MODEL TEST PAPER 4

FINAL COURSE: GROUP – II

PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
Division A – Multiple Choice Questions
MCQ Most Appropriate MCQ No. Most Appropriate
No. Answer Answer
1. (a) 9. (b)
2. (b) 10. (b)
3. (a) 11. (c)
4. (b) 12. (c)
5. (c) 13. (b)
6. (c) 14. (b)
7. (c) 15. (c)
8. (a)
Division B – Descriptive Questions
1. (a) Computation of Total Income of Paras Ltd. for the A.Y. 2025-26
Particulars Amount (`)
I Profits and gains of business and
profession
Net profit as per the statement of profit 7,50,00,000
and loss
Add: Items debited but to be
considered separately or items of
expenditure to be disallowed
(a) Depreciation as per Companies 52,00,000
Act
(c) Provision for wages payable to -
workers
[Since the provision is based on a
fair estimate of wages payable with
reasonable certainty, the provision
is allowable as deduction. 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.

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 As the provision of ` 18 lakhs has
been debited to statement of profit
and loss, no adjustment is required
while computing business income]
(e) Loss due to destruction of 17,00,000
machinery by fire
[Loss of ` 17 lakhs due to
destruction of machinery caused
by fire is not deductible since it is
capital in nature.
Since the loss has been debited to
statement of profit and loss, the
same is required to added back while
computing business income]
(f) Provision for gratuity 1,60,00,000
[Provision of ` 320 lakhs for
gratuity based on actuarial
valuation is not allowable as
deduction. However, actual gratuity
of ` 160 lakhs paid is allowable as
deduction.
Hence, the difference has to be
added back to income [` 320 lakhs
(-) ` 160 lakhs]
(g) Advertisement in souvenir of a 2,30,000 2,31,30,000
political party
[Advertisement charges paid in
respect of souvenir published by a
political party is not allowable as
deduction from business profits of
the company. Since the
expenditure has been debited to
statement of profit and loss, the
same has to be added back while
computing business income]
9,81,30,000
Add: Income taxable but not
credited to statement of profit and loss
AI(ii) GST not refunded to customers 1,00,000
out of GST refund received from
State Govt.

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 [The amount of GST refunded to the
company by the Government is a
revenue receipt chargeable to tax.
Out of the refunded amount of ` 3
lakhs, the amount of ` 2 lakh stands
refunded to customers would not be
chargeable to tax. 12
The balance amount of ` 1,00,000
lying with the company would be
chargeable to tax]
9,82,30,000
Less: Items credited to statement of
profit and loss, but not includible in
business income/ permissible
expenditure and allowances
(b) Industrial power tariff concession -
received from State Government
[Any assistance in the form of, inter
alia, concession received from the
Central or State Government would
be treated as income. Since the same
has been credited to statement of
profit and loss, no adjustment is
required]
(d) Dividend received from US 12,00,000
company
[Dividend received from foreign
company is taxable under “Income
from other sources”. Since the same
has been credited to the statement of
profit and loss, it has to be deducted
while computing business income]
(e) Scrap value of machinery 3,00,000
[Scrap value of machinery, being
capital in nature, has to be reduced
from WDV of machinery. Since the
same has been credited to the
statement of profit and loss, it has to
be deducted while computing
business income]
(h) Long term capital gains on sale of 3,00,000
equity shares

12CIT v. Thirumalaiswamy Naidu & Sons (1998) 230 ITR 534 (SC)

287
 [The taxability or otherwise of long-
term capital gain on sale of equity
shares has to be considered while
computing income under the head
“Capital Gains”. Since such capital
gains has been credited to statement
of profit and loss, the same has to be
reduced to arrive at the business
income.]
AI(i) Depreciation as per Income-tax 71,00,000 89,00,000
Rules, 1961
Profits and gains from business and 8,93,30,000
profession
II Capital Gains
Long term capital gain on sale of 3,00,000
equity shares
[Long term capital gains in excess of
` 1.25 lakhs (i.e., ` 1.75 lakhs, being
` 3 lakh – ` 1.25 lakhs) on sale of
equity shares on which STT is paid at
the time of acquisition and sale would
be taxable@10% u/s 112A, without
indexation benefit.]
III Income from Other Sources
Dividend received from foreign 12,00,000
company
[Dividend received from a foreign
company is chargeable to tax under the
head” Income from other sources”]
Gross Total Income 9,08,30,000
Less: Deduction under Chapter VI-A
Under section 80GGB [Contribution by a
company to a registered political party is
allowable as deduction, since payment is
made otherwise than by cash. Expenditure
incurred by an Indian company on
advertisement in souvenir published by
such political party tantamount to
contribution to such political party.] 2,30,000
Total Income 9,06,00,000

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2. (a) As per section 80AC, while computing the total income of an assessee
of a previous year (P.Y.2024-25, in this case) relevant to any
assessment year (A.Y.2025-26, in this case), any deduction is
admissible, inter alia, under section 80-IA, such deduction shall not be
allowed unless it furnishes a return of income for such assessment
year on or before the ‘due date’ specified in section 139(1).
Since the turnover of the partnership firm has exceeded the
prescribed threshold limit in the previous year 2024-25, it would be
subject to audit under section 44AB, in which case the ‘due date’ of
filing its return of income for A.Y.2025-26 would be 31st October,
2025 as per section 139(1).
Computation of total income and tax liability of M/s. Parth
Curators for A.Y. 2025-26
I. Where the firm files its return of income on 31st October
2025:
Particulars ` in lakhs
Gross Total Income 300.00
Less: Deduction under section 80-IA 200.00
Total Income 100.00
Tax liability@ 30% 30.00
Add: Health and Education cess@4% 1.20
Regular income-tax payable 31.20

Computation of Alternate Minimum Tax payable [Section

115JC]
Particulars ` in lakhs
Total Income 100.00
Add: Deduction under section 80-IA 200.00
Adjusted Total Income 300.00
Alternate Minimum Tax (AMT) @ 18.5% on ` 300 55.50
lakhs
Add: Surcharge@12% (Since adjusted total 6.66
income > ` 1 crore)
62.16

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 Add: Health and Education cess@4% 2.49
Total tax payable (AMT) 64.65

Since the regular income-tax payable by the firm is less than the
alternate minimum tax payable, the adjusted total income shall be
deemed to be the total income of the firm for P.Y.2024-25 and it
shall be liable to pay income-tax on such total income @ 18.5%
[Section 115JC(1)]. Therefore, the tax payable for the A.Y.
2025-26 would be ` 64.65 lakhs.
Tax credit for Alternate Minimum Tax [Section 115JD]
` in lakhs
Total tax payable for A.Y.2025-26 (Alternate 64.65
Minimum Tax)
Less: Regular income-tax payable 31.20
To be carried forward for set-off against regular 33.45
income-tax payable (upto a maximum of fifteen
assessment years).

II. Where the firm files its return of income on 7th December
2025:
Where the firm files its return on 7-12-2025, it would be a belated
return under section 139(4). Consequently, as per section 80AC,
deduction under 80-IA would not be available. In such
circumstances, the gross total income of ` 300 lakhs would be the
total income of the firm.
Particulars ` in lakhs
Income-tax @ 30% of ` 300 lakhs 90.000
Add: Surcharge @12% (since total income 10.800
exceeds ` 1 crore)
Income-tax (plus surcharge) 100.800
Add: Health and Education cess @ 4% 4.032
Total tax liability 104.832

Practical solution regarding obtaining clarifications:

The practical solution regarding obtaining clarifications would be to
file the return of income under section 139(1) on or before the ‘due

290
 date’, i.e., 31.10.2025, and claim deduction under section 80-IA. In
such a case, the firm can claim deduction of ` 200 lakhs under
section 80-IA. Thereafter, consequent to the clarifications obtained,
if any change is required, it can file a revised return under section
139(5) by 31.12.2025 which would replace the original return filed
under section 139(1). A revised return filed under section 139(5)
would replace the original return filed under section 139(1).
If the firm files the return of income under section 139(1) on or
before 31.10.2025, its tax liability would stand reduced to ` 64.65
lakhs, as against ` 104.832 lakhs to be paid if return is furnished
after due date. Further, it would also be eligible for tax credit for
alternate minimum tax under section 115JD to the extent of ` 33.45
lakhs. Therefore, the firm is advised to file its return of income on
or before 31.10.2025.
(b) Since Mr. Gaurav is an individual resident in India for the P.Y.
2024-25, his global income would be subject to tax in India.
Therefore, income earned by him in Country M and Country N would
be taxable in India. He would, however, be entitled to deduction
under section 91, since India does not have a DTAA with Country
M and Country N, and all conditions under section 91 are satisfied.
Computation of total income of Mr. Gaurav for A.Y. 2025-26
Particulars ₹ ₹
Income under the head “Salaries”
Pension from State Government 3,90,000
Less: Standard deduction u/s 16(ia) 75,000
3,15,000
Income from House Property
Rental income from property in Country 3,00,000
N 13
Less: Municipal taxes 20,000
2,80,000
Less: Deduction u/s 24(a)@30% 84,000
1,96,000

13 In the absence of any information relating to fair rent, municipal value and standard

rent, rental income is assumed to be the gross annual value.

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Profits and Gains of Business or
Profession
Speculative income in India 1,16,000
Less: Set-off of business loss from 1,06,000
proprietary business in Country N under
section 70
10,000
Short-term capital gains on sale of plot 2,10,000
in India
Income from Other Sources
Agricultural income from Country M [not 90,000
exempt u/s 10(1), since it is earned from
land situated outside India]
Dividend from a company in Country M 64,000
1,54,000
Gross Total Income 8,85,000
Less: Deduction under Chapter VI-A
[No deduction allowable as per - -
section 115BAC]
Total Income 8,85,000

Computation of net tax liability of Mr. Gaurav for A.Y.2025-26

Particulars ₹
Tax payable on ₹ 8,85,000
Upto ₹ 3,00,000 Nil
₹ 3,00,000 to ₹ 7,00,000 @ 5% 20,000
₹ 7,00,000 to ₹ 8,85,000 @ 10% 18,500
38,500
Add: Health and education cess@4% 1,540
40,040
Less: Rebate under section 91 (See Working Note 8,142
below)
Tax Payable 31,898
Tax Payable (rounded off) 31,900

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 Calculation of Rebate under section ₹
91:
Average rate of tax in India [i.e.,
₹ 40,040/₹ 8,85,000 x 100] = 4.524%
Doubly taxed income pertaining to
Country M
Agricultural income 90,000
Dividend from a company in Country M
[Not includible, since exempt in Country -
M]
90,000
Rebate under section 91 on ₹ 90,000
@4.524% [being the lower of average 4,071
Indian tax rate (4.524%) and Country M
tax rate (10%)]
Doubly taxed income pertaining to
Country N
Income from house property less 90,000
business loss set-off against income
chargeable to tax in India (₹ 1,96,000 –
₹ 1,06,000)
Rebate under section 91 on ₹ 90,000
@4.524% [being the lower of average 4,071
Indian tax rate (4.524%) and Country N
tax rate (5%)]
Total rebate under section 91
(Country M + Country N) 8,142

3. (a) (i) Computation of taxable income of public charitable trust

Particulars ₹
(i) Income from property held under trust 10,00,000
(ii) Income from business (incidental to main 4,00,000
objects)
(iii) Voluntary contributions from public 7,00,000
Voluntary contribution made with a
specific direction towards corpus are
alone to be excluded under section

293
 11(1)(d). In this case, there is no such
direction and hence, included.
21,00,000
Less: 15% of the income eligible for 3,15,000
retention / accumulation without any
17,85,000
conditions
Less: Amount applied for the objects of
the trust
(i) Amount spent for charitable 8,00,000
purposes
(₹ 11,60,000 - ₹ 3,60,000)
-
(ii) Repayment of loan for construction
of orphan home (See note below)
Taxable Income 9,85,000

Note - As per Explanation 4(ii) to section 11(1), any

application for charitable or religious purposes, from any loan
or borrowing in the concerned year, shall not be treated as
application of income for charitable or religious purposes.
However, the amount not so treated as application, shall be
treated as application in the year in which the loan is repaid.
Therefore, the repayment of loan for construction of orphan
home can be treated as application of income only if such
expenditure on construction of orphanage was not treated as
application in year such expenditure was incurred. However,
in this case, the amount spent on construction of orphanage
was allowed as deduction in the P.Y. 2020-21. Thus,
repayment of loan taken for such purposes will not be allowed
as application as it would tantamount to double deduction.
(ii) As per Explanation below to section 10(23C)(iiiae), it has been
clarified that the limit of annual receipts of ₹ 5 crore is qua
‘taxpayer’ and not qua ‘activity’. Therefore, if the aggregate
annual receipts from educational activity and medical activity
exceeds ₹ 5 crores, then exemption under sub-clause (iiiad)
and (iiiae) cannot be availed.

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 Since, in the present case, the aggregate annual receipt of
₹ 7 crores (₹ 3 crores of educational institution and ₹ 4 crores
from hospital) exceeds the threshold of ₹ 5 crores, exemption
under section 10(23C)(iiiad) and (iiiae) cannot be availed,
even though the individual receipts have not exceeded ₹ 5
crores.
(b) Computation of income to be declared by the branch in its return
of income
Computation of Head Office expenses allowable u/s 44C:
Particulars ₹ ₹
Net profit of the branch 28,00,000
Add: Head office expenditure 1,20,00,000
debited to profit and loss
Unabsorbed depreciation 17,00,000
Capital expenditure for 7,00,000
promoting family planning
Brought forward business 25,00,000
loss
Deductions under Chapter 20,00,000
VI-A
1,89,00,000
Adjusted total income 2,17,00,000
Note – Depreciation for the current financial year and capital
expenditure on scientific research are not required to be added
back for computing adjusted total income.
Head office expenses allowable u/s 44C = ₹ 10,85,000
Being the lower of -
(i) 5% of ₹ 2,17,00,000 = ₹ 10,85,000
(ii) Actual Head Office expenses allocated to the branch
= ₹ 1,20,00,000
Income to be declared by the branch for A.Y.2025-26
Particulars ₹
Net profit of the branch 28,00,000
Add: Head office expenditure
debited to profit and loss 1,20,00,000
1,48,00,000

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 Less: Head office expenses 10,85,000
allowable u/s 44C
Income to be declared by the 1,37,15,000
branch
4. (a) (i) TDS under section 194C is not attracted since the payment of
₹ 3 lakhs for repair of residential house is for personal purpose.
TDS under section 194M is also not attracted as aggregate of
contract payment to the payee in the P.Y.2024-25 does not
exceed ₹ 50 lakhs.
However, on payment of ₹ 75,000 towards commission to
Mr. Mukesh for business purposes, tax is required to be
deducted at source u/s 194H @5%, since the payment
exceeds ₹ 15,000, and Mr. Mukesh’s turnover from business
exceeds ₹ 1 crore in the P.Y.2023-24. Accordingly, amount of
₹ 3,750 (₹ 75,000 x 5%) is required to be deducted at source.
(ii) Yes, he can do so. If a person has a loss in any previous year
and has furnished a return of loss under section 139(3) on or
before the due date of filing return of income u/s 139(1), he
shall be allowed to furnish an updated return, if such updated
return is a return of income. Accordingly, in this case, since
the original return of Mr. Rajesh was filed on the due date u/s
139(1) i.e., on 31.10.2023, he can file an updated return within
2 years from the end of A.Y.2023-24, i.e., on or before
31.3.2026.
Accordingly, he can file an updated return of income on
30.11.2024 declaring total income of ₹ 7 lakhs, after paying
tax due on such total income along with interest under section
234B and section 234C and additional income-tax at 25% of
aggregate of tax and interest payable (since the updated
return is filed before 31.3.2025, i.e., before 12 months from
the end of A.Y.2023-24).
(b) As per section 194-I dealing with deduction of tax at source from
payment of rent, the rate of TDS applicable is 2% for machinery hire
charges and 10% for building lease rent. The scope of the section
includes within its ambit, rent for machinery, plant and equipment.
Tax is required to be deducted at source from payment of rent, by
whatever name called, under any lease, sub-lease, tenancy or any

296
 other agreement or arrangement for the use of building and
machinery, irrespective of whether such assets are owned or not by
the payee.
The limit of ₹ 2,40,000 for tax deduction at source will apply to the
aggregate rent of all the assets. Even if two separate agreements
are entered into, one for sub-lease of building and another for hiring
of machinery, rent and hire charges under the two agreements have
to be aggregated for the purpose of application of the threshold limit
of ₹ 2,40,000.
In this case, since the payment for rent and hire charges credited to
the account of Jim, the payee, aggregates to ₹ 2,48,000 (₹ 1,40,000
+ ₹ 1,08,000), tax is deductible at source under section 194-I. Tax
is deductible@10% on ₹ 1,40,000 (rent of building) and @2% on
₹ 1,08,000 (hire charges of machinery).
(c) Computation of capital gains of Mr. Sarthak for A.Y. 2025-26
Particulars ₹ ₹
Redemption of SLR growth fund
Full value of consideration
[Redemption value] 1,45,98,000
Less: Indexed cost of acquisition
[₹ 1,20,00,000 × 363/301] 1,44,71,761
Long term capital gains [Since it is
debt fund (as not more than 65% of the 1,26,239
proceeds are invested in equity shares
of domestic companies) and it was
held by Mr. Sarthak for more than 36
months immediately preceding the
date of its transfer]
Redemption of XYZ Strategic fund
Full value of consideration 50,00,000
[Redemption value]
Less: Cost of acquisition 46,00,000
Short term capital gains [Since it is a 4,00,000
specified mutual fund (as not more
than 35% of its proceeds are invested
in equity shares of domestic
companies) which is acquired on or

297
after 1.4.2023, this fund would be
considered as short-term capital asset
as per section 50AA irrespective of the
period of holding]
Redemption of MNO Midcap fund
Full value of consideration 1,18,00,000
[Redemption value]
Less: Cost of acquisition 1,15,00,000
Short term capital gains [Since it is 3,00,000
equity-oriented fund (as more than 65%
of its proceeds are invested in equity
shares of domestic companies) and it
was held by Mr. Sarthak for not more
than 12 months immediately preceding
the date of its transfer]
Redemption of TBA Growth fund
Full value of consideration 1,20,00,000
[Redemption value]
Less: Cost of acquisition [Indexation 1,10,00,000
benefit would not be available]
Long term capital gains [Since it is 10,00,000
equity-oriented fund (as more than
65% of its proceeds are invested in
equity shares of domestic companies)
and it was held by Mr. Sarthak for more
than 12 months immediately preceding
the date of its transfer]
18,26,239
Less: Exemption under section 54F
Capital gain arising on transfer of a
long-term capital asset other than a
residential house shall not be
chargeable to tax to the extent such
capital gain is invested in the purchase
of one residential house property in
India within one year before or two
years after the date of transfer of
original asset.
Therefore, in the present case, the
exemption would be available only in

298
 respect of long-term capital gains from
redemption of SLR growth fund and
TBA Growth fund.
Exemption from long term capital gains 10,00,000
from redemption of TBA Growth fund
[10,00,000x1,20,00,000/1,20,00,000]
Exemption from long term capital gains
from redemption of SLR short term 69,181
fund [1,26,239 x 80,00,000 (2 crores –
1.20 crores)/1,45,98,000]
Capital gains chargeable to tax for
A.Y.2025-26 7,57,058

5. (a) (i) Section 144C requires the eligible assessee, XYZ Ltd., to file
his objections within 30 days of the receipt of draft
assessment order from the Assessing Officer with the DRP
and the Assessing Officer.
If he fails to do so, the Assessing Officer will proceed to
complete the assessment on the basis of the draft order.
The CBDT has clarified that the assessee has a choice
whether to file an objection before the DRP against the draft
assessment order or not to exercise this option and file an
appeal later before CIT (Appeals) against the final
assessment order passed by the Assessing Officer.
Therefore, XYZ Ltd. can choose to file an appeal before
Commissioner (Appeals) against the final assessment order
instead of filing objection before the DRP against the draft
assessment order passed by the Assessing Officer.
In case XYZ Ltd. files objection before the DRP, then, he has
the right to appeal to Appellate Tribunal, if he is aggrieved by
the final order passed by the Assessing Officer in pursuance
of the directions of the DRP.
(ii) As per section 132B, the amount of existing liability under the
Income-tax Act and the amount of liability determined on
completion of assessment under section 148 may be
recovered out of assets seized under section 132. The words
“existing liability” postulates a liability that is crystallized by
adjudication.

299
 Likewise, “a liability is determined” only on completion of the
assessment. Until the assessment is complete, it cannot be
postulated that a liability has been crystallized.
It is only when the liability is determined on the completion of
assessment that it would stand crystallized and in pursuance
of which a demand can be raised and recovery can be
initiated. Accordingly, the assessee may make an application
to the Assessing Officer within 30 days from the end of the
month in which the asset was seized, for release of the assets
seized.
However, in the present case, the assessee moved an
application before the Assessing Officer for adjustment of tax
liability on income surrendered during search by sale of seized
gold bars.
In this case, assessment is not complete and the liability has
not been crystallised.
Therefore, the action of the Assessing Officer in turning down
the application of the assessee is in order, since the assets
seized cannot be adjusted against tax liability on income
surrendered during search 14.
(iii) The time limit for service of notice under section 143(2) is three
months from the end of the financial year in which the return of
income was furnished by the assessee. The return of income
for assessment year 2024-25 was filed by the assessee on 25th
October, 2024. Therefore, the notice under section 143(2) has
to be served by 30th June, 2025. However, the notice was
served on the assessee only on 9th July, 2025. Hence, the
notice issued under section 143(2) is time-barred.
However, as per section 292BB, where an assessee had
appeared in any proceedings or co-operated in any enquiry
relating to an assessment or reassessment, it shall be
deemed that any notice required to be served upon him, has
been duly served upon him in time in accordance with the
provisions of the Act and such assessee shall be precluded
from raising any objection in any proceeding or enquiry that

14 It was so held in Hemant Kumar Sindhi & Another v. CIT (2014) 364 ITR 555 (All)

300
 the notice was (a) not served upon him or (b) not served upon
him in time or (c) served upon him in an improper manner.
The above provision shall not be applicable where the assessee
has raised such objection before the completion of such
assessment or reassessment. Therefore, in the instant case, if
the assessee, T Ltd., had raised an objection to the proceeding,
on the ground of non-service of the notice under section 143(2)
on time, then, the validity of the assessment order can be
challenged. In absence of such objection, the assessment order
cannot be challenged.
(b) In India, the Finance Act, 2016 has introduced a concessional
taxation regime for royalty income from patents for the purpose of
promoting indigenous research and development and making India
a global hub for research and development. The purpose of the
concessional taxation regime is to encourage entities to retain and
commercialise existing patents and for developing new innovative
patented products. Further, this beneficial taxation regime will
incentivise entities to locate the high-value jobs associated with the
development, manufacture and exploitation of patents in India.
The nexus approach has been recommended by the OECD under
BEPS Action Plan 5. This approach requires attribution and taxation
of income arising from exploitation of Intellectual property (IP) in the
jurisdiction where substantial research and development (R & D)
activities are undertaken instead of the jurisdiction of legal
ownership. Accordingly, section 115BBF has been inserted in the
Income-tax Act, 1961 to provide that where the total income of the
eligible assessee (being a person resident in India who is the true
and first inventor of the invention and whose name is entered in the
patent register as the patentee in accordance with the Patents Act,
1970 and includes every such person, being the true and the first
inventor of the invention, where more than one person is registered
as patentee under Patents Act, 1970 in respect of that patent)
includes any income by way of royalty in respect of a patent
developed and registered in India, then such royalty shall be taxable
at the rate of 10% (plus applicable surcharge and cess). For this
purpose, developed means atleast 75% of the expenditure should
be incurred in India by the eligible assessee for any invention in
respect of which patent is granted under the Patents Act, 1970.

301
6. (a) Equalisation levy of 6% is attracted in respect of the amount of
consideration exceeding ₹ 1 lakh for, inter alia, online advertisement,
received or receivable by a non-resident not having permanent
establishment in India, from, inter alia, a resident in India who carries
on business or profession.
In this case, the payment of ₹ 10 lakhs by NI Ltd., a resident in India
(since it is an Indian company) to SK Inc., New York, a non-resident
not having PE in India, for online advertisement services would be
subject to Equalisation Levy@6%. Such income is, however,
exempt under the Income-tax Act, 1961 by virtue of section 10(50)
thereof.
NI Ltd. is required to deduct equalisation levy of ₹ 60,000 i.e., @6%
of ₹ 10 lakhs from such payment.
(b) Computation of Tax Liability of Mr. Aryan & Mr. Aditya for the
A.Y. 2025-26 as per section 115BAC
Particulars Mr. Mr. Aditya
Aryan
Income under the head “Salaries”
Salary 13,00,000 13,00,000
Less: Standard deduction u/s 16(ia) 75,000 75,000
12,25,000 12,25,000
Less: Set-off loss from house property
in respect interest on loan for self-
occupied property [not allowable as
deduction u/s 115BAC] - -
Gross Total Income 12,25,000 12,25,000
Less: Deduction under section 80D &
80GGC [Not allowable as deduction
u/s 115BAC] - -
Total income as per section 12,25,000 12,25,000
115BAC
Tax Liability
Upto ₹ 3,00,000 Nil Nil
₹ 3,00,001 to ₹ 7,00,000 @ 5% 20,000 20,000
₹ 7,00,001 to ₹ 10,00,000 @ 10% 30,000 30,000

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₹ 10,00,001 to ₹ 12,00,000 @ 15% 30,000 30,000
₹ 12,00,001 to ₹ 12,25000 @ 20% 5,000 5,000
85,000 85,000
Add: Health and education cess @4% 3,400 3,400
Tax Liability 88,400 88,400

Computation of Tax Liability of Mr. Aryan & Mr. Aditya for the
A.Y. 2025-26 as per regular provisions of Income-tax Act
Particulars Mr. Aryan Mr. Aditya
Income under the head
“Salaries”
Salary 13,00,000 13,00,000
Less: Standard deduction u/s 16(ia) 50,000 50,000
12,50,000 12,50,000
Less: Set-off of loss from house
property in respect of interest on
loan borrowed for self-occupied
property, restricted to ₹ 2,00,000, - 2,00,000
as per section 71(3A)
Gross Total Income 12,50,000 10,50,000
Less: Deduction u/s VI-A
Section 80D – Medical insurance 24,000 -
premium
Section 80GGC – Contribution to
political party by cheque - 1,50,000
Tax Liability 12,26,000 9,00,000
Upto ₹ 2,50,000 Nil Nil
₹ 2,50,001 to ₹ 5,00,000 @ 5% 12,500 12,500
₹ 5,00,001 to ₹ 10,00,000 @ 20% 1,00,000 80,000
Above ₹ 10,00,000 @30% 67,800 -
1,80,300 92,500
Add: Health and Education cess 7,212 3,700
@4%
Tax liability 1,87,512 96,200
Tax liability (rounded off) 1,87,510 96,200

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 Since tax liability of Mr. Aryan and Mr. Aditya as per section
115BAC is lower than the tax liability computed as per the
regular provisions of the Act, it is advisable to them not to opt
out of section 115BAC.

(c) A transaction where one of the parties thereto is a person located

in a NJA would be deemed to be an international transaction and all
parties to the transaction would be deemed as associated
enterprises. Accordingly, all the provisions of transfer pricing would
be attracted in case of such a transaction.
Hence, the transactions between TI Ltd, an Indian company and
LMP Ltd., located in NJA, would be deemed to be international
transactions between associated enterprises.
The transactions of TI Ltd. with TOP Inc. of Country X and MON Inc.
of Country Y for sale of identical goods are comparable uncontrolled
international transactions, since they are neither associated
enterprises of TI Ltd. nor are they situated in NJA. Hence,
Comparable Uncontrolled Price (CUP) method can be used to
determine ALP.
Where more than one price is determined by the most appropriate
method, CUP method in this case, then, the arithmetic mean has to
be taken in cases where the number of entries in the dataset is less
than 6 (in this case it is only 2). Moreover, the benefit of permissible
variation between the ALP and the transfer price based on the rate
notified by the Central Government (i.e., maximum of 3% of
transaction price) would not be available in respect of such
transaction.
Computation of ALP using CUP method
Particulars TOP Inc. MON Inc.
₹ in crores ₹ in crores
Price charged by TI Ltd. (on CIF 10.50 11.00
basis)
Less: Ocean freight and insurance,
has to be reduced since the price 0.18 0.18
charged to LMP Ltd. is on FOB basis
10.32 10.82

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Less: Cost of after-sales support
service (has to be reduced, since 0.13 0.13
such services are being provided to
TOP Inc. and MON Inc. but not to
LMP Ltd.)
Arm’s Length Price 10.19 10.69
Arithmetic mean of the above prices [(₹ 10.19 10.44
crores + ₹ 10.69 crores)/2]
Less: Price at which goods were sold 9.50
to LMP Ltd.
Arm’s length adjustment [increase in profit of TI 0.94
Ltd.]

305