 even though the same is within the limits prescribed under section 40(b)(v).

The High Court observed that section 40(b) prescribes the limits of remuneration to working partners, and
deduction is allowable up to such limits while computing the business income. If the remuneration paid is
within the ceiling limit provided under 40(b)(v), then, provisions of section 40A(2) cannot be taken.

The Assessing Officer is only required to ensure that the remuneration is paid only to working partners, the
partnership deed provides for payment of such remuneration and the remuneration is within the limits
prescribed under section 40(b)(v). If these conditions are complied with, then the Assessing Officer cannot
disallow any part of the remuneration on the ground that it excessive or unreasonable.

8. A partnership firm with three equal partners authorized payment of monthly salary of Rs.1 lakh each to
all the partners w.e.f. 01.04.2022. Earlier, the partnership deed authorized payment of monthly salary
of Rs.50,000 each to all the partners. The business of the firm has more than doubled during the
financial year 2022-23 and the partners anticipating such increase in business/profit have changed
accordingly the condition for working partner salary.

The profit of the firm was Rs.50 lakhs for the year ended 31.03.2023 and the corresponding profit was
Rs.20 lakhs for the year ended 31.03.2022. The partners of the firm want to know whether increase in
payment of salary to working partners would be subjected to disallowance under section 40A(2).

Answer: Refer problem no.7 given above

9. Answer with reference to (i) Issue involved; (ii) Provisions applicable;

(iii) Analysis; and (iv) Conclusion.

Bose & Co. is a partnership firm consisting of 4 partners with equal shares. The partnership firm is
engaged in execution of civil construction contracts with State Government authorities.

The partnership firm deposited ₹ 50 lakhs in State Bank of India (SBI) for the purpose of obtaining
guarantee as and when the tenders were applied by the firm. It also kept ₹ 10 lakhs in fixed deposit
with Canara Bank, being the surplus funds of the firm. The firm credited interest on bank deposits of
₹ 4,00,000 from SBI and ₹ 80,000 from Canara Bank in Profit and Loss account and computed
working partners' salary based on the resultant book profit.

The Assessing Officer wants to tax interest incomes as income under the head 'other sources' and
accordingly reduced the amount allowable by way of working partners' salary. Is the action of the
Assessing Officer tenable in law?
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Answer:

(a) Issue Involved: The issue under consideration is whether the following interest income would be
taxable under the head 'Profits and Gains from Business or Profession' or under the head 'IFOS':

(1) interest income of ₹ 4 lakhs on deposit made with bank for obtaining bank guarantee to carry on
business; and

(2) interest income of ₹ 80,000 on fixed deposits made out of surplus funds

(b) Provision applicable: As per the provisions of section 40(b), salary to a working partner is deductible
based on the book profits of the firm. In computing the book profits, only items chargeable as business
income alone can be included, and not those chargeable under the head "IFOS".

(c) Analysis: The interest income from the deposits made by the firm for the purpose of obtaining
guarantee, as and when tenders were applied by it, is linked to the business of the firm. Making
deposits is an essential requirement for obtaining the bank guarantee which was necessary to apply
for tenders. If the firm had not furnished bank guarantee, it would not be eligible for applying for the
tenders. Such interest income would, therefore, be taxable under the head "Profits and gains of
business or profession'. Case Law. However, the interest amount on fixed deposits made out of
surplus funds available with the firm would be chargeable to tax under the head "IFOS".

(d) Conclusion: Applying the rationale of the above court rulings to the facts of the present case, the action
of the Assessing Officer in taxing the interest of ₹ 4 lakhs on deposit made with the bank, for obtaining
guarantee for applying for tenders, under the head "Income from Other Sources" and accordingly,
reducing the amount allowable by way of working partners' salary, is not tenable in law. However,
similar action relating to interest income of ₹ 80,000 on fixed deposits made out of surplus funds with
the firm, is correct/tenable in law.

10. M/s.HIG, a firm, consisting of three partners namely, H, I and G, carried on the business of purchase
and sale of television sets in wholesale and manufacture and sale of pens under a deed of partnership
executed on 01.04.2016. H, I and G were partners in their individual capacity.

The deed provided for payment of salary amounting to Rs.1,50,000 each to H and G, who were the
working partners. A new deed of partnership was executed on 01.10.2022 which, apart from providing
for payment of salary to the two working partners as mentioned in the deed executed on 01.04.2016,
for the first time provided for payment of simple interest @ 12% per annum on the balances standing
to the credit of the capital accounts of partners from 01.04.2022.

The firm was dissolved on 31.03.2023 and the capital assets of the firm were distributed among the
partners on 20.04.2023.

The net profit of the firm for the year ending 31.03.2023 after payment of salary to the working
partners and debit/credit of the following items to the Profit and Loss Account was Rs.10,000:

a) Interest amounting to Rs.1,00,000 paid to the partners on the balances standing to the credit of
their capital accounts from 01.04.2022 to 31.03.2023.

b) Interest amounting to Rs.25,000 paid to the partners on the balances standing to the credit of
their current accounts from 01.04.2022 to 31.03.2023.
 171

c) Interest amounting to Rs.20,000 paid to the Hindu undivided family of partner H @ 18 % p.a.

d) Payment of Rs.5,000 towards bribe.

e) Rs.30,000 being the value of gold jewellery received as gift from a manufacturer for achieving
sales target.

f) Depreciation amounting to Rs.15,000 on motor car bought and used exclusively for business
purposes, but not registered in the name of the firm.

g) Depreciation amounting to Rs.37,500 of new machinery bought and installed for manufacture of
pens on 01.11.2022 at a cost of Rs.5,00,000.

h) Interest amounting to Rs.25,000 received from the bank on fixed deposits made out of surplus
funds.

The firm furnishes the following information relating to it:

i. Closing stock-in-trade was valued at Rs.60,000 as per the method of lower of cost or market
rate consistently followed by it. The market value of the closing stock-in-trade was Rs.65,000.

ii. Brought forward business loss relating to the AY 2022-23 was Rs.30,000.

iii. The fair market value of the capital assets as on 31.03.2023 was Rs.20,00,000 and the cost of
their acquisition was Rs.15,00,000.

Compute the total income of M/s. HIG for the assessment year 2023-24.

Answer:
The partnership deed provides for payment of interest only on balances in capital accounts of partners.
As such, the interest paid on the balances standing to the credit of the current accounts of partners is not
allowable u.s.40(b). Case law.

Depreciation on motor car is allowable though not registered in the name of the firm. Supreme Court

As per ICDS II: Valuation of inventories: Closing stock has to be valued at net realizable value in the case
of a dissolved firm. As such, the closing stock-in-trade of the firm has to be valued at net realizable value.

11. Anushtup Chandra, Balram and Vasudev were partners in a partnership firm, engaged in wholesale
grains trade. On 30.06.2022, it was agreed that the firm to be dissolved from the close of business
hours that day and that Mr.Vasudev was entitled to continue the business of the firm w.e.f. the next day.
One of the terms for dissolution was that the stock as on 30.06.2022 would be valued at the cost price
of Rs.10 lacs, despite the market value being Rs.12 lakhs.

You are required to examine, whether in computing the income of the dissolved firm, the stock can be
valued at Rs.10 lakhs, since it has been so agreed upon and the business of the firm is continued by a
partner. CA Final
 172

Answer:
In case of dissolution of a partnership firm, ICDS II on Valuation of Inventories requires the inventory
on the date of dissolution to be valued at the net realizable value, whether business is discontinued or
not.

Therefore, if the firm is dissolved on 30.06.2022, the inventory on the date of dissolution has to be
valued at the net realizable value of Rs.12 lakhs as per ICDS II, even though one of the partners is
continuing the business of the firm.

OBJECTIVE TYPE QUESTIONS:

1. Tax payable by a firm whose total income is Rs.11 crores is Rs. _____________ crores.

(A) Rs.3.73
(B) Rs.3.39
(C) Rs.3.84
(D) None of the above.

Hint: 11 crores x 30% + 12% surcharge + 4% cess (option C)

2. M/s.Thakural & Sons paid Rs.11,00,000 as remuneration to its partners. The same was in accordance with
partnership deed. Partners are also entitled to interest on capital @ 11% as per partnership deed. Total
interest paid during the year Rs.1,30,000. The book profit before interest on capital and remuneration is
Rs.37,00,000. The salary allowable as deduction to the firm is:

a) Rs.22,62,000
b) Rs.11,00,000
c) Rs.23,10,000
d) Rs.22,32,000

Answer:
Profit before deductions 3700000
Less: Int on capital @ 11% 130000
Book Profit 3570000

Max remn: (3570000 – 300000) x 60% + 270000 = Rs.2232000 (or) actual remuneration Rs.1100000
(whichever is less). Salary, allowable as deduction to the firm is Rs.1100000.

3. Mr.K is a working partner in a firm on behalf of his HUF and the HUF has contributed Rs.3,00,000 as its
capital contribution. Apart from this, K has given a loan of Rs.50,000 to the firm in his individual capacity.
The firm pays interest as per market rate of 15% per annum on capital as well as loan. Compute the amount
of interest that shall be allowed to the firm while calculating its business income assuming that the interest
is authorized by partnership deed.

a) Rs.42,000 c) Rs.52,500
b) Rs.51,000 d) Rs.43,500 Answer: d
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CHAPTER 10: NON-RESIDENT

INCIDENCE OF TAXATION:
ROR RNOR NR
 Income earned and received in India Taxable Taxable Taxable

 Income earned in India but received outside

India Taxable Taxable Taxable

 Income earned outside India but received in

India directly Taxable Taxable Taxable

 Income earned and received outside India Taxable Not taxable Not taxable

 Income earned and received outside India

from a business controlled from India Taxable Taxable Not taxable

 Past untaxed foreign income brought into India Not taxable Not taxable Not Taxable

1. Mr.Rupesh is a resident and ordinary resident has furnished the following particulars of income
earned during the previous year 2022-23:

Income from agriculture in Pakistan, received there but latter on Rs.86,000

is remitted to India Rs.3,41,000

Income from property in USA received outside India (out of this Rs.92,000
is used in Canada for meeting education expenses of his son and Rs.2,48,000
is latter remitted to India) Rs.3,40,000

Income from business in Iran which is controlled from New Delhi

(Rs.70,000 is received in India) Rs.4,05,000

Dividend paid by an Indian company but received outside India Rs.1,95,800

Profits from a business in New Delhi and managed from outside India
(60% of profit is received outside India) Rs.92,000

Profit on sale of a building in India but received in Nepal Rs.8,74,000

Pension from a former employer in India, received in Iran Rs.2,55,000

Gift in foreign currency from a friend received in India Rs.80,000

Find out gross total income for A.Y.2023-24. Cma final – Dec 2019
 174

RESIDENTIAL STATUS OF A FOREIGN COMPANY – POEM:

2. ABC Ltd, a software giant in India, set up a 100% subsidiary company by name SHD Inc. in
Switzerland on 1st April, 2022. The subsidiary company SHD Inc., is mainly engaged in the software
services, hardware services and data backup services in three different countries viz., Switzerland,
Sweden and India. The following information is furnished by SHD Inc. for FY 2022-23:

Particulars In Switzerland In Sweden In India

Value of assets as per books of account 24 12 24
(₹ in crores)
Number of employees working (in thousands) 30 10 28
Pay Roll expenditure (₹ in crores) 4 2.6 5.4
Total aggregate income earned ₹ 80 crores

I. Break up of total income:

a. ₹ 28 crores derived from the transactions where purchases are made from associated
enterprises and sold to non-associated enterprises;

b. ₹ 24 crores derived from the transactions where both purchases and sales are made from/to
associated enterprises;

c. ₹ 16 crores derived from the transactions where purchases are made from non-associated
enterprises and sold to associated enterprises;

d. ₹ 8 crores by way of income from capital gains on trading of shares;

e. ₹ 4 crores by way of interest from non-associated enterprises;

f. During F.Y. 2022-23, total 5 board meetings were held, 2 in India, 1 in Sweden and 2 in
Switzerland.

II. Based on the above information, determine the residential status of SHD Inc., applying the
provisions of POEM for the AY 2023-24.

Answer:
Residential status of a foreign company depends upon its “Place of Effective Management” (POEM). If
its POEM during that year is in India then it is treated as “resident”.

For determining the “Place of Effective Management” (POEM), the important criteria is whether the
company is engaged in “active business outside India or not”.

A company is said to be engaged in “ACTIVE BUSINESS OUTSIDE INDIA" only if it satisfies all the
conditions mentioned below:

 passive income is 50% or less of its total income; and

 less than 50% of its total assets are situated in India; and
 less than 50% of total employees are situated in India; and
 payroll expenses of employees in India is less than 50% of its total payroll expenditure; and
 Majority meetings of Board of Directors are held outside India
 175

Note 1: Passive income shall be the aggregate of:

a. Income from transactions (purchase and sales) between associated enterprises; and
b. Income by way of royalty, dividend, capital gains, interest and rental income whether
derived from associated or non-associated enterprises.

Note 2: Number of employees: Employees shall also include persons who are not directly
employed but performs functions similar to employees e.g. contract persons.

Passive income calculation:

Income from transactions between associated enterprises 24 crores
Capital gain on trading in shares 8 crores
Interest income 4 crores
36 crores

Passive income : Total income 36 crores/80 crores x 100 45%

Assets situated in India : Total assets worldwide 24 crores/60 crores x 100 40%
No. of employees in India : Total employees worldwide 28000/68000 x 100 41.18%
Payroll expenses in India : Total payroll expenses 5.4 crores/12 crores x 100 45%
Majority of Board meetings are held outside India. (2 in India and 3 outside India)

Therefore, applying the test of ACTIVE BUSINESS OUTSIDE INDIA, the POEM of SHD Inc. is outside
India and it is therefore a Non-Resident for A.Y.2023-24.

3. John Butler Inc., is a company incorporated in Colombo, Sri Lanka. 60% of its shares are held by
PQR Pvt. Ltd., a domestic company. John Butler Inc. has its presence in India also.

The data relating to John Butler Inc., are as under:

Particulars India Sri Lanka

Fixed assets at depreciated values for tax purposes (₹ in crores) 90 70
Intangible assets (₹ in crores) 40 180
Other assets (₹ in crores) 30 90

Income from trading operations (₹ in crores) 15 42

Income from investments (₹ in crores) 30 13

Number of employees (Residents in respective countries) 40 60

For POEM purposes, state whether,

i. The company shall be said to be engaged in 'active business outside India'.

ii. Because of increased operations in India, more manpower is needed. 30 more employees may
be required in this regard. The company can either take these employees directly in its roll or
can outsource the increased operation to an external agency which will engage the 15 employees
in its roll and finish the work for the company. Which choice will be better?
 176

Answer:
i. Residential status of a foreign company depends upon its POEM. If its POEM during that year is in
India then it is treated as resident. For determining the “Place of Effective Management” (POEM),
the important criteria is whether the company is engaged in “active business outside India or not”.

A company is said to be engaged in “ACTIVE BUSINESS OUTSIDE INDIA" only if it satisfies all the
following conditions:

 passive income is 50% or less of its total income; and

 less than 50% of its total assets are situated in India; and
 less than 50% of total employees are situated in India; and
 payroll expenses of employees in India is less than 50% of its total payroll expenditure; and
 Majority meetings of Board of Directors are held outside India

Note 1: Passive income shall be the aggregate of:

a. Income from transactions (purchase and sales) between associated enterprises; and
b. Income by way of royalty, dividend, capital gains, interest and rental income whether
derived from associated or non-associated enterprises

Note 2: Number of employees: Employees shall include persons who are not directly employed but
performs functions similar to employees e.g. contractual persons.

Now, as per the information given in the question:

a. The % of total assets in India to total assets all over the world is computed as under:
Total assets worldwide: 90 + 70 + 40 + 180 + 30 + 90 = Rs.500 crore
Total assets in India: 90 + 40 + 30 = 160 crore
Assets situated in India: 160/500 x 100 = 32% which is < 50%

b. The % of passive income to total income worldwide is computed below:

Passive income = Rs.43 crore (30 + 13) (investment income)
Total income = Rs.100 crore
% of passive income to total income: 43% which is < 50%

c. The % of employees in India to total employees worldwide: 40/100 x 100 = 40% < 50%

d. Assume that payroll expenses of employees in India is less than 50% of its total payroll expenditure;
and

e. Assume that majority of board meetings are held outside India.

Therefore: All the conditions of “ACTIVE BUSINESS OUTSIDE INDIA” are satisfied and hence the
POEM of John Butler Inc shall be outside India. John Butler Inc is therefore, treated as a non-resident
for A.Y.23-24.

ii. As per POEM Rules, employees shall include persons who are not directly employed but performs
functions similar to employees e.g. contractual persons. If 30 employees are employed in India, then,

Number of employees in India: % becomes 70/130 x 100 = 53.85%

 177

Then company shall not be said to have “ACTIVE BUSINESS OUTSIDE INDIA”. In such a case, John
Butler Inc shall be treated as resident for A.Y.23-24.

If outsourcing of work is done to an external agency which will engage 15 employees then number of
employees in India: % becomes 55/115 x 100 = 47.82%

The company shall be said to have “ACTIVE BUSINESS OUTSIDE INDIA”. In such a case the
company shall be regarded as non-resident for A.Y.2023-24. Therefore, the choice of outsourcing
is better.

NON-RESIDENT SPORTSPERSON:
4. During the financial year 2022-23, Mr.Nadal, a tennis professional and a non-Indian citizen
participated in India in a Tennis Tournament and won the prize money of Rs.15 lacs. He
contributed articles on the tournament in a local newspaper for which he was paid Rs.1 lac. He was
also paid Rs.5,00,000 by a Soft Drink company for appearance in a T.V. advertisement. Although his
expenses in India were met by the sponsors, he had to incur Rs.3,00,000 towards his travel costs to
India. He was a non-resident for tax purposes in India. What would be his tax liability in India for
A.Y.2023-24? Is he required to file his return of income?

Answer
U/s.115BBA, all the three items of receipts in India viz. prize money of Rs.15 lakhs, amount received
from newspaper of Rs.1 lakh and amount received towards TV advertisement of Rs.5 lakhs are
chargeable to tax. No expenditure is allowable against such receipts.

The rate of tax chargeable u.s. 115BBA is 20%, plus cess @ 4%. The total tax liability works out to
Rs.4,36,800 being 20.8% of Rs.21 lacs. Thus, Nadal will be liable to tax on the income earned in India.
Tds u.s.194E @ 20.8% shall be deducted.

He is not required to file his return of income if (a) his total income during the previous year consists
only of incomes arising u.s.115BBA and (b) the tax deductible at source have been deducted from
such incomes.

5. Smith, a foreign national and a cricketer came to India as a member of Australian cricket team for the
year ended 31st March, 2023. He received Rs.5 lakhs for participation in matches in India. He also
received Rs.1 lakh for an advertisement of a product on TV. He contributed articles in a newspaper
for which he received Rs.10,000. When he stayed in India, he also won a prize of Rs.20,000 from
horse racing in Mumbai. He has no other income in India during the year.

i. Compute tax liability of Smith for Assessment Year 2023-24.

ii. Are the incomes specified above subject to deduction of tax at source?
iii. Is he liable to file his return of income for Assessment Year 2023-24?
 178

i. Computation of tax liability of Smith for the A.Y.2023-24

Particulars ₹ ₹
Incomes taxable u.s.115BBA
Income from participation in matches in India 5,00,000
Advertisement of product on TV 1,00,000
Contribution of articles in newspaper 10,000

Income from horse races 20,000

Total income 6,30,000
Tax @ 20% u.s.115BBA on ₹ 6,10,000 1,22,000
Tax @ 30% on income of ₹ 20,000 from horse races 6,000
1,28,000
Add: Cess @ 4% 5,120
Total tax liability of Smith for the A.Y.2023-24 133,120

ii. Yes, the above income is subject to tax deduction at source.

Income referred to in section 115BBA (i.e., ₹ 6,10,000, in this case) is subject to tax deduction at
source @ 20.8% u.s.194E. Casual income is subject to tds @ 30% u.s.194BB. Since Smith is a non-
resident, the amount of tax to be deducted, would be increased by cess @ 4%.

iii. Section 115BBA provides that if the total income of the non-resident sportsman comprises of only
income referred to in that section and tax deductible at source has been fully deducted, it shall not
be necessary for him to file his return of income. However, in this case, Mr.Smith has income from
horse races as well. Hence, he is required to file his return of income for A.Y.2023-24.

PRESUMPTIVE TAXATION - NON-RESIDENTS:

SECTION 44 B: NON-RESIDENTS ENGAGED IN SHIPPING BUSINESS:

Applicability: Non-resident engaged in the business of operation of ships on the Indian

Ports

Estimated Income: 7.5% of gross receipts on account of carriage of passengers, livestock or

goods.

Note: “Gross receipts” include freight and also includes amount collected for
demurrage and handling charges. The amount should be either received in
India or should be in connection with carriage of passengers, livestock or
goods from a PORT IN INDIA (Originating port).
 179

6. Mr.Robert, a non-resident, (aged 38) operates a ship for the carriage of goods, passengers and
livestock between Dubai, Mumbai and Chennai. He provides you the following particulars for the
previous year 2022-23:

(i) Received Rs.200 lakhs in India for carriage of livestock from Mumbai to London.
(ii) Received Rs.50 lakhs in India for carriage of passengers from Dubai to Colombo.
(iii) Received Rs.65 lakhs in Dubai on account of carriage of goods from Chennai to Dubai.
(iv) Expenses incurred during the year in respect of operation of such ships Rs.195 Lakhs.
(v) Winning from horse races in India Rs.25 lakhs.

Compute the total income of Mr.Robert chargeable to tax in India for the AY-2023-24. Also, calculate
the tax payable thereon. May 2019 CA final

7. Mr.Roy, a non-resident, is engaged in business of shipping and operating its ships in Indian ports
during the previous year ending on March 31, 2023, had collected freight Rs.100 lakhs (collected in
US dollars) for the cargo booked for Paradeep Port (Odisha) 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 was discontinued
during the year 2021-22. 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. CWA F – D 19

SECTION 44 BBA: NON-RESIDENT OPERATING AN AIRCRAFT:

Applicability: Non-resident engaged in the business of operating an aircraft

Estimated Income: 5% of gross receipts on account of carriage of passengers or goods. The

amount should be either received in India or should be in connection with
carriage of passengers, livestock or goods from an airport in India.

8. Mr.Q, a non-resident, operates an aircraft between Singapore and Chennai. He received the
following amounts while carrying on the business of operation of aircrafts for the year ended
31.3.2023:

i. ₹ 2 crores in India on account of carriage of passengers from Chennai.

ii. ₹ 1 crore in India on account of carriage of goods from Chennai.
iii. ₹ 3 crores in India on account of carriage of passengers from Singapore.
iv. ₹ 1 crore in Singapore on account of carriage of passengers from Chennai.

The total expenditure incurred by Mr.Q for the purposes of the business during the year ending
31.3.2023 was ₹ 6.75 crores. Compute the income of Mr.Q chargeable to tax in India under the head
"Profits and gains of business or profession" for the assessment year 2023-24.
 180

EQUALIZATION LEVY – Section 165:

Facebook, Google, Yahoo, etc. are non-residents and do not have a permanent
establishment in India (i.e. do not have a fixed place of business in India through which
they carry on business).

A large number of:

a. persons resident in India and carrying on business or profession; and
b. non-residents having permanent establishment in India

make payments to Facebook, Google, Yahoo, etc. for online advertisement and digital
marketing. The above payers claim deduction of advertisement expenses as business
expenditure. The amount received by Facebook, Google, Yahoo, etc. is not taxable in India
as per DTAA since they do not have any permanent establishment in India. Now Indian tax
authorities are losing revenues since the payer gets the deduction of amount paid by him
and the amount received by Facebook, Google, Yahoo, etc. is not taxed in India. In light of
this, the Finance Act, 2016 has introduced the concept of EQUALISATION LEVY to get
revenue.

Rate of Equalization levy: An equalization levy @ 6% on the amount of consideration for

any specified service received or receivable by a non-resident from:

(i) a person resident in India & carrying on business or profession; or

(ii) a non-resident having a permanent establishment in India.

Meaning of specified service: "Specified service" means:

a. Online advertisement
b. Any provision of digital advertisement space or any other facility or service for the
purpose of online advertisement.

Limit:
Equalization levy shall not be applicable if the aggregate amount received by a non-
resident from the payer does not exceed Rs.1,00,000 in P.Y.

Permanent Establishment (PE): includes a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
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Problems:
9. R Ltd., Mumbai entered into the following agreements with various non-resident entities during the
previous year 2022-23:

i. Paid ₹ 4,00,000 to M/s.Neil Inc., a company based in USA for online advertisement of its
products. M/s.Neil Inc., does not have a Permanent Establishment in India.

ii. Paid ₹ 50,000 to Mr.David, a non-resident individual, against providing digital space for online
advertisement of its products.

Discuss the relevant provisions of Income-tax Act in respect of such agreements and also state the
tax implications of such payments. M-19

Answer:
i. R Ltd., an Indian company pays Rs.4,00,000 (> Rs.1,00,000) for online advertisement of its products
to M/s.Neil Inc., a non-resident entity which has no PE in India. Accordingly, R Ltd. is required to
deduct equalisation levy of ₹ 24,000 i.e., @ 6% of ₹ 4 lakhs, being the amount paid towards online
advertisement services. Non-deduction of equalisation levy would attract disallowance u.s.
40(a)(ib) of 100% of the amount paid to M/s.Neil Inc. while computing business income of R Ltd.

ii. In this case, equalisation levy is not chargeable as the amount of consideration of ₹ 50,000 for
digital space for online advertisement paid to Mr.David does not exceed ₹ 1,00,000.

10. ABC Ltd., an Indian company, is carrying on the business of manufacture and sale of teakwood
furniture under the brand name "PUREWOOD". In order to expand its overseas sales/exports, it
launched a massive advertisement campaign of its products. For the purpose of online
advertisement, it utilized the services of PQR Inc., a London based company. During the previous
year 2022-23, ABC. Ltd. paid ₹ 5 lakhs to PQR Inc. for such services.

Discuss the tax implications/TDS implications of such payment and receipt in the hands of ABC Ltd.
and PQR Inc., respectively assuming that PQR Inc. has no permanent establishment in India.

Answer:

Equalisation Levy provides a levy of 6% on the amount of consideration for specified services
received or receivable by a non-resident not having permanent establishment in India,

a) from a resident in India who carries out business or profession, or

b) from a non-resident having permanent establishment in India.

Equalisation levy shall not be levied:

a. Where the non-resident providing the specified services has a PE in India and the specified
services is effectively connected with such PE
b. The aggregate amount of consideration for specified service received or receivable during the
previous year does not exceed Rs.1 lakh.
c. Where the specified service is not for the purposes of carrying out businesses or profession.
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Where PQR Inc. has no PE in India:

In the present case, equalization levy @ 6% is chargeable on the amount of Rs.5,00,000 received by
PQR Inc., a non-resident not having a PE in India from ABC Ltd., an Indian company. Accordingly,
ABC Ltd is required to deduct equalization levy of Rs.30,000 i.e. @ 6% of Rs.5 lakhs, being the
amount paid towards online advertisement services provided by PQR Inc. Non-deduction of
equalization levy would attract disallowance u.s.40(a)(ib) of 100% of the amount paid while
computing business income of ABC Ltd.

Where PQR Inc. has PE in India and the service is effectively connected to the PE in India:
Equalisation levy would not be attracted where the non-resident service provider has a PE in India
and the service is effectively connected to the PE in India. Therefore, the ABC Ltd is not required to
deduct equalization levy on Rs.5 lakhs, being the amount paid towards online advertisement
services to PQR Inc. in this case.

However, tax has to be deducted by ABC Ltd at the rates in force u.s.195 in respect of such payment
to PQR Inc. Non-deduction of tax at source u.s.195 would attract disallowance u.s.40(a)(i) of 100%
of the amount paid while computing business income of ABC Ltd.
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CHAPTER 11: TAXATION ON DIVIDEND, BUY-BACK

Dividend received from domestic companies:
Dividend received from domestic companies (listed or unlisted) shall be taxed in the hands of the
shareholders. Tax shall be deducted at source @ 10% u.s.194. Interest expenditure shall be allowed as
deduction subject to limit of 20% of dividend income.

1. Mr.X aged, 61 years, received dividend of Rs.12,00,000 from ABC Ltd. in P.Y.2022-23. Interest on loan
taken for the purpose of investment in shares of ABC Ltd., is Rs.3,00,000. Income included in the hands of
Mr. X for P.Y. 2022-23 would be:–

(a) Rs.12,00,000
(b) Rs.9,60,000
(c) Rs.9,00,000
(d) Rs.2,00,000

DIVIDEND FROM A SPECIFIED FOREIGN COMPANY:

Applicable to: An Indian Company

Note: “Specified Foreign Company” means a foreign company in which

Indian company must hold 26% or more equity share capital.

Tax rate u.s.115BBD: 15% (plus applicable surcharge 7% or 12% and cess) on the gross
amount of dividend. Expenditure shall not be allowed. (removed)

From A.Y.2023-24: Dividend from a specified foreign company shall be taxable at

normal tax rates applicable to the company. Expenditure shall not
be allowed.

1. Madan Traders Ltd. Jaipur received Rs.200 lacs by way of dividend declared by Botham Co. Ltd of UK in
January, 2023. Madan Traders Ltd. has 26% shareholding in Botham Co. Ltd. The tax liability of Madan
Traders Ltd. (excluding surcharge and cess) on the dividend income would be:

a) NIL
b) Rs.62.4 lakhs
c) Rs.30 lakhs
d) Normal rate @ 25% Rs.50 lakhs Answer: option D

2. Alpha Ltd., Mumbai has 27% shareholding in Beta Pte. Inc. of Singapore. Alpha Ltd. received Rs.15 lakhs
(converted in Indian rupee) by way of dividend in October, 2022. The dividend so received is taxable in
the hands of Alpha Ltd. at

a) Nil, fully exempt

b) 10%
c) 15%
d) At normal rates applicable to the company Answer: option D
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3. ABC Ltd., an Indian Company, engaged in the business of manufacturing, shows a total income of
Rs.260 lakhs for the year ended 31.03.2023. ABC Ltd. received dividend of Rs.40 lakhs from XYZ
Inc., company incorporated in USA, in the month of October, 2022 in which ABC Ltd. holds 30%
of the shares, which is included in the total income. Compute tax liability of ABC Ltd. Assume
total turnover of ABC Ltd for the previous year 20-21 has not exceeded Rs.400 crores.

Section 2 (22) (e): LOAN TO A SHAREHOLDER - DEEMED DIVIDEND:

Where a closely-held company advances a loan:

a) to a “shareholder” who owns at least 10% equity shares in such company; or

b) to “any other person” for the benefit of such shareholder; or
c) to “any other concern” wherein such shareholder owns substantial interest in addition to
10% shareholding in the closely-held company.

then such loan or advance shall be deemed as dividend u.s.2(22)(e) to the extent of accumulated
profits of the company in the hands of the shareholder. Such dividend is taxable in the hands of
the shareholder and company shall not pay tax on such dividends.

Notes:
A closely-held company is a company in which public has no substantial interest (e.g. a private
company).

“Substantial interest” shall mean 20% share capital in case of a company or 20% share of
profits in case of any other concern.

Where “money-lending” is a substantial part of the business of the company (i.e. finance
business), deemed dividend provisions are not applicable.

CBDT Circular: provides that any loan or advance given for commercial purposes will not attract
2(22)(e).

Problems on Deemed Dividend:

4. Rahul holding 28% equity shares in a company took loan of Rs.5,00,000 from the same company.
On the date of granting the loan, the company had accumulated profits of Rs.4,00,000. The
company is engaged in some manufacturing activity.

a. Is the amount of loan taxable as deemed dividend, if the company is a company in which
the public are substantially interested?

b. What would be your answer, if the lending company is a private limited company (i.e.) a
company in which the public are not substantially interested?
 185

5. MNO Ltd. is a company, in which the public are not substantially interested. K is a shareholder of
the company holding 15% of the equity shares. The accumulated profits of the company as on
31.03.2023 amounted to Rs.80,00,000. The company lent Rs.10,00,000 to K by an account payee
bank draft on 01.10.2022. The loan was not connected with the business of the company. K
repaid the loan to the company by an account payee bank draft on 31.03.2023. Examine the
effect of the borrowal and repayment of the loan by K for the AY 2023-24.

6. Mr.Dhaval is in business of manufacturing customized kitchen equipments. He is also the

Managing Director and held nearly 65% of the paid-up share capital of Aarav Ltd. A substantial
part of the business of Dhaval is obtained through Aarav Ltd. For this purpose, Aarav Ltd. passed
on the advance received from its customers to Dhaval to execute the job work entrusted to him.

The Assessing Officer held that the advance money received by Dhaval is in the nature of loan
given by Aarav Ltd. to him and accordingly is deemed as dividend within the meaning of
provisions of Sec.2(22)(e) of the Income Tax act, 1961. The Assessing Officer, treated the
advance money as the deemed dividend. Examine whether the action of the Assessing Officer is
tenable in law.

Answer: CBDT Circular: Trade advances in the nature of commercial transactions would not be subject
to “deemed dividend” provisions u.s.2(22)(e).

7. On 20th Feb. 2023, Vaamana Textiles Pvt. Ltd has given a trade advance of Rs.50 lakhs to Mr.P, 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 Mr.P (the shareholder).

Answer: CBDT Circular: Trade advances in the nature of commercial transactions would not be subject
to “deemed dividend” provisions u.s.2(22)(e).

8. Discuss whether liability to deduct tax at source arises in the following:

Lumnous Pvt Ltd., whose accumulated profits are Rs.20 lakhs, wants to disburse a loan of Rs.25
lakhs to Mrs.Nisha, a resident shareholder holding 20% of the equity shareholding in the
company. Can the entire amount of loan be disbursed to the shareholder, keeping in mind the
provisions of the Income-tax Act, 1961? The Finance Manager feels that this being a pure loan
transaction, there is no bar for disbursing the entire amount. Is his view correct?
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Section 56(2)(viib):
Where a CLOSELY-HELD COMPANY issues shares to a RESIDENT at a PREMIUM and the ISSUE
PRICE is more than the FAIR MARKET VALUE then the difference between the issue price and
the fair market value shall be treated as income and therefore, chargeable to tax. Section
56(2)(viib)

Section 56(2)(viib) is attracted if the following two conditions are satisfied:

Condition 1: Shares are to be issued at a premium (not at par or discount) &
Condition 2: Issue price should be higher than the fair market value

9. Discuss the applicability of the provisions of section 56(2)(viib) in respect of the shares issued by
the following closely held companies to resident Indians:

Company Consideration received Face value FMV of a No. of shares

for issue of shares of a share share issued
Win (P) Ltd Rs.370 Rs.300 Rs.350 1,00,000
Gain (P) Ltd Rs.330 Rs.300 Rs.350 2,00,000
Profit (P) Ltd Rs.290 Rs.300 Rs.280 3,00,000
Top (P) Ltd Rs.310 Rs.300 Rs.275 4,00,000

10. MLX Investments (P) Ltd. was incorporated during P.Y. 2020-21 having a paid up capital of Rs.10
lakhs. In order to increase its capital, the company further issued 1,00,000 shares (having face
value of Rs.100 each) during the year at par as on 01.08.2022. The FMV of such share as on
01.08.2022 was Rs.85.

(i) Determine the tax implications of the above transaction in the hands of the company,
assuming it is the only transaction made during the year.

(ii) Will your answer change, if shares were issued at Rs.105 each?

(iii) What will be your answer, if shares were issued at Rs.105 and FMV of the share was
Rs.120 as on 01.08.2022?

BUY-BACK OF SHARES PROVISIONS:

In case of any company (listed or unlisted):

In the hands of the company:

As per section 115-QA, the company shall pay additional income tax @ 23.296% (20% + 12% +
4%) within 14 days on distributed income which shall be calculated as under:

Distributed income = Buyback price – Issue price

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In the hands of the shareholder:

The amount received by shareholders on Buyback of listed/unlisted shares shall be exempt
u.s.10(34A). No tax treatment in the hands of the shareholders.

11. Avimanyu, a resident individual held 25% equity shares in FMC Ltd., an unlisted Indian company.
The company's paid up share capital as on 31st March, 2022 was Rs.10 lakhs divided into 1 lakh
equity shares of ₹ 10 each issued at a premium of ₹ 20 each. The shares were allotted to the
shareholders on 1st October, 2012.

The company had gone for buyback of 30% of its shares on 30th April, 2021 as per the
provisions of the Companies Act, 2013. The company paid ₹ 60 per share on buy back.

Explain and compute the tax effect in the hands of FMC Ltd. and Avimanyu. Would there be
change in the tax liability if FMC Ltd. was listed on a stock exchange?

CII: 2012-13: 200 and for 2022-23: 331 CA final

Distribution of assets by a company to its shareholders at the time of liquidation:

12. Mr.Raghu purchased 10,000 equity shares of AB Avenues Private Limited on 25.05.2004 for ₹
1,24,300. The company went into liquidation on 31.07.2022. The following is the summarized
financial position of the company as on 30.07.2022.

Liabilities ₹ Assets ₹
60,000 equity shares of ₹ 10 each 6,00,000 Agricultural lands in urban area 22,00,000
General reserve 40,00,000 Cash at bank 32,22,200
Liability for income tax 8,22,200 ____________
54,22,200 54,22,200

The assets remaining after discharging liability for income-tax were distributed to the shareholders
in the proportion of their shareholding. The market value of agricultural land as on 31.07.2022 is ₹
60,00,000.

The agricultural land received as above was sold by Mr.Raghu on 28.02.2023 for ₹ 15,00,000. Discuss
the tax implications in the hands of the Company and Mr.Raghu. The cost inflation indices are F.Y.
2004-05: 113 and F.Y 2022-23: 331. Also compute the total income of Mr.Raghu for AY 23-24.

Answer:

Tax implication in the hands of the company:

Distribution of assets by a company to its shareholders at the time of liquidation is NOT regarded as
“transfer”. Consequently, there will be no capital gains in the hands of the company. (refer capital gains)

However, any distribution of assets by a company to its shareholders at the time of liquidation, to the
extent of accumulated profits (general reserve) shall be treated as dividend.
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Tax implication in the hands of the shareholder (Mr.Raghu)

Income from other sources:

Taxable amount of dividend (4000000 x 1/6) Rs.6,66,667

Capital Gains:
Agricultural land in urban area (market value) 60,00,000
Cash at bank (after payment of income-tax) 24,00,000
Total 84,00,000
Less: Accumulated profits assessed as dividend 40,00,000
Balance to be taxed as capital gains 44,00,000

Share of Mr.Raghu (deemed sale consideration) 7,33,333 (1/6th of Rs.44,00,000)

Less: Indexed cost of acquisition 3,64,100 (1,24,300 x 331/113)
Long term capital gain 3,69,233

On sale of agricultural land by Mr.Raghu:

Sale consideration 15,00,000
Less: Cost of acquisition (being market value of
the land on the date of distribution) 10,00,000 (1/6th of 60 lakhs)
Short term capital gain (< 24 months) 5,00,000

Other issues:
13. Ram and Rahim were Executive Directors of Saraswathi Tea Pvt. Ltd. In respect of a bank loan,
they gave their personal guarantee. The assessee company paid them guarantee commission of
Rs.1 lakh each. The Assessing officer feels that this is a disguised payment of dividend under
section 2(22) and is not a commission which is deductible as business expenditure. He has
disallowed the same. Is the action of the AO valid in law? CMA final

Issue involved:
Whether commission paid can be treated as payment of dividend to shareholders and be
disallowed while computing business income.

Provisions involved:
If commission is paid to shareholders in lieu of dividend, such payment can be disallowed while
computing business income of the assesse. Section 36(1)(ii).

Analysis:
In this case, guarantee commission is paid to directors who have given their personal guarantee
to the bank for availing loan by the company. The AO is not correct in treating this payment as
disguised payment of dividend, as dividend is paid to all shareholders and not only to Ram and
Rahim. The AO has to determine whether the transaction is real and genuine.

Conclusion:
The AO is not correct in treating the payment of guarantee commission as disguised dividend.
Such payment is deductible as business expenditure.
 189

14. Kaushiba Logistics Pvt Ltd., borrowed a sum of Rs.50 lakhs from a bank for business purposes.
For the sanction of the bank loan, two directors gave guarantee to the bank. The assessee paid
guarantee commission of Rs.80,000 to the two directors in this regard and claimed the same as
business expenditure. The AO has disallowed the same on the ground that this is an indirect
payment of dividend to the two directors. Is this correct? CMA final

For answer to 14: Refer answer to sum no.13.

15. MNO Ltd., a listed company, wanted some credit facilities from the bank for its business purpose.
The bank insisted on personal guarantee of the directors as a precondition for providing
financial assistance to the company. A resolution was passed for paying commission to the
directors and a sum of Rs.24.50 lakhs each was paid as commission calculated at the rate of 1.5%
of the principal sum, in respect of which personal guarantee was furnished by the directors to
the bank.

The assesse claimed the expenses as business expenditure. But applying section 36(1)(ii), the
AO held that if the amount was not paid to them as commission, the same would have been
payable as dividend and therefore the AO disallowed the commission of Rs.24.50 lakhs paid by
company to its employee directors. Is the action of the AO valid?

For answer to 15: Refer answer to sum no.13.

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CHAPTER 12: MAT PROVISIONS

TAX RATES OF A COMPANY ~ A.Y.2023-2024:
A. Domestic company:

Total turnover or Gross receipts Tax rate

Does not exceed Rs.400 crores for the P.Y.2020-21: 25% of total income
Exceeds Rs.400 crores for the P.Y.2020-21: 30% of total income

Note: Domestic companies can also opt for paying lower rate of tax @ 22% u.s.115BAA by
not claiming certain deductions and exemptions.

B. Foreign company (irrespective of turnover): 40% of total income

Surcharge rates:
Domestic company:
(a) Total income > Rs.1 crore but is ≤ Rs.10 crore: Surcharge 7%
(b) Total income is > Rs.10 crore: Surcharge is 12%

Foreign company
(a) Total income > Rs.1 crore but is ≤ Rs.10 crore: Surcharge 2%
(b) Total income is > Rs.10 crore: Surcharge is 5%

SECTION 115BAA - Concessional tax rate of 22%:

Who can opt section 115BAA: Any domestic company (existing or new companies engaged in any
type of business)

Tax rate: 22% + 10% surcharge (compulsory irrespective of income) + 4%

cess (25.168% effective rate) irrespective of turnover.

Conditions: Should be opted before due date of filing return of income.

Once option is exercised, it cannot be withdrawn for same or

subsequent assessment years

Note: A company eligible to exercise option u.s.115BAA can defer exercise

of such option to a future year, if it is availing sizable profit-linked or
investment-linked deductions or additional depreciation or MAT
credit in the relevant previous year.
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SECTION 115BAB for new companies:

Who can opt section 115BAB: A domestic company set up and registered on or after 01.10.2019
engaged in manufacturing activity or generating electricity.

Tax rate: 15% + 10% surcharge (compulsory irrespective of total income) +

4% cess (17.16% effective rate) irrespective of turnover.

Condition: Should commence manufacturing or generating electricity before

31.03.2024.

Should be opted before due date of filing return of income.

Option should be exercised in the very first year in which it is set up,
failing which it cannot exercise such option in future years.

Common points for both section 115BAA and section 115BAB:

a. Such companies are not subject to MAT

b. The following deductions are not available:

- Section 10AA (units in SEZ)
- Additional depreciation
- Section 35
- Section 35AD
- Section 35CCC
- Section 35CCD
- Chapter VI-A deductions (except section 80JJAA & section 80M)
- Set-off of unabsorbed depreciation and losses on account of above deductions

MINIMUM ALTERNATIVE TAX – MAT: U.S.115 JB

Every company shall pay tax at normal rate (30% or 25%) on its total income (or) at 15% of its
“book profits” (whichever is higher). In addition to this surcharge and cess is also payable. The
excess tax paid on account of MAT shall be carried forward as MAT credit to be set-off against
future tax liability.

Important: Companies opting to pay tax u.s.115BAA or 115BAB shall not be subject to MAT
 192

Computation of Book Profits ~ explanation 1 to section 115JB:

Net Profit as per Profit and Loss Account xxx

Add:
1. Income tax paid / provision for income tax (note 1) xxx
2. Proposed dividend xxx
3. Amount transferred to any reserve, by whatever name called xxx
4. Provision for losses of subsidiary companies xxx
5. Provision for unascertained liabilities (adhoc) (note 2) xxx
6. Expenditure in connection with an income exempt u.s.10 xxx
7. Depreciation debited xxx
8. Any decrease or diminution in the value of an asset (note 3) xxx
9. Provision for deferred tax xxx
10. Balance in revaluation reserve on sale of an asset (if not credited) xxx
11. Expenses relating to share of income being a member of AOP/BOI (note 7) xxx
12. Expenditure relating to royalty income in respect of patent u.s.115BBF (note 4) xxx

Less:
a. Amount withdrawn from any reserve credited to P and L account (note 5) xxx
b. Income exempt under section 10 (excluding section 10 AA) (note 6) xxx
c. Deferred tax xxx
d. Depreciation excluding increase on account of revaluation xxx
e. Transfer from revaluation reserve, to the extent it does not exceed the
amount of depreciation on account of revaluation of assets xxx
f. Bfd business loss or unabsorbed depreciation (wel as per books) xxx
g. Share of income from AOP or BOI (already taxed in the hands of AOP) (note 7) xxx
h. Income by way of royalty in respect of patent chargeable u.s.115BBF (note 4) xxx

BOOK PROFITS XXX

1. The following item is also to be added:

a. Interest charged under this Act (e.g. Interest u.s.234A, 234B or 234C)

The following items are not to be added:

a. Penalty payable under the IT Act or penalties under any other law
b. Interest paid under any other Act (e.g. int on delayed payment of GST)
c. Securities Transaction Tax or Commodities Transaction Tax

2. Examples of unascertained liabilities (any provision on ad-hoc basis):

E.g. Provision for gratuity, Provision for warranty, etc. These provisions shall not be added, if it is
made as per actuarial valuation or on scientific basis (becomes ascertained liability).

3. Examples of diminution (decrease) in the value of an asset:

Provision for doubtful debts; Permanent decrease in the value of investments

4. Royalty received from patents developed and registered in India shall be taxed @ 10% under
section 115BBF. Such royalty shall be reduced while computing book profits.
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5. Amount withdrawn from any reserve credited to P and L account

Amount withdrawn from any reserve, credited to P and L A/c, shall be reduced only if the reserve
was added to book profit earlier.

6. Incomes exempt u.s.10 are not subject to MAT (e.g. Agricultural income, etc). However,
income from units in SEZ are exempted u.s.10AA as per the normal provisions. But these units are
subject to MAT provisions and therefore required to pay income tax.

7. Company being a member of an AOP or BOI:

A partnership firm pays tax on its total income. Hence, share of profit received by a partner is
exempt from tax u.s.10(2A) and thereby not subject to MAT. Similarly, if AOP pays tax at
maximum marginal rate on its total income, share of income received by a company being a
member of AOP is not subject to MAT.

8. Important: Incomes that are taxed at a rate less than 15% shall not form part of book profits,
hence shall not be subject to MAT.

a. Royalty received from patents developed and registered in India u.s.115BBF: 10%
b. LTCG on sale of listed shares through the stock exchange: 10%
c. Income from transfer of carbon credits: 10%

9. MAT Credit shall be carried forward for a period of 15 years.

10. MAT provisions are also applicable for capital gains. Exemptions if any (e.g. Sec. 54EC) shall not
be available while computing book profit.

11. Interest u.s.234A, 234B & 234C is only after adjusting MAT credit if any.

12. In case of conversion of a company into a limited liability partnership, MAT credit shall not be
available to the successor LLP.

13. MAT provisions apply to foreign companies also. However, MAT provisions are not applicable to
a foreign company if:

a. The assesse is a resident of a country or a specified territory with which India has
DTAA and the assesse does not have a permanent establishment in India; or

b. The assesse is a resident of a country with which India does not have any DTAA and the
assesse is not required to seek registration under any law for the time being in force
relating to companies.
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Problems on MAT:
1. The net profit of ABP Ltd., as per Profit & Loss Account for the previous year 2022-23 is Rs.100 lakhs
after debiting/crediting the following items:

 Provision for income-tax: Rs.15 lakhs

 Provision for deferred tax: Rs.8 lakhs
 Proposed dividend: Rs.20 lakhs
 Depreciation debited to P&L Account is Rs.12 lakhs. This includes depreciation on revaluation of
assets to the tune of Rs.2 lakhs.
 Profit from unit established in Special Economic Zone: Rs.30 lakhs
 Provision for permanent diminution in value of investments: 2 lakhs

Bfd. losses and unabsorbed depreciation as per books of the company are as follows:

Previous Year Brought forward loss Unabsorbed Depreciation

(Rs. in lakhs) (Rs. in lakhs)
2019-20 2 5
2020-21 - 3
2021-22 10 2

Compute book profit of the company under section 115JB for Assessment Year 2023-24 assuming
that the company has not opted to pay taxes u.s.115BAA or 115BAB.

2. XYZ Limited’s Profit and Loss Account for the year ended 31 st March, 2023 shows a net profit of
Rs.75 lakhs after debiting/crediting the following items:

 Depreciation Rs.24 lakhs (including Rs.4 lakhs on revaluation)

 Interest to financial institution not paid before due date of filing return of income Rs.6 lakhs.
 Provision for doubtful debts Rs.1 lakh.
 Provision for unascertained liabilities Rs.2 lakhs.
 Transfer to General Reserve Rs.5 lakhs.
 Net agricultural Income Rs.16 lakhs.
 Amount withdrawn from Reserve created during 2018-19 Rs.3 lakhs.
(Book profit was increased by the amount transferred to such reserve in A. Y. 2019-20).

Other information:
Bfd. loss and unabsorbed depreciation as per books are Rs.12 lakhs and Rs.10 lakhs, respectively.

Compute minimum alternate tax under section 115JB for A.Y.2023-24. Assume that the
company has not opted to pay tax u.s.115BAA or u.s.115BAB.
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3. The Statement of Profit & Loss of Alpha Limited, a domestic company for the year ended 31st March,
2023 discloses a net profit of Rs.120 lacs after debiting/crediting the following items:

a. Provision for doubtful debts Rs.2.40 lacs

b. Provision for income tax Rs.18 lacs
c. Provision for deferred tax Rs.9 lacs
d. Depreciation Rs.15 lacs (including depreciation on revaluation of assets Rs.3 lacs.)
e. Profit from export in unit set up in Special Economic Zone Rs.22 lacs (eligible for deduction
under section 10AA)
f. Provision for losses of subsidiary company Rs.20 lacs
g. Profit on sale of land held as capital asset for 10 years Rs.10 lacs

The Company has informed you that the entire capital gain on sale of land was invested in bonds of
REC Limited within six months from the date of sale. Details of brought forward losses and
unabsorbed depreciation as per books of the company:

Previous Year Brought forward loss Unabsorbed depreciation

(Rs. in lacs) (Rs. in lacs)
2017-18 - 4
2018-19 2 3
2019-20 8 2

Compute book profit of the company under section 115JB for Assessment Year 2023-24.
Assume that the company has not opted to pay tax u.s.115BAA or u.s.115BAB.

4. The net profit as per the profit and loss account of XYZ Ltd., a resident company, for the year ended
31.3.2023 is Rs.190 lacs arrived at after making the following adjustments:

Particulars Rs. (in lacs)

i. Depreciation on assets 100
ii. Reserve for currency exchange fluctuation 50
iii. Provision for tax 40
iv. Proposed dividend 120

a. Net profit includes exempt income u.s.10 of Rs.10 lacs.

b. Provision for tax includes Rs.18 lacs of interest payable on income-tax.

c. Depreciation includes Rs.40 lacs towards revaluation of assets.

d. Amount of Rs.50 lacs credited to P & L account was drawn from revaluation reserve.

e. Balance of profit and loss account shown in balance sheet at the asset side as at 31.3.2022 was
Rs.30 lacs which includes unabsorbed depreciation of Rs.10 Iakhs.

Compute the book profits of the company for the year ended 31.3.2023 liable to tax under MAT.
Assume that the company has not opted to pay tax u.s.115BAA or u.s.115BAB.
 196

5. Sona Ltd., a resident company, earned a profit of Rs.15 Lakhs after debit / credit of the following
items to its Statement of Profit and Loss for the year ended on 31.3.2023:

i) Items debited to Statement of Profit and Loss:

No Particulars Rs.
1 Provision for the loss of subsidiary 70,000
2 Provision for doubtful debts 75,000
3 Provision for Income tax 1,05,000
4 Provision for gratuity based on actuarial valuation 2,00,000
5 Depreciation 3,60,000
6 Interest to financial institution (unpaid before filing of return) 1,00,000
7 Penalty for infraction of law 50,000

ii) Items credited to Statement of Profit and Loss:

No Particulars Rs.
1 Profit from unit established in special economic zone 5,00,000
2 Share in income of an AOP as a member 1,00,000
3 Agricultural income 75,000
4 Long term capital gains 3,00,000

Other information:
i) Depreciation includes Rs.1,50,000 on account of revaluation of fixed assets.
ii) Depreciation as per Income–tax Rules is Rs.2,80,000

iii) Balance of Statement of Profit and Loss shown in Balance Sheet at the asset side as at
31.03.2022 was Rs.10 lakhs which includes unabsorbed depreciation of Rs.4 lakhs

iv) The capital gain has been invested in specified assets under Sec.54EC.
v) The AOP, of which the Company is a member, has paid tax at maximum marginal rate
vi) Provision for income-tax includes Rs.45,000 of interest payable on income-tax.

Compute minimum alternate tax u/s.115JB of the Income Tax Act, 1961, for A.Y.2023-24.

6. A domestic company, Aman Ltd., furnishes the following particulars in respect of Assessment
Year 2023-24 and seeks your opinion on the application of section 115JB. Also compute the total
income and tax payable.
₹
1) Profit as per statement of profit and loss account as per Schedule III 215 Lakhs

2) Statement of Profit and Loss A/c includes:

a) Credits: Agricultural income 20 Lakhs

Excess realized on sale of land held as investment 30 Lakhs
 197

b) Debits: Depreciation on straight line method basis 100 Lakhs

Provision for loss of subsidiary company 60 Lakhs

3) Depreciation allowable as per the Income-tax Rules, 1962 150 Lakhs

4) Capital gain on sale of land mentioned above as computed under

Income-tax Act, 1961 40 Lakhs

5) Losses brought forward as per books of account and as per IT Act, 1961
Business loss 50 Lakhs
Unabsorbed depreciation 60 Lakhs

The company has represented to you that the excess realized on sale of land cannot form part of
the book profit for purpose of section 115JB. You will have to deal with this issue.

7. Viraj Exports Limited, a domestic company, earned profit of ₹ 95 Lakhs as per statement of
Profit and Loss for the year ended 31.03.2023, after debiting or crediting the following items:

₹
(i) Items debited to statement of profit and loss:
a) Provision for income tax (including interest of ₹
50,000) 5,00,000
b) Sales tax liability 70,000
c) Depreciation 4,00,000
d) Interest to financial institutions unpaid before due
date of filing of return of income 1,20,000
e) Reserves for currency exchange fluctuation 1,30,000
f) Penalty for infraction of law 60,000

(ii) Items credited to statement of Profit and loss:

a) Exempted income u.s.10 1,40,000
b) Long term profit on sale of rural agricultural land 10,00,000
c) Profit on unit established in SEZ 8,00,000
d) Net agricultural income 6,00,000
e) Royalty received from patents developed and
registered in India 40,00,000

Other information:
a) Depreciation as per the Income-Act, 1961 ₹ 3,50,000.

b) Depreciation (as per books) includes ₹ 1,90,000 on account of revaluation of assets.

c) Interest on borrowed capital ₹ 1,00,000 payable to Y, not debited to Profit and loss
account.
 198

d) Profit and Loss Account in balance sheet on the assets side as at 31.03.2022 was ₹
4,70,000 which included unabsorbed depreciation of ₹ 4,10,000.

e) The company is an eligible assessee as per the provisions of section 115BBF of the
Income-tax, 1961.

Compute minimum alternate tax under section 115 JB of the Income-tax Act, 1961.

8. Sony Textiles (P) Ltd., Surat earned a profit of ₹ 20 lakhs after debit / credit of the following
items to its statement of profit and loss for the year ended 31.03.2023

Particulars ₹
Items debited to Profit and Loss:
(i) Provision for the loss of subsidiary 2,00,000
(ii) Provision for doubtful debts 1,50,000
(iii) Provision for Income tax 3,00,000
(iv) Provision for Gratuity (based on actuarial valuation ₹ 5 Lakhs) 7,00,000
(v) Depreciation 5,60,000
(vi) Interest to financial institution (unpaid till filing of return on 01.12.2023) 2,50,000
(vii) Penalty for infraction of law 60,000
Items credited to Profit and loss:
(i) Royalty in respect of patent (chargeable to tax under Section 115 BBF) 6,00,000
(ii) Share income as partner in a firm 1,20,000
(iii) Agricultural income 75,000
(iv) Long term capital gains on sale of vacant land 4,00,000

Other information:
i. Depreciation includes ₹ 1,60,000 on account of revaluation of fixed assets.

ii. Depreciation as per Income-tax Rules is ₹ 2,80,000.

iii. Income tax liability on income computed as per regular provisions for the A.Y.2023-24 is
₹ 1,22,070 excluding tax on royalty chargeable to tax under section 115BBF.

Compute Minimum Alternate Tax under Section 115 JB of the Income-tax Act, 1961 for the
assessment year 2023-24 and tax credit eligible for carry forward by the company under the
section 115 JAA. CMA Final Dec 2017
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9. Sanvitha Manufacturing Industries Ltd., reports a net profit of Rs.15 Lakhs for the year ended
31.03.2023 after debit / credit of the following items:

A. Items debited to Profit and Loss Account: Rs.

Provision for income tax 5,00,000
Expenditure towards amalgamation of Cochin Industries P Ltd.,
Cochin in December 2022 8,00,000
Fees for technical services paid to foreign company without
deduction of tax at source and no TDS was remitted till the date
specified in Section 139 (1) 1,00,000
Provision for bad and doubtful debts 6,00,000
Depreciation 40,00,000

Cash payments for purchase of raw materials in excess of

Rs.10,000. Aggregate of such payments 7,00,000
Bank term loan interest (actually paid during the year and up to
the ‘due date’ for filing the return specified in section 139 (1)
Rs.3,00,000) 8,00,000
Rent paid for a branch premises owned by one of the directors
who has 22% stake in the company. (25% of the expenditure is
excessive to the prevailing market rent) 12,00,000

B. Items credited to Profit and Loss Account:

Revaluation reserve in respect of fixed assets 7,50,000
Agriculture income-net 3,50,000
Deferred tax 4,00,000

Additional information:
i) Depreciation debited to Profit and Loss Account given above includes Rs.10,00,000 in
respect of assets revalued.

ii) The following amounts are brought forward, relating to the Assessment Year 2022-23

Particulars As per Books As per Income-tax

Rs. Rs.
Business Loss 22,00,000 Nil
Unabsorbed depreciation 17,00,000 35,00,000

You are required to compute for the Assessment Year 2023-24

i) Income liable to tax under Section 115 JB of the Income Tax Act, 1961; and
ii) Total income chargeable to income tax, as per normal provisions Cma final – Dec 2015

Book profit u.s.115JB is Rs.4 lacs total income is Rs.840000

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10. Shakshitha Pvt. Ltd., furnishes the following summarized position of its profit and loss account
and pertinent additional information thereto, for the year ended 31.3.2023:

(₹ in lakhs)
i. Net profit as per books 26
ii. Share of income from an AOP 6
Expenditure debited in books for earning such income 0.8
iii. Compounding fee paid to corporation authorities 1.2
iv. Provision for income-tax 2
v. Provision for loss of foreign subsidiary 4
vi. CSR expenditure debited to P & L Account 14
vii. Royalty received relating to business
(chargeable at 10%) 6

viii. The brought forward business loss and depreciation are as under:

As per books As per IT Act

Business loss for AY 2021-22 4 12
Depreciation 3 11

ix. The members as well as their shares in the AOP in which Shakshitha Pvt. Ltd. is a member,
are specific and determinate.

x. In the current year, the depreciation charged as per books is the same as that of the one
allowable as per IT. Act, 1961, before considering the provisions of section 32(2).

Compute the books profits of the company and the tax on book profits under section 115JB for
the AY 2023-24. The company is not an Ind-AS compliant company.
(ACS Final – June 2018)
(CWA Final – Dec 2018)

Other problems in MAT:

1. Fun India Limited has a carried forward credit of Rs.2 lakhs under section 115JAA (3A) of the
Income-tax Act, 1961 from assessment year 2022-23. In the A.Y.2023-24, the company’s total
income and book profit under section 115JB are Rs.6 lakhs and Rs.7 lakhs, respectively.
Compute the tax payable by the company for A.Y.2023-24 and the amount to be carried forward
under section 115JAA. Assume applicable tax rate is 25% under normal provisions.

Answer: MAT credit can be adjusted only when company pays tax as per normal provisions.

Tax on total income @ 25% including cess Rs.1,56,000 whichever is higher

Tax on book profits @ 15% including cess Rs.1,09,200

Therefore, tax payable by Fun India Limited Rs.1,56,000

Less: MAT credit Rs.46,800 Balance credit to be cfd
Balance tax payable Rs.1,09,200 200000-46800 = 153200

After adjusting credit, tax liability cannot be less than Rs.1,09,200

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2. Maitri Jeans (P) Ltd. is in the business of manufacturing jeans. For the assessment year 2023–24,
it paid tax @ 15% on its book profit computed under section 115JB. The Assessing Officer
though satisfied that it is liable to pay book profit tax under section 115JB wants to charge
interest under sections 234B and 234C as no advance tax was paid during the financial year
2022-23. The company seeks your opinion on the proposed levy of interest. Advice.

Answer:
The issue under consideration is whether interest under section 234B and 234C of the Income-tax Act,
1961 can be levied where a company is assessed on the basis of book profits under section 115JB.

There is a specific provision in section 115JB providing that all other provisions of the Income-tax Act,
1961 shall apply to every assessee, being a company, mentioned in that section. Section 115JB is a self-
contained code pertaining to MAT, and by virtue of this specific provision, the liability for payment of
advance tax would be attracted. Therefore, interest u.s.234B and 234C would be attracted for failure on
the part of the company to pay advance tax on the basis of tax on book profits u.s.115JB.

3. In the context of provisions contained in the IT Act, 1961 examine the correctness of the
following: “Transfer pricing rules shall have no implication where income is computed on the
basis of book profits”.

The statement is correct.

For the purpose of computing book profit for levy of minimum alternative tax, the net profit shown in the
Statement of Profit and Loss prepared in accordance with the Companies Act can be increased /decreased
only by the additions and deductions specified in Explanation 1 to section 115JB. No other adjustments
can be made to arrive at the book profit for levy of MAT. The Explanation 1 to section 115JB does not
provide for adjustments for Transfer Pricing. Therefore, transfer pricing adjustments cannot be made
while computing book profit for levy of MAT. Hence, the statement that transfer pricing rules shall have
no implication where income is computed on the basis of book profits is correct.
 202

Loss under the head How to set-off current If carried forward, No. of years cfd Whether return has
year losses? how to set-off? to be filed in time?

House property Inter-source adjustment Only against HP income 8 Can be a belated return
(SOP or LOP) (no limit)

Inter-head adjustment
(max Rs.2 lakhs)

Business Loss:
Non-speculative business Inter-source adjustment Only against Business income 8 Yes
Inter-head adjustment

Speculative business loss Only against speculative Only against speculative

business income business income 4 Yes

Specified business loss Only against specified Only against specified

under section 35 AD business income business income Indefinitely Yes

Capital Loss:
Short-term capital loss Against any capital gains Only against capital gains 8 Yes

Long-term capital loss Against LTCG only Only against LTCG 8 Yes

LTCL on sale of listed

shares Against LTCG only Only against LTCG 8 Yes

Other Sources:
Loss from the activity of Income from the activity of Income from the activity of
owning and maintaining owning and maintaining owning and maintaining
race horses race horses race horses 4 Yes
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CHAPTER 13: SET-OFF AND CFD OF LOSSES

Step 1: Inter-source Adjustment:
Set-off within the same head of income

Step 2: Inter-head Adjustment:

Set-off against income from any other head of income

Step 3: Carry forward of a loss:

Unabsorbed loss (if any) will be carried forward.

Important points:
 Business loss cannot be set-off against salary income.

 House property loss can be set-off without any ceiling limit against HP income. However,
loss from HP can be set-off up to a maximum limit of Rs.2 lakhs against other heads of
income and balance loss if any shall be carried forward.

 Loss of a discontinued business can be carried forward and be set-off against income from
any other business.

 Meaning of unabsorbed depreciation: Business profits are insufficient to absorb the

entire amount of depreciation. Unabsorbed depreciation can be carried forward for any
number of years and can be set off against any head of income.

Order of set off if business profits are insufficient:

A. Current year capital expenditure on scientific research;
Current year depreciation;
Current year expenditure on family planning

B. Brought forward business loss

C. Unabsorbed depreciation;
Unabsorbed capital expenditure on scientific research;
Unabsorbed family planning expenditure

Compulsory filing of loss returns (Section 80): In order to claim the benefit of carry forward
of a loss, the assessee should file his loss return before the “due date” of filing return. However,
loss under the head “house property” & “unabsorbed depreciation” can be carried forward even
if the return is filed after the “due date”.
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Late filing of income tax return: Effect on losses:

1. A firm filed a return of income for the assessment year 2023-24 after expiry of due date, showing
business loss of Rs.3.35 lakhs, unabsorbed depreciation of Rs.1 lakh, loss from house property of
Rs.75,000 and loss of Rs.1.30 lakhs under the head “capital gains”. What is the effect of such
return of income?

LOSSES CAN BE CARRIED FORWARD ONLY BY THE PERSON WHO HAS INCURRED THE
LOSS. ANY EXCEPTIONS TO THIS RULE?

The following are the exceptions:

a. Where a business carried on by one person, is acquired by another person through

INHERITANCE. (refer problem no.2, 3 and 4)

b. Conversion of a private company into a limited liability partnership (LLP). Such losses can be
carried forward for a fresh period of 8 years and unabsorbed depreciation for an indefinite
period subject to certain conditions. (refer problem no.6 & 11)

c. Losses and unabsorbed depreciation of an amalgamating company can be set off against the
income of the amalgamated company if the amalgamation is within the meaning of section 72 A. A
fresh period of 8 years in case of losses (excluding speculative losses) and indefinite period in
case of unabsorbed depreciation is available to the amalgamated company. (refer problem no.5)

d. Loss of a demerged company can be cfd by the resulting company. Loss can be carried forward by
the resulting company only for the remaining number of years. (refer problem no.8)

2. R & Co., a sole proprietary concern of Mr.R got converted into partnership after his death on
02.04.2022 by his two sons and the business of R & Co., was continued to be carried in the same
manner. There were business losses of Rs.4.25 lacs till 31.03.2022. The net results of the
business for the year ended 31.03.2023 were profits of Rs.5 lacs. The partners want to set off the
losses of Rs.4.25 lacs from the profits of the firm. Can they do so?

Solution:
It has been held by the Supreme Court in CIT v. Madhukant M. Mehta that where legal heirs of a
deceased proprietor enter into partnership and carries on the same business in the same
premises under the same trade name, there is succession by inheritance. Hence, the assessee-
firm is entitled to carry forward and set-off the deceased’s business loss against its income for
the subsequent years. In view of the aforesaid case, partners are entitled to set off the losses of
Rs.4.25 lakhs, from the business of the firm.
 205

3. ST & Co., a partnership firm was dissolved and as per the dissolution deed of the partnership
firm, with effect from 18th September, 2022, Mr.S, one of the partners of erstwhile firm took over
the entire business of the partnership firm in his individual capacity including fixed assets,
current assets and liabilities and the other partner was paid his dues. He then continued the
business as a sole proprietor with effect from that date.

The assessee, relying upon Section 78(2) claimed the set-off of the losses suffered by the
erstwhile partnership firm against his income earned as an individual proprietor, considering
the case as inheritance of business. The claim of the assessee was disallowed by the Assessing
Officer.

4. Govinda and Vaamana were partners in a firm, which got dissolved consequent to the demise of
Govinda. The firm had unabsorbed losses. Vaamana, who took over the business, has set off the
said loss in his personal hands in the subsequent year. Such set off is not allowed by the
Assessing Officer. Is his action correct?

Answer:
The Delhi High Court held that on dissolution of a partnership firm, the takeover of the running business
of the firm by the erstwhile partner as a sole proprietor was not a case of succession by inheritance.
Hence, the carry forward of losses of the firm by the sole proprietor was not allowed in this case.

Therefore, the action of the Assessing Officer in disallowing the claim of set-off of losses suffered by the
erstwhile partnership firm ST & Co. against the income earned as an individual proprietor is correct.

5. OLD Ltd was amalgamated with NEW Ltd on 01.04.2022. OLD Limited has the following carried
forward losses as assessed till the assessment year 2022-23:

Speculative loss Rs.4,00,000

Unabsorbed depreciation Rs.18,00,000
Unabsorbed expenditure of capital nature on scientific research Rs.2,00,000
Business loss Rs.120 lakhs

NEW Ltd has computed a profit of Rs.140 lacs for the financial year 2022-23 before setting of the
eligible losses of OLD Ltd but after providing depreciation at 15% per annum on Rs.150 lacs,
being the consideration at which plant and machinery were transferred to NEW Limited. The
written down value as per income-tax record of OLD Limited as on 31.03.2022 was Rs.100 lacs.

The above profit of NEW Limited includes speculative profit of Rs.10 lacs. Compute the total
income of NEW Limited for Assessment Year 2023-24 and indicate the losses/other allowances
to be carried forward by it. CWA Final – Dec 2017
 206

CONVERSION OF A PRIVATE COMPANY INTO LIMITED LIABILITY PARTNERSHIP (LLP):

6. MITTAL (P) Ltd., converted into a Limited Liability Partnership (LLP) by name ALL TRADE LLP,
with effect from 01.04.2022:

The following details are given to you:

Assessment Year 2015-16: Business loss brought forward Rs.2,00,000
Assessment Year 2022-23: Business loss brought forward Rs.5,00,000
(These are related to erstwhile MITTAL (P) Ltd.)

Total Income of ALL TRADE LLP, for the financial year 2022-23 (before
set off of brought forward business losses of erstwhile company) Rs.6,00,000

Assume that all the conditions prescribed in section 47 (xiiib) were satisfied by MITTAL (P) Ltd.
at the time of conversion into LLP:

i. Explain whether ALL TRADE LLP can set off and carry forward the business loss of its
predecessor.

ii. State whether any change in partners of ALL TRADE LLP at a later date would have any tax
consequence.

Conditions to be satisfied u.s.47(xiiib):

a. ALL ASSETS AND LIABILITIES of the company immediately before conversion become the assets and
liabilities of the LLP;

b. ALL THE SHAREHOLDERS of the company immediately before conversion become the partners of
the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as
their shareholding in the company on the date of conversion;

c. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in
any form or manner, other than share in profit and capital contribution in the LLP;

d. The aggregate of the profit-sharing ratio of the shareholders of the company in the LLP shall not be
less than 50% at any time during the period of five years from the date of conversion.

CARRY FORWARD OF LOSSES IN CASE OF A CLOSELY HELD COMPANY (SEC.79)

A closely held company can set off its brought forward losses provided:

The shareholders who own more than 50% shares as on the LAST DAY OF THE PREVIOUS YEAR
during which the loss was incurred MUST CONTINUE to own such % on the LAST DAY OF THE
PREVIOUS YEAR during which the loss is sought to be set-off. In other words, if there is a change in
the shareholding pattern in excess of 49%, losses cannot be carried forward for the purpose of set-
off.
 207

However, under the following circumstances, losses can be set-off even if there is more than 49%
change in the shareholding pattern:

a. In case of DEATH of a shareholder

b. Transfer of shares on account of GIFT TO A RELATIVE

Exception to the above: Unabsorbed depreciation can be carried forward – Supreme Court

7. A private limited company has share capital in the form of equity shares. The shares were held up till
31st March, 2021 by four members A, B, C and D equally. The company made losses/profits for the
past three assessment years as follows:

Asst. Year Business loss Unabsorbed depreciation Total

2019-20 nil 5,00,000 5,00,000
2020-21 nil 2,00,000 2,00,000
2021-22 6,00,000 6,00,000 12,00,000

The above figures have been accepted by the tax department. During the previous year ended
31.03.2022, A sold his shares to Y and during the previous year ended 31.03.2023, B sold his shares
to Z.

The profits for the past two previous years are as follows:
31.03.2022 Rs.8,00,000 (before charging depreciation of Rs.1,00,000)
31.03.2023 Rs.15,00,000 (before charging depreciation of Rs.1,50,000)

Compute taxable income for A.Y.2023-24. Workings must form part of your answer.

LOSSES IN THE CASE OF DEMERGER:

8. X Ltd., a pharmaceutical company having accumulated losses and unabsorbed depreciation to be
set off in future for Rs.130 lacs and Rs.250 lacs as on 31.03.2022 was demerged on 16.05.2022
and 30% of its total assets were transferred to the resulting company, XY Ltd. How shall the
accumulated losses and unabsorbed depreciation of the demerged company be dealt with in the
return for A.Y.2023-24 of the resulting company:

i. When the same are not directly relatable to the undertaking transferred and
ii. When the same are directly relatable to the undertaking transferred.

Answer:
The accumulated business loss and unabsorbed depreciation of the demerged company shall be carried
forward and set off by the resulting company XY Ltd in the following manner:

i. Where such loss or unabsorbed depreciation is not directly relatable to the undertaking
transferred (resulting company), such loss shall be apportioned between the demerged company
and the resulting company in the same proportion in which assets of the undertaking have
been retained by the demerged company and transferred to the resulting company and
shall be allowed to be carried forward and set off in the hands of the demerged company or the
resulting company. In this case, therefore, 30% of ₹130 lacs and ₹250 lacs, shall be allowed to be
carried forward and set off by the resulting company and the balance by the demerged company.
 208

ii. Where such loss or unabsorbed depreciation is directly relatable to the undertaking transferred
(resulting company), the entire loss or unabsorbed depreciation shall be allowed to be cfd and set
off in the hands of the resulting company. Accordingly, in such a case, the entire amount of ₹ 130
lacs and ₹ 250 lacs shall be allowed to be set off in the hands of the resulting company.

LOSSES OF A PARTNERSHIP FIRM – Section 78:

Where a change has occurred in the constitution of a firm, the loss attributable to the share of a
retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by
the firm. However, this restriction shall not apply on unabsorbed depreciation. (section 78)

9. M/s.Vivitha & Co., a partnership firm, with four partners A, B, C and D having equal shares,
furnishes the following details, summarized from the valid returns of income filed by it:

Assessment Year Item eligible for carry forward and set-off

2021-22 Unabsorbed business loss Rs.1,20,000
2022-23 Unabsorbed business loss Rs.1,90,000
2022-23 Unabsorbed depreciation Rs.1,20,000
2022-23 Unabsorbed long-term capital losses Rs.3,00,000

C who was a partner during the last three years, retired from the firm with effect from 1.04.2022.

The summarized results of the firm for the A.Y.2023-24 are as under:
Income from house property Rs.70,000
Income from business Rs.1,70,000

Short term gain from sale of shares Rs.40,000

Long term gain from sale of building Rs.2,10,000
Income from other sources Rs.60,000

Briefly discuss how the items brought forward from earlier years can be set off in hands of the
firm for the A.Y. 2023-24, in the manner most beneficial to the assessee.

LOSSES OF A PARTNERSHIP FIRM:

10. M/s.ABCD, a firm, consists of four partners namely, A, B, C and D. They shared profits and losses
equally during the year ended 31.03.2022. The assessed business loss of the firm for the
assessment year 2022-23 which it is entitled to carry forward amounts to Rs.6,40,000.

A new deed of partnership was executed among A, B, C and D on 01.04.2022 in terms of which
they agreed to share profits and losses in the ratio of 15:15:20:50 respectively. Compute the
amount of business loss relating to the assessment year 2022-23, which the firm is entitled to set
off against its business income for the assessment year 2023-24. The business income of the
firm for the assessment year 2023-24 is Rs.3,30,000.
 209

Answer: Section 78 which deals with carry forward and set-off of losses in the case of change in
constitution of firm, is applicable only where there is retirement or death of a partner. It is not
applicable to a case where there is a change in the ratio of sharing profits and losses amongst
the existing partners. Therefore, section 78 is not applicable to the case of M/s.ABCD.

11. ABC Private Limited was converted into a LLP on 01.07.2022. The following are the particulars
of ABC Private Limited as on 31.03.2022: -

a. Unabsorbed depreciation Rs.13 lakhs

b. Business loss of Rs.10 lakhs (relating to previous year 2014-15)
c. Unadjusted MAT credit u.s.115JAA Rs.8,00,000

d. WDV of the Assets as per the Income-tax Act:

a. Plant and machinery (15%) Rs.10 lakhs (market value Rs.15 lakhs)
b. Plant and machinery Rs.50 lakhs (cost) deduction claimed u.s.35AD
c. Building (10%) Rs.20,00,000 (market value Rs.30 lakhs)

e. VRS expenditure incurred by the company during the previous year 2020-21 is Rs.25
lakhs. The company has been allowed deduction of Rs.5 lakhs for each for the previous
year 2020-21 and previous year 2021-22 under section 35DDA.

f. Cost of land (acquired in the year 2002) Rs.50 lakhs (market value Rs.100 lakhs)

Assuming that the conversion fulfills all the conditions specified in Section 47(xiiib), explain
the tax treatment of the above in the hands of LLP.

Answer:

Unabsorbed depreciation:
ABC LLP would be able to carry forward the unabsorbed depreciation of ABC Private Ltd as on
31.03.2022 indefinitely for set-off against its income.

Brought forward business loss:

ABC LLP would be able to carry forward and set-off the business loss of ABC Private Ltd. The business
loss, is eligible for set-off against income of the LLP in the A.Y.2023-24. Such accumulated loss can be
carried forward for fresh period of 8 years.

MAT credit:
As per Section 115JAA, the credit for MAT paid by ABC Private Ltd cannot be availed by the successor LLP

Depreciation:
The actual cost of the block of assets in the case of ABC LLP would be the w.d.v. of the block of assets of
ABC Private Ltd on the date of conversion.
Dep for ABC P Ltd Dep for ABC LLP
Plant and machinery Rs.37,397 Rs.1,12,603
Building Rs.49,863 Rs.1,50,137
No. of days 91 (30+31+30) 274
 210

In the hands of ABC LLP, the actual cost of plant and machinery in respect of which deduction has been
claimed u.s.35AD by ABC Pvt Ltd., would be NIL. Hence no depreciation is allowed.

VRS compensation:
ABC LLP would be eligible for deduction of Rs.5 lakhs each for the remaining three years i.e. P.Y.2022-23,
P.Y.2023-24 and P.Y.2024-25 as per section 35DDA.

Land:
The cost of acquisition of a non-depreciable asset, being land, in the hands of ABC LLP would be the cost
for which ABC Private Ltd acquired it, i.e. Rs.50 lakhs.

Conditions of section 47(xiiib)

a. All the assets and liabilities of the company immediately before the conversion become the assets and
liabilities of the LLP;

b. All the shareholders of the company immediately before the conversion become the partners of the LLP
and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their
shareholding in the company on the date of conversion;

c. The shareholders of the company do not receive any consideration or benefit directly or indirectly, in
any form or manner, other than by way of share in profit and capital contribution in the LLP;

d. The aggregate of the profit-sharing ratio of the shareholders of the company in the LLP shall not be less
than 50% at any time during the period of five years from the date of conversion.

MCQs:
1. When a partnership firm consisting of four partners with equal share has brought forward business loss
of Rs.10 lakhs and one of the partners retired on 01.04.2022, the amount of business loss eligible for carry
forward would be –

(A) Rs.10 lakhs

(B) Nil
(C) Rs.2.50 lakhs
(D) Rs.7.50 lakhs option D (10 lacs – 2.5 lacs)

2. Gama Traders is a partnership firm consisting of 4 equal partners. One partner retired on 31.03.2022. The
firm has eligible brought forward loss of Rs.4 lakhs relating to the assessment year 2021-22. The total
income of the firm of the previous year 2022-23 before set off of the said brought forward loss is
Rs.7,20,000. The amount of brought forward loss eligible for set off would be:–

(A) Rs.4,00,000
(B) Nil
(C) Rs.1,00,000
(D) Rs.3,00,000 option D (4 lacs – 1 lac)
 211

CHAPTER 14: CAPITAL GAINS

CAPITAL GAINS: Any GAIN arising from TRANSFER of a CAPITAL ASSET shall be chargeable to
tax in the year in which TRANSFER TOOK PLACE.

CAPITAL ASSET - Section 2 (14):

“Capital asset” means: -

a. property of any kind held by an assessee, whether or not connected with his business or
profession;

b. Securities held by a Foreign Institutional Investor (FIIs).

c. Any unit linked insurance policy (ULIP) issued on or after 01.02.2021.

ASSETS NOT REGARDED AS CAPITAL ASSETS:

a. Stock-in-trade held by an assessee for the purposes of his business;

b. Personal effects (excluding jewellery; immovable property; paintings; drawings;

archaeological collections; sculptures and any work of art)

c. Agricultural land in rural area in India

MEANING OF RURAL AGRICULTURAL LAND:

a. If situated within municipality limits and having a population of less than 10,000;

b. If situated outside the limits of a municipality:

Shortest aerial distance from the local Population according to the last
limits of a municipality preceding census
Up to 2 kms from the local limits < 10,000
Above 2 kms and up to 6 kms < 1,00,000
Above 6 kms and up to 8 kms < 10,00,000
Above 8 kms Rural Area (not a capital asset)
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TRANSACTIONS REGARDED AS “TRANSFER”:

 Sale
 Exchange
 Relinquishment
 Extinguishment of rights
 Compulsory acquisition under any law
 Conversion of capital asset into stock-in-trade
 Maturity or redemption of a zero-coupon bond

TRANSACTIONS NOT REGARDED AS TRANSFER:

 Gift, Will, Inheritance

 Distribution of assets by a HUF. to its members in kind at the time of partition

 Distribution of assets by a company to its shareholders at the time of liquidation

 Transfer of capital assets by a holding company to its wholly owned Indian subsidiary company
 Transfer of capital asset by a wholly owned subsidiary company to its Indian holding company

 Any transfer in the scheme of amalgamation

 Any transfer in the scheme of demerger

 Transfer of capital asset in the case of conversion of proprietary concern or firm into a company
 Transfer in the case of conversion of a company into a limited liability partnership

 Conversion of bonds or debentures of in to shares or debentures.

 Conversion of preference shares into equity shares of that company

 Transfer of asset under notified reverse mortgage scheme

 Transfer of Sovereign Gold Bond Scheme by way of redemption

TYPES OF CAPITAL ASSETS:

a. Short term capital asset
b. Long term capital asset

MEANING OF LONG TERM CAPITAL ASSET:

Any capital asset held for more than 36 months is a long-term capital asset. Any capital asset
held for less than or equal to 36 months is a short-term capital asset.

However the period of holding is 12 months in the case of the following assets:
a) a security including listed shares
b) a unit of an equity oriented fund (36 months for debt oriented mutual fund)
c) a zero coupon bond
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Note: In the case of IMMOVABLE PROPERTY (being land or building) & UNLISTED SHARES
the period of holding (POH) is 24 months.

Important: Any capital asset acquired by way of gift, will, inheritance, etc. the period of holding
by the previous owner shall also be taken into consideration.

Important: Any asset on which depreciation is claimed by the assessee, such asset shall always be
a short-term capital asset irrespective of period of holding.

Difference between short term and long term capital gain:

Particulars Short term Long term

Tax rate Normal rates Flat rate of 20% or 10%
Deductions under chapter VIA Available Not available
Indexation benefit Not available Available
Sec.54, 54B, 54EC, 54EE, 54F Not available Available

Computation of short-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Cost of acquisition xxx
Less: Cost of improvement xxx
Short-term capital gains xxx

Computation of long-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Indexed cost of acquisition xxx
Less: Indexed cost of improvement xxx
Long-term capital gains xxx

Year Index Year Index Year Index Year Index

01-02 100 02-03 105 03-04 109 04-05 113
05-06 117 06-07 122 07-08 129 08-09 137
09-10 148 10-11 167 11-12 184 12-13 200
13-14 220 14-15 240 15-16 254 16-17 264
17-18 272 18-19 280 19-20 289 20-21 301
21-22 317

22-23: 331
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Meaning of Indexed Cost of Acquisition:

COST
Indexed cost = --------------------------------------------------------------- x Index of the year of transfer
2001-02 (or) the first year of the current
assessee who held the asset
(whichever is later)

Indexation: However, the Courts have held that indexed cost of acquisition has to be computed
with reference to the year in which the previous owner first held the asset and not the year in
which the current assessee became the owner of the asset.

Meaning of the term “COST”:

a. If the asset was acquired before 1.4.2001:

Purchase price (or) fair market value as on 1.4.2001
shall be the cost according to the choice of the assessee.

b. If the asset was acquired on or after 1.4.2001:

Purchase price shall be the cost.

Meaning of indexed cost of improvement:

Any improvements before 1.4.2001 shall be ignored. In other words improvements on or after
1.4.2001 is to be considered for indexation.

COST OF IMPROVEMENT
ICOI = --------------------------------------------------------- x Index of the year of transfer
Index of the year during which
improvement took place

Problems: Meaning of Capital Asset:

1. State whether the following are capital assets are not:

Property held by a dealer in property; Gold held by a jeweller; Personal car and air conditioner;
Residential house for personal use; Personal mobile phone; Loose diamonds; Gold and silver
coins used for puja; Furniture held for personal use; Furniture in the class room of RR Academy;
Shares held by a dealer in shares; Goodwill of a business (self-generated); Paintings and
drawings; Statue of Lord Ganesh (sculpture).
 215

Short term or Long term Capital Assets (period of holding):

2. State whether the asset is short term or long term in the following cases:
X purchases a residential house on 10.3.2020 and sells it on 26.12.2022.
Y purchases listed shares in an Indian Company on 10.3.2021 and sells it on 6.6.2022.

R purchases shares in an unlisted company on 10.03.2021 and sells these shares on 20.11.2022
X Ltd. sells plant and machinery in 2022-23 after using the asset for 5 years.

Mr.X purchases a house in 2004-05 and gifts it to his son Mr.Y on 1.11.2022 and Mr.Y sells it to
Mr.Z on 23.01.2023.

Computation of Long Term Capital Gain:

3. Mr.R sold a house to his friend Mr.D on 11.08.2022 for Rs.25,00,000. The Sub-Registrar refused
to register the document for the said value, as according to him, stamp duty had to be paid on
Rs.45,00,000, which was the Government guideline value. Mr.R preferred an appeal to the
Revenue Divisional Officer, who fixed the value of the house as Rs.33,00,000 (Rs.23,00,000 for
land and the balance for building portion). The differential stamp duty was paid, accepting the
said value determined.

What are the tax implications in the hands of Mr.R and Mr.D for the assessment year 2023-24?
Mr.R had purchased the land on 01.06.2011 for Rs.5,18,880 and completed the construction of
house on 01.10.2020 for Rs.14,00,000. Cost inflation indices: 184 for the financial year 2011-12
280 for the financial year 2018-19 and 331 for the financial year 2022-23.

4. Mr.C purchases a house property for Rs.1,06,000 on 15.5.1975. The following expenses are
incurred by him for making additions:

Cost of construction of the first floor in 82-83: Rs.3,10,000

Cost of construction of the second floor in 02-03: Rs.7,35,000
Reconstruction of the house in 12-13: Rs.5,50,000

FMV. of the property on 1.4.2001 is Rs.8,80,000. Stamp duty value as on 01.04.2001 is

Rs.8,50,000. The house is sold by Mr.C on 10.8.2022 for Rs.72,00,000 (expenses incurred on
transfer Rs.2,00,000). (CII: 2002-03: 105 & 2012-13: 200)

5. The assessee was a company carrying on business of manufacture and sale of art-silk cloth. It
purchased machinery worth Rs.4 lacs on 1.5.2008 and insured it with United India Assurance
Ltd against fire, flood, earthquake etc. The written down value of the asset as on 01.04.2022
was Rs.2,20,000. The insurance policy contained a reinstatement clause requiring the
insurance company to pay the value of the machinery, as on the date of fire etc., in case of
destruction of machinery.
 216

A fire broke out in August, 2022 causing extensive damage to the machinery of the assessee
rendering them totally useless. The assessee company received a sum of Rs.6 lacs from the
insurance company on 15th March, 2023. Discuss the issues arising on account on the
transactions and their tax treatment. (CII for 2007-08 & 2022-23 are 129 & 331).

Capital gain in case of JOINT DEVELOPMENT AGREEMENT – Section 45(5A):

Capital gain in case of JOINT DEVELOPMENT AGREEMENTS – Section 45(5A):

Where the capital gains arises to an Individual or HUF from the transfer of land or building or
both, under a specified agreement, shall be chargeable to tax in the year in which certificate of
completion for whole or part of the project is issued by the competent authority.

The full value of consideration received shall be the aggregate of:

(i) his share of stamp duty value in the project as on the date of issue of certificate of completion;
(ii) consideration received in cash, if any.

“Specified agreement” means a registered agreement in which a person owning land or building or
both, agrees to allow other person to develop a real estate project on such land, in consideration of a
share, being land or building or both in such project, whether with or without payment of part of
the consideration in cash.

6. Mr.X purchased a residential plot on 01.01.1998 for Rs.50,00,000. FMV of plot as on 01.04.2001 is
Rs.65,00,000. Alpha Builders enter into a Development Agreement with Mr.X on 01.05.2022 on the
following terms and conditions:

a. Mr.X will hand over the possession of plot to Alpha Builders on 01.05.2021

b. Alpha Builders will pay a cheque of Rs.60 lakhs to Mr.X on 01.05.2022.

c. Alpha Builders will construct 10 residential units on the plot of land will give 6 units to
Mr.X. The 10 units shall be completed by 30.06.2024 and on that date 6 units will be
handed over to Mr.X

d. The stamp duty value of plot on 01.05.2022 is Rs.2 crores

e. The stamp duty value of each flat on 30.06.2024 is Rs.45 lakhs

CASE I: The project completion certificate is issued by competent authority on 30.06.2024. 6

units are handed over to Mr.X on 30.06.2024.

CASE II: The project completion certificate is issued by competent authority on 30.04.2025 and
on that date the stamp duty value of each flat is Rs.50 lakhs. 6 units are handed over to
Mr.X on 30.04.2025.
 217

Answer:
There is a ‘Transfer’ on 01.05.2022 in hands of Mr.X since he has given the possession of residential plot
to the builder under a Development Agreement.

However, the capital gains shall not be taxable in previous year 22-23 but shall be taxable in the previous
year in which certificate of completion is issued by competent authority.

The above section is applicable since assessee is an individual.

The holding period of residential plot shall be taken from 01.01.1998 to 30.04.2022 i.e. long term

Sale consideration = SDV on the date of issue of completion certificate of his share in land/building in
project plus consideration received in cash.

7. X Ltd is a company in which the whole of its share capital was held by Y Ltd. Both X Ltd and Y Ltd
are Indian companies. X Ltd had made investment in shares of ABC Ltd in 1979 for Rs.3,00,000
which it sold to Y Ltd on April 1, 2014 for a consideration of Rs.30,00,000. The fair market value
of these shares of ABC Ltd as on April 1, 2001 is Rs.20,00,000.

Y Ltd disinvested 5% of the shares held by it in X Ltd., in January 2023 by sale to public. It sold
the shares in ABC Ltd in March 2023 acquired by it from X Ltd for a sum of Rs.70,00,000.

Discuss the issue with relevant provisions and tax effects of these transactions in the hands of X
Ltd and Y Ltd in the relevant assessment years. CA – Final (May 2018)

Answer:

On sale of shares of ABC Ltd by X Ltd to Y Ltd on 01.04.2014:

Since both X Ltd and Y Ltd are Indian companies and Y Ltd holds 100% of shares of X Ltd., the transfer of
capital asset (shares of ABC Ltd) by X Ltd to Y Ltd would not be treated as a transfer. Hence, no capital
gains tax would be attracted on such transfer in the hands of X Ltd.

On disinvestment (sale) of shares of X Ltd made by Y Ltd in January, 2023

Where a holding company ceases to hold 100% of shares of the subsidiary company before the expiry of
eight years from the date of transfer of capital asset, the amount of capital gains not charged to tax at the
time of transfer would be deemed to be income chargeable under the head “capital gains’ of the previous
year in which transfer took place.

However, in this case, the above provision would not apply because the eight year period from the date of
transfer expires on 31.03.2022 and the disinvestment by Y Ltd of 5% shares held in X Ltd was only in
January 2023.

Sale of shares of ABC Ltd by Y Ltd in March 2023

This transaction would attract capital gains tax in the hands of Y Ltd for the A.Y.2023-24. The capital
gains would be LTCG, since the period of holding is more than 24 months.

The cost of acquisition to X Ltd in the year 1979 or f.m.v. as on 01.04.2001, whichever is higher shall be
the cost of acquisition.
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Computation of LTCG
Sale consideration 70,00,000
Less: Indexed cost 66,20,000 (20 lacs / 100 x 33 1)
LTCG 3,80,000

8. State whether the agricultural land mentioned below is a capital asset or not:

S. no. Area Distance Population

from the local limits Answer
1. A 1 km 9,000 Not a CA
2. B 1.5 kms 12,000 CA
3. C 2 kms 11,00,000 CA
4. D 3 kms 80,000 Not a CA
5. E 4 kms 3,00,000 CA
6. F 5 kms 12,00,000 CA
7. G 6 kms 8,000 Not a CA
8. H 7 kms 4,00,000 Not a CA
9. I 8 kms 10,50,000 CA
10. J 9 kms 15,00,000 Not a CA
 219

SECTION 54: Transfer of a residential house and purchase or construction of a

residential house:

Exemption under this section is available to Individuals and HUF only

The house transferred should be a residential house
The residential house transferred should be a long-term capital asset
A residential house should be purchased or constructed before the due date of filing ROI.

Amount of exemption: Amount invested is exempted from tax.

Where the amount of capital gains exceeds Rs.2 crores:

Exemption can be availed in respect of ONE residential house purchased or constructed in India

Where the amount of capital gains does not exceed Rs.2 crores (once in a life time):
Exemption can be availed in respect of TWO residential houses purchased or constructed in India

Scheme of deposit: If the new house is not purchased or constructed before the due date then
the same can be deposited under Capital Gain Account Scheme for claiming exemption.

Extension of time limit if deposit is made: The new house/houses should be purchased one
year before or two years after the date of transfer (three years for construction).

Withdrawal of exemption: The new residential house should not be transferred within a
period of three years from the date of its purchase or construction. If transferred, the exemption
previously granted shall be reduced from the cost of acquisition for computing capital gains.

Note: The unutilized deposit amount in the capital gain account scheme, in the case of an
assessee, who dies before the expiry of the two/three years stipulated period, cannot be taxed in
the hands of the deceased or the legal heirs.

SECTION 54 B: Transfer of an Agricultural land and purchase of an agricultural land

The agricultural land transferred should be a capital asset first (i.e. situated in urban area)
This section is available to Individuals and HUF only
The agricultural land must be used by the assessee or by his parents or HUF for agricultural purposes
at least for two years immediately preceding the date of transfer.

The agricultural land can be either a STCA or LTCA.

The new agricultural land (urban or rural) should be purchased within two years from the date of
transfer.

Exemption, Scheme of deposit and withdrawal of exemption are same as per Section 54.
 220

Where an urban agricultural land is compulsorily acquired under any Law and compensation is
determined or approved by the Central Government or by RBI, the capital gain on such acquisition is
fully exempt u/s.10 (37).

SECTION 54 D: Transfer (on account of compulsory acquisition) of any land or building

used for industrial purposes and purchase of land or building for
industrial purposes.

This section is available to all assesses

The land or building should have been used for industrial purposes by the assessee at least for
two years immediately preceding the date of transfer.

The industrial land or building can be either a short term or a long term capital asset.
The new industrial land or building should be purchased within 3 years from the date of receipt
of compensation.

Amount of exemption, Scheme of deposit, Withdrawal of exemption are same as per section 54.

SECTION 54 EC: Transfer of land or building and investment in a “Specified Asset”

This section is available to all assessees.

The land or building transferred should be a long-term capital asset. (Such asset can also be a
depreciable asset held for more than 24 months – Supreme Court)

The assessee should invest in a “specified asset” within 6 months from the date of transfer.

Specified asset means bonds redeemable after 5 years issued by the National Highways Authority
of India (NHAI) or by the Rural Electrification Corporation Ltd (REC) or any other bond notified
by the Central Government.

The assessee should not transfer or convert or avail loan or advance on the security of such
bonds within a period of 5 years from the date of acquisition of such bonds.

Amount of exemption: Rs.50 lakhs (or) amount invested within 6 months (whichever is less)
 221

SECTION 54 F: Transfer of any capital asset (except a residential house) but

purchase/construction of a residential house.

This section is available for Individual and HUF only

The capital asset transferred should be a long-term capital asset
A new residential house should be purchased in INDIA within one year before or two years after
from the date of transfer (3 years for construction)

The assessee should not own more than one residential house on the date of transfer

Amount of exemption:
a. If entire net consideration is invested, entire capital gain is exempt from tax

b. If part of net consideration is invested then amount exempt is:

Amount invested
---------------------------- (x) LTCG (before exemption)
Net consideration

Withdrawal of exemption:
a) If the new residential house is transferred within a period of three years; or
b) The assessee should not purchase or construct another house within the stipulated period.

Problems on Section 54:

9. Mr.R sold his residential house on 27.12.2022 which has resulted in a long-term capital gain of
Rs.1,50,00,000. For claiming exemption u.s.54, he purchases two residential houses in Chennai
for Rs.60,00,000 each within the time allowed. Compute taxable capital gains if he has
exercised his option to claim exemption for two houses.

What will be your answer in the above case if the sale had resulted in a long-term capital gain of
Rs.2,25,00,000?

10. Determine the amount of exemption u/s.54 and taxable capital gains:
X sells a residential house in Agra for 73,00,000 on 23.12.2022 which was purchased by him on
20.04.2005 for Rs.10,53,000. Selling expenses in this connection Rs.25,000. On 16.03.2023, he
purchases a house in Chennai for Rs.50,00,000.

On 18.11.2023, X sells the house in Chennai for Rs.53,00,000. Can he also claim exemption
under section 54 in respect of transaction ii. (CII: 05-06: 117)
 222

11. 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. Dec 2019 CMA final

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 within 3 years.

Provisions applicable:
Exemption will be available u/s.54, where the long-term capital gain derived by a resident
individual/HUF is reinvested in purchase/construction of another residential house within a period of 2
or 3 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.

Problems on Section 54B:

12. X is in possession of agricultural land situated within urban limits, which is used for agricultural
purposes during the preceding 3 years by his father. On 10.01.2023 this land was compulsorily
acquired by the Government of India on a compensation fixed and paid by it for Rs.10,00,000.
Advise X as to the tax consequences, assuming that the entire amount is invested in shares.

Problems on Section 54EC:

13. On 02.01.2023, X sells land for Rs.90,00,000 (cost of acquisition on 10.3.2003: Rs.12,60,000). On
5.02.2023, he acquires bonds of National Highway Authority of India (investment being
Rs.45,00,000). Again on 03.05.2023 he further invested Rs.35,00,000 in these bonds. Find out the
amount of exemption under section 54 EC and taxable capital gains. (CII: 02-03: 105)

14. R acquired a land on 15.12.2008 for Rs.5,48,000 which was sold on 15.11.2022 for Rs.24,20,000.
Expenses of transfer were Rs.20,000. He invests Rs.10,00,000 in the bonds of Rural Electrification
Corporation Ltd on 16.04.2023. Compute capital gains for A.Y. 2023-24.
 223

State the period for which the bonds should be held by the assessee. What will be the consequences
if such bonds are sold within the specified period? What will be the consequences if R takes a loan
against the security of such bonds? (CII: 08-09: 137)

Problems on Section 54F:

15. X sells jewellery on 10.7.2022 for Rs.42,50,000 (cost on 15.6.2004 Rs.6,78,000 and selling expenses
Rs.50,000). On 10.7.2022, he owns one residential house property. To get the benefit of
exemption under section 54F, X deposits on 30.5.2023 Rs.33,60,000 in Capital Gains Deposit
Scheme. By withdrawing from the Deposit Account he purchases a residential house property at
Delhi on 16.12.2023 for Rs.30,24,000. Compute capital gains for A.Y.2023-24. (CII: 04-05: 113)

16. Mr.Dhanapal, a resident individual, sold a house plot purchased 48 months back for Rs.70 lakhs
and invested the net sale proceeds in purchase of a residential house within 6 months from the
date of sale. He does not own any other residential house. The new house, however, is in the
name of his wife. The Assessing Officer refuses to grant exemption under section 54F on the
ground that the new residential house is not in the name of the assessee. CMA final J-2019

Exemption u/s 54F:

Issue involved:
The issue under consideration is whether exemption u.s.54F can be denied to the assessee, if the net sale
proceeds of a long term capital asset are invested in a new residential house within the stipulated time
limit but the said house is purchased in the name of his wife and not in his name.

Provisions applicable:
Section 54F requires purchase or construction of a residential property within the specified period. It
does not require purchase of new residential house in the name of the assessee himself. It only requires
the assessee to purchase or construct a residential house within the stipulated time limit.

Analysis of the given issue:

In this case, Mr.Dhanapal had not purchased the new house in the name of a stranger or somebody who
is unconnected with him, but had purchased it in the name of his wife. The entire investment for
purchase of new residential house had come out of the sale proceeds of the plot belonging to Mr.
Mr.Dhanpal. Therefore, Mr.Dhanapal is entitled to claim exemption u/s 54F in respect of utilization of
sale proceeds of plot of land for investment in residential house property in the name of his wife.

Conclusion:
As a consequence, the action taken by the Assessing Officer in rejecting the claim for deduction u.s. 54F
in the hands of Mr.Dhanapal due to the reason that he had invested the sale proceeds in purchasing a
new residential house in the name of his wife rather than in his name, is not valid.
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17. Mrs.Priya, a resident individual, sold on 30.6.2022, depreciable assets held for more than 36
months and invested the proceeds on 30.9.2022 in a residential house property to claim
exemption from capital gains. Examine the validity of the order of the Assessing Officer in
denying her the exemption under section 54F of the Income-tax Act, 1961. Mrs.Priya does not
own any other residential house.

Solution:

Section 50: Capital gain arising on transfer of a depreciable asset shall be treated as short-term
capital gain only for the purposes of sections 48 (mode of computation) and 49 (cost of the
asset) and not for the purpose of any other section.

Section 54F being an independent section will not be bound by the provisions of section 50
(capital gains in case of depreciable assets). The nature of capital asset, whether short-term or
long-term, has to be determined applying the provisions of section 2(42A). The depreciable
asset, if held for more than 24 months, shall be a long-term capital asset. Therefore, the action
of the Assessing Officer in denying her exemption u.s.54F is not valid. SC decision

In this case, since a depreciable asset is held for more than 24 months is transferred and the
proceeds are invested within a span of 3 months in a residential house property, exemption
u.s.54F cannot be denied to Mrs.Priya.

18. Mr.C is running a factory in Nagpur for the past 10 years. He sold the factory building along
with land for Rs.80 lakhs and the consideration was appropriated as Rs.20 lakhs for the
building and Rs.60 lakhs for the land underneath the building. The factory building is the only
asset in the block on which depreciation was claimed and whose WDV was Rs.1,80,000. The
indexed cost of acquisition of land amounts to Rs.22 lakhs. He deposited Rs.48 lakhs in capital
gain bonds of NHAI within 2 months after the sale of factory building.

The Assessing Officer disallowed the claim of exemption on the reasoning that capital gain on
transfer of depreciable asset being short-term is not eligible for exemption u.s.54EC. Is the
action of the Assessing Officer valid in law?

Solution:
Section 50: Capital gain arising on transfer of a depreciable asset shall be treated as short-term capital
gain only for the purposes of sections 48 (mode of computation) and 49 (cost of the asset) and not for
the purpose of any other section.

Section 54EC being an independent section will not be bound by the provisions of section 50 (capital
gains in case of depreciable assets). The nature of capital asset, whether short-term or long-term, has to
be determined applying the provisions of section 2(42A). The depreciable asset, if held for more than 36
months, shall be a long-term capital asset. Therefore, the action of the Assessing Officer in denying
exemption u.s.54EC is not valid. Supreme Court decision

In this case, since a depreciable asset is held for more than 24 months is transferred and the proceeds
are invested within a span of 2 months in NHAI bonds, exemption u.s.54EC cannot be denied to Mr.C.
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Section 54GB: Transfer of a residential property (land or building) and subscription

of equity shares in an eligible start-up company

Exemption is available to an Individual or HUF

The house or plot of land transferred should be a long-term capital asset

The assessee should incorporate a company being an eligible start-up company in which the
assessee should subscribe more than 25% shares.

Meaning of “eligible company”:

a. Should be incorporated in the financial year in which the capital asset is sold or before the
due date of filing return of income
b. The company is an eligible start-up engaged in an eligible business
c. The assessee has more than 25% share capital or more than 25% voting rights

Meaning of eligible start-up:

A company engaged in an eligible business which fulfils the following conditions:
a. Incorporated in India during the period 01.04.2016 to 31.03.2022.
b. The total turnover does not exceed Rs.100 crores in the previous year for which deduction
under section 80IAC is claimed.
c. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.

Meaning of eligible business:

A business carried out by an eligible start-up engaged in
- innovation, development or improvement of products or processes or services or
- a scalable business model with a high potential of employment generation or wealth creation.

The eligible company shall in turn purchase eligible plant and machinery before the due date of
furnishing return of income.

Amount of exemption: Similar to Section 54F

Scheme of deposit: If the new asset is not acquired within the time allowed, the same can be
deposited under capital gain deposit scheme for the purpose of claiming exemption.

Extension of time: The eligible company is required to purchase new plant or machinery within
ONE year from the date of subscription of shares by the assessee

Lock-in-period: 5 years for shares and 5 years for assets (3 years for computers or computer
software)
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Eligible Plant and Machinery does not include:

Second-hand machinery
Assets used in any office premises or any residential accommodation
Any office appliance including computers or computer software
Any Vehicle
Machinery where the whole of the actual cost is allowed as deduction

Note: In case of eligible start-up, being a technology-driven start-up, the company can also
purchase computers or computer software. This is because computers or computer software
form the core asset base of such technology driven start-ups.

Problems on Section 54GB:

19. Mr.A sold his residential property on 02.02.2023 for Rs.90 lacs and paid brokerage @ 1% of sale
price. He had purchased the said property in May, 2002 for Rs.24,36,000. In June, 2023, he
invested Rs.75,00,000 in equity shares of A Pvt Ltd, an eligible start-up company, which
constituted 27% of share capital of the said company.

A Pvt Ltd. utilized the said sum for the following purposes:

a. Purchase of new plant and machinery during July, 2023 Rs.65,00,000

b. Included in (a) above is Rs.8,00,000 for purchase of cars

c. Air conditioners purchased for Rs.1 lac included in (a) above were installed at the residence
of Mr.A

d. Amount deposited in capital gain deposit scheme in a bank on 28.09.2023 Rs.10,00,000

Compute the chargeable capital gain for A.Y.2023-24. Assume that Mr.A is liable to file his return
of income on or before October 31, 2023 and he files his return on 29.10.2023.

(Cost Inflation Index: FY.2002-03: 105 & FY.22-23: 331)

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CAPITAL GAINS – PART III:

TREATMENT OF ADVANCE MONEY RECEIVED AND FORFEITED:
WEF 01.04.2014: Any advance money received by the assessee shall be taxable under the head
“Income from other sources” if:

a) such advance is forfeited; and

b) the negotiations did not result in transfer of such capital asset

Provision before 01.04.2014: Advance money received and forfeited shall be reduced from the
cost and the reduced cost is considered for indexation.

SECTION 50 C: IN THE CASE OF IMMOVABLE PROPERTY:

Sale consideration is taken as the STAMP DUTY VALUE or the ACTUAL SALE PRICE whichever
is higher. Where the stamp duty value does not exceed 110% of the actual sale price, then the
actual sale price shall be deemed to be the full value of consideration.

SDV on the date of agreement and on the date of registration are not same:
Ordinarily, SDV on the date of registration should be considered. However, SDV on the date of
the agreement may be taken only in a case where the amount of consideration, or part thereof,
has been paid by way of an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account, on or before the date of the agreement.

In case of dispute on the part of the assessee:

In case of dispute, the assessee can request the A.O. to refer the matter to the Valuation Officer.

e.g. case I case II case III

Actual sale value 25,00,000 25,00,000 25,00,000
Stamp duty value 32,00,000 32,00,000 32,00,000
Value determined by Valuation Officer 22,00,000 28,00,000 35,00,000

As per Section 50C (sale consideration) 25,00,000 28,00,000 32,00,000

SECTION 50 B: COMPUTATION OF CAPITAL GAIN IN THE CASE OF SLUMP SALE

‘Slump Sale’ means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities.

a) “FMV 1” being fair market value of capital assets transferred (or) “FMV 2” being fair
market value of the consideration (monetary and non-monetary) received (whichever is
higher) shall be deemed to be the full value of consideration.

b) Cost of acquisition and cost of improvement shall be the “NET WORTH” of the undertaking
c) NET WORTH means value of total assets minus value of total liabilities of the “DIVISION”
d) Any change in the value of assets on account of revaluation shall be ignored
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e) In case of depreciable assets, written down value (as per I.T. Act) shall be considered
f) In case of non-depreciable assets, book value shall be considered
g) Net worth cannot be negative
h) Short term or Long term depends upon the period for which the undertaking is owned and
held by the assessee.

i) Indexation benefit is not available

j) A report of a C.A. in Form No.3CEA showing the amount of net worth should be furnished

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET IN TO STOCK-IN-TRADE:

Conversion of capital asset into stock-in-trade amounts to transfer.

I. Computation of capital gain on conversion:

Fair Market Value on the date of conversion xxx
Less: Indexed cost of acquisition xxx
Long term capital gain xxx

The above capital gains are taxed only in the year in which the stock-in-trade is sold.

II. Computation of business income on sale of stock-in-trade:

Sale proceeds of stock in trade xxx
Less: Cost of stock-in-trade (being f.m.v. on the date of conversion) xxx
Income from Business xxx

MEANING OF ‘REVERSE MORTGAGE’:

A senior citizen who owns a house but not having regular source of income can mortgage his
property with a bank. The bank in turn pays him PERIODIC INSTALMENTS OR LUMP SUM to
the senior citizen during his life time. The borrower can continue to stay in the house and as well
as receive regular income from the bank.

The borrower is not required to pay the principal as well as the interest to the bank during his
life time. The bank will recover the loan along with the interest by selling the house after the
death of the borrower. However, before selling the property, the legal heirs are given an option
to repay the loan along with interest and get the mortgaged property released.

Tax treatment:
Mortgage of a property in a transaction of reverse mortgage under a scheme notified by Central
Government shall not be regarded as ‘transfer’. Therefore, no capital gain tax. The periodic
installments or lump sum received by the senior citizen is exempt from tax u.s.10 (43).
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COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

Under compulsory acquisition cases, capital gains are taxable in the year of receipt of
compensation by the assessee. However, if compensation is received based on an INTERIM
ORDER of a court, tribunal or other authority, such compensation shall be deemed to be income
of the previous year in which the FINAL ORDER of such court, tribunal or other authority is made.

RECEIPT OF INSURANCE CLAIMS FOR DAMAGE OF CAPITAL ASSETS:

“Damage or Destruction” of a capital asset will be treated as transfer (extinguishment) provided
the asset is insured and compensation is received. Such gains are taxed in the year during which
the compensation is received from the “Insurer”.

The damage or destruction is as a result of a) flood, typhoon, hurricane, cyclone, earthquake; b)

riot or civil disturbance; or c) accidental fire or explosion; or d) action by an enemy.

SELF-GENERATED ASSETS:
Self-generated assets include:

a. Goodwill of a business; (but does not include self-generated goodwill of a profession)

b. tenancy rights,
c. route permits,
d. loom hours,
e. the right to manufacture, produce and process any article or thing, a trade mark or brand
name associated with a business and
f. a right to carry on any business or profession. (Section 55)

The cost of the above self-generated assets is “Nil”. Even if the aforesaid assets were acquired
before April 1, 2001, the option of adopting the fair market value on the said date is not available.
The entire sale consideration shall be treated as “capital gains”.

Note: Self-generated asset does not include “goodwill of a profession” (Supreme Court). If self-
generated goodwill of a profession is sold, then no capital gains shall arise.

RULE: CAPITAL GAINS ARE TAXED IN THE YEAR IN WHICH TRANSFER TOOK PLACE.

Exceptions to the above rule:

a. Conversion of Capital Asset in to Stock in trade
b. Compulsory Acquisition under any law
c. Extinguishment (destroyed) of a capital asset and Insurance compensation is received
d. In the case of Joint Development Agreement

Section 50CA: Capital gains in the case of UNQUOTED SHARES:

The full value of consideration shall be the higher of the following:
 Actual consideration received; or
 FMV of shares as per valuation rules prescribed by the CBDT
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Advance money received and forfeited before or after 01.04.2014:

20. Mr.Suman received an advance of Rs.3 lakhs on 12.11.2022 to transfer his residential house
property. Since the transfer was not effected during the previous year due to failure in negotiations,
he deducted the advance money forfeited from the cost of acquisition of the property. State whether
the treatment is correct by Mr.Suman.

21. Mr.H has acquired a residential house in Chennai on 1 st April, 2001 for Rs.22,00,000 and decided to
sell the same on 3rd May, 2004 to Mrs.P and an advance of Rs.70,000 was taken from her. The
balance money was not paid by Mrs.P and hence, Mr.H has forfeited the entire advance sum.

In April, 2022, he once again entered into negotiations for sale of the said property to Mr.Y and
received Rs.2 lakhs as advance, but the transfer did not materialize and hence, the advance was
forfeited. On 3rd March, 2023, he finally sold this house to Mr.S for Rs.98,00,000. Compute capital
gains for A.Y.2023-24.

Section 50 C: Capital gain in the case of immovable property:

22. Mr.T inherited a house in Jaipur under will of his father in May, 2003. The house was purchased by
his father in January, 2000 for Rs.2,50,000. He invested an amount of Rs.7,02,000 in construction of
one more floor in this house in June, 2005. The house was sold by him in November, 2022 for
Rs.37,50,000.

The valuation adopted by the registration authorities for charge of stamp duty was Rs.47,25,000
which was not contested by the buyer, but as per assessee’s request, the Assessing Officer made a
reference to Valuation Officer. The value determined by the Valuation Officer was Rs.50,00,000.

Brokerage @ 1% of sale consideration was paid by Mr.T to Mr.S. The fair market value as on
01.04.2001 was Rs.3,27,000. You are required to compute the amount of capital gain chargeable to
tax for A.Y.2023-24. (CII: 2003-04: 109; 2005-06: 117)

Stamp Duty Value on the DOA and Stamp duty value on the DOR:
23. Mr.S entered into an agreement with Mr.D to sell his residential house located at Kanpur on
16.08.2022 for Rs.1,50,00,000. The sale proceeds was to be paid in the following manner:

i. 20% through account payee bank draft on the date of agreement;

ii. 60% on the date of the possession of the property;
iii. Balance after the completion of the registration of the title of the property.

Mr.D was handed over the possession of the property on 15.12.2022 and the registration
process was completed on 14.01.2023. He paid the sale proceeds as per the sale agreement.

The value determined by the stamp duty authority:-

a) on 16.08.2022 was Rs.170 lakhs;
b) on 15.12.2022 was Rs.171 lakhs; and
c) on 14.01.2023 was Rs.171.50 lakhs.
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Mr.S had acquired the property on 01.04.2001 for Rs.30,00,000. After recovering the sale
proceeds from Mr.D, he purchased two residential house properties, one in Kanpur for
Rs.20,00,000 on 24.03.2023 and another in Delhi for Rs.35,00,000 on 28.05.2023. Compute
capital gains for A.Y.2023-24.

24. Mr.Shiva purchased a house property on February 15, 1979 for ₹ 3,24,000. In addition, he has
also paid stamp duty @ 10% on the stamp duty value of ₹ 3,50,000.

In April, 2007, Mr.Shiva entered into an agreement with Mr.Mohan for sale of such property for
₹ 14,35,000 and received an amount of ₹ 1,11,000 as advance. However, the sale consideration
did not materialize and Mr.Shiva forfeited the advance.

In May 2014, he again entered into an agreement for sale of said house for ₹ 20,25,000 to
Ms.Deepshikha and received ₹ 1,51,000 as advance. However, as Ms.Deepshikha did not pay
the balance amount, Mr.Shiva forfeited the advance. In August, 2014, Mr.Shiva constructed the
first floor by incurring a cost of ₹ 3,90,000.

On November 15, 2022, Mr.Shiva entered into an agreement with Mr.Manish for sale of such
house for ₹ 30,50,000 and received an amount of ₹ 1,50,000 as advance through an account
payee cheque. Mr.Manish paid the balance entire sum and Mr.Shiva transferred the house to
Mr.Manish on February 20, 2023. Mr.Shiva has paid the brokerage @1% of sale consideration
to the broker.

On April 1, 2001, fair market value of the house property was ₹ 11,85,000 and Stamp duty value
was ₹ 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15th
November, 2022 was ₹ 39,00,000 and on 20th February, 2023 was ₹ 41,00,000. Compute the
capital gains in the hands of Mr.Shiva for A.Y.2023-24.

CII for F.Y. 2001-02: 100; F.Y. 2007-08: 129; F.Y. 2014-15: 240; F.Y. 2021-22: 331

25. Mrs.Yuvika bought a vacant land for ₹ 80 lakhs in May 2004. Registration and other expenses
were 10% of the cost of land. She constructed a residential building on the said land for ₹ 100
lakhs during the financial year 2006-07.

She entered into an agreement for sale of the above said residential house with Mr.Johar (not a
relative) in April 2015. The sale consideration was fixed at ₹ 700 lakhs and on 23.4.2015,
Mrs.Yuvika received ₹ 20 lakhs as advance in cash by executing an agreement. However, due to
failure on part of Mr.Johar, the said negotiation could not materialise and hence, the said
amount of advance was forfeited by Mrs.Yuvika.

Mrs.Yuvika, again entered into an agreement on 01.08.2022 for sale of this house at ₹ 810 lakhs.
She received ₹ 80 lakhs as advance by RTGS. The stamp duty value on the date of agreement
was ₹ 890 lakhs. The sale deed was executed and registered on 14.01.2023 for the agreed
consideration. However, the State stamp valuation authority had revised the values, hence, the
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value of property for stamp duty purposes was ₹ 900 lakhs. Mrs.Yuvika paid 1% as brokerage
on sale consideration received.

Subsequent to sale, Mrs.Yuvika made following investments:

Acquired two residential houses at Delhi for ₹ 130 lakhs and ₹ 50 lakhs on 31.01.2023 and
15.05.2023.

Acquired a residential house at UK for ₹ 180 lakhs on 23.03.2023.

Subscribed to NHAI capital gains bond (approved under section 54EC) for ₹50 lakhs on
29.03.2023 and for ₹ 40 lakhs on 12.05.2023.

Compute the income chargeable under the head 'Capital Gains' of Mrs.Yuvika for A.Y.2023-24.
The choice of exemption must be in the manner most beneficial to the assessee.

Cost Inflation Index: F.Y. 2004-05 - 113; F.Y. 2006-07 - 122; F.Y. 2022-23 - 331.

Conversion of capital asset in to stock in trade:

26. Mrs.Harshita purchased a land at a cost of Rs.34,88,000 in the financial year 2003-04 and held
the same as her capital asset till 20th March, 2022. She started her real estate business on 21st
March, 2022 and converted the said land into her stock in trade of her business on the said date,
when the fair market value of the land was Rs.210 lakhs.

She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
Rs.10 lakhs. Construction was completed in February, 2023. She sold 10 flats at Rs.30,00,000
per flat in March, 2023. The remaining 5 flats were held as stock on 31st March, 2023.

She invested Rs.50 lakhs in bonds issued by NHAI on 31 st March, 2023 and another Rs.50 lakhs
in bonds of REC Ltd in April, 2023. Compute capital gains & business income arising from above
transactions for assessment year 2023-24 indicating clearly the reasons for treatment for each
item. (Cost inflation Index: 2003-04: 109; 2021-22: 317)
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Computation of capital gain in the case of slump sale (Section 50 B)

27. The Balance Sheet of LMN Ltd as on 30 th November 2022, being the date on which Unit N has
been transferred by way of slump sale is given hereunder:

BALANCE SHEET AS ON 30.11.2022

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up capital 1,700 Fixed Assets:
Reserves 620 Unit L 150
Unit M 150
Unit N 550
Liabilities
Unit L 40 Other assets
Unit M 110 Unit L 520
Unit N 90 Unit M 800
Unit N 390
TOTAL 2,560 TOTAL 2,560

 Using the information given below, calculate the capital gain arising on slump sale of Unit N:

 Slump sale consideration Rs.850 lakhs. However, fmv of assets of unit N on the date of transfer is
Rs.880 lacs.

 Fixed assets of Unit N includes land which was purchased at Rs.60 lakhs in the year 2008 and
revalued at Rs.90 lakhs as on 31.03.2022.

 Fixed assets of Unit N reflected at Rs.460 lakhs (Rs.550 lakhs less land value of Rs.90 lakhs) is the
written down value of depreciable assets as per books. However, the written down value of
these assets under section 43 (6) of the Income-tax Act is Rs.410 lakhs.

 Other assets of Unit N shown at Rs.390 lakhs represent book value of non-depreciable assets.

 Unit N is in existence since July, 2007

 CII may be taken as 125 for 2007-08 and 331 for 2022-23
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28. PQR Ltd has two units – one engaged in manufacture of computer hardware and the other
involved in developing software. As a restructuring drive, the company has decided to sell its
software unit as a going concern by way of slump sale for Rs.345 lakhs to a new company called S
Ltd, in which it holds 74% equity shares. Fair market value of the assets transferred as on the
date of transfer is Rs.385 lakhs.

The balance sheet of PQR Ltd as on 31 st March 2023, being the date on which software unit has
been transferred, is given hereunder:

BALANCE SHEET AS ON 31.03.2023

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up share capital 300 Fixed Assets:
General Reserve 150 Hardware unit 170
Share premium 50 Software unit 200
Revaluation Reserve 120 Debtors
Current liabilities Hardware unit 140
Hardware unit 40 Software unit 110
Software unit 90 Inventories
Hardware unit 95
Software unit 35
Total 750 Total 750

Following additional information is furnished by the management:

a. The software unit is in existence since May, 2011

b. Fixed assets of software unit include land which was purchased at Rs.40 lakhs in the year 2010
was revalued at Rs.60 lakhs as on 31st March, 2023

c. Fixed assets of software unit reflected at Rs.140 lakhs (Rs.200 lakhs minus land value Rs.60
lakhs) is written down value of depreciable assets as per books of account. However, the written
down value of these assets under section 43 (6) of the Income-tax Act is Rs.90 lakhs.

Ascertain the capital gain, which would arise from slump sale to the company.

COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

29. Mr.A owns a land which was compulsorily acquired by NHAI on 10.01.2022 and he was
compensated for a sum of Rs.1 crore on 25.02.2022. The market value of the said property as on
the date of compulsory acquisition is Rs.2.5 crore. Mr.A filed a suit against NHAI challenging the
quantum of compensation.

On 26.07.2022, court passed an interim order granting an additional compensation of Rs.1.25

crores and the same was received on 27.07.2022. However, the final order of the court was made
on 20.04.2023 confirming the interim order. Determine the year of chargeability.
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Solution: Taxable in the year in which the Court passes the FINAL order:
Year of chargeability of original compensation shall be the year in which such compensation
was received. Accordingly, Rs.1 crore shall be chargeable in the A.Y.2022-23.

Enhanced compensation received in pursuance of an interim order shall not be chargeable to

tax in the year in which it is received. Such enhanced compensation shall be chargeable in the
year in which the final order of the court is passed.

In the given case, though the interim order was passed in the financial year 2022-23, the year of
chargeability shall be A.Y.2024-25, being the year in which court has passed the final order.
Thus, Rs.1.25 crores shall be chargeable to tax only in the A.Y.2024-25.
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CHAPTER 15: TAXATION OF TRUSTS

Types of Trusts:
a. Religious trust (a temple run by a trust); or
b. Charitable trust; or
c. Partly religious & partly charitable trust

Income of a trust is EXEMPT u.s.11 only if the following conditions are satisfied:

a. The trust should be REGISTERED u.s.12AA or u.s.12AB of the IT Act

b. At least 85% of the income should be APPLIED for the objects of the trust
c. If 85% could not be applied, the trust has the OPTION TO ACCUMULATE
d. The accounts should be AUDITED if the total income exceeds basic exemption.

“INCOME” includes:
1. Income from property held by the trust;
(includes any income except agricultural income. It also includes business income)

2. Voluntary contributions received (corpus or anonymous donations or grants)

(Corpus donations are not taxable) (anonymous donations are taxed @ 30%)

What are CORPUS DONATIONS?

A donation will be treated as corpus donation only if it is received with a specific direction
from the donor that they should form part of corpus of trust.

Important: Corpus donations shall be exempt only if such donations are invested in
modes or forms specified u.s.11(5).

What are ANONYMOUS DONATIONS?

The trust does not maintain a record of the identity of the donor (e.g. the name and address
of the donor). Such A.D. are taxed @ 30% (after excluding 5% of total (all) donations of the
trust or Rs.1,00,000) (whichever is higher)

Prescribed Modes of Investments – Section 11(5)

a. Government Savings Certificates (e.g. IVP, KVP)
b. Post Office Savings Banks
c. Deposit with Schedule Banks or Co-operative Banks
d. Units of UTI
e. Government Securities
f. Investment or deposits in any Public Sector Company
g. Immovable Property
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1. XYZ Charitable Trust is an educational institution registered u.s.12AB of the Income-tax Act.
During the FY 2022-23, the trust receives a corpus donation of Rs.25 lakhs with a specific
direction that the corpus fund should be utilised for setting up a science laboratory. The trust
intends to set up the lab only during P.Y. 2024-25 and will utilize the funds only during that
financial year. In this regard, the trust wants to understand whether the corpus donations are
exempt u.s.11(1)(d) of the Income-tax Act.

Answer: Corpus donations shall be exempt only if such donations are invested in modes or
forms specified u.s.11(5).

Anonymous donations are taxable in case of the following trusts:

 Wholly Charitable: A.D. to be taxed @ 30%
 Wholly Religious: A.D. are not taxed @ 30% but treated as normal donations

Example:
TULSI FOUNDATIONS, a public charitable and religious trust registered u.s. 12AB, runs a hospital and
also owns a temple. It furnishes you the following information for the year ended 31st March, 2023:
Voluntary contributions received from public amounted to Rs.35 lakhs. It includes corpus donation of
Rs.5 lakhs and anonymous donation Rs.10 lakhs. Out of the anonymous donations of Rs.10 lakhs, Rs.8
lakhs are made to the donation box of temple.

Answer: Corpus donations shall be exempt only if such donations are invested in modes or
forms specified u.s.11(5).

Out of anonymous donations of Rs.10 lakhs; Rs.8 lacs shall be treated as normal donations and
balance shall be taxed at 30%.

Section 10(23C): Income of Education Institutions and Hospitals

Any university or any educational institution (say A) existing solely for educational
purposes and not for profit or any hospital (say B) existing solely for philanthropic
purposes and not for profit, whose aggregate annual receipts (A & B) do not exceed Rs.5
crores, entire income from such activity shall be exempt u.s.10(23C)(iiiad) &
u.s.10(23C)(iiiae).

2. A not for profit trust undertakes philanthropic activities through an educational institution and
a hospital. During the P.Y.2022-23 the trust had annual receipts of Rs.3 crores from its
educational institution and Rs.4 crores from the hospital. During the P.Y.2022-23, it desires to
avail exemption u.s.10(23C)(iiiad) and 10(23C)(iiiae), as the individual threshold under each of
the sub clauses, is less than Rs.5 crores. Can it do so? Examine.

Answer:
Aggregate annual receipts of both the institutions exceeds Rs.5 crores during the year, hence
exemption shall not be available.
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How to compute taxable income of a trust?

Income of trust from property & contributions xxx

(excluding corpus donations & anonymous donations)

Less: General exemption of 15% xxx

Balance 85% xxx

Less: Exemption based on application xxx

Less: Exemption based on accumulation: xxx

Taxable Income of the Trust xxx

Important: Provisions of section 40(a)(ia) and section 40A(3) are also applicable while
computing business income of the trust.

APPLICATION OF INCOME:
A trust must utilize or spend at least 85% of its INCOME during the previous year for the
objects of the trust. If, in any previous year, the income applied to the objects of the trust
falls short of 85% due to the reason that:

A. Income has not been received: then such income can be applied/used during the
previous year in which the income is received or in the immediately following year;
or

B. Any other reason (e.g. received on the last day of the previous year):
then such income can be applied/used during the year immediately following the
previous year in which the income was received.

The option to apply the income in the other year as above should be exercised in writing
before the due date for furnishing return of income.

Examples of Application of income:

 Can be used for revenue or capital purpose
 A trust making donations to another trust (except corpus donations)
 Repayment of loans including interest taken to fulfil the objects of the trust
 Loans advanced by an educational trust to students for higher studies
 Payment of taxes whether of current year or past years

Important: A registered trust making a corpus donation to another registered trust

cannot be treated as application of income. (Amendment)
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3. Ramji Charitable Trust, registered u.s.12AB and recognized u.s.80G of the Income-tax Act, 1961,
was created for providing relief to disabled persons. It filed the return of income for the year
ended 31.3.2023 declaring 'Nil' income. While completing the assessment, the Assessing
Officer found that a large sum was donated to the corpus of another trust by the assessee i.e.,
Ramji Charitable Trust. The contention of the assessee was that corpus donations to another
trust is treated as application of income. Discuss the validity.

Answer:
A registered trust making a corpus donation to another registered trust cannot be treated as
application of income. Therefore, the contention of the assesse is not correct.

ACCUMULATION OF INCOME:
Where 85% of the income is not applied for objects, the charitable trust may accumulate or
set apart either the whole or part of its income for future application for such purposes.

For this purpose such trust has to inform the AO the purpose and period (maximum 5
years) for which the income is accumulated or set apart. The benefit of accumulation is not
available if Form No.10 is not uploaded before the due date of filing return of income. The
amount accumulated should be invested in specified forms and modes.

4. Compute taxable income of a Registered Charitable Trust in the following cases:

Income of the trust Applied for objects Accumulated for future

A. Rs.40 lacs Rs.30 lacs Nil
B. Rs.10 lacs Nil Rs.6,00,000
C. Rs.6 lacs Rs.2 lacs Rs.3 lacs

D. Rs.25,00,000
(includes corpus donation
of Rs.5 lacs) Nil Rs.14.5 lacs

E. Rs.8 lacs
(Rs.2 lacs due but not
received) Rs.80,000 Rs.3 lacs

Can a trust carry “business activities”:

A Trust can carry out business activities if such activities are incidental to the attainment of
its objectives and separate books are maintained.
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5. A public charitable trust registered u.s.12AA/12AB, for the previous year ending March 31,
2023, derived gross income of Rs.21 lakhs, which consisted of the following:

Income from properties held by trust (net) Rs.10,00,000

Income (net) from business (incidental to main objects) Rs.4,00,000
Voluntary contribution from public Rs.7,00,000

The trust applied a sum of Rs.11.60 lakhs towards charitable purposes during the year,
which includes repayment of loan taken for construction of orphan home of Rs.3.60 lakhs.
Compute the taxable income of the trust for AY 2023-24.

6. An institution operating for promotion of education claiming exemption under section 11

since 1994 furnishes the following data for the assessment year 2023-24:

1. Fees collected from students Rs.14 crores

2. Construction of a new computer science laboratory Rs.0.50 crores
3. Land acquired to be used as a cricket field for the students Rs.2 crores
4. Amount earmarked and set apart for construction of an arts
block within the next 4 years Rs.4 crores

Compute the total income of the institution for the A.Y.2023-24.

7. Gangaram Public Charitable Trust runs a hospital registered u.s.12A. The gross receipts
from its operational activities are Rs.250 lacs and expenses incurred are Rs.50 lacs.
Depreciation on various assets used in the hospital is Rs.15 lacs. Out of income of Rs.250
lacs, the amount accrued but not received as on 31.03.2023 is Rs.20 lacs.

The institution earmarked and set apart Rs.30 lacs in March, 2023 to give as advance for a
building intended to be taken on lease for expansion of the hospital, but the amount was
paid on 7th April, 2023, as the lease agreement could not be signed by 31st March, 2023.

The trust has got an ERP package developed and installed by an IT company during the
year. The total cost to the trust on account of the ERP package was Rs.85 lacs. Advise the
trust on its total income, if the trust has incurred Rs.12 lacs for purchase of a number of
desktop and laptop computers for use in the hospital.
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8. Public Charitable Trust (Registered under section 12AA) furnishes the following data for
the financial year ending 31.3.2023.

S. No. Particulars Rs. (in lacs)

(i) Income from engineering college affiliated to university 10

(ii) Income from properties held in trust (out of this Rs.2 lacs was not
received during the year and Rs.3 lacs was received only on the last
day of the year) 26

(iii) Net income from business held under trust (as incidental to the main
objects) as per books 2

(iv) Amount spent on free scholarship, free meals and fee medical relief 9

(v) Repayment of loan taken for construction of Health Care Centre 3

You are required to:

a) Compute the taxable income of the Trust for the assessment year 2023-24. Assume
that option is exercised under Explanation to section 11(1) of the Act.

b) Advise how the taxability on the computed income could be minimized or reduced.

9. Compute the amount of A.D. chargeable to tax u.s.115BBC @ 30%. The trust is established
wholly for charitable purposes.

Total donations Anonymous donations Taxable @ 30% Balance

included in total donations normal rates
30,00,000 12,00,000 10,50,000 1,50,000
1,00,00,000 60,00,000 55,00,000 5,00,000
24,00,000 2,00,000 80,000 1,20,000
10,00,000 80,000 nil 80,000

10. XYZ is a public charitable trust created under a trust deed for providing relief to physically
challenged persons and registered under section 12AB. The following are the particulars of
receipts of the trust during the year ending March 31, 2023:

Particulars lakhs
Income from properties held by trust (net) 15
Income (net) from business (incidental to main objects) 14
Voluntary contributions from public 18
(including the corpus donation of Rs.7 lakhs)
 242

The trust applied Rs.18 lakh towards various activities and programmes undertaken for the
benefit of physically challenged persons during the year. The trust has also paid Rs.8 lakh
towards repayment of a loan taken two years back for the purpose of construction of its
centre for training the handicapped persons in various handicraft works and sports.

The trust gave a corpus donation of Rs.5,00,000 to another Trust XYZ registered under
section 12AA and having objects similar to assessee trust. The donation has been given to
Trust XYZ with a specific direction that it is towards corpus of Trust XYZ.

Determine the tax liability, if any, of the trust for the assessment year 2023-24 and also
state how the trust can mitigate such liability.

11. M/s.Mahan Charitable Trust is running an educational institution with hostel facility for the
orphan children. It is registered under section 12AB.

The details of income and expenditure of the Trust are as given below:
a) Voluntary contributions received during the years 150 lakhs.
This includes:
i. Corpus donation Rs.20 lakhs
ii. Donation of Rs.20 lakhs from Mr.Michael, a foreign donor, which was received
on 31.03.2023.

b) Salary paid to teachers and administrative staff Rs.40 lakhs.

c) Other general expenses Rs.10 lakhs includes payment to grocery stores of Rs.30,000
by crossed cheque.

d) A land belonging to the Trust in a nearby village which was purchased in the year
2016-17 for Rs.5 lakhs were sold for Rs.10.50 lakhs and another land adjacent to the
Trust premises was purchased for Rs.12 lakhs to be used as playground for the
children.

e) Five laptops costing Rs.50,000 each were purchased during the year for teaching
purposes.

f) The Trust had accumulated Rs.30 lakhs under section 11(2) for 3 years in the
financial year 2018-19 for constructing a school building. Amount spent for the said
purpose till 31.03.2022 was Rs.27 lakhs. The project is completed with a saving in
project cost.

g) Two additional rooms measuring 1500 sq. ft. each were constructed in the existing
hostel for the children. Cost of construction is Rs.1200 per sq. ft.
 243

h) It made a corpus donation of Rs.20 lakhs to a charitable trust registered u/s.12AB

having similar objects.

Compute taxable income of Mohan Charitable Trust for the assessment year 2023-24.
Support your answer with necessary working notes.

12. Mani foundations, a charitable trust registered under section 12AB of the Income tax Act
run schools for primary and secondary education. The following particulars pertaining to
the previous year 2022-23 are furnished to you by the trust:

S. No. Particulars Rs. in lakhs

i. Gross receipts from students towards 200
tuition fees, development fees, laboratory fees, etc.

ii. Voluntary contributions received from public 25

(including anonymous donation Rs.5 lakhs)

iii. Government grants 8

iv. Donation given towards corpus to a trust registered 2

u/s.10(23C)

v. Amount applied for the purpose of schools 105

vi. Included in (v) above, a sum of Rs.5 lakhs, being the amount
applied for the benefit of the founder of the trust.

vii. The trust set apart Rs.55 lakhs for acquiring a building to
expand its schools. But the amount was paid in May 2023
when the sale geed was registered in its name. 55

viii. Excess of expenditure over income in the P.Y. 2021-22 25

Compute the total income of the trust for the assessment year 2023-24 in order to avail
maximum benefits within the four corners of law.
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13. Tulsi Foundations, a public charitable and religious trust registered under section 12AB,
runs a hospital and also owns a temple. It furnishes you the following information for the
year ended 31st March, 2023:

i Gross receipts from hospital Rs.200 lakhs.

ii Voluntary contributions (not included in gross receipts) received from public amounted
to Rs.35 lakhs. It includes corpus donation of Rs.5 lakhs and anonymous donation Rs.10
lakhs. Out of the anonymous donations of Rs.10 lakhs, Rs.8 lakhs are made to the
donation box of temple.

iii Operational expenses incurred for the hospital amounted to Rs.94 lakhs and for the
temple amounted to Rs.15 lakhs.

iv On 01.01.2023, Rs.6 lakhs was paid to a contractor in cash for the overall maintenance
of the hospital. This amount is included in the operational expenses of the hospital.

v On 1st May, 2022, the trust purchased and installed new computer software for Rs.25
lakhs for the hospital. The rate of depreciation is 40% as per the Income-tax Act, 1961.

vi The trust gave donation of Rs.12 lakhs to Balaji trust (having objects of charitable
nature), registered under section 12AB, but not similar to the objects of the donor trust.

Compute total income and tax liability of the trust for A. Y. 2023-24 in such a manner
that it can avail optimal benefit within the four corners of law.

14. A public charitable trust registered u.s.12AA/12AB runs a hospital and also a medical
college. It furnishes you the following information for the year ended 31st March, 2023:

i. Gross receipt from Hospital Rs.425 lakhs

ii. Income from business - incidental to main objects Rs.2 lakhs.

iii. Voluntary contributions received from public Rs.32 lakhs. It includes corpus
donation of Rs.3 lakhs and anonymous donation of Rs.5 lakhs.
Note: Voluntary contributions are included in Gross receipt given in (i) above.

iv. Hospital operational expenses incurred Rs.105 lakhs. (This does not include
capital expenditures and depreciation)

v. Gross receipt given in (i) above includes a sum of Rs.55 lakhs which has accrued but
not received. Further, a sum of Rs.18 lakhs was received only on 31.03.2023.
 245

vi. The trust set apart Rs.80 lakhs for acquiring a building to expand its hospital.
But the amount was paid in May, 2023 when sale deed was registered in its name.

vii. In June, 2022, the trust purchased and installed new computer software for Rs.28
lakhs. The rate of depreciation is 40% as per Income-tax Act, 1961.

viii. The trust incurred Rs.35 lakhs towards purchase of laptops, computers and printers
for the hospital.

ix. It repaid loan of Rs.15 lakhs taken earlier for construction of hospital building.

Compute the total income of the trust for the assessment year 2023-24 in
order to avail maximum benefits within the four corners of law.

CAPITAL GAINS:
Where a capital asset held under trust, is transferred:

Amount exempt is:

a. If entire net consideration is invested then entire capital gain is exempt.
b. If part of net consideration is invested then amount exempt is the difference
between the cost of new asset acquired and the cost of old asset sold.

15. Shree Ram Charitable Trust registered under section 12AA/12AB of the Income-tax Act,
1961 runs a school. During the year ended 31st March, 2023, it sold one building for a sum
of Rs.50 lacs. The building was acquired by the trust at Rs.10 lacs in the year 2018-19. The
trust utilized Rs.41 lacs out of sale consideration in construction of an additional school
building. Advise the trust on the taxable capital gain.

16. Ramji Charitable Trust had sold a capital asset costing Rs.70,000 on 13.06.2022 for
Rs.1,50,000. It purchased new assets on 01.07.2022 for Rs.1,20,000. The amount taxable
as capital gains for Ramji Charitable Trust in assessment year 2023-24 is :-

A. Rs.80,000 B. Nil C. Rs.30,000 D. Rs.40,000

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SECTION 2(15): “CHARITABLE PURPOSE” includes:

i. Relief of the poor;

ii. Education;
iii. Yoga;
iv. Medical relief;
v. Preservation of environment (including watersheds, forests and wildlife) and
vi. Preservation of monuments or places or objects of artistic or historic interest; and
vii. Advancement of any other object of general public utility.

Can a trust carry “business activities”:

A Trust can carry out business activities if such activities are incidental to the attainment of
its objectives and separate books are maintained.

Restriction on “Advancement of any other object of general public utility”:

“Advancement of any other object of general public utility” shall not be treated as
charitable purpose if it involves the carrying on of any business where the total receipts
from such business exceeds 20% of the total receipts of the trust.

Receipts from business activities < 20% of total receipts: Charitable Status is NOT lost
Receipts from business activities > 20% of total receipts: Charitable Status is lost

17. XYZ Charitable trust, derives the following income:

i. Total receipts of the trust Rs.100 lakhs

ii. The gross receipts from commercial activity during the year is Rs.25 lakhs. The entire
profit from commercial activity has been applied for the object of the trust.

Would XYZ Charitable trust lose its “charitable” status if:

a. The trust is running an educational institution

b. The trust is involved in preventing the deforestation of forest areas
c. The trust is carrying on the operations of preservation of Taj Mahal in India
d. The trust is formed solely for providing yoga
e. The trust is established for the advancement of objects of general public utility

18. An institution having its main object as “advancement of general public utility” received Rs.30
lakhs in aggregate during the previous year 2022-23 from an activity in the nature of trade.
The total receipts of the institution, including donations, was Rs.140 lakhs. It applied 85% of
its total receipts from such activity during the same year for its main object i.e. advancement of
general public utility.

(i) What would be the tax consequence of such receipt and application thereof by the
institution?
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(ii) Would your answer be different if the institutions total receipts had been Rs.150
lakhs (instead of Rs.140 lakhs) in aggregate during the p.y.2023-24?

(iii) What would be your answer if the main object of the institution is “relief of the
poor” and the institution receives Rs.30 lakhs from a trading activity, when its total
receipts are Rs.140 lakhs and applies 85% of the said receipts for its main object?

Specified persons (related persons):

a. Author or founder of the trust
b. Any trustee or manager of the trust
c. any person who has made donation above Rs.50,000
d. Relatives of author, founder, donor, member, trustee or manager.

Note: Specified persons do not include “employees”.

EXIT TAX - TAX ON ACCRETED INCOME ON CERTAIN TRUSTS

A trust or an institution carrying on charitable activity may:-
a) Voluntarily wind up its activities and dissolve; or
b) Merge with any non-charitable institution; or
c) Convert into a non-charitable organisation

Section XII-EB imposes additional income tax in the nature of exit tax when the
organisation is converted into a non-charitable organization or gets merged with a non-
charitable organization or does not transfer the assets to another charitable organization.

Exit tax payable: MMR @ 34.944% (30% + 12% + 4%) on accreted income

Assets to be ignored while computing accreted income:

a) Assets acquired out of agricultural income;
b) Assets acquired before registration
c) Assets transferred to another registered charitable institution within 12 months
from the end of the month of dissolution.
d) TDS/TCS/Advance tax
e) Deferred Revenue Expenditure

Valuation rules:

Quoted shares: Average of highest and lowest price (if no trading; previous day)

Unquoted shares: (A+B-L)/no. of equity shares

A: book value of all assets in the balance sheet
B: fmv of immovable property, bullion, jewellery, shares.
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L: book values of liabilities shown in the balance sheet

(does not include share capital; reserves and surplus; dividend;
provision for tax; provision for unascertained liabilities; contingent
liabilities)

Shares and securities other than equity shares:

Price it would fetch if sold in the open market

Immovable Property:
Price it would fetch if sold in the open market OR SDV (whichever is higher)

Any other asset:

Open market value

Liabilities:
Does not include: Accumulated corpus fund; reserves and surplus; contingent liability;
provision for unascertained liabilities; provision for taxation.

19. "Serving the poor", a charitable trust, is registered under section 12AA of the Act. On
1.4.2022, it got merged with M/s.AP Ltd., which is a company engaged in manufacturing of
steel utensils.

All the assets and liabilities of the erstwhile trust became the assets and liabilities of M/s.
AP Ltd who is not entitled for registration under section 12AB of the Act.

The trust appointed a registered valuer for the valuation of its assets and liabilities. From
the following particulars (including the valuation report), calculate the tax liability in the
hands of the trust arising as a result of such merger:

Stamp duty value of land held Rs.15 lakhs. However, if this land is sold in the open market,
it would ordinarily fetch Rs.17 lakhs. The book value of the land is Rs.20 lakhs.

75,000 equity shares in Ink Ltd. traded in Delhi Stock Exchange. The lowest price per share
on 1.4.2022 was Rs.75 and the highest price on that day was Rs.85. The book value was
Rs.67 lakhs.

55,000 preference shares held in N Ltd. The shares will fetch Rs.44 lakhs, if they are sold in
the open market on 1.4.2022. Book value was Rs.25 lakhs.

Corpus fund as on 1.4.2022 Rs.15 Lakhs.

Outside liabilities Rs.90 lakhs
Provision for taxation Rs.5 lakhs.
Liabilities in respect of payment of various utility bills Rs.6 lakhs.
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20. Helpage is a charitable trust set up on 1.4.2011 with the object of providing relief to the
poor. Later on, in April, 2013, it changed its object to medical relief. It applied for
registration on the basis of its new object, i.e., medical relief, on 1.9.2013 and was granted
registration under section 12AA on 1.2.2014.

On 1.4.2022, Helpage got merged with M/s.Medicare (P) Ltd, a pharmaceutical company
not entitled for registration under section 12AB. All the assets and liabilities of the
erstwhile trust became the assets and liabilities of M/s.Medicare (P) Ltd. The trust
appointed a registered valuer for the valuation of its assets and liabilities. From the
following particulars (including the valuation report), calculate the tax liability in the hands
of the trust arising as a result of such merger:

(i) Land:
Location Date of SDV as on Value if sold book value
Purchase 01.04.2022 in open market on 01.04.2022
Noida 01.09.2011 55 lakhs 58 lakhs 50 lakhs
Coimbatore 01.09.2014 100 lakhs 120 lakhs 110 lakhs

(ii) Shares:
Type of shares Date of Face value Purchase BSE Price Market value
Purchase of each price of on 1.4.2022 01.04.2022
Share each share
5000 quoted 01.05.2015 Rs.100 Rs.110 High Price Rs.320 ***
equity shares Low Price Rs.300
of A Ltd

2000 preference 01.09.2016 Rs.100 Rs.100 *** Rs.180

Liabilities:
Book value of liabilities as on 01.04.2022 is Rs.120 lakhs. This includes:-
a) Corpus fund Rs.12 lakhs;
b) Provision for tax Rs.8 lakhs; and
c) Reserves and surplus Rs.18 lakhs
 250

CHAPTER – 16: IMPORTANT CASE LAWS

1. 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.

Business income or income from house property?

Issue involved:
The issue under consideration is whether the income derived by the company by letting out
properties owned by it is taxable as business income or as income from house property.

Provisions applicable:
Where the income in question is one earned as a mere owner of the property, it will be income from
house property. If the income is one derived from the business of the company, which included
letting out the properties owned, it would be business income, for which various deductions will be
available.

Analysis:
Where there is letting out of properties, the assessment under “IFHP” may be correct but not so,
where the letting or sub-letting is part of a trading activity. 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.

2. 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.

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.

Provisions applicable
Exemption will be available u/s.54, where the long-term capital gain derived by a resident
individual/HUF is invested in purchase of another residential house within a period of 2 years from
the date of transfer.
 251

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.

3. 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?

Already done: Refer tds chapter

4. Mr.Dhanapal, a resident individual, sold a house plot purchased 48 months back for Rs.70 lakhs and
invested the net sale proceeds in purchase of a residential house within 6 months from the date of sale.
He does not own any other residential house. The new house, however, is in the name of his wife. The
Assessing Officer refuses to grant exemption under section 54F on the ground that the new residential
house is not in the name of the assessee. Is the rejection justified?

Exemption u/s 54F:

Issue involved:
The issue under consideration is whether exemption u.s.54F can be denied to the assessee, if the
net sale proceeds of a long term capital asset are invested in a new residential house within the
stipulated time limit but the said house is purchased in the name of his wife and not in his name.

Provisions applicable:
Section 54F requires purchase or construction of a residential property within the specified period.
It does not require purchase of new residential house in the name of the assessee himself. It only
requires the assessee to purchase or construct a residential house within the stipulated time limit.

Analysis of the given issue:

In this case, Mr.Dhanapal had not purchased the new house in the name of a stranger or somebody
who is unconnected with him, but had purchased it in the name of his wife. The entire investment
for purchase of new residential house had come out of the sale proceeds of the plot belonging to Mr.
Mr.Dhanpal. Therefore, Mr.Dhanapal is entitled to claim exemption u/s 54F in respect of utilization
of sale proceeds of plot of land for investment in residential house property in the name of his wife.

Conclusion:
As a consequence, the action taken by the Assessing Officer in rejecting the claim for deduction u.s.
54F in the hands of Mr.Dhanapal due to the reason that he had invested the sale proceeds in
purchasing a new residential house in the name of his wife rather than in his name, is not valid.
 252

5. Anustup Chandra Textiles Ltd., had borrowed a sum of Rs.2 crores from a bank during the period when
its business was being set up. From the surplus funds, it made short-term deposits and earned interest
of Rs.3 lakhs. The assessee claimed that it was not a revenue receipt but a capital receipt, since the
interest was earned prior to commencement of business and in any case, the interest received would be
offset by the interest paid on the loan borrowed. The Assessing Officer negative the claim of the
assessee. Is the AO justified in his action?

Taxability of interest from deposits made out of borrowed funds:

Issue involved:
The issue under consideration is whether the interest income of Rs.3 lakhs on short-term fixed
deposits made out of the unspent amount of term loan, would be a capital receipt not chargeable to
tax or a revenue receipt chargeable to tax.

Provisions applicable:
Interest which is chargeable to tax under the Income-tax Act, 1961 would be assessable under the
head “Income from Other Sources”,
a. if such income is not exempt, and
b. is not chargeable to tax under any other head including “Business or profession”.

Analysis of the issue:

Interest earned by the assessee is clearly its income and unless it can be shown that there is
exemption under any provision of the Act, like section 10, such income will be taxable. The fact that
the source of income was borrowed money does not detract anything from the revenue character of
the receipt.

The interest payable on funds borrowed for the business prior to commencement of such business
can be capitalized. However, such interest payable cannot be adjusted against interest received on
investment of surplus funds assessable under the head “Income from Other Sources”.

Conclusion:
The Assessing Officer is correct.

6. Vishal Hotels Ltd., runs a famous restaurant. Customers frequenting the same, add tips to be given to
the servers in the food bill while making the payment. The tips so collected by the hotel is pooled and
distributed to all the employees. The Assessing Officer of the TDS Ward has issued a notice stating that
the assessee should deduct tax at source from the tips distributed to the employees, since the same is
nothing but payment of salaries. Assessee seeks your advice. (or)

MNC Ltd. is engaged in this business of managing and operating hotels. The assessee allowed the
employees to accept tips from customers. Some customers paid the bill and tips to the employees
through credit card. The assessee, being employer collected the amounts and disbursed tips to the
employees on monthly basis. The assessee did not deduct tax at source on the said payments as the
amounts were not in the nature of salary. Does the action of the assessee satisfy the legal
requirements?

Refer TDS chapter for answer

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7. Ram and Rahim were Executive Directors of Saraswati Tea Pvt. Ltd. In respect of a bank loan, they
gave their personal guarantee. The assessee-company paid them guarantee commission of Rs.1 lakh
each. The Assessing Officer feels that this is a disguised payment of dividend under section 2(22) and is
not a commission which is deductible as business expenditure. He has disallowed the same. Is the
action of the AO valid in law?

Allowability of commission paid to directors:

Issue involved:
The issue under consideration in this case is whether guarantee commission paid by a company to
its employee directors is deductible as its business expenditure, where such guarantee was given by
the employee directors to the bank for enabling credit facility to the company, and whether it can
be contended that the same would have been payable as dividend had it not been paid as
commission.

Provisions applicable:
In the absence of any specific disallowance, expenditure incurred wholly and exclusively for the
purpose of business has to be allowed under section 37.

Analysis of the issue:

The directors of the company are employees of the company and are entitled to remuneration for
the services rendered as employees. In this case, they also provided personal guarantee to banks,
since it was a precondition laid down by the bank to provide financial assistance to the company.
This act of providing personal guarantee was clearly beyond the scope of their services as
employees of the company. The assessee-company, in its commercial wisdom, passed a resolution
resolving that the directors be paid commission for providing their personal guarantees for the
financial assistance availed by the assessee-company from the bank. In such a case, the Assessing
Officer only has to determine whether the transactions are real and genuine.

As regards section 36(1)(ii), the recipient directors were not entitled to receive the amount as
commission in lieu of dividend. Dividend is paid to all the shareholders and the recipient directors
were not the only shareholders of the company. The payment of commission, hence, cannot be
taken as payment of dividend, since payment of dividend would result in payment to all the
shareholders.

Conclusion:
Therefore, the action of the Assessing Officer, holding that if the amount was not paid to them as
commission, the same would have been payable as dividend is not valid.

8. Govinda and Vaamana were partners in a firm, which got dissolved consequent to the demise of
Govinda. The firm had unabsorbed losses. Vaamana, who took over the business, has set off the said
loss in his personal hands in the subsequent year. Such set off is not allowed by the Assessing Officer.
Is his action correct?
 254

Set off of losses:

Issue involved:
The issue involved in this case is whether the loss suffered by an erstwhile partnership firm, which
was dissolved, can be carried forward for set-off by the individual partner who took over the
business of the firm as a sole proprietor, considering the succession as a succession by inheritance.

Provisions applicable:
Section 78(2) deals with carry forward of losses in case of succession of business. It provides that
only the person, who has incurred the losses, and no one else, would be entitled to carry forward
the same and set it off. An exception provided there under is in the case of succession by
inheritance.

Analysis of the issue:

Upon dissolution, the partnership firm, ceased to exist. Also, the partnership firm, and the sole
proprietorship concern are two separate and distinct units for the purpose of assessment. The
exception given in section 78(2), permitting carry forward of losses by the successor in case of
inheritance, is not applicable in the present case since the partnership firm was dissolved and
ceased to continue. Taking over a business by a partner cannot be considered as a case of
inheritance due to death as per the law of succession.

Conclusion:
The action of the Assessing Officer in disallowing the claim of set-off of losses suffered by the
erstwhile partnership firm ST & Co. against the income earned as an individual proprietor is,
therefore, correct.

9. Dempo Ltd. transferred its factory building for Rs.65 lakhs. The company owned only one such
building in the block of assets. The written down value of the factory building was Rs.13.95 lakhs. The
company acquired the building 10 years ago for Rs.40 lakhs. It deposited Rs.50 lakhs in REC bonds
within one month after the transfer of factory building. The company claimed exemption u.s.54EC. Is
the claim of the company tenable in law?

Exemption u/s.54EC relating to depreciable assets:

Issue involved:
The issue is whether exemption under section 54EC can be claimed in respect of capital gain on
transfer of depreciable asset where the asset had been held for more than 24 months.

Provisions applicable:
As per section 54EC, where capital gain arises from transfer of any long- term capital asset and such
capital gain or part thereof is invested in specified asset (which includes REC bonds) within 6
months from date of transfer, exemption is available up to maximum limit of Rs. 50 lakhs.

Analysis of the issue:

Under section 50, capital gain arising from transfer of depreciable asset shall be deemed to be short
term capital gain. However, the deeming provision is limited to computation of capital gain and
does not go beyond to deny the benefits of exemption under section 54EC or section 54F.
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Where the asset forming part of the block was held for more than the specified period (24 months
for building / 36 months for other capital assets) is eligible to be categorized as long term capital
asset, the benefit of exemption is allowable.

Conclusion:
Hence, the claim of the company is tenable in law.

10. Sagoserve Co-operative Society was a co-operative society deriving income of Rs.2 crore, for which
deduction was allowed u.s.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? (or)

Can the provisions of Section 14A of the IT Act, be applied for disallowing expenditure relating to
income for which deduction is available under Chapter VI-A, or the section can be invoked only in
respect of expenditure relating to income exempt under the provisions of section 10? (or)

Jayakrishna Flour Mills Pvt. Ltd., has derived an income of Rs.1.2 crore from generation and
distribution of electricity, using windmills. Such profits have been claimed as 100% deduction under
section 80-IA. The assessee has paid interest of Rs.60 lakhs to a bank in respect of the term loans on
the windmills. The Assessing Officer wants to invoke the provisions of section 14A in respect of such
interest. Can he do so?

Applicability of Section 14A

Issue involved:
The issue under consideration is whether section 14A can be invoked to disallow expenditure
relating to income covered by deduction under Chapter VIA.

Provisions applicable:
As per section 14A, no deduction shall be allowed in respect of expenditure relating to an income
which does not form part of the total income of the assessee.

Analysis:
In the given situation the income in question was not covered by any exemption under any of the
clauses 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. Section 14A is applicable only in respect of
expenditure relating to income which is exempt under section 10 and not in respect of deduction
available under Chapter VIA.

Conclusion:
The action of the Assessing officer invoking the provisions of section 14A in the given situation is
incorrect.
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11. 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?

Unexplained cash credit – Section 68:

Issue involved:
The issue involved is whether the addition u/s.68 is justified in law.

Provisions applicable:
As per section 68 where any sum is found credited in the books of an assessee 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.

Analysis of the issue:

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. 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.

12. “Ghosh Group of Educational Institutions”, running three famous colleges in Kolkata, claimed
exemptions under section 10(23C). In all these three colleges, there is a net surplus after meeting all
its expenses. The Assessing Officer (AO) rejected the claim for exemption on the ground that the
presence of net surplus leads to the inference that the assessee-institution does not exist solely for
educational purposes. Is the rejection of the AO justified in law?

Exemption u/s 10(23C):

Issue involved:
The issue under consideration is whether the AO is justified in rejecting the claim for exemption u/s
10(23C), on the ground that the assessee-institution does not exist solely for educational purposes.

Provisions applicable:
Section 10(23C)(iiiad) prescribes three requirements, namely:
1. the education institution must exist solely for educational purposes;
2. it should not be for purposes of profit; and
3. the aggregate annual receipts should not exceed Rs.1 crore.
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Analysis of the issue:

Where an educational institution carries on the activity of education primarily for educating
persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely
for educational purposes and becomes an institution for the purpose of making profit.

The predominant object test must be applied - the purpose of education should not be submerged
by a profit making motive;

A distinction must be drawn between the making of surplus and an institution being carried on “for
profit”. Merely because imparting of education results in making a profit, it cannot be inferred that
it becomes an activity for profit;

If after meeting expenditure, surplus arises incidentally from the activity carried on by the
educational institution, it will not cease to be one existing solely for educational purposes.

Conclusion:
Therefore, the action of the Assessing Officer, rejecting the claim for exemption is not valid.
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CHAPTER – 17 TAX PLANNING, TAX EVASION

Question 1:
Distinguish between ‘tax evasion’ and ‘tax avoidance’.

Tax evasion means a method of evading tax liability by dishonest means like suppression,
conscious violation of rules, inflation of expenses etc. while tax avoidance means planning
for minimization of tax burden according to the provisions of the tax laws and within legal
framework, though it defeats the basic intention of legislature.

Tax evasion involves no payment of tax after the liability of tax has arisen while tax
avoidance is planning before hand to avoid tax legally.

Tax evasion involves use of unfair means while tax avoidance takes into account various
lacunas of law.

Question 2:
Distinguish between ‘tax planning’ and ‘tax management’.

Tax Planning Tax Management

(i) Tax planning a wider team and Tax Management is narrower term and is the
includes tax management first step towards tax planning
(ii) Every person may not require tax Tax management is essential for every person
planning
(iii) Tax planning helps in decision Tax management helps in complying the
making conditions for effective decision making
(iv) Tax planning helps to claim Tax management helps in complying the
various benefits of tax conditions for claiming tax benefits

Question 3:
Teerath Ltd. is a widely held company. It is currently considering a major expansion of its
production facilities and the following alternatives are available:

Particulars Alt-1 Alt-2 Alt-3

(Rs.) (Rs.) (Rs.)
Share capital 10,00,000 20,00,000 50,00,000
14% Debentures 15,00,000 20,00,000
18% Loan from Bank 25,00,000 10,00,000

Expected rate of return before tax is 30%. Rate of dividend of the company since 2000 has
not been less than 22% and date of dividend declaration is 30th June every year. Which
alternative should the company opt with reference to tax planning ?
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Question 4:
A company wants to raise capital of Rs.40,00,000 for a project wherefrom earnings before
tax would be 30% of the capital employed. The company can raise debt finance
@ 12% p.a.

The following three alternatives for raising capital are available for the company :
(i) Rs.40,00,000 by equity capital
(ii) Rs.20,00,000 by equity capital and Rs.20,00,000 by loans
(iii) Rs.8,00,000 by equity capital and Rs.32,00,000 by loans.

Assume that the company would distribute the entire amount of profits as dividend. The
tax rate is 26%. Work out which one of the above three alternatives should the company
opt to minimize its tax liability?

Question 5:
Specify with reason, whether the following acts can be considered as (i) Tax planning; or
(ii) Tax management; or (iii) Tax evasion:

a. Mr.P deposits Rs.1,00,000 in PPF account so as to reduce his total income from
Rs.10,00,000 to Rs.9,00,000 and thereby his tax liability.
b. SQL Ltd. Maintains register of tax deduct at source effected by it to enable timely
compliance.
c. An individual tax payer making tax saver deposit in a bank
d. A partnership firm obtaining declaration from lenders/depositors in Form
No.15G/15H and forwarding the same to income-tax authorities
e. A company installed an air-conditioner costing Rs.75,000 at the residence of a
director as per terms of his appointment but treats it as fitted to quality control
section in the factory. This is with the objective to treat it as plant for the purpose of
computing depreciation.
f. AR Ltd issued a credit note for Rs.80,000 as brokerage payable to Mr.X who is the
son of the Managing Director of the company. The purpose is to increase the total
income of Mr.X from Rs.4,00,000 to Rs.4,80,000 and reduce the income of AR Ltd
correspondingly.
g. A company remitted provident fund contribution of both its own contribution and
employee’s contribution on monthly basis before due date.
h. Z Ltd. deducts tax at source but fails to deposit the same in government treasury.
i. Y, a non-resident Indian citizen visits India every year only for 181 days to remain
non-resident
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CHAPTER – 18 FILING OF RETURNS

Due date of filing return of income – Section 139(1):

a) An assessee who is required to furnish

Transfer Pricing Report 30th November

b) Any Company (other than ‘a’ above) 31st October

c) A person whose accounts are required to be

audited under the IT Act or under any other law 31st October

d) A partner of a firm (working or sleeping)

where the firm is subject to audit under
the IT Act or under any other law 31st October

e) In the case of any other assessee 31st July

Who are required to furnish return of income?

1. Every COMPANY or a FIRM is compulsorily required to file return of income irrespective of
income or loss.

2. Every other person (individual or huf) is required to furnish return of income if his total
income without giving effect to:

a. Chapter VI-A deductions; or

b. Section 54, 54B, 54D, 54EC, 54F; exceeds the basic exemption.

3. Mandatory filing of IT returns in certain cases:

An individual who is not required to furnish a return u.s.139(1), is required to file income-tax
return before the due date, if such person:

a. has deposited an amount or aggregate of the amounts exceeding Rs.1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or

b. has incurred expenditure of an amount or aggregate of the amounts exceeding Rs.2 lakhs
for himself or any other person for travel to a foreign country; or

c. has incurred expenditure of an amount or aggregate of the amount exceeding Rs.1 lakh
towards consumption of electricity; or

d. if his total sales, turnover or gross receipts in business > Rs.60 lakhs during the previous
year or total gross receipts in profession > Rs.10 lakhs during the previous year; or
 261

e. if the aggregate of TDS and TCS during the previous year is Rs.25,000 or more (Rs.50,000
or more for senior citizen); or

f. Amount deposited in savings bank account is Rs.50 lakhs or more during the previous
year.

4. Mandatory filing of return by resident person in certain cases:

An individual, being a resident and ordinary resident in India, who is not required to furnish a
return under section 139(1) and who at any time during the previous year:

a) holds, as a BENEFICIAL OWNER, any asset (including financial interest in any entity)
located outside India or has signing authority in any account located outside India; or

b) is a BENEFICIARY of any asset (including financial interest in any entity) located outside
India,

shall furnish, on or before the due date, a return in respect of his income or loss for the
previous year.

a) ‘Beneficial owner’ means an individual who has provided, directly or indirectly,

consideration for the asset for the immediate or future benefit, direct or indirect, of
himself or any other person.

b) ‘Beneficiary’ means an individual who derives benefit from the asset during the
previous year and the consideration for such asset has been provided by any person
other than such beneficiary.

Late fee for delay in filing return of income – Section 234F:

Total income exceeds Rs.5 lakhs : Rs.5,000
Total income of a person does not exceed Rs.5 lakhs : Rs.1,000

Problems:
1. Mr.R furnishes the following particulars for the year ending 31.03.2023:
Income from other sources Rs.2,20,000; LTCG on sale of residential house Rs.72 lakhs
Exemption available u.s.54 Rs.72 lakhs
Examine whether Mr.R should file return of income for A.Y.2023-24.

2. Mr.A furnishes the following particulars for the year ending 31.03.2023:
Income from business Rs.3,30,000; Income from other sources Rs.10,000;
LTCG on sale of urban land Rs.24 lakhs. Amount invested in NHAI bonds Rs.23 lakhs
Deductions under Chapter VI A Rs.2,00,000.
Examine whether Mr.A should file return of income for A.Y.2023-24.
 262

3. Mr.R has taxable income of Rs.1,75,000 during the p.y. 2022-23. He is required to file his IT return
only if:

a. He has deposited an amount exceeding Rs………..in his current account in a bank; or

b. His electricity bill exceeds Rs………….; or
c. His expenditure on foreign travel exceeds Rs………..; or
d. Total turnover in his business has > …………. during the previous year; or
e. Gross receipts in his profession has > ………… during the previous year; or
f. Aggregate of tds and tcs is Rs……….. or more during the previous year
g. Amount deposited in savings bank account is Rs…………or more during the p.y.

4. Mr.Dinesh, a resident in India, has gross total income of Rs.2,30,000 comprising of interest on
saving A/c and rental income during the previous year 2022-23. He incurred expenditure of
Rs.2,00,000 for his son for a study tour to Europe. Whether he is required to file return of income
for the assessment year 2022-23? If yes, what is the due date?

(a) Yes, 31st July of A.Y

(b) Yes, 30th September of A.Y
(c) Yes, 31st October of A.Y
(d) No, he is not required to file return of income.

5. In the following cases relating to P.Y.2022-23, the total income of the assessee or the total income
of any other person in respect of which he/she is assessable under Income-tax Act does not exceed
the basic exemption limit.

You are required to state with reasons, whether the assessee is still required to file the return of
income or loss for A.Y.2023-24 in each of the following independent situations:

i. Manish & Sons (HUF) sold a residential house on which there arose a long term
capital gain of Rs.12 lakhs which was invested in Capital Gain Bonds u/s.54EC so that
no long term capital gain was taxable.

ii. Mrs.Archana was born in Germany and married in India. Her residential status under
section 6(6) of the Income-tax Act. 1961 is 'resident and ordinarily resident'. She owns
a car in Germany which she uses for her personal purposes during her visit to her
parents' place in that country.

iii. Sudhakar has incurred an expenditure of Rs.1,20,000 towards consumption of

electricity, the entire payment of which was made through banking channels.

6. Mr.Y has a total income of Rs.4,50,000 for A.Y.2023-24. He furnishes his return of income for A.Y.
2023-24 on 2nd December, 2024. He is liable to pay fee of:– (a) Rs.1,000 u.s.234F (b) Rs.5,000 u.s.
234F (c) Rs.10,000 u.s. 234F (d) Not liable to pay any fee
 263

7. Mr. Z, a salaried individual, has a total income of Rs.8 lakhs for A.Y. 2023-24. He furnishes his
return of income for A.Y. 2023-24 on 28th August, 2023. He is liable to pay fee of:– (a) Rs.1,000
u.s.234F (b) Rs.5,000 u.s.234F (c) Rs.10,000 u.s.234F (d) Not liable to pay any fee.

8. Discuss, with reasons, whether the following statement is correct:

Mahesh, a resident and ordinary resident in India and having a house property and a bank
account outside India, is not required to file return of income for Assessment Year 2023-24, if his
total income is below the maximum amount not liable to tax.

Solution:
The statement is not correct. Mahesh is a resident and ordinary resident for A.Y.2023-24. He has
a house property and a bank account outside India. Hence, he is required to file return of income
for A.Y.2023-24 even if his total income is below the basic exemption (Rs.2,50,000).

9. Arun's GTI of P.Y. 2022-23 is Rs.2,45,000. He deposits Rs.45,000 in PPF. He pays electricity bills
aggregating to Rs.1.20 lakhs in the P.Y.2022-23. Which of the statements is correct?

(a) Arun is not required to file his return of income u/s.139(1) for P.Y. 2022-23, since his total
income before giving effect to deduction u.s. 80C does not exceed the basic exemption limit.

(b) Arun is not required to file his return of income u/s.139(1) for P.Y. 2022-23, since his
electricity bills do not exceed Rs.2,00,000 for the P.Y.2022-23.

(c) Arun is not required to file his return of income u/s.139(1) for P.Y. 2022-23, since neither
his total income before giving effect to deduction under section 80C exceeds the basic
exemption limit nor his electricity bills exceed Rs.2 lakh for the P.Y.2022-23.

(d) Arun is required to file his return of income u/s 139(1) for P.Y. 2022-23, since his
electricity bills exceed Rs.1 lakh for the P.Y.2022-23.

10. Mr.Ravi, a resident Indian aged 52 years, gifted a sum of Rs.30 lakhs to his wife Mrs.Sudha on the
occasion of her 50th birthday. Out of the said sum, Mrs.Sudha purchased a car for Rs.29,52,000
inclusive of RTO charges of Rs.2,15,000, insurance of Rs.51,575, extended warranty of Rs.25,255
and accessories charges of Rs.35,460 during the P.Y. 2021-22. These charges were shown
separately in the invoice. Mrs.Sudha’s furnished her Aadhaar No. to the dealer.

She is a housewife and does not have any income except rental income of Rs.25,000 p.m. in respect
of a house property gifted to her by her father. Mr.Ravi is of the opinion that his wife is not
required to furnish return of income, since her total income does not exceed the basic exemption
limit. Examine.
 264

BELATED RETURN u.s.139 (4)

A belated return can be filed at any time:
a. before three months prior to the end of the relevant assessment year (i.e. 31.12.2023);
or
b. before the completion of the assessment (whichever is earlier).

Mr.A, who has only salary income for the p.y. 2022-23 (AY 2023-24) ought to have filed return of
income on or before 31.07.2023, being the time limit allowed u.s.139(1). In case if he has not
filed the return on or before 31.07.2023, he may file a belated return on or before 31.12.2023,
which is before three months prior to the end of the relevant assessment year. In case
assessment is completed by the A.O., say by 10.12.2023, the corresponding time limit for
furnishing belated return u.s.139(4) also concludes by 10.12.2023.

Note: a. A belated return can attract interest u.s.234A if there is any tax due
b. A belated return shall attract late fee
c. Losses cannot be carried forward

REVISED RETURN u.s.139 (5)

If an assesse, after furnishing the return of income, discovers ANY OMISSION OR ANY WRONG
STATEMENT in the return filed, he may furnish a revised return.

A revised return can be filed at any time:

a. before three months prior to the end of the relevant assessment year (i.e. 31.12.2023);
or
b. before completion of assessment (whichever is earlier).

Revised return filed shall replace the original return for all purposes.

Example:
For Assessment Year 2023-24
Due date for filing ITR: 31st July, 2023
A belated return can be filed before 31st December, 2023
The return filed (in time or belatedly) can be revised before 31 st December, 2023.

Note:
a. A revised return can be revised again.
b. A belated return can also be revised.

Problems:
1. Mr.Y filed a return of income on 28.11.2023 (belated return) for A.Y.23-24 returning a taxable income
of Rs.10,00,000. Later, on 01.12.2023 he filed a revised return declaring a reduced taxable income of
Rs.6,00,000. As on 01.12.2023 assessment order was not passed. Advise on the validity of the return?
 265

Solution:
A belated return can also be revised. A revised return can be filed before three months prior to the end
of the relevant assessment year (i.e. before 31st December, 2023). A revised return was filed by the
assessee on 01.12.2023 reducing the taxable income to Rs.6,00,000. A revised return filed shall replace
the original return for all purposes. The return filed is a valid return in law.

2. Mr.V submits his return of income on 12.09.2023 for A.Y.2023-24 consisting of income under the head
house property and other sources. On 21.12.2023, he realized that he had not claimed deduction
u.s.80TTA in respect of his interest on savings bank account. He wants to revise his return of income.
Can he do so? Discuss. Would your answer be different if he discovered this omission on 21.03.2024?

Solution:
Mr.V is not subject to Tax Audit. Due date for filing return of income for A.Y.2022-23 is 31st July, 2023.

A return furnished u.s.139(1) or a belated return u.s.139(4) can be revised. Therefore, Mr.V can revise
the return of income filed by him in November 2023, to claim deduction u.s.80TTA, since the time limit
for filing a revised return is before three months prior to the end of the relevant assessment year,
which is 31.12.2023.

However, he cannot revise return had he discovered this omission only on 21.03.2024, since it is
beyond 31.12.2023.

3. Explain with brief reasons whether the return of income can be revised u.s.139(5) of the Income-
tax Act, 1961 in the following cases:
a. Belated return filed under section 139(4).
b. Return already revised once under section 139(5).
c. Return of loss filed under section 139(3).

Solution:
Any person who has furnished a return u.s.139(1) or 139(4) can file a revised return at any time
before three months prior to the end of the relevant assessment year or before completion of
assessment, whichever is earlier, if he discovers any omission or any wrong statement in the
return filed earlier. Accordingly,

(i) A belated return filed u.s.139(4) can be revised.

(ii) A return revised earlier can be revised again as the first revised return replaces the original
return. Therefore, if the assessee discovers any omission or wrong statement in such a
revised return, he can furnish a second revised return within the prescribed time i.e. before
three months prior to the end of the relevant assessment year or before the completion of
assessment, whichever is earlier.

(iii) A return of loss filed u.s.139(3) is deemed to be return filed u.s.139(1), and therefore, can be
revised u.s.139(5).
 266

Updated Return u.s.139(8A):

Updated return of income can be filed by the assesse within 24 months from the end of the
relevant assessment year.

Updated return can be filed irrespective of whether the assesee has filed his return or not for
that Assessment Year. For e.g. For A.Y.2020-21, an assessee can file an updated return before 31st
March, 2023 voluntarily irrespective of whether he has filed his income tax return or not for
A.Y.2020-21.

Updated return cannot be filed if such a return:

a) is a loss return; or
b) has the effect of decreasing the total tax liability; or
c) results in refund or increases the refund due.

Additional income-tax payable at the time of updated return:

a) 25% of aggregate of tax and interest payable, if such return is furnished after the expiry of
time available under section 139(4) or 139(5) and before completion of the period of 12
months from the end of the relevant assessment year; or

b) 50% of aggregate of tax and interest payable, if such return is furnished after the expiry of
12 months from the end of the relevant assessment year but before completion of the period of
24 months from the end of the relevant assessment year.

1. State whether the following statements are true or false:

a) Updated return can be filed within 24 months from the end of the relevant assessment year.
b) Updated return for A.Y.2021-22 can be filed before 31st March, 2024.
c) An updated return for A.Y.2021-22 can be filed by the assesse only if he has filed his ITR earlier.
d) An updated return cannot result in refund or increase in refund.
e) Additional income-tax in case of an updated return is 25% of aggregate of tax and interest
payable provided such return is furnished within a period of 12 months from the end of the
relevant A.Y.

DEFECTIVE RETURN:
The A.O. may intimate the defect in the return of income to the assesse. The assesse may be
called upon to rectify the defect within 15 days from the date of intimation. The Assessing
Officer has the discretion to extend the time period beyond 15 days, on an application made by
the assessee.

If the return is not so rectified within 15 days or within the extended time, the AO shall treat
the return of income as an invalid return.
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CHAPTER – 19 CHAPTER VIA DEDUCTIONS

 Deductions under chapter VIA cannot exceed Gross Total Income

 Deductions are NOT available against incomes that are taxed at SPECIAL RATE

 Deductions can be in respect of certain:

 Expenditure incurred or payment made (eg. 80C, 80D); or
 Incomes (eg. 80IA to 80TTB)

 Deduction in respect of certain incomes such as 80-IA, 80-IAB, 80-IAC, 80-IB, 80IBA, 80-IC,
80-IE, 80JJA, 80JJAA, 80LA, 80M, 80P, 80PA, 80QQB and 80RRB shall be allowed only if the
return of income is filed before ‘due date’.

 Chapter VIA deductions are not available under the new tax regime under section 115BAC
except for Section 80CCD (2) and Section 80JJAA.

Section 80 C Deduction in respect of certain investments, deposits

To whom available: Individuals and HUF (resident or non-resident)

Amount of deduction: Maximum Rs.1,50,000

Condition: Payment should be made on or before 31st March

Investments which qualify for deduction under section 80 C:

 Life insurance premium paid on the life of individual, spouse, children (minor or major;
dependent or not)

Policy issued: Qualifying amount

Before 01.04.2012 20% of sum assured or actual premium (w.e.l)
On or after 01.04.2012 10% of sum assured or actual premium (w.e.l)

Policy on the life of any person suffering from any disability or disease:
Before 01.04.2012 20% of sum assured or actual premium (w.e.l)
Between 2012-13 10% of sum assured or actual premium (w.e.l)
On or after 01.04.2013 15% of sum assured or actual premium (w.e.l)

 Contribution to SPF or RPF out of salary

 Amount deposited in 15-year PPF (individual, spouse and children)
 Amount invested in NSC certificates (VIII issue) and interest accrued thereon
 Repayment of loan taken from banks for purchase or construction of a house
 Stamp duty (registration charges) paid on purchase or construction of a residential house
 268

 Tuition fees for education of the children in India (max: 2 children) (full time education)
 Investment in units of a tax-saver mutual fund
 Fixed deposit (tax-saver) in a scheduled bank for a period of 5 years
 Amount deposited in five year time deposit scheme in post office
 Contribution towards Unit Linked Insurance Plan (ULIP)
 Deposit in Senior Citizen Saving Scheme
 Deposit in Notified Bonds of NABARD
 Contribution to Sukanya Samriddhi Account notified by Central Government

Section 80 CCC: Contribution to the Pension Fund of LIC or any other

Insurance company

To whom available: Individuals only

Amount of deduction: Actual premium paid or Rs.1,50,000 (whichever is less)

Note: The aggregate of section 80C, 80CCC and 80CCD(1) cannot exceed Rs.1,50,000

Section 80 CCD: Contribution to the Notified Pension Scheme (NPS) set-

up by the Central Government

To whom available: Individuals only

U.S. 80CCD(1):
Amount of deduction: a. In case of a salaried employee:
 Amount contributed; or
 10% of salary (basic + DA (F))
(whichever is less)

b. In case of self-employed:
 Amount contributed; or
 20% of gross total income; or
(whichever is less)

Important: The aggregate of Section 80C, 80CCC & 80CCD(1) cannot exceed Rs.1,50,000.

Note: There are two types of NPS account i.e., Tier I and Tier II.
Section 80CCD - (Tier I account) under the NPS.
Section 80C - (Tier II account) only for Central Government employees.
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A. Additional deduction u.s.80CCD(1B) (apart from Rs.1,50,000):

Section 80CCD(1B) provides for an additional deduction up to Rs.50,000 in respect of amount
contributed under NPS. Hence an assessee can claim Rs.1,50,000 and also additional Rs.50,000
(in total Rs.2,00,000) to reduce his tax liability.

B. Contribution by the EMPLOYER to the pension fund:

Contribution made by the employer is taxable under the head “salary” and such contribution is
separately allowed as deduction under section 80CCD (2) but not exceeding 10% of salary.
(14% shall be allowed as deduction in case of Central or State Government employees).

C. ON CLOSURE OR OPTING OUT OF NPS BY ANY ASSESSEE:-

Section 10(12A) provides that any payment from NPS Trust on account of closure or his opting
out of the pension scheme, 60% of the total amount payable shall be exempt from tax.

D. PARTIAL WITHDRAWAL – EXEMPTION ONLY IN CASE OF EMPLOYEES:

Section 10(12B): In case of partial withdrawal by any employee: 25% of amount contributed
by the employee shall be exempt.

Note: Difference between 10(12A) and 10(12B): Section 10(12A) exemption is for all
individuals (salaried or self-employed) but Section 10(12B) is only for ‘salaried’ individuals.

Important: However, the amount received by the nominee on the death of the assessee shall
NOT be deemed to be the income of the nominee, hence exempt from tax.

Summary: Amount received on closure or opting out of NPS:

 60% shall be exempt in case of total withdrawal for all assesses – Section 10(12A)
 25% of the amount of contribution made by the employee shall be exempt in case of
partial withdrawal – Sec 10(12B)
 Received by nominee on death of the assessee shall be fully exempt

Section 80 CCE – Maximum deduction restricted to Rs.1,50,000:

The aggregate of section 80C, section 80CCC and section 80CCD(1) cannot exceed Rs.1,50,000.
Deduction u.s.80CCD(1B) and 80CCD(2) are separate deductions in addition to Rs.1,50,000.

Important: Section 80CCD(1B) and Section 80CCD(2) are not included in the above limit. They
are separate deductions.
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Section 80 D: Health insurance premium paid to Insurance

Company or to Central Government Health Schemes

To whom available: Individuals and HUF (resident or non-resident)

Deduction on account of: a. Medical insurance premium paid; or

b. Expenditure on preventive health check-up; or
c. Medical expenditure on the health of a senior citizen not
having a mediclaim policy.

I. Amount of deduction:

Category I:
For assessee, spouse and Rs.25,000 (or) actual premium paid (whichever is less)
dependent children Rs.50,000 if the assessee is a resident senior citizen

Category II:
For parents Separate deduction of Rs.25,000 if policy is taken on the health
of parents (dependant or not). Higher deduction of Rs.50,000
if parent is a resident senior citizen.

Conditions: a. Premium can be paid by any mode EXCEPT cash.

b. Mediclaim Policy can be taken on the health of the
individual, spouse, dependent children and parents.

Premium paid to cover more than one year:

In case of single premium health insurance policies having cover of more than one year, the
deduction is allowed on proportionate basis for the number of years for which health insurance
cover is provided.

II. Deduction in respect of expenditure on preventive health check-up:

The aggregate deduction on account of preventive health check-up of self, spouse, dependent
children, parents cannot exceed Rs.5,000. This is within the overall limit of Rs.25,000 (or)
Rs.50,000 mentioned above.

Important: Expenditure on preventive health check-up can be paid in cash.

III. Medical expenditure incurred on the health of a SENIOR CITIZEN (WHO IS NOT COVERED
BY ANY HEALTH INSURANCE) (as a welfare measure):
Expenditure on medical treatment of senior citizen (resident) for whom health insurance is not
available: Deduction is Rs.50,000 (or) actual medical expenditure (w.e.l.)
 271

Provisions in brief: For his family For his parents

a. Medical Insurance premium Rs.25,000 Rs.25,000 (including expenses)
(no senior citizen)

b. Medical Insurance premium Rs.25,000 Rs.50,000 (including expenses)

(if parent is a senior citizen)

c. Medical Insurance premium Rs.50,000 Rs.50,000 (including expenses)

(if assesse is also a senior citizen)

Section 80 DD Deduction in respect of expenditure incurred for

dependent persons with disability

To whom available: Resident individuals or resident huf

Amount of deduction: Rs.75,000 flat with less than 80% disability

Rs.1,25,000 flat with 80% or more disability

note: Actual expenditure is not relevant

note: A Certificate from the medical authority should be produced.

note: ‘Family’ includes: spouse, dependant children, dependant parents,

dependant brothers and sisters of the individual.

Section 80 DDB: Deduction in respect of expenditure incurred on medical

treatment of specified diseases or ailments

To whom available: Resident individuals or resident huf

Amount of deduction: Rs.40,000 or actual expenditure (whichever is less)

Rs.1,00,000 or actual expenditure (w.e.l for res. senior citizen)

Condition: The assessee is required to obtain a PRESCRIPTION from a

specialist doctor.

‘Family’ includes the assessee, spouse, dependant children, dependant parents, dependant brothers
and sisters of the individual.

Note: Deduction will be reduced to the extent of amount received from Insurance Company or
towards medical reimbursement from Employer.
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Points Section 80DD Section 80DDB

 Assessee should be a: Resident Resident
 Suffering from: Disability Disease
 Actual expenditure: Not relevant Relevant
 Whether assessee is also included: No Yes
 Requirement: Medical certificate Prescription

Section 80 E: Deduction i.r.o. loan taken for higher education

To whom available: Individuals only

Amount of deduction: Actual amount of interest

 The loan can be for the assessee himself or his spouse or his children or a student for whom the
assessee is the legal guardian.
 Loan can be borrowed from any financial institution or approved charitable institution
 Deduction is allowed for a period of 8 years
 Higher education in an educational institution can be in India or outside India

“Higher Education” means any course of study pursued after passing the Senior Secondary
Examination or its equivalent from any school or board recognized by the Government.

Section 80EE: Deduction i.r.o. interest on loan taken for

acquisition of a residential house

To whom available: Individuals only

Amount of deduction: Maximum Rs.50,000 (in addition to Rs.2,00,000 u.s.24)

Period of benefit: Till the repayment of loan

Conditions:
 The value of residential house does not exceed Rs.50,00,000
 The loan amount does not exceed Rs.35,00,000
 The loan is sanctioned during the previous year 2016-17
 The loan is borrowed from a bank or a housing finance company
 The assessee does not own any residential house on the date of sanction of loan

Note: The above deduction is only in respect of a self-occupied property

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Section 80EEA: Deduction i.r.o. interest on loan taken for

acquisition of a residential house

To whom available: Individuals only

Amount of deduction: Maximum Rs.1,50,000 (in addition to Rs.2,00,000 u.s.24)

Period of deduction: Till the repayment of loan

Conditions:
 The stamp duty value does not exceed Rs.45,00,000
 The loan should be sanctioned during the period 01.04.2019 to 31.03.2022
 The loan is borrowed from a bank or a housing finance company
 The assessee should not own any residential house on the date of sanction of loan

Note: The above deduction is available for both self-occupied and let-out properties

Points Section 80EE Section 80EEA

 Value of the property Rs.50 lakhs Rs.45 lakhs
 Deals with: Actual purchase price Stamp duty value
 Amount of loan: Rs.35 lacs Not specified
 Loan sanctioned during the period 2016-17 1.4.19 to 31.03.22
 Amount of deduction: Rs.50,000 Rs.1,50,000
 Deduction available: Only for self-occupied Both self and let out

Section 80 EEB: Deduction i.r.o. interest on loan taken for purchase of

Electric Vehicle:

To whom allowed: Individuals only

Conditions: a. Loan should be sanctioned during the period between 01.04.2019

to 31.03.2023

b. Loan should be sanctioned by a bank or NBFCs (non-banking

finance companies)

Amount of deduction: Maximum deduction Rs.1,50,000 in respect of interest

Period of deduction: Till the repayment of loan

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Problems on Gross Total Income

1. Mr.S, aged 67 years, furnishes the following particulars for the year ending 31.03.2023:

a. LIP paid – Rs.50,000, policy assured for Rs.2,00,000. Policy was taken in 2011.
b. Contribution to PPF – Rs.30,000 in the name of mother
c. Tuition fee payment – Rs.10,000 each for 3 daughters pursuing full time graduation course in
Chennai; Tuition fee for son pursuing MBA in a foreign university – Rs.1,00,000
d. Housing loan principal repayment – Rs.84,000 to HDFC Ltd. This property is under construction
at Chennai as on 31.03.2023
e. Principal repayment of housing loan taken from friend – Rs.50,000, property is self-occupied.
f. Deposit under Senior Citizens Savings Scheme – Rs.50,000
g. Deposits under Post Office Time Deposit Scheme (five years) – Rs.30,000
h. Investment in National Savings Certificate – Rs.30,000
i. Subscription to bonds issued by NABARD Rs.25,000
j. Term Deposits of Rs.1,50,000 with a Scheduled bank for a period of 5 years. This deposit was
pledged to avail education loan for his son. Compute deduction eligible under section 80 C.

Sec. 80 CCD
2. Mr.D a salaried employee with HDFC Bank is a subscriber to a National Pension Scheme (NPS). The
accumulated balance in his NPS account as on 31.01.2022 is Rs.50 lakhs. Out of which Rs.30 lakhs
were contributed by his employer and the balance of Rs.20 lakhs is his own contribution. Compute
the taxable amount on withdrawal in the following situations:

a. On 28th February, 2022 he had opted out of the scheme and withdrew the entire amount of
Rs.50 lakhs;

b. On 28th February, 2022 he made a partial withdrawal of Rs.20 lakhs out of contribution made
by him to his NPS account.

Sec 80 D:
3. Mr.A, aged 40 years, paid medical insurance premium of Rs.20,000 during the previous year 2022-23
to insure his health as well as the health of his spouse. He also paid medical insurance premium of
Rs.47,000 during the year to insure the health of his father, aged 63 years, who is not dependent on
him. He contributed Rs.3,600 to Central Government Health Scheme during the year on his health.
He has incurred Rs.3,000 in cash on preventive health check-up of himself and his spouse and
Rs.4,000 by cheque on preventive health check-up of his father. Compute the deduction u.s.80D for
the A.Y.2023-24.

4. Mr.Y, aged 40 years, paid medical insurance premium of Rs.22,000 during the previous year 2022-23
to insure his health as well as the health of his spouse and dependent children. He also paid medical
insurance premium of Rs.33,000 during the year to insure the health of his mother, aged 67 years,
who is not dependent on him. He incurred medical expenditure of Rs.20,000 on his father, aged 71
years, who is not covered under Mediclaim policy. His father is also not dependent upon him. He
contributed Rs.6,000 to Central Government Health Scheme during the year. Compute the deduction
u.s.80D for the A.Y.2023-24.
 275

5. Mr.A (aged 63), a resident Indian, paid for himself through account payee cheque, health insurance
premium of Rs.2,10,000 for 5 years in one lump sum on 28.12.2022. The eligible amount of deduction
u.s.80D for A.Y.2023-24 would be Rs………………….

a. Rs.50,000 c. Rs.30,000
b.Rs.35000 d. Rs.42,000

6. The following are the particulars relating to Mr.A and Mr.B, salaried individuals for A.Y.2023-24:

Particulars Mr.A Mr.B

Stamp duty value of the house Rs.45 lakhs Rs.48 lakhs
Amount of loan taken Rs.43 lakhs Rs.45 lakhs
Loan taken from HFC SBI
Rate of interest 9% p.a. 9% p.a.

Date of sanction of loan 01.04.2021 01.04.2020

Date of disbursement of loan 01.05.2021 01.05.2020

Purpose of loan Purchase of Purchase of

house for self-occ house for self-occ

Compute deduction u.s.80EEA for A.Y.2023-24 assuming no principal repayment is made.

Problem on Section 80EEB:

7. The following are the particulars relating to Mr.A and Mr.B, salaried individuals, for A.Y.2023-24:

Mr.A Mr.B
Amount of loan taken Rs.20 lakhs Rs.15 lakhs
Loan taken from NBFC Public Sector Bank

Date of sanction of loan 01.04.2020 30.3.2019

Date of disbursement of loan 01.05.2020 01.05.2019
Purpose of loan Electric vehicle Electric vehicle
for personal use for personal use

Cost of electric vehicle Rs.22 lakhs Rs.18 lakhs

Rate of interest 10% p.a. 10% p.a.
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Section 80 G: Deduction in respect of Donations

To whom allowed: All Assessees (individuals, huf, firms, companies)

Conditions: Donation should be made only to approved institutions;

Donation should not be in kind;
Donation can be made in cash. However, donations in excess of
Rs.2,000 by cash not eligible for deduction.
Donation should not be made for the benefit of any particular religion,
caste, community, class, creed, etc

Amount of deduction: 100% of donations made to the following funds:

 Prime Minister’s Citizen Assistance and Relief in Emergency
Situations Fund (PM Cares Fund)
 Prime Minister’s National Relief Fund
 National Children’s Fund
 National Defence Fund
 National Foundation for Communal Harmony
 Zila Saksharta Samiti
 National Illness Assistance Fund
 National or State Blood Transfusion Council
 Gujarat Earth Quake Relief Fund
 National Sports Fund
 National Cultural Fund
 National Trust for Welfare of Persons with Mental Retardation,
Autism, Cerebral Palsy and multiple disabilities
 Swachh Bharat Kosh
 Clean Ganga Fund
 National Fund for Control of Drug Abuse

50% of donation made to the following funds:

 Prime Ministers Drought Relief Fund
 Jawaharlal Nehru Fund
 Indira Gandhi Memorial Trust
 Rajiv Gandhi Foundation

50% of qualifying amount if donations are made to the following:

 Approved charitable institution for charitable purpose
 Any approved temples, mosque, church, gurudwara or any
other place of national importance for repairs or
renovation

Qualifying amount: Actual donation made (or) 10% of adjusted gross total income
(whichever is less) will qualify for 50% deduction.
 277

Adjusted Gross Total Income means: Gross total income (-) incomes taxed at special rates (-)
all deductions u.s. 80 except 80 G

Note: If donations are made to the Government for the PROMOTION OF FAMILY PLANNING then
100% of qualifying amount is allowed as deduction.

Section 80 GG: Deduction in respect of House Rent paid

To whom allowed: Individuals only

Amount of deduction: 25% of adjusted gross total income;

Rs.5,000 per month;
Rent paid (-) 10% of adjusted gross total income

whichever is less is allowed as deduction

Conditions:
 Deduction under this section is not available for salaried employees who receive HRA
 The assessee or his spouse or his minor child should not own any residential house at the
place where the assessee is employed or where he carries on his business.
 The assessee should not own any self-occupied property in India.

Adjusted Gross Total Income means: Gross total income (-) incomes taxed at special rates (-)
all deductions u.s. 80 except 80 GG.

Section 80 GGB: Deduction in respect of contributions made by companies

to any political party or an electoral trust:

To whom available: Indian Company

Amount of deduction: 100% of contribution made

Note: “Contribution” also includes expenditure incurred on

advertisement in a souvenir or a brochure published by a
political party.

Important: No deduction if donations are in cash.

 278

Problems on Section 80 G:
8. X (34 years), a resident individual, submits the following particulars:
Business income Rs.2,55,000;
Interest on debentures Rs.50,000;
Long-term capital gains on transfer of gold Rs.4,10,000;
Short-term capital gain on sale of shares taxable u/s.111A Rs.20,000;
Other short-term capital gain Rs.10,000;

Contribution towards PPF Rs.40,000;

Payment of medical insurance premium on own life Rs.28,000 through net banking
Interest paid on loan taken (p.y. 22-23) from NBFC for purchase of Electric vehicle Rs.1,80,000 for
personal use.

Donation to PM CARES fund Rs.4,000;

Donation to Swachh Bharat Kosh Rs.3,000;
Donation to Rajiv Gandhi Foundation Rs.1,000;
Donation to Prime Minister’s Drought Relief Fund Rs.5,000;
Donation to a poor boy for higher education Rs.5,000;
Donation to approved public charitable institution Rs.11,000;
Donation of clothes to an approved institution Rs.5,000;
Donation in cash to National Children Fund Rs.5,000
Donation to a charitable institution for construction of a rest house only for a particular religious
community Rs.25,000. Compute total income. Ignore provisions of Section 115BAC.

Problems on Section 80 JJAA:

9. Mr.A has commenced the business of manufacture of computers on 1.4.2022. He employed 350 new
employees during the previous year 2022-23, the details of which are as follows:

No. of employees Date of Regular/Casual Monthly emoluments

employment per employee
75 1.4.2022 Regular Rs.24,000
125 1.5.2022 Regular Rs.26,000
50 1.8.2022 Casual Rs.24,500
100 1.9.2022 Regular Rs.24,000

The regular employees participate in provident fund while the casual employees do not.

Compute the deduction, if any, available to Mr.A for A.Y.2023-24, if the profits and gains derived from
manufacture of computers for that year is Rs.75 lakhs and total turnover is Rs.10.16 crores. What
would be your answer if Mr.A has commenced the business of manufacture of footwear on 1.4.2022?
 279

Section 80 GGC: Deduction in respect of contributions made by any person

to political parties or to an electoral trust

To whom available: Any assessee other than an Indian Company

Amount of deduction: 100% of contribution made to a political party or to an

electoral trust

Important: No deduction if donations are in cash.

Section 80 JJAA: Deduction i.r.o new employment

To whom available: All assesses to whom section 44AB applies (Tax Audit)

Amount of deduction: 30% of “additional employee cost”.

Period of deduction: 3 Assessment Years

1. “Additional employee”: An employee who is newly employed during the previous year

Who is not an additional employee:

 an employee whose total emoluments exceed Rs.25,000 per month; or

 an employee employed for a period of less than 240 days during the previous year
(150 days in case of an assessee engaged in the business of manufacturing of apparel or
footwear or leather products)

 an employee who does not participate in the recognized provident fund

2. “Additional Employee Cost”: Total emoluments paid or payable to additional employees

Condition: Emoluments should not be paid in cash. However, in the case

of first year of a new business the emoluments can be in cash.

Section 80M: Deduction in respect of inter-corporate dividends:

To whom available: Domestic company

Amount of deduction: Dividend received (or) dividend distributed (whichever is less)

Condition: Dividend should be distributed within one month prior to the due
date of filing return of income.
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Section 80 QQB: Deduction in respect of royalty income of authors:

To whom available: Resident Individual

Conditions: a) Should be a book on literary, artistic or scientific nature

b) Income is derived by way of Royalty or Copyright fee

Amount of deduction: If received by way of lumpsum:

 Royalty income; or
 Rs.3,00,000 (whichever is less)

If not by way of lumpsum:

 Royalty income (not to exceed 15% of the value of books sold)
(before allowing expenses); or
 Rs.3,00,000 (whichever is less)

Note: ‘Books’ here does not include journals, guides, newspapers, textbooks for school students,
pamphlets, dairies and other publications of similar nature.

Note: Royalty earned outside India will qualify for deduction u.s.80QQB only if it is brought to
India in convertible foreign exchange within a period of six months from the end of the previous
year or within the time extended by RBI.

Section 80 RRB: Deduction in respect of royalty income on Patents

To whom available: Resident Individual

Conditions: a) Owner or Co-owner of a Patent

b) Patent should be registered under the Patents Act, 1970

Amount of deduction: 100% of royalty income (or) Rs.3,00,000 (whichever is less)

Section 80 TTA: Deduction i.r.o. interest on deposits in SAVINGS account

To whom available: Individual or HUF

Amount of deduction: Interest income (in aggregate) or Rs.10,000 (whichever is less)

Income eligible: Interest on savings account with a bank

Interest on savings account with a post office
Interest on savings account with a co-operative bank
 281

Important:
Deduction under this section is not available for senior citizens. Senior citizens can claim
deduction under section 80TTB.

Interest on post office savings account is also exempt u.s.10(15) up to Rs.3,500 in a single
account and Rs.7,000 in a joint account. Deduction u.s.80TTA is in addition to the amount
exempt.

Section 80 TTB: Deduction i.r.o. interest on deposits in case of a senior

citizen (both SAVINGS & TIME DEPOSIT):

To whom available: A resident senior citizen

Amount of deduction: Interest income (in aggregate) or Rs.50,000 (whichever is less)

Income eligible: Interest on ‘time deposit’ or ‘savings account’ with a:

i. Bank; or
ii. Post Office; or
iii. Co-operative banks

Points Section 80 TTA Section 80 TTB

 To whom available Not allowed for Snr Ctzns Only for senior citizens
 Deals with: Interest on savings a/c only Any interest on savings/fixed/recurring
 Amount of deduction: Rs.10,000 (max) Rs.50,000 (max)

Section 80 U: Deduction in case of an assessee with disability

To whom available: Resident Individuals

Amount of deduction: Rs.75,000 in case of a person with disability

Rs.1,25,000 in case of a person with severe disability

Conditions: Medical Certificate should be produced

 282

10. Mr.A has commenced the business of manufacture of computers on 1.4.2022. He employed 350 new
employees during the previous year 2022-23, the details of which are as follows:

No. of employees Date of Regular/Casual Monthly emoluments

employment per employee
75 1.4.2022 Regular Rs.24,000
125 1.5.2022 Regular Rs.26,000
50 1.8.2022 Casual Rs.24,500
100 1.9.2022 Regular Rs.24,000

The regular employees participate in provident fund while the casual employees do not.

Compute the deduction, if any, available to Mr.A for A.Y.2023-24, if the profits and gains derived from
manufacture of computers for that year is Rs.75 lakhs and total turnover is Rs.10.16 crores. What
would be your answer if Mr.A has commenced the business of manufacture of footwear on 1.4.2022?

Problem on section 80QQB:

11. Mr.X, an author, received a lumpsum royalty of Rs.8,00,000 for assignment of interest in copyright to a
publisher. The book is covered by section 80QQB. Expenditure incurred for earning such royalty is
Rs.2,40,000. Compute deduction available u.s.80QQB for Mr.X for A.Y.2023-24.

12. Mr.A received royalty of Rs.2,88,000 from a foreign country for a book authored by him, being a work of
literary nature. The rate of royalty is 18% of value of books. The expenditure incurred by him for
earning this royalty was Rs.40,000. The amount remitted to India till 30 th September, 2023 is
Rs.2,30,000. Compute the amount includible in the gross total income of Mr.A and the amount of
deduction which he will be eligible for under section 80QQB.

Problem on Section 80 TTA:

13. Mr.R (42 years) furnishes the following information for the previous year 2022-23:
Income from salary (computed) Rs.24,00,000; Loss from let-out property Rs.2,50,000; LTCG on sale
of listed shares through recognised stock exchange and STT paid Rs.4,00,000; Dividend from
domestic companies Rs.12 lakhs; Interest on savings account with a bank Rs.14,500. Compute total
income of the assessee.

Problem on section 80TTB:

14. Mr.A, resident individual aged about 61 years, has earned business income of Rs.8,00,000; lottery
income of Rs.1,20,000 (gross) during the previous year 2022-23. He also has interest on fixed
deposit of Rs.30,000 with banks. He invested an amount of Rs.1,50,000 in Public Provident Fund
account. What is the total income of Mr.A for the A.Y.2023-24.
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Section 80IAC: Tax incentives for new start-ups

Objective: Section 80IAC provides tax incentive for start-ups in order to aid their
growth in the early phase of their business.

Quantum of deduction: 100% of profits by an eligible start-up from an eligible business

Period of deduction: Any three consecutive years out of ten years beginning from the year
in which the eligible start-up is incorporated.

Eligible Start-up: a) Should be a Company or LLP engaged in eligible business

b) Incorporated during 01.04.2016 to 31.03.2023.
c) Should hold a certificate from IMBC
d) Total turnover does not exceed Rs.100 crores in the previous year
for which deduction u.s.80IAC is claimed

Eligible business: A business carried out by an eligible start-up engaged in innovation,

development or improvement of products or processes or services
or a scalable business model with a high potential of employment
generation or wealth creation.

Problem:
15. A Pvt Ltd was incorporated on 01.04.2019 and it holds a certificate of eligible business from the
notified IMBC. It is engaged in innovation of new products. Its total turnover and profits and
gains from such business for the previous year 2019-20 to previous year 2028-29 are as follows:

Particulars P. Y. P. Y P. Y. P. Y. P. Y. P. Y. P. Y. P. Y. P. Y. P. Y.
19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29

Total turnover 65.42 68.36 70.21 72.72 74.95 73.52 74.68 72.51 68.42 66.52
Profits/Losses (5.52) (4.37) (2.52) 18.13 19.87 17.59 19.42 18.56 16.52 15.53

Is A Pvt Ltd eligible for any tax benefit under the provisions of the Income tax Act, 1961 for
A.Y.2023-24? If yes, what is the benefit available? CA final – May 2018