DT Mock Test Paper Solution – 1 CA Final Examination, November, 2018

Expected Questions Set for November, 2018 CA Final DT Exams for New and Old Syllabus.

Note: Students are expected to complete the paper and do write at the end the total time taken to complete the

paper. This Mock Test Paper has to be solved by students themselves.

[Total Marks: 100 Marks]

1) Answer All The Questions:

a) Mr. X was the owner of a Freehold land. In April 2017, he entered into a collaboration agreement

with Arihant Builders for developing the property. According to the terms of the agreement, Arihant

Builders were to develop, construct, and put up a building consisting of four independent floors –

ground floor, first floor, second floor and third floor with terrace at its own cost. Mr. X handed over

to Arihant Builders, the physical possession of the entire property, for the limited purpose of

development. Arihant Builders was to get the third floor plus the undivided interest in the land to

the extent of 25% for its exclusive enjoyment. The remaining floors (i.e., the ground floor, first and

second) were to be handed over to Mr. X after construction.

The cost of construction of each floor was Rs. 1 crore, which was borne by Arihand Builders. In

addition to the cost of construction incurred by Arihant Builders on development of the property, a

further amount of Rs. 5 crore was payable by Arihant Builders to Mr. X as consideration against the

rights of Mr. X. Part completion certificate of ground, first and 2nd floor was received on 31/03/2018.

The SDV as on the said date was Rs. 50 lakhs, 60 lakhs, 75 lakhs respectively.

You are required to discuss and resolve the following issues arising in the assessment of Mr. X as a

result of the above transaction –

(i) What is the year of chargeability of the capital gains on transfer of land?

(ii) For computation of capital gains, what should be the full value of consideration accruing as a

result of transfer of the capital asset?

(iii) Is Mr. X eligible for exemption under section 54F?

(iv) If the answer to (ii) is yes, whether exemption is to be restricted to the cost of construction of

one independent floor, on the reasoning that the floors given to Mr. X contained independent

residential units having seprate entrances and therefore, cannot quality as a single residential

unit?

[12 Marks]

Solution:

(i) Where an individual/HUF has entered into a joint development agreement with a builder, then subject to section 45(5A), Capital Gains arising to the individual on transfer of such land/building to the builder shall be taxable as income of the previous year in which the certificate of completion for whole or part of the project is issued by the competent authority. In the present case the part completion certificate of ground, first and 2nd floor was received on 31/03/2018. Therefore the year of chargeability of capital gains arising on transfer of land shall be P.Y. 2017-18.

(ii) As per Section 45(5A) the stamp duty value of the share of owner of land/ building in the developed property on the date of issuing of said certificate of completion, as increased by any monetary consideration received, if any, shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the capital asset.

Therefore in the present case the FVC = Rs. 50 lakhs + Rs. 60 lakhs + Rs. 75 lakhs + Rs. 5 crore = Rs. 6.85 crore.

(iii) Yes, Mr. X is eligible for exemption under section 54F. Since the cost of construction of the floors handed over to Mr. X has been included in the full value of consideration, the same would also represent investment by Mr. X in residential house. Hence, Mr. X is eligible for exemption under section 54F.

(iv) Section 54F uses the expression “residential house” and not “residential unit”. Section 54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the section should be taken to have been satisfied. There is nothing in the section which requires the residential house to be constructed in a particular manner. The only requirement is that it should be for residential use and not for commercial use. The physical structuring of the new building, whether lateral or vertical, should not come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the exemption under section 54F. It is neither expressly nor by necessary implication prohibited. Therefore, Mr.X is entitled to exemption of capital gains in respect of investment of Rs. 3 crores in the residential house, comprising of independent residential units handed over to him.

b) Examine the tax consequence for Assessment Year 2018-19 in respect of fees for technical services

(FTS) received by Mr. Tom Sawyer, a non-resident, from Ganga Ltd., an Indian company, in

pursuance of an agreement approved by the Central Government, if –

a) India has no Double Tax Avoidance Agreement (DTAA) with Country A

b) India has a DTAA with Country A, which provides for taxation of such FT S @5%.

c) India has a DTAA with Country A, which provides for taxation of such FTS @15%.

The technical services are utilised by Ganga Ltd. for its business in Calcutta. Assume that Tom Sawyer

is a resident of Country A and he has no fixed place of his profession in India.

Would your answer change if he has a fixed place of his profession in India and he renders technical

services through that place? Examine, in a case where India has no DTAA with Country A.

[8 Marks]

Solution:

As per section 9(1)(vii)(b), income by way of fees for technical services payable by a resident is deemed to accrue or arise in India, except where the fees is payable, inter alia, in respect of services utilized in a business or profession carried on by such person outside India. In this case, since Ganga Ltd. utilizes the technical services for its business in Calcutta, the fees for technical services payable by Ganga Ltd. is deemed to accrue or arise in India in the hands of Mr. Tom Sawyer. In accordance with the provisions of section 115A, where t he total income of a non- corporate non-resident includes any income by way of royalty or fees for technical services other than the income referred to in section 44DA(1), received from an Indian concern in pursuance of an agreement made by him with the Indian concern and the agreement is approved by the Central Government, then, the special rate of tax at 10% of such fees for technical services is applicable. No deduction would be allowable under sections 28 to 44C and section 57 while computing such income. Section 90(2) makes it clear that where the Central Government has entered into a DTAA with a country outside India, then, in respect of an assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Therefore, if the DTAA provides for a rate lower than 10%, then, the provisions of DTAA would apply.

a) In this case, since India does not have a DTAA with Country A, of which Tom Sawyer is a resident, the fees for technical services (FTS) received from Ganga Ltd., an Indian company, would be taxable @10%, by virtue of section 115A.

b) In this case, the FTS from Ganga Ltd. would be taxable @5%, being the rate specified in the DTAA, even though section 115A provides for a higher rate of tax, since the tax rates specified in the DTAA are more beneficial. However, since Tom Sawyer is a non-resident, he has to furnish a tax residency certificate from the Government of Country A for claiming such benefit. Also, he has to furnish other information, namely, his nationality, his tax identification number in Country A and his address in Country A.

c) In this case, the FTS from Ganga Ltd. would be taxable @10% as per section 115A, even though DTAA provides for a higher rate of tax, since the provisions of the Act (i.e. section 115A in this case) are more beneficial.

If Mr. Tom Sawyer has a fixed place of profession in India, and he renders technical services through the fixed place of profession, then, by virtue of section 44DA, such income by way of fees for technical services received by Mr. Tom Sawyer from Ganga Ltd., India, would be computed under the head "Profits and gains of business or profession" in accordance with the provisions of Income-tax Act, 1961, since technical services are provided from a fixed place of profession situated in India and fees for technical services is received from an Indian concern in pursuance of an agreement with the non-resident and is effectively connected with such fixed place of profession. No deduction would, however, be allowed in respect of any expenditure or allowance which is not wholly and exclusively incurred for the fixed place of profession in India. Mr. Tom Sawyer is required to keep and maintain books of account and other documents in accordance with the provisions contained in section 44AA and get his accounts audited by an accountant and furnish the report of such audit in the prescribed form duly signed and verified by such accountant along with the return of income. It may be noted that the concessional rate of tax@10% under section 115A would not apply in this case.

2) Answer All The Questions:

a) A Pvt. Ltd., a new start up, incorporated on 01/08/2016, was engaged in development &

manufacturing of new eligible product. The company had 10 shareholders each holding 10% equity

shares at the time of incorporation of the company.

In order to expand its business further, it has raised funds through private equity placement (20%

from outside India) on 01/06/2017. Although the existing shareholders held their shares, the revised

shareholding of each of them dropped to 4%, the balance 60% being held by the private equity

investors. The Net Profit of the company for the previous year 2017-18 is Rs. 50 Lakhs after debit and

credit of the following:

(i) Rs. 10 Lakhs paid to Foreign JV partner towards access of customer database and to get 2

senior employee of the JV company on the payroll of the assessee company.

(ii) Rs. 5 Lakhs credited to P/L account on account of exchange rate fluctuation towards raising

the share capital from the foreign country. The money raised was applied towards working

capital requirement of the company.

(iii) Rs. 10 Lakhs was paid on 01/08/2017 towards purchase of heavy duty spare parts which was

essential to avoid the breakdown of machines. 50% of the amount was paid in cash.

(iv) During the previous year the company paid Rs. 25 Lakhs to authorised agency towards

feasibility study and market survey for the expansion of its business.

(v) Rs. 1 Lakh paid to the Registrar of Company towards increasing its authorised share capital.

(vi) Rs. 3 Lakh was debited to Profit and Loss Account being expenses towards issue of share

capital.

Additional Information:

(i) B/f business loss and unabsorbed depreciation of AY 2017-18 is Rs. 10 Lakhs and Rs. 5 Lakhs

respectively.

(ii) The following details pertains towards expansion of business and the issue of shares:

- Cost of project - Rs. 1,300 Lakhs

- Share Capital issued of Rs. 1,000 Lakhs at F.V. (Rs. 100 each)

- Share Premium - Rs. 500 Lakhs

- Debenture - Rs. 300 Lakhs (to be redeemed after 20 years)

- The FMV of the shares - Rs. 140 each.

(iii) The company acquired the land towards its expansion of business. The cost of land is Rs. 2

crores. 50 percent of the cost of land was to be borne by the Central Government towards

promotion of the startup business.

(iv) The expansion process was completed on 31/03/2018.

Compute the total income of the company.

[16 Marks]

Solution:

Computation of Total Income Of A Pvt. Ltd.

For the A.Y. 2018-19

Particulars Amount (in lakhs)

Amount (in lakhs)

Net Profit as per the books (+) Amount paid to foreign JV partner - [The SC in IBM Global Services India Ltd. has held that the

amount paid to the foreign JV partner towards sharing of the customer base is not a capital expenditure. Further the amount paid towards obtaining the employee of the foreign company is for the purpose of business & profession as it saves the training cost on the recruitment]

(-) Amount credited towards exchange fluctuation - [The Delhi HC in Jagjit Industries Ltd. has held that exchange

gain on raising share capital from foreign country is in the nature of capital receipt irrespective of the purpose for which it is raised or the manner in which it is applied]

(+) Expenditure on spare parts - [As per ICDS – V where the spare can be used only in

connection with a particular asset and its use is irregular then such expenses shall be capitalised]

(-) Depreciation on above expenditure

Actual Cost Rs. 10 lakhs (-) Payments in cash > Rs. 10,000 Rs. 5 lakhs WDV Rs. 5 lakhs

(i) Depreciation u/s 32(1)(ii) @ 15% 75,000 (ii) Depreciation u/s 32(1)(iia) @ 20% 1,00,000 (+) Expenses towards expansion of business by raising share capital is a capital expenditure and hence shall not be allowed as deduction.

50 NIL

5

10

(1.75)

25

(-) Deduction u/s 35D: Step 1: [5% of cost of project (1300)

OR 5% of Capital Employed (1000+300)]

Whichever is higher

Rs. 65

Step 2: [Preliminary Exps. (25) OR

Qualifying Amount of Step 1 (65)] Whichever is lower

Rs. 25

∴ Deduction = 1/5 x Rs. 25 (+) Exps. Towards increase in authorised share capital & towards issue of share capital is a capital expenditure and hence disallowed as held by the SC in brook bond India Ltd. (+) Subsidy on land - [Out of the total cost of Rs. 200 lakhs, 50% is borne by the

Govt. As per ICDS VI. Subsidy or grant given by the government or any authority in respect of the asset other than depreciable asset to which explanation 10 to Section 43(1) is applicable shall be considered as Income u/s 2(24) and accordingly chargeable to tax]

(-) B/f business losses - [The benefit of Section 79(b) shall be available since the

company being eligible startup company has issued new share capital while all the shareholders of the company before the fresh issue continues to hold those shares on the last day of the P.Y. to which the loss is sought to be set off, even though their overall voting power went below 51%]

(-) Unabsorbed Depreciation u/s 32(2)

(5)

4

100

177.25

10

5

Profits and Gains from Business or Profession Income from Other Sources - U/s 56(2)(viib)

Since the issue price > facevalue [1500 (-) 1400] x 80% (The section applies only when the share is issued to the resident since 20% of the funds is raised outside India, only 80% of the difference between issued price and the FMV shall be chargeable under the said section)

162.25

80.00

Gross Total Income (-) Deduction under Chapter VIA - u/s 80IAC

[100% of the profit derived from the eligible business: 162.25(-) 100: The land subsidy was not in respect of manufacturing or selling activities of the product and hence does not have a direct nexus between profit and gains derived from the activities of undertaking]

242.25

(62.25)

Total Income 180

3) Answer All The Questions:

a) Z Ltd. An Indian multinational group has a holding company A Co. in Singapore for global reporting

purpose. The A. Co. also has 100% downstream subsidiaries B. Co. and C. Co. in Singapore and D. Co.

in China. The POEM of A Co. is in India and is exercised by Indian Multinational Company of the

group. The subsidiaries B, C and D are engaged in active business outside India. The meetings of BOD

of B Co., C. Co. and D Co. are held in their respective countries.

D Co. transfers process knowhow to Z Ltd. For which it is paid royalty at Rs. 15 crore. Similar process

transfer made by XY Ltd. To TN Ltd. fetched the former a royalty of Rs. 12 crore. (Both XY Ltd. & TN

Ltd. are unrelated party).

Z Ltd. processes the goods and sells to B Co. the finished product for Rs. 85 Crore. Similar goods sold

by Z Ltd. to E Co. were for Rs. 90 crore. The only difference being the price charged to E Co. was cum-

warranty. The warranty charges could be estimated to Rs. 2.5 crore.

During the year Z Ltd. took a loan of Rs. 150 crore @ 10% rate of interest. The interest expenses

claimed as deduction was Rs. 7.5 crore. The loan was guaranteed by C Co. EBITDA of Z Ltd. was Rs. 20

crore.

Z Ltd. distributes the common H.O. expenditure to A, B, C & D Co. The common H.O. expenses are Rs.

30 crores. The expenses debited in its profit and loss account are Rs. 30 crore, whereas the recovery

credited to P&L Account is Rs. 20 crore. The relative contributions of the entities are 50% (Z Ltd.),

10% (A), 20% (B), 10% (C), 10% (D).

You are required to:

(i) Ascertain residential status of A Co., B Co., C Co. and D Co.

(ii) Workout the total income after carrying necessary adjustments. The total income before these

adjustments is Rs. 25 crore. Also discuss the consequences aftermath.

(iii) What could be the possible reporting compliance and who could be responsible to report the

same?

[12 Marks]

Solution:

(i) W.e.f. AY 2017-18, a company would be resident in India in any previous year if: - It is an Indian Company, or - Its place of effective management, in that year, is in India. “Place of Effective Management” (POEM) means a place –

where key management and commercial decisions that are necessary for the business of an entity as a whole

are in substance made. Based on above the residential status for AY 2018-19 of various companies is as under:

1 Z Ltd. Resident in India as it is an Indian Company. 2 A Co. The foreign company A Co. shall be considered as tax resident of India for AY

2018-19 as the question clearly provides that its POEM is exercised by the Indian Co. Z Ltd.

3 B Co., C. Co., D Co.

Merely because the POEM of the intermediate holding company A Co. is in India, the POEM of its subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately. As indicated in the facts, since B Co., C Co., and D Co. are independently engaged in active business outside India and majority of Board meetings of these companies are also held outside India, the POEM of B Co., C Co. and D Co. shall be presumed to be outside India.

(ii)

Z Ltd., A Co., B Co., C Co. and D Co. are all associated enterprises falling within the scope of Sec. 92A.

Further the transactions entered by Z Ltd. with its AE are in the course of International Transaction as its AE are non-resident.

As per Section 92(1) any income arising from an international transaction shall be computed having regard to the arm’s length price.

As per section 92(2) where in an international transaction, two or more associated enterprises enter into a mutual agreement for the allocation or apportionment of any cost or expenses incurred, the cost or expense allocated or apportioned to any such enterprise shall be determined having regard to the arm’s length price.

Further as per section 92(3), the provisions of the section shall not apply in a case where the computation of income u/s 92(1) or 92(2) has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be.

Keeping in mind the above statutory provisions, the Total Income of Z Ltd. for AY 2018-19 is computed as under:

Total Income of Z Ltd. for AY 2018-19

Particulars Most

Appropriate Method

TP Adjustment (Rs. In crores)

Amount (Rs.) (in crores)

Total Income before transfer pricing adjustment (+) T.P. Adjustments (Primary): (i) Royalty paid to D Co. towards

transfer of process knowhow

(ii) Sales of goods to B Co. at ex-warranty

(iii) Allocation of HO expenditure:

Since the recovery made by Z Ltd. is more than the relative contribution of its AE, no adjustments are required in view of Section 92(3).

---

CUP

CUP

---

---

(15-12)

90 – 2.5 87.5 (-)

transfer price

85.0

---

25

3

2.5

---

Total Income after primary adjustment (+) Adjustment u/s 94B

Z Ltd. pays interest in respect of debt which is guaranteed by its AE. Interest paid in excess of 30% EBITDA shall be disallowed and will be allowed to be carried forward. It is assumed that the rate of interest is at arm’s length. [7.5 (-)(30% x 20)]

30.5

1.5

Total Income Rs. 32 Crore

Note: Since the amount of primary adjustment made in case of Z Ltd. for AY 2018-19 (Rs. 5.5 crore) exceed Rs. 1 crore, the assessee may be liable to carry out secondary adjustment u/s 92CE, if the amount of primary adjustment is not repatriated within the time limit prescribed in Rule 10CB.

(iii) As per section 286 r.w. Rule 10DA and Rule 10DB, the following reporting compliance shall be applicable for Z Ltd./A Co.:

MASTER FILE: Rule 10DA

Assuming that the consolidated group revenue exceeds Rs. 500 crores, the assessee would be required to furnish report electronically in Part A & Part B of Form 3CEAA on or before the date of filing of ROI. Further the ggregate value of International Transactions as per per books exceeds Rs. 50 crore. Also the aggregate value of international transaction involving intangible property as per books exceeds Rs. 10 crore. Country by Country reporting (CbCr) Section 286 r.w. Rule 10DB requires submission of CbCr in the case of an international group for an accounting year, if total consolidated group revenue exceeds Rs. 5500 crore. Assuming that the above threshold in not crossed CbCr is not required to be filed.

b) Bingo Inc. (resident of UK), engaged in shipping business had appointed 4 agents in India for booking

cargo and for clearing goods. Bingo Inc. had set up and maintained ‘Vault’ (an integrated and

centralized communication system) for its agents across globe. Bingo Inc. incurred Rs. 1 crore on

developing the system. The Indian agents shared cost of system & paid Rs. 10 Lakh on pro-rata basis

without deducting tax, contending to be reimbursement of expenses. The AO treated the payments

by agents as fees for technical services and issued notice to agents u/s 201(1) treating them assessee

in default. Examine the transaction.

[4 Marks]

Whether the

consolidated

group revenue

> Rs. 500 cr?

Furnish report electronically in Part A (only)

of Form No. 3CEAA on or before the due

date of filing ROI.

NO

Whether –

Aggregate value of international transaction during accounting year (as per books) exceeds Rs. 50 crore?

OR

Aggregate Value of international transactions in respect of purchase, sale, transfer,

lease or use of intangible property during the accounting year exceeds Rs. 10 cr.?

YES NO

Furnish report electronically in Part A & Part B of Form 3CEAA on or before the date of filing

of the ROI.

YES

Solution:

Director of Income-Tax (International Taxation) v. A.P. Moller Maersk [2017] – SC Facts: 1. The assessee was a

foreign company engaged in shipping business and was a tax resident of Denmark.

2. The assessee had agents working for it across the globe, who booked cargo and acted as clearing agents.

3. In India, the assessee had three agents.

4. The assessee had set up and maintained a vertically integrated communication system called Maersk net system in order to help all its agents.

5. The agents paid for the system on a pro rata basis.

6. The Assessing Officer contended that the amounts paid by the Indian agents were fees for technical services taxable under Article 13(4) of the India and Denmark DTAA.

7. The assessee argued that the arrangement was merely a cost sharing system and the payments were only a reimbursement of expenses.

Provision: Sec.9(1)(vii) provides that income by way of fees for technical services payable by a person who is a resident in India is deemed to accrue or arise in India.

Analysis: 1. Centralised communication system was an integral part of the

international shipping business of the assessee The Supreme Court observed that, for the sake of convenience of its agents, the assessee had set up a centralised communication system which was an integral part of the international shipping business of the assessee and common facility was provided to all the agents.

2. Sharing of Expenditure Towards Common Facilities: The expenditure incurred for running this system was shared by all the agents and payments to assessee were merely as reimbursement of expenses incurred. The payments could not be treated as fees for technical services.

3. Transaction at ARM’s Length: No profit element was embedded in the payments, also the TPO had accepted that the payments were in the nature of reimbursement (in assessee’s hands at arm's length)

4. DTAA applied: Moreover, the Revenue authorities had accepted that assessee’s freight income in the relevant assessment years was not chargeable to tax as it arose from the operation of ships in international waters in terms of Article 9 of the India and Denmark DTAA (DS Comment: as per Article 9, shipping profits are taxable in the country where POEM is established).

5. Business Profit v/s Technical Services: Once that was accepted and it was found that the communication system was an integral part of the shipping business, payments received from agents could not be treated as in lieu of any technical services.

6. It was only a facility that was allowed to be shared by the agents and it can not be treated as any technical services SC relied on Kotak Securities Ltd. ruling wherein it was held that “use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all”; Thus, SC ruled that “it is only a facility that was allowed to be shared by the agents and by no stretch of imagination it can be treated as any technical services provided to the agents”

Issue Raised: Whether payments made by the agents, , to use a

Conclusion: The Supreme Court, accordingly, held that amounts paid by Indian agents to the non-resident company would not be liable to tax as fee

centralized communication system maintained by the assessee-company, can be treated as fees for technical services?

for technical services under Article 13(4) of the India and Denmark DTAA.

4) Answer All The Questions:

a) The assessment of Mr. Hari for A.Y.2011-12 was made on 28.3.2013 making an addition of Rs.

3,25,000 in respect of certain income received during the P.Y.2010-11. The assessee contested the

addition before Commissioner (Appeals) but lost the case. The Appellate Tribunal passed an order on

26.2.2018 holding that the said income was not taxable in the P.Y.2010-11 but the same was taxable

in the year of accrual, being P.Y.2005-06 relevant to A.Y.2006-07. The Assessing Officer issued notice

under section 148 for A.Y.2006-07 in March 2018 bringing to tax the sum of Rs. 3,25,000. Is the

notice for reassessment valid?

[4 Marks]

Solution:

Section 149(1) provides the time limit for issue of notice under section 148 for assessment, reassessment or re-computation where income has escaped assessment. The time limit prescribed under section 149(1) in a case where income escaping assessment exceeds Rs. 1 lakh is 6 years from the end of the relevant assessment year. In this case, the relevant assessment year is A.Y.2006-07, being the year in respect of which the income exceeding Rs. 1 lakh has escaped assessment. The six year time limit under section 149(1) for issuing notice under section 148 relating to A.Y.2006-07 expires on 31.3.2013. In this case, the notice under section 148 is issued in March, 2018, which is outside the six year time limit prescribed under section 149(1). The restriction of time limit under section 149(1) is, however, not applicable where notice under section 148 is issued for making an assessment, reassessment or re-computation to give effect to any finding or direction contained in an order passed by any authority in any proceeding by way of appeal, reference or revision or by a Court in any proceeding under any other law. This relaxation is contained in section 150(1). However, such relaxation will not apply where any such assessment or reassessment relates to an assessment year in respect of which an assessment or reassessment could not have been made at the time the order which was the subject matter of appeal, reference or revision, as the case may be, was made on account of such assessment or reassessment having become time-barred at that point of time itself. This restriction is contained in section 150(2). The relaxation contained in section 150(1) is, therefore, subject to the restriction contained in section 150(2). In this case, since the notice under section 148 was issued for the purpose of making reassessment to give effect to an appellate order, the restriction contained in section 149(1) does not apply. The relaxation under section 150(1) will apply in this case, since the order which was the subject matter of appeal was passed on 28.3.2013, which is within the six year time limit from the end of the relevant assessment year, i.e., A.Y.2006-07. Therefore, since the original order which was the subject matter of appeal was passed on 28.3.2013, the relaxation contained in section 150(1) will apply. Consequently, the notice issued under section 148 by the Assessing Officer in March 2018, in this case, would be valid.

b) Does the Appellate Tribunal, under section 254(2), have the power to review or re- appreciate the

correctness of its earlier decision on merits? Also, discuss whether the Tribunal has the power there

under to recall an order in entirety, to rectify a mistake apparent from record. In this context,

distinguish between the power to review and power to recall, with the aid of recent case laws.

[4 Marks]

Solution:

Section 254(2) specifically empowers the Appellate Tribunal to amend any order passed by it, either suo motu or on an application made by the assessee or Assessing Officer, with a view to rectifying any mistake apparent from record, at any time within 4 years from the date of passing the order sought to be amended. The powers of the Tribunal under section 254(2) relating to rectification of its order are very limited. Such powers are confined to rectifying any mistake apparent from the record. The mistake has to be such that for which no elaborate reasons or inquiry is necessary. Accordingly, the re-appreciation of evidence placed before the Tribunal during the course of the appeal hearing is not permitted. It cannot re-adjudicate the issue afresh under the garb of rectification. This issue came up for consideration before the Punjab & Haryana High Court in the case of CIT vs. Vardhman Spinning (1997) 226 ITR 296, wherein it was observed that the jurisdiction to review or modify orders passed by the authorities under the Act cannot be inferred on the basis of a supposed inherent right. The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR 243 (Delhi)(FB), observed that the justification of an order passed by the Tribunal recalling its own order is required to be tested on the basis of the law laid down by the Apex Court in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR 466, dealing with the Tribunal’s power under section 254(2) to recall its order where prejudice has resulted to a party due to an apparent omission, mistake or error committed by the Tribunal while passing the order. Such recalling of order for correcting an apparent mistake committed by the Tribunal has nothing to do with the doctrine or concept of inherent power of review. It is a well settled provision of law that the Tribunal has no inherent power to review its own judgment or order on merits or re-appreciate the correctness of its earlier decision on merits. However, the power to recall has to be distinguished from the power to review. While the Tribunal does not have the inherent power to review its order on merits, it can recall its order for the purpose of correcting a mistake apparent from the record. When prejudice results from an order attributable to the Tribunal’s mistake, error or omission, then it is the duty of the Tribunal to set it right. The Delhi High Court observed that the Tribunal, while exercising the power of rectification under section 254(2), can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake, error or omission and the error committed is apparent. Thus, while the Tribunal does not have the power to review or reappreciate the correctness of its earlier decision on merits under section 254(2), it, however, has the power to recall its order in entirety to rectify a mistake apparent from record.

c) Biotech Ltd. filed its return of income for A.Y.2018-19 on 30th September, 2018. In computing its

business income, it had claimed a weighted deduction @150% of the expenditure of Rs. 22 lakhs

(including cost of building Rs. 10 lakhs) on in-house scientific research under section 35(2AB). The

assessee had clearly disclosed the bifurcation of expenditure of Rs. 22 lakhs in its return of income.

The Assessing Officer, disallowed Rs. 5 lakhs, being the excess 100% of cost of building which was

claimed as weighted deduction under section 35(2AB), since the same was eligible only for

deduction@100% under section 35(1)(iv) read with section 35(2). He also levied penalty under

section 270A @200%. Biotech Ltd. agreed with the disallowance made but contended that there no

misreporting of particulars of income so as to attract penalty under section 270A, since it has

disclosed all the particulars of income, including the bifurcation of expenditure in respect of which

deduction was claimed under section 35(2AB). Discuss the correctness of the Biotech Ltd.’s

contention.

[4 Marks]

Solution:

The issue under consideration in this case is whether making an incorrect claim in the return of

income would tantamount to underreporting of income or furnishing of inaccurate particulars for attracting the penal provisions under section 270A when no information given in the return of income is found to be incorrect. This issue came up before the Supreme Court in CIT v. Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158. The Supreme Court observed that in order to attract the penal provisions of section 270A, there has to be underreporting of income or furnishing inaccurate particulars of income. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. Making an incorrect claim (i.e. a claim which has been disallowed) would not, by itself, tantamount to underreporting of income. The Apex Court held that where there is no finding that any details supplied by the assessee in its return are incorrect or erroneous or false, there is no question of imposing penalty under section 270A. A mere making of a claim, which is not sustainable in law, by itself, will not amount to underreporting of income regarding the income of the assessee. Applying the rationale of the above Supreme Court ruling to the case on hand, penalty under section 270A cannot be imposed on Biotech Ltd. merely for making an incorrect claim which is not sustainable in law, since the company had furnished all the details and no information given by the company was found to be incorrect or erroneous or false. The contention of Biotech Ltd. is, therefore, correct.

d) Satpura Ltd. has received a notice under section 148 for the Assessment Year 2014-15 on

09/08/2017. It also anticipates similar notice for the Assessment Year 2012-13 and 2013-14 for

which it has already furnished return of income. On examination of the books of account produced,

you have noticed huge amounts of concealed income. As a consultant, what would be your advice to

Satpura Ltd.?

[4 Marks]

Solution:

As per section 245C, an assessee may, at any stage of a case relating to him, make an application in the prescribed form and manner to the Settlement Commission. “Case” means any proceeding for assessment which may be pending before an Assessing Officer on the date on which such application is made. A proceeding for assessment or reassessment or re-computation under section 147 is deemed to have commenced from the date of issue of notice under section 148. Where a notice under section 148 is issued for any assessment year, a proceeding under section 147 shall be deemed to have commenced on the date of issue of such notice and the assessee can approach the Settlement Commission for other assessment years as well, even if notice under section 148 for such other assessment years have not been issued but could have been issued on that date. However, a return of income for such other assessment years should have been furnished under section 139 or in response to notice under section 142. In the case on hand, Satpura Ltd. has received a notice under section 148 for the A.Y.2014-15 and also anticipates similar notices for the A.Y.2012-13 and A.Y.2013-14, for which return of income has been furnished. Thus, a proceeding for assessment is pending before an Assessing Officer i.e., the basic condition for approaching Settlement Commission is satisfied. Moreover, since after examination of the books of account, huge amount of concealed income is also noticed, it is presumed that the second condition that the additional amount of income-tax payable on the income disclosed in the application should exceed Rs. 10 lakhs has also been satisfied. Based on these facts, assuming that the necessary conditions are fulfilled, our advice as consultant to Satpura Ltd. would be to approach the Settlement Commission to have its case settled and apply for grant of immunity from penalty and prosecution.

5) Answer All The Questions:

a) Discuss the following issues in the context of the provisions of the Income-tax Act, 1961, with

specific reference to clarification given by the Central Board of Direct Taxes –

(i) Moon TV, a television channel, made payment of Rs. 50 lakhs to a production house for

production of programme for telecasting as per the specifications given by the channel. The

copyright of the programme is also transferred to Moon TV. Would such payment be liable

for tax deduction at source under section 194C? Discuss.

Also examine whether the provisions of tax deduction at source under section 194C would

be attracted if the payment was made by Moon TV for acquisition of telecasting rights of the

content already produced by the production house.

(ii) Mudra Adco Ltd., an advertising company, has retained a sum of Rs. 15 lakhs, towards

charges for procuring and canvassing advertisements, from payment of Rs. 1 crore due to

Cloud TV, a television channel, and remitted the balance amount of Rs. 85 lakhs to the

television channel. Would the provisions of tax deduction at source under section 194H be

attracted on the sum of Rs. 15 lakhs retained by the advertising company?

[5 Marks]

Solution:

(i) The CBDT has, vide Circular No. 4/2016 dated 29.2.2016, clarified that while applying the relevant provisions of TDS on a contract for content production, a distinction is required to be made between:

i a payment for production of content/programme as per the specifications of the broadcaster/telecaster; and

ii a payment for acquisition of broadcasting/telecasting rights of the content already produced by the production house.

In the first situation where the content is produced as per the specifications provided by the broadcaster/telecaster and the copyright of the content/programme also gets transferred to the telecaster/broadcaster, such contract is covered by the definition of the term `work’ in section 194C and, therefore, subject to TDS under that section. However, in a case where the telecaster/broadcaster acquires only the telecasting/ broadcasting rights of the content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1). Therefore, such payments are not liable for TDS under section 194C. However, payments of this nature may be liable for TDS under other sections of Chapter XVII-B of the Act. In this case, since the programme is produced by the production house as per the specifications given by Moon TV, a television channel, and the copyright is also transferred to the television channel, the same falls within the scope of definition of the term ‘work’ under section 194C. Therefore, the payment of Rs.50 lakhs made by Moon TV to the production house would be subject to tax deduction at source under section 194C. If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1). Therefore, such payment would not be liable for tax deduction at source under section 194C.

(ii) The issue of whether fees/charges taken or retained by advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing) is 'commission' or 'discount' to attract the provisions of tax deduction at source has been clarified by the CBDT vide its Circular No.5/2016 dated 29.2.2016. The Circular draws reference to the Allahabad High Court ruling in the case of Jagran Prakashan Ltd. and the Delhi High Court ruling in the matter of Living Media Limited. In both the cases, the Courts have held that the relationship between the media company and the advertising agency is that of a 'principal-to-principal' and, therefore, not liable for TDS under section 194H. Though these decisions are in respect of print media, the ratio is also applicable to electronic media/television advertising as the broad nature of the activities involved is similar.

In view of the above, the CBDT has clarified that no liability to deduct tax is attracted on payments made by television channels to the advertising agency for booking or procuring of or canvassing for advertisements. Accordingly, in view of the clarification given by CBDT, no tax is deductible at source on the amount of Rs. 15 lakhs retained by Mudra Adco Ltd., the advertising company, from payment due to Cloud TV, a television channel.

b) Mr. Rajiv is a retail trader and his total income for the last few years ranged between Rs. 8 lakh to Rs.

10 lakh. He celebrated his 25th wedding anniversary on a large scale on 2nd December, 2017

by hosting a cruise party in the luxury cruise liner “Ocean Princess”, for which he had spent Rs. 30

lakh. The Assessing Officer, in the course of scrutiny assessment of Mr. Rajiv, asked him to explain

the source of such expenditure. The explanation offered by Mr. Rajiv that the same was out of his

savings for the last few years, was not found satisfactory by the Assessing Officer, since a couple of

years ago, he had spent to tune of Rs. 60 lakh on the grand wedding celebrations of his daughter at

Vijayaseshmahal in Chennai. You are required to examine the tax consequences.

[5 Marks]

Solution:

If any expenditure is incurred by an assessee in any financial year in respect of which he is not able to offer explanation about the source of such expenditure or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, then the amount of such unexplained expenditure may be deemed as income of the assessee for such financial year as per section 69C. Therefore, in this case, since the Assessing Officer is not satisfied with the explanation offered by Mr. Rajiv, the expenditure of Rs. 30 lakh incurred by him in the financial year 2017-18 in hosting a grand cruise party may be deemed as his income for P.Y. 2017-18 as per section 69C. Further, such unexplained expenditure which is deemed as the income of Mr. Rajiv shall not be allowed as deduction under any head of income. Where the total income of Mr. Rajiv includes such unexplained expenditure of Rs. 30 lakh, which is deemed as his income under section 69C, such deemed income would be taxed at the rate of 60% as per section 115BBE plus surcharge@25% and cess@3%. The effective rate of tax would be 77.25%. Further, no basic exemption or allowance or expenditure shall be allowed to him under any provision of the Income-tax Act, 1961 in computing such deemed income. No set-off of loss is permissible against such deemed income. New section 271AAC has been inserted with effect from 1st April, 2017 in the Income-tax Act, 1961 to provide for levy of penalty@10% of tax payable under section 115BBE, in a case where income determined includes any income referred to in sections 68, 69, 69A to 69D for any previous year. However, no such penalty would be levied on such income to the extent the same has been included by the assessee in return of income furnished under section 139 and tax in accordance with section 115BBE has been paid on or before the end of the relevant previous year.

c) For A.Y. 2015-16, the order of assessment was passed on 01/02/2017 in consequence of which

notice of demand was raised u/s 156 demanding additional tax of Rs. 1,50,000/-. The assessee paid

the additional tax on 15/02/2017 and filed as appeal. The CIT(A) on 02/03/2017 cancels the order of

the AO. The order of the CIT(A) is received on the same date.

On the basis of the above answer the following:

(i) Calculate the amount of Interest payable by the department, if the AO gives the effect to the

said order on 17/08/2017. Also suggest the situation under which the AO can with held the

refund.

(ii) Assuming that the department files a subsequent appeal, and the ITAT maintains the order

of the AO by passing its order on 28/02/2018, what shall be the interest due to the

department considering that the assessee makes the payment of the amount due on

15/03/2018?

(iii) Whether the AO is required to raise a fresh notice of demand towards the sum due arising

out of the order of the ITAT?

[6 Marks]

Solution:

(i) Interest payable to assessee-

Interest shall be calculated at the rate of 0.5% per month or part thereof from the date of payment of tax to the date on which the refund is granted. No interest shall be payable, if the amount of refund < 10% of the tax determined u/s 143(1) or on regular assessment. Accordingly in the present case for the period 15/2/2017 to 17/8/2017 the interest shall be calculated as under: Rs. 1,50,000 x 0.5% x 7 (6 Months and 2 days) = Rs. 5,250/-

Where the refund arises out of appeal effect being delayed beyond the time presented u/s 153(5) (i.e. 3 months from the end of the month in which appellate order is received by CIT), the assessee shall be entitled to receive an additional interest). The Additional interest on such refund shall be calculated at the rate of 3% per annum, for the period beginning from the date following the date of expiry of the time allowed u/s 153(5) to the date on which the refund is granted. In the present case the appeal order is received on 2/3/2017. Therefore interest shall be calculated from 1/7/2017 to 17/8/2017 = 48 days. Interest = [Rs. 1,50,000 x (3/100) x (48/365)] = Rs. 592 Therefore total interest payable to assessee = Rs. 5,250 + Rs. 592 = Rs. 5,842/-

For every assessment year commencing on or after the 1st day of April, 2017, where refund of any amount becomes due to the assessee u/s 143(1) and the AO is of the opinion that the grant of the refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the PCIT or CIT, withhold the refund up to the date the assessment is made. Since in the present case the refund is arising in consequence of order of the appellate authority, the AO cannot withhold the refund.

(ii) In the present case the interest u/s 220 shall be charged for the period from 28/2/2018 till 15/3/2018 in consequence of the demand arising in consequence of the decision of the ITAT. The interest shall be charged @ 1% per month. Therefore the amount of interest shall be Rs. 1,50,000 x 1% = Rs. 1,500/-

(iii) No separate notice of demand is required to be served in respect of the demand arising in consequence of the order of the appellate authority. The original notice of demand served u/s 156 shall be deemed to be valid till the disposal of appeal by the last appellate authority.

6) Answer All The Questions:

a) Net profit of ABC LLP for previous year is Rs. 20 lakh after the debit and credit of the following:

(i) Dividend received from various domestic companies during the previous year is Rs. 12 lakh.

(ii) Depreciation as per books Rs. 3 lakh.

(iii) Speculation profit on contract of goods settled without obtaining its delivery of Rs. 2 lakh.

(iv) Amount debited includes contribution of Rs. 1 lakh towards national laboratory.

(v) Rs. 2 lakh debited on account of bad debts in respect of debtors taken over of A Pvt. Ltd.

(vi) Rs. 10 lakh being incurred on 30/08/2017 towards replacing the existing ceiling of factory

building which was in a very bad state.

(vii) The arrears of interest on loan taken by A Pvt. Ltd. of Rs. 8 lakh was converted in to a new

loan repayable in 10 equal installment commencing from PY 18-19. The firm claimed the

deduction of arrears of interest on loan.

(viii) Rs. 5 lakh, being sales tax dues of earlier years determined during the year on disposal of

appeals by appellate authorities, for which the firm has furnished a bank guarantee and

claimed deduction.

Additional Information:

Partner A,B,C were equal partner at the time of its formation as they held the shares in the erstwhile

company. Partner A however retired on 31/3/18 to whom the land was distributed by the firm

towards settlement of his dues. The FMV of the land as on 31/3/18 is Rs.90 lakhs . The SDV of the

land as on this date was Rs.100 lakhs.

A Pvt. Ltd. was incorporated on 01/12/2009 in which A,B,C held shares equally. Finding it difficult to

sustain the business being as a corporate entity, it converted itself as LLP on 31/07/2017. The

following are the particulars of A Pvt. Ltd. as on 31-3-17:

a. Unabsorbed depreciation - Rs. 13 Lakhs

b. Business loss Rs. 10 Lakhs (relating to P.Y. 2009-10)

c. Speculative loss of AY 14-15 is Rs. 2 lakhs.

d. Unadjusted MAT credit u/s 115JAA Rs. 8 lakhs

e. WDV of the assets as per 43(6) of the Income Tax Act:

Plant and Machinery (15%) Rs. 60 lakhs

Building (10%) Rs. 20 lakhs

Land (acquired in 2001-2002) is Rs.50 lakhs.

f. VRS expenditure incurred by the company during the P.Y. 2015-16 is Rs.25 lakhs. The

company has been allowed deduction of Rs. 5 lakhs each year for the P.Y. 2015-16 and P.Y.

2016-17 u/s 35DDA.

g. The turnover of the company from P.Y.14-15 to P.Y.16-17 is less than Rs. 60 lakhs in each

year.

Compute the Tax liability of the firm for AY 2018-19.

[12 Marks]

Solution:

Computation of Total Income

Particulars Amount (Rs. In lakhs)

Net Profit as per Profit and Loss Account Less: Dividend Taxable under the head IFOS Less: Speculation Profit Add: Depreciation as per books Bad Debts [Note 2] Add: Replacement of Ceiling [Note 3] Add: Arrears of Interest [Note 4] Add: Sales Tax Dues [Note 5] Less: Corresponding depreciation on account of capitalisation of above expenses (Rs. 10 lakhs x 10%) Less: Deduction for count to National Laboratory (150% of Rs. 1 lakh) Less: Depreciation in respect of asset received on conversion [Note 8]

20 (12)

(2) 3 -

10 8 5

(1)

(0.5) (7.34)

Less: VRS Expenses (5)

I) Profits and Gains from Business or Profession Less: Brought forward Business Loss [Note 7]

18.16 (6.67)

(-) UAD of A Pvt. Ltd. Rs. 13 lakh (Restricted to….)

11.49 (11.49)

II) Speculation Profit

NIL 2

III) Long Term Capital Loss – Carried Forward (Rs. 46 lakh) -

IV) Income from Other Sources Dividend taxable u/s 115BBDA (Rs. 12 lakh – Rs. 10 lakh)

2

Total Income 4

Computation of Tax Liability

Particulars Amount (Rs. In lakhs)

- 30% on Rs. 2 lakh - 10% on Rs. 2 lakh u/s 115BBDA

0.600 0.200

Total Add: Education Cess @ 3%

0.800 0.024

Total Tax Liability 0.824

Notes:

1) Dividend received by LLP from domestic companies in excess of Rs. 10 lakh would be taxable u/s 115BBDA @ 10% as per FA 2017.

2) Successor to business will be allowed deduction of bad debts for debtors of predecessor if it formed part of predecessor’s income.

3) Rs. 10 lakh incurred towards replacement of existing ceiling is a capital expense as it increases the future benefits of the existing asset which has an enduring benefit as per ICDS V. The amount shall be capitalised.

4) Conversion of interest into loan by bank cannot be considered as actual payment of interest. Therefore, such amount shall be allowed as deduction only on actual payment of loan instalment.

5) As per section 43B, any tax, duty, cess or fee is allowed as deduction on actual payment. Furnishing of bank guarantee shall not mean actual payment.

6) Capital Gains on distribution of land on retirement of partner would be taxable in the hands of firm u/s 45(4). FMV of the asset as on the date of distribution shall be the full value of consideration as per section 45(4). Capital Gains: FVC u/s 45(4) - Rs. 90 lakh (-) ICOA (50L x 272/100) - Rs. 136 lakh Long Term Capital Loss - Rs. 46 lakh Since Sec. 45(4) itself provides for the value on which the charge shall be created, it shall override the valuation provision u/s 50C.

7) Conversion of Pvt. Ltd. Co. to LLP would be exempt u/s 47 as all the conditions are satisfied. Other points arising on such conversion: a) UAD of Pvt. Ltd. would be carried forward by successor LLP. b) Business loss of A Pvt. Ltd. shall be carried forward by successor LLP for fresh

period of 8 years. However, since partner A retired during the year, his share of loss would not be allowed to be carried forward as per section 78(1). Section 78(1) shall not apply to UAD. Therefore, business loss that would not be carried forward = Rs. 10 lakh x 1/3 = Rs. 3.33 lakh

∴ Rs. 6.67 would only be carried forward. c) Speculative loss of A Pvt. Ltd. shall not be carried forward by LLP. d) MAT credit shall lapse. e) VRS exps. Of Rs. 5 lakh can be claimed by LLP during current year and remaining in

future years. 8) Depreciation:

Depreciation shall be allowed to successor LLP and Pvt. Ltd. co. based on proportionate no. of days. I) In hands of Company:

Plant and Machinery Building

WDV 60 lakh 20 lakh

Total 60 lakh 20 lakh

Depreciation Rate 15% 10%

Depreciation 9 lakh 2 lakh

No. of days 122 122

∴ Depreciation to Co. 3,00,822 (9 x 122/365)

0.66 lakh (2x122/365)

II) In hands of LLP:

No. of days 243 243

∴ Depreciation to LLP 5,99,178 1.34 lakh

Total Depreciation = Rs. 7.34 lakh

b) A Ltd. an Indian Company, gives following data. Find out tax payable for the Assessment year 2018-

19 and the amount of MAT credit.

Rs.in crore

Tax Payable under normal provisions (ignoring section 115JAA) (a) 1

Tax Payable under section 115JAA (b) 50

Tax Paid in a foreign country (which is otherwise eligible for claiming as tax credit under section 90/90A/91)

(c) 45

[4 Marks]

Solution:

Computation of MAT Credit and Tax Payable

Particulars Rs.in crore

Tax Payable under normal provisions (ignoring section 115JAA) (a) 1

Tax Payable under section 115JAA (b) 50

Tax Paid in a foreign country (which is otherwise eligible for claiming as tax credit under section 90/90A/91)

(c) 45

Tax Payable before foreign tax credit [(a) or (b), whichever is higher ] (d) 50

Less : Foreign tax credit (c) (e) 45

Tax payable for the assessment year 2018-19 [(d) –(e)] (f) 5

MAT credit (before amendment) [excess of (b) over (a) ] (g) 49

Recalculation of MAT credit (after amendment )(i.e. ignore MAT provisions and find out how much foreign tax credit is available) -

- Tax payable under normal provisions (a) (h) 1

- Foreign tax credit is utilized to pay MAT [(a) or (c), whichever is lower] (i) 1

- How much foreign tax credit is utilized to pay MAT (e) (j) 45

- Extra foreign tax credit utilized only because of MAT provisions [(j)-(i)] (k) 44

MAT credit (after amendment) to be carried forward to next 15 years [(g)-(k)] (l) 5

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