ANSWERS OF MODEL TEST PAPER 6

FINAL COURSE: GROUP - II

PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
Division A – Multiple Choice Questions
MCQ Most Appropriate MCQ Most Appropriate
No. Answer No. Answer

1. (c) 9. (c)
2. (c) 10. (c)
3. (d) 11. (b)
4. (a) 12. (a)
5. (c) 13. (d)
6. (c) 14. (c)
7. (d) 15. (c)
8. (a)

Division B – Descriptive Questions

1. Computation of Total Income and tax liability of Kansal Cements Ltd.
for the A.Y. 2025-26 under regular provisions of the Act
Particulars Amount (in `)
I Profits and gains of business or
profession
Net profit as per statement of profit and 75,00,000
loss from Cement business
Add: Items debited but to be
considered separately or to be
disallowed
(i) Depreciation as per the 6,00,000
Companies Act, 2013
(ii) Interest expenditure towards 1,50,000
borrowed funds for investing in
shares
[Allowability or otherwise of interest
expenditure on earning dividend

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 has to be considered separately
under the head “Income from Other
Sources”. Since the amount has
been debited to the statement of
profit and loss, it has to be added
back.]
(iii) Expenditure towards Nil
construction of tenements for
company’s workers
[As Kansal Cements Ltd. acquired
no ownership rights in the
tenements and remained the
property of the Housing Board, the
expenditure of ` 5,00,000 was
incurred wholly and exclusively for
the welfare of the employees and,
therefore, constituted legitimate
business expenditure 19. Since the
same has been debited to the
statement of profit and loss, no
further adjustment is required] 7,50,000
82,50,000
Less: Items credited but not taxable
or chargeable to tax under another
head/ Allowable expenditure
(ii) Dividend received from foreign 5,00,000
company
[Dividend received from foreign
company is taxable under the head
“Income from Other Sources”.
Since the same has been credited
to the statement of profit and loss,
the same has to be deducted while
computing business income]
(iv) Waiver of amount by trade Nil
creditor
[Amount waived by the trade
creditor is deemed income under
section 41(1) as there is a benefit

19 CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521 (SC)

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 by way of remission or cessation of
trading liability. Since the same has
been credited to the statement of
profit and loss, no further
adjustment is required.]
(v) Upfront discounted interest to 4,00,000
debenture holders
[Since the liability of Kansal
Cements Ltd. with respect to
upfront interest payment had
arisen this year, it would be eligible
to claim the entire amount of ` 5
lakhs of interest paid as
deduction 20 under section
36(1)(iii). As only 1/5th of the
interest is debited to the statement
of profit and loss, remaining 4/5th
also has to be reduced] 9,00,000
73,50,000
Less: Depreciation as per the Income- 4,50,000
tax Act, 1961
69,00,000
Profit from business of developing
and building rental housing projects
Net profit from business of developing 20,00,000
and building rental housing projects
Income from housing project executed 10,00,000
as a work contract 30,00,000
99,00,000
II Capital Gains
Long term capital gain on
compulsory acquisition of land
Full value of consideration 8,00,000
[Additional compensation
pursuant to order of the
High Court]
Less: Cost of acquisition Nil 8,00,000

20 Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605 (SC)

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 Short term capital gain on damage of
machinery due to fire
Full value of consideration 22,00,000
[Insurance compensation]
Less: WDV as on 9,39,250 12,60,750 20,60,750
1.4.2024
Computation of WDV as on 1.4.2024
Actual Cost as on 20,00,000
1.5.2021
Less: Depreciation for 3,00,000
P.Y. 2021-22 [15%]
Less: Additional Dep.@ 4,00,000
20%
WDV 13,00,000
Less: Depreciation for 1,95,000
P.Y. 2022-23 [15%]
WDV 11,05,000
Less: Depreciation for 1,65,750
P.Y. 2023-24 [15%]
WDV as on 01.04.2024 9,39,250
III Income from Other Sources
Dividend received from foreign 5,00,000
company
Less: Interest expenditure of 1,00,000 4,00,000
` 1,50,000 allowed upto 20% of
dividend
Gross Total Income 1,23,60,750
Less: Deduction under Chapter VI-A
Under section 80-IAB 20,00,000
[100% of profits from business of
developing and building rental housing
projects. No deduction is allowed in
respect of income from housing project
executed as a work contractor]
Under section 80M 4,00,000
[Deduction in respect of inter-corporate
dividend to the extent of dividend

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 distributed by it on or before the due
date specified u/s 139(1) or dividend
received, whichever is lower]
24,00,000
Total Income 99,60,750
Computation of tax liability
Tax on long term capital gains of 1,60,000
` 8,00,000 @ 20%
Tax on other income of ` 91,60,750 @
30%, since the turnover of the company
for the previous year 2022-23 exceeds
` 400 crores 27,48,225
29,08,225
Add: Health and education cess @4% 1,16,329
Tax liability 30,24,554
Tax liability (Rounded off) 30,24,550

2. (a) Computation of Taxable Capital gain in the hands of Salsy

Limited for A.Y.2025-26
Particulars `
Full value of consideration [See Note 1 below] 2,64,00,000
Less: Net worth [See Note 2 below] 2,37,25,000
Long-term capital gain [Since the Unit is held 26,75,000
for more than 36 months]
No indexation benefit is allowed in slump sale.

Note 1: Computation of Full value of consideration

Particulars `
Fair market value of the capital assets transferred
by way of slump sale [FMV1]
Land, being an immovable property [Stamp duty 62,00,000
value on 1.10.2024, being the date of slump sale]
Building, being an immovable property [Stamp 72,00,000
duty value on 1.10.2024, being the date of slump
sale]
Machinery [Book value as appearing in the books 52,00,000
of accounts]

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 Investment in listed equity shares of ABC Limited 42,00,000
[Fair market value as on 1.10.24] [1,00,000 x 42]
Inventories [Book value as appearing in the 60,00,000
books of accounts]
Licenses and Franchises [Book value as 23,00,000
appearing in the books of accounts]
3,11,00,000
Less: Liabilities of Chemical Unit – Trade 47,00,000
Creditors
Fair market value of the capital assets transferred 2,64,00,000
by way of slump sale [FMV1]
Fair market value of the consideration received 2,42,00,000
or accruing as a result of transfer by way of slump
sale [Value of the monetary consideration
received] [FMV2]
Full value of consideration [Higher of FMV1 or 2,64,00,000
FMV2]

Note 2 – Computation of Net worth

Particulars ` `
Land (Excluding ` 20 lakhs on 50,00,000
account of revaluation)
Building 70,00,000
Machinery 52,00,000
Investment in Equity Shares of 35,00,000
ABC Ltd.
Inventories 60,00,000
Licenses and Franchises 17,25,000
Cost as on 1.6.2023 23,00,000
Less: Depreciation @ 25% for 5,75,000
Financial Year 2023-24
WDV as on 1.4.2024 17,25,000
Total assets 2,84,25,000
Less: Trade Creditors 47,00,000
Net worth 2,37,25,000

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(b) Computation of income to be declared by the branch in its
return of income for A.Y.2025-26
Particulars ` `
Loss of the branch (28,00,000)
Add: Short-term capital loss 1,50,000
[Allowed to be set-off
only against capital
gains]
Expenditure on 9,60,000
Voluntary Retirement
Scheme [Only 1/5 is
allowable as deduction.
Thus, 4/5th will be added
back]
Brought forward 17,00,000
speculative business
loss [Allowed to be set-
off only against
speculative business]
Head office expenditure 1,65,00,000 1,93,10,000
debited to profit and loss
1,65,10,000
Less: Head office expenses allowable u/s 10,60,500
44C [Refer note below]
Income to be declared by the branch 1,54,49,500
Note - Computation of Head Office expenses allowable u/s
44C
Head office expenses allowable u/s 44C =
` 10,60,500
Being the lower of -
(i) 5% of ` 2,12,10,000 (adjusted total
income) = `10,60,500
(ii) Actual Head Office expenses allocated to
the branch= ` 1,65,00,000

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 Computation of Adjusted Total Income
Particulars ` `
Loss of the branch (28,00,000)
Add: Current year depreciation NIL
Unabsorbed depreciation 18,00,000
Short-term capital loss 1,50,000
Expenditure on Voluntary 9,60,000
Retirement Scheme
[Only 1/5 is allowable as
deduction. Thus, 4/5th will
be added back]
Brought forward 17,00,000
speculative business loss
Deductions under
Chapter VI-A 29,00,000
Head office expenditure 1,65,00,00
debited to profit and loss 0
2,40,10,000
Adjusted total income 2,12,10,000
Note – Depreciation for the current financial year is not
required to be added back for computing adjusted total
income.

3. (a) (i) As per section 13B, any voluntary contribution received by an

electoral trust would be exempt during the previous year, if
such electoral trust –
- distributes to the eligible political parties during the said
previous year, 95% of the total contributions received
during the financial year along with the surplus, if any,
brought forward from earlier previous year; and
- functions in accordance with the rules (Rule 17CA) made
by the Central Government.
In the present case, M/s MPL, an electoral trust incorporated
in the previous year 2024-25, received voluntary contributions
of ` 600 lakhs. It spent ` 5 lakhs for the purpose of managing
its affairs.

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 As per rule 17CA, since M/s MPL, an electoral trust
incorporated in the P.Y. 2024-25, it is eligible to spend ` 5
lakhs, being ` 30 lakhs i.e., 5% of total contributions of ` 600
lakhs subject to the limit of ` 5 lakhs.
Accordingly, distributable contribution for the P.Y. 2024-25
would be ` 595 lakhs [i.e., ` 600 lakhs less ` 5 lakhs]. In such
a case, M/s MPL can distribute ` 595 lakhs to a registered
political party as the same exceeds ` 570 lakhs, being 95% of
total contributions received of ` 600 lakhs.
Rule 17CA provides that the electoral trust shall not accept
contributions, inter alia, from an individual who is not a citizen
of India.
If M/s MPL received ` 100 Lakhs as contribution from
individuals who are not citizen of India, it has violated the
conditions mentioned in Rule 17CA. In such case, M/s MPL,
an electoral trust, would not be eligible for exemption under
section 13B in respect of entire contribution.
Moreover, the CBDT may withdraw the approval after giving
an opportunity of being heard and record the reasons in
writing for the withdrawal of approval.
(ii) No, Astha Foundation trust cannot claim exemption under
section 10(23C)(iiiad) and section 10(23C)(iiiae), since the
aggregate annual receipt of ` 5.4 crores (` 1.2 crores from
school and ` 4.2 crores from hospital) exceeds the aggregate
threshold of ` 5 crores tough the individual receipts from
school and hospital have not exceeded ` 5 crores.
(iii) Where a trust or institution or fund is notified under section
10(46), the approval or provisional approval granted under
first regime under section 10(23C)(vi) would become
inoperative from the date of such notification issued under
section 10(46).
Accordingly, in the present case, since approval granted
under section 10(23C)(vi) would become inoperative from
15.11.2024, being the date of notification issued under section
10(46), Care for All Foundation cannot simultaneously enjoy

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 the benefits of both sections i.e., 10(23C)(vi) and section
10(46).
(b) Computation of taxable total income and net tax liability of
Mr. Ashok for A.Y.2025-26 under the default tax regime under
section 115BAC
Particulars ` `
Profits and Gains of Business or
Profession
Income from sole-proprietary 8,00,000
concern in India
Business Income in Country ‘N’ 9,50,000
17,50,000
Less: Business loss of A.Y. 2021-22 50,000 17,00,000
in Country ‘N’
Income from Other Sources
Gift received from a friend in 65,000
Country ‘N’
Dividend in Country ‘N’ 1,40,000 2,05,000
Gross Total Income 19,05,000
Less: Deductions under Chapter VI-
A [Not available under default tax Nil
regime]
Total Income 19,05,000
Tax liability on ` 19,05,000
Tax on total income [30% of 2,61,500
`4,05,000 + ` 1,40,000]
Add: Health and Education 10,460
cess@4%
2,71,960
Less: Deduction u/s 91 (See 1,57,794
Working Note below)
Net Tax Liability 1,14,166
Net Tax Liability (Rounded off) 1,14,170

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 Working Note: Calculation of deduction under section 91
Average Rate of tax in Country N
- Tax @10% on dividend income 14,000
of ` 1,40,000
- Tax @20% on other income of 2,03,000
` 10,15,000 (Business income
of ` 9,50,000 and gift of
` 65,000)
Total Tax Liability in Country N 2,17,000
Average Rate of tax in Country N 18.79%
= 2,17,000/11,55,000 x 100
Indian Rate of tax = 2,71,960/19,05,000 x 100 14.28%
Doubly taxed income from Country N
Business income [9,50,000 – 9,00,000
` 50,000]
Gift from a friend of ` 65,000 65,000
Dividend Income 1,40,000
Doubly taxed income 11,05,000
Deduction u/s 91= Lower of average rate of tax 1,57,794
in Country N and Indian rate of tax rate of tax x
Doubly taxed income = [14.28% x ` 11,05,000]

4. (a) (i) As per section 194LA, Maharashtra State Government is

required to deduct tax at source @ 10% on the entire sum of
` 2,90,000 on 10.12.2024, being the date on which enhanced
compensation of ` 50,000 is paid to Mr. Bhuvan on account of
compulsory acquisition of urban land since aggregate amount
of compensation including enhanced compensation exceeds
` 2,50,000 during the F.Y. 2024-25.
(ii) Mr. Robert, being a seller of an overseas tour programme
package has to collect tax at source under section 206C(1G)
from Mr. Aman on receiving the amount for purchase of
package.
Tax has to be collected at source @ 5% on ` 7 lakhs received,
and @ 20% on ` 2 lakhs, being above ` 7 lakhs.

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 Since Mr. Aman has not filed his return of income for A.Y.
2024-25 and A.Y. 2023-24 and the TCS credit exceeds
` 50,000 for both A.Y 2024-25 and A.Y. 2023-24, section
206CCA is invoked which provides, tax is required to be
collected at source, in his case, at the higher of twice the rate
specified under section 206C(1G) and 5%.
However, the higher rate of TCS leviable cannot exceed 20%.
Accordingly, Mr. Robert is required to collect tax @ 10% (twice
of 5%) on ` 7 lakhs and @ 20% (40% twice of 20% but
restricted to 20%) on ` 2 lakhs (` 9 lakhs – ` 7 lakhs).
(iii) As per section 194BA, on any income by way of winnings from
any online game during the financial year, tax @ 30% is required
to be deducted on the net winnings in the user account.
Since there is a withdrawal on 1.2.2025, Dream 44 is required
to deduct tax at source at the time of such withdrawal on the
net winnings comprised in such withdrawal, as well as on the
remaining amount of net winnings in the user account at the
end of the financial year.
Net winnings at the time of first withdrawal during the F.Y. i.e.,
on 1.2.2025 = ` 25,00,000, being amount withdrawn –
(` 1,00,000, being non-taxable deposit made in the user
account + ` 10,000, being opening balance) = ` 23,90,000.
Net winnings at the end of the financial year i.e., on 31.3.2025
= (` 25,00,000, being amount withdrawn + ` 6,60,000, being
closing balance) – (` 1,00,000, being non-taxable deposit
made in the user account + ` 10,000, being opening balance
+ ` 23,90,000, being net winnings comprised in the earlier
withdrawal) = ` 6,60,000.
(b) (i) Surya Ltd., an Indian company and Sun Inc. of UK, are
deemed to be associated enterprises as per section 92A(2),
since Surya Ltd. guarantees 10% or more of total borrowings
of Sun Inc.
Further, the transaction of purchasing raw material falls within
the meaning of “international transaction” under section 92B.
Hence, transfer pricing provisions would be attracted in this
case.

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 Computation of Arm’s length price and adjustment to be
made as per Comparable Uncontrolled Price Method
Particulars ` in crores
Price of imported goods charged by Sun 60.00
Inc. from Surya Ltd.
Less: Mark up earned @ 25% [` 60 crores 12.00
x 25/125] from Surya Ltd.
48.00
Add: Mark up earned in uncontrolled 9.60
comparable transaction @ 20%
Add: Adjustment on account of brand value 1.00
[Annual cost of brand value]
Add: Adjustment on account of cost of 0.576
credit for 1 month [12% x 1/12 x 57.60]
Arm’s length price of raw material 59.176
purchase
Less: Price at which raw material was
imported by Surya Ltd. from Sun Inc. 60.000
Adjustment to be made to the income of 0.824
Surya Ltd.

(ii) Surya Ltd. is required to furnish the audit report under section
92E on or before 31.10.2025, being the specified date i.e.,
date one month prior to the due date for furnishing the return
of income under section 139(1) for the relevant assessment
year.
(iii) If Surya Ltd. fails to furnish the audit report under section 92E,
penalty of ` 1 lakh would be leviable.
5. (a) (i) As per section 253(2), the Principal Commissioner or
Commissioner may, if he objects to any order passed by the
Joint Commissioner (Appeals) or the Commissioner (Appeals)
under section 250, direct the Assessing Officer to appeal to
the Appellate Tribunal against such order.
However, the Departmental appeals are subjected to the
monetary limits and other conditions specified by the CBDT

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 for filing appeals before Income Tax Appellate Tribunal, High
Courts and SLPs/ appeals before Supreme Court.
The key points as per CBDT circulars in this regard are as
under:
- Departmental Appeals shall not be filed before Appellate
Tribunal in cases where the tax effect does not exceed
the monetary limit of ` 60 lakhs.
- Tax would include surcharge and cess. However, the tax
will not include any interest thereon, except where
chargeability of interest itself is in dispute.
In the present case, tax of ` 50.934 lakhs [78% of ` 65.30
lakhs] under section 115BBE and interest of ` 12.35 lakhs
determined in respect of additions of unexplained jewellery
under section 69A.
Since the tax effect excluding interest does not exceed ` 50
lakhs, the department cannot file appeal before the ITAT.
(ii) As per section 142(2A), if at any stage of the proceedings, the
Assessing Officer, having regard to the nature and complexity
of the accounts, volume of the accounts etc. is of the opinion
that it is necessary so to do, he may, with the previous
approval of the Principal Chief Commissioner (PCC) or Chief
Commissioner (CC) or the Principal Commissioner (PC) or
Commissioner (C) get the inventory valued by a Cost
Accountant and furnish a report of such inventory valuation.
Opportunity of being heard is to be given to the assessee
before directing to get the inventory valued.
For inventory valuation, Cost Accountant should be nominated
by PCC or CC or PC or C of Income-tax. Further, the
expenses of inventory valuation including remuneration of
Cost Accountant shall be determined by the PCC or CC or PC
or C of Income-tax in accordance with the prescribed
guidelines, and not by the AO. The expenses so determined
shall be paid by the Central Government.
In the present case, though AO has taken the relevant
approval and the company was given opportunity of being
heard, the Assessing Officer is not justified in appointing a

336
 Chartered Accountant in practice, fixing his fees himself and
asking the CA to raise the bill to the company. For inventory
valuation, a Cost Accountant nominated by PCC or CC or PC
or C can be appointed and expenses of inventory valuation
including remuneration are also determined by these
authorities. Such expenses shall be paid by the Central
Government and not by the company.
(iii) The obligation to deduct tax at source in terms of section 194H
arises when the legal relationship of principal and agent is
established. Agency is a triangular relationship between the
principal, agent and the third party. The legal position of a
distributor is generally regarded as different from that of an
agent.
Section 194H fixes the liability to deduct tax at source on the
'person responsible to pay' and the liability to deduct tax at
source arises when the income is credited or paid by the
person responsible for paying. However, deduction of tax at
source in terms of section 194H is not to be extended and
widened in ambit to apply to true/genuine business
transactions, where the assessee is not the person
responsible for paying or crediting income.
In the present case, M/s SBL Cellular Limited, being an
assessee,
• neither pays nor credits
• any income to the person with whom he has contracted.
M/s SBL Cellular Limited is not privy to the transactions
between distributors/franchisees and third parties. It is,
therefore, impossible for M/s SBL Cellular Limited to deduct
tax at source and comply with section 194H, on the difference
between the total/sum consideration received by the
distributors/franchisees from third parties and the amount paid
by the distributors/franchisees to them.
Thus, in the case on hand, section 194H is not applicable in
the hands of M/s SBL Cellular Limited and it would not be
under a legal obligation to deduct tax at source on the

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 income/profit component in the payments received by the
distributors/ franchisees from the third parties/customers.
Accordingly, the contention of the Revenue that company
should deduct tax under section 194H is not correct.
The above answer is based on the rationale of the Supreme
Court ruling in Bharti Cellular Ltd. vs. ACIT [2024] 462 ITR
247.
(b) (i) As per UN Model Convention, “Automated digital services”
means any service provided on the Internet, or another
electronic network, in either case requiring minimal human
involvement from the service provider.
The term “Automated digital services” includes specially:
(a) online advertising services;
(b) supply of user data;
(c) online search engines;
(d) online intermediation platform services;
(e) social media platforms;
(f) digital content services;
(g) online gaming;
(h) cloud computing services; and
(i) standardized online teaching services.
(ii) A hybrid mismatch is an arrangement that exploits a difference
in the tax treatment of an entity or an instrument under the
laws of two or more tax jurisdictions to achieve double non-
taxation.
Hybrid mismatch arrangements are sometimes used to
achieve unintended double non-taxation or long-term tax
deferral in one or more of the following ways -
- Creation of two deductions for a single borrowal

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 - Generation of deductions without corresponding income
inclusions
- Misuse of foreign tax credit
- Participation exemption regimes
6. (a) (i) Section 80-IA provides for deduction of 100% of the profits
and gains derived from the business of, inter alia, developing,
operating and maintaining a solid waste management system
for 10 consecutive assessment years out of 20 years.
Section 80-IA(7) read with Rule 18BBB requires audit of
accounts and furnishing of audit report in Form 10CCB on or
before the prescribed time for claim of such deduction.
Form 10CCB is a declaration provided by the Chartered
Accountant that in his opinion the enterprise satisfies the
conditions stipulated in section 80-IA and the amount of
deduction claimed thereunder is as per the provisions of the
Income-tax Act, 1961 and meets the required conditions.
As per clause (7) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in
practice shall be deemed to be guilty of professional
misconduct, if he does not exercise due diligence, or is grossly
negligent in the conduct of his professional duties.
With respect to Form 10CCB, the Chartered Accountant later
came to know about the error that the period of ten years had
expired in A.Y. 2023-24 and he withdrew his report in Form
10CCB and informed M/s. PQR Waste Management Pvt. Ltd.,
who also had filed a revised return immediately withdrawing
the claim for deduction under section 80-IA.
Accordingly, clause (7) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 may not be invoked as the
chartered accountant withdrew his report in Form 10CCB as
soon as he came to know about the error and informed the
company and company filed a revised return accordingly.

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 (ii) A. GAAR provisions would not apply in this case as the
assessee, M/s KKT Private Limited merely makes a
selection of acquiring the machine on lease over outright
purchase, out of the options available to him under the
provisions of the Act for which he is eligible and satisfies
the stipulated conditions, if any.
Even if choice of such option results in lower tax liability,
the same is a result of tax planning.
B. Investment strategy adopted by the assessee to reduce
its tax effect for a particular year is not a method of tax
evasion.
Selling of shares of an Indian company at loss and
setting off such loss against the short-term capital gain
arising on sale of other listed shares is as per the
provisions of law. It does not make any difference if the
shares sold are purchased again in the next year. It
would be considered as tax planning.
(b) As per section 245Q(2), the application of advance ruling needs to
be made in quadruplicate by the applicant i.e., M/s ABC Ltd.
Since the value of transaction between M/s ABC Ltd and M/s Pinicer
Inc., in respect of which ruling is sought, exceeds ` 100 crores but
does not exceed ` 300 crores, fees of ` 5 lakhs to be accompanied
with the application.
As per section 245W(1), an applicant who is aggrieved by any ruling
pronounced by the Board for Advance Rulings may appeal to the
High Court against such ruling of the Board of Advance Rulings.
He has to do so within sixty days from the date of the communication
of that ruling or order. However, where the High Court is satisfied
that the appellant was prevented by sufficient cause from presenting
the appeal within the 60 days period, it may grant further period of
30 days for filing such appeal.

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