Super 25 Q&A for Last Day Revision by CA BB · 2017-04-24 · Super 25 Q&A for Last Day Revision by...

Super 25 Q&A for Last Day Revision by CA BB

CA Bhanwar Borana (CA BB) Page 1

1. BB Ltd., an Indian company, receives the following dividend income during the P.Y.

2016-17 -

(i) from shares held in BCD Inc., a Danish company, in which it holds 25% of nominal value of equity share capital – ` 65,000;

(ii) from shares held in EFG Inc., an English company, in which it holds 31% of nominal value of equity share capital – ` 1,50,000.

(iii) From shares held in HIJ Inc., a Dutch company, in which it holds 62% of the nominal value of equity share capital - ` 1,07,000

(iv) From shares held in Indian subsidiaries, on which dividend distribution tax has been paid by such subsidiaries – ` 47,000.

BB Ltd. has paid remuneration of ` 16,000 for realising dividend, the breakup of

which is as follows –

(1) ` 4,000 (BCD Inc.); (2) ` 7,000 (EFG Inc.);(3) ` 5,000(Indian subsidiaries)

The business income of BB Ltd. computed under the provisions of the Act is ` 48 lakh. Compute the total income and tax liability of BB Ltd., ignoring MAT. Assuming that BB Ltd. has distributed dividend of ` 4,20,000 in February, 2017, compute the additional income-tax payable by it under section 115-O. Ignore the provisions of double taxation avoidance agreement, if any, applicable in this regard.

Solution:

Computation of Total Income of BB Ltd. for A.Y.2017-18

Particulars `

Profits and gains of business or profession Income from other sources (See Note below) Total income

48,00,000 3,18,000 51,18,000

Particulars `

From BCD Inc., a Danish company, – Net Dividend (i.e., ` 65,000 – 61,000

` 4,000) is Taxable at Normal Rates

From EFG Inc., an English company – Gross Dividend is taxable @15% 1,50,000

under section 115BBD [No deduction is allowable in respect of any expenditure as per section 115BBD (2)]

From HIJ Inc., a Dutch company–gross dividend is taxable @ 15% 1,07,000

under section 115BBD [no deduction is allowable in respect of any expenditure as per section 115BBD (2)]

From shares in Indian subsidiaries ` 47,000 – exempt under section

10(34) since dividend distribution tax has been paid under section 115-O [As per section 14A, no deduction is allowable in respect of expenditure Incurred to earn exempt income] Nil

3,18,000



Computation of tax liability of BB Ltd. for the A.Y.2016-17

Particulars `

Tax @ 15% under section115BBDon ` 2,57,000(gross dividend) 38,550

Tax @ 30% on balance income of ` 48,61,000 14,58,300

14,96,850

Add: Education cess @ 2% and Secondary and higher education 44,906

cess @1%

Taxliability 15,41,756

Computation of additional income- tax payable by BB Ltd. under section 115-O

Particulars `

Amount distributed by way of dividend 4,20,000

Less: Dividend received from Indian subsidiaries, on which

DDT payable under section115 –O has been paid 47,000

Dividend received from foreign subsidiary, HIJ Inc.,

on which tax is payable under section 115BBD 1,07,000 1,54,000

2,66,000

Gross Dividend (266000/85*100) 3,12,941

Additional income-tax @ 15%

46,941

Add: Surcharge @ 12% 5,633

52,574

Add: Education cess @2% and Secondary and higher education 1,577

cess@1%

Additional income-tax payable under section 115-O 54,151

2. Mr. Shakti purchased a residential house in March, 2002 for Rs. 22 Lakhs. He sold

the house on

01st December, 2016 for Rs. 100 Lakhs. He paid brokerage at 2% on sale price. He

invested Rs. 80 Lakhs in April 2017 in equity shares of Shakti Manufacturing

Private Limited, a newly formed manufacturing company which qualifies to be a

small enterprise under Micro, Small and Medium Enterprises Development Act,

2006. Mr. Shakti holds 80% of Share Capital of the Company.

The Company utilized the sum of Rs. 80 Lakhs in the following manner:

i) Purchase of new machinery during April 2017 Rs. 70 Lakhs (including Rs. 10 Lakhs for purchase of computers).

ii) Deposit in specified bank on 25th September, 2017 Rs. 10 Lakhs

The due date for filing return of income for Mr. Shakti for A.Y. 2017-18 is 30th

September, 2017. Assume that he files the return on 28th September, 2017.

Compute the taxable Capital Gain arising from the above transaction for A.Y. 2017-

18 (CII : F.Y. 2001-02 – 426, F.Y. 2016-17 – 1125)



Solution:

Name of the Assessee: Mr. Shakti

Previous Year: 2016-17

Assessment Year: 2017-18

Computation of Taxable Capital Gains

Particulars ₹

Full Value of Consideration

Less : Expenses on transfer (2% of sale consideration)

1,00,00,000

(2,00,000)

Net Consideration

Less : Indexed Cost of acquisition

Rs. 22,00,000 * 1125 [F.Y.2016-17]

426 [F.Y.2001-02]

98,00,000

(58,09,859)

Long Term Capital Gain

Less : Exemption under section 54 GB (Note 1)

Rs. 39,90,141 * Rs. 70,00,000

Rs. 98,00,000

39,90,141

(28,50,101)

Taxable Capital Gains 11,40,040

Deemed Cost of new plant and machinery for exemption u/s 54GB

Particulars ₹

1. Purchase cost of new P & M acquired in April 2017 Less : Cost of officer appliances i.e computers (which have

been specifically excluded from the meaning of new plant

and machinery)

70,00,000

(10,00,000)

60,00,000

2. Amount deposited in the specified bank before the due date of filing return

10,00,000

Deemed Cost of P & M (New)for exemption u/s 54GB 70,00,000

NOTES

Exemption u/s 54GB can be availed on LTCG on transfer of a residential house,

since all the conditions given are fulfilled by Mr. Shakti.



i) The sales proceeds are used for subscription in the equity shares of an eligible company, being a newly incorporated manufacturing company which qualifies to be a small enterprise under the Micro, Small and Medium Enterprises Act, 2006.

ii) Mr. Shakti holds more than 50% of the share capital in the said company. iii) Further, the amount of subscription as share capital has been utilized by the

eligible company for purchase of new P & M within a period of one year from the date of subscription.

3. Mr. Ramesh received the following gifts during the P.Y.2016-17 from his from his friend Mr. Suresh

(1) Cash gift of ₹ 1,01,000 on his marriage anniversary on 14/02/2017

(2) 75 shares of ABC Ltd., the FMV of which was ₹ 62,000, on his birthday, 30/09/2016.

(3) 120 shares of XYZ Ltd., the FMV of which was ₹ 85,000 on the date of transfer. This gift was received on the occasion of Diwali. Mr. Suresh had

originally purchased the shares on 02/04/2015 at a cost of ₹ 64,000. Further, on 5th January, 2017, Mr. Ramesh purchased land from his grandfather’s

brother for ₹ 18,00,000. The stamp duty value of land was ₹ 25,00,000.

On 3rd March, 2017, he sold 120 shares of XYZ Ltd. for ₹ 1,15,000. Compute the income of Mr. Ramesh chargeable under the head “Income from other sources” and “Capital Gains” for A.Y. 2017-18.

Solution:

Computation of “Income from Other Sources” of Mr. Ramesh for the A.Y.17-18

Particulars ₹

(1)

Where any sum of money received without consideration and the

aggregate value exceeds ₹ 50,000, the whole of the aggregate value of such sum is taxable under section 56(2)(vii). Hence,

cash gift of ₹ 1,01,000 received on 14/02/2017 from his friend is taxable under section 56(2)(vii).

1,01,000



(2)

(3)

(4)

Fair market value of shares of ABC Ltd. received from a friend

without consideration on 30/09/2016 is taxable under section

56(2)(vii) as “shares” are included within the definition of

“property” and the aggregate fair market value exceeds ₹ 50,000.

Fair market value of shares of XYZ Ltd. is taxable under the

section 56(2)(vii) as shares are included within the definition of

“property” and the aggregate fair market value exceeds ₹ 50,000.

Purchase of land for inadequate consideration on 5/01/2017 would attract the provisions of section 56(2)(vii), since the difference between stamp duty value and actual consideration

exceeds ₹ 50,000. The difference between stamp duty value and

the consideration is ₹ 7,00,000 (i.e., ₹ 25,00,000 - ₹ 18,00,000), which is chargeable to tax under the section 56(2)(vii) . Grandfather’s brother is not a relative within the meaning of section 56(2)(vii)

62,000

85,000

7,00,000

Income From Other Sources 9,48,000

Computation of “Capital Gains” of Mr. Ramesh for the A.Y. 2017-18

Particulars ₹

Sales Consideration (03/03/2017) Less: Cost of Acquisition [deemed to be the fair market value charged to tax under section 56(2)(vii)] [ as per section 49(4)] SHORT TERM CAPITAL GAINS

1,15,000

85,000

30,000

Note – The period of holding of the previous owner, Suresh, is not to be considered

for determining whether capital gains is long-term or short-term, since in this case

is covered under section 49(4) and not under section 49(1).



4. A partnership firm consisting of three partners X, Y and Z is engaged in the business of manufacturing and selling toys.

Turnover of the business for the year ended 31st March, 2017 amounts to Rs.175 lakh. Bad debts written off in the books are Rs.75,000. Interest at 12% is provided to partner Z on his capital of Rs.6 lakh as authorized by the partnership deed.

The firm had business loss of Rs.50,000 and unabsorbed depreciation of Rs. 1,50,000 carried forward from Assessment Year 2016-17. The firm did not pay tax under presumptive tax system in assessment year 2016-17. The firm opts for presumptive taxation under section 44AD for Assessment Year 2017-18.

(i) Compute the income of the firm chargeable under the head “Profits and gains of business or profession.”

(ii) What would be the liability for interest under sections 234B and 234C,

if the firm has not paid any advance tax? Solution:

Computation of income of the firm chargeable under the head “PGBP”

Notes: 1. A partnership firm falls within the definition of “eligible assessee” under

section 44AD. The threshold limit of turnover for applicability of presumptive taxation scheme under section 44AD is Rs.200 lakh. In this case, since the turnover of the business of the firm is Rs.175 lakh, it falls within the definition of “eligible business” and therefore, the firm is

eligible to opt for presumptive taxation under section 44AD. 8% of the total turnover would be deemed to be the business income of the firm.

2. As per section 44AD(2), all deductions allowable under sections 30 to 38

shall be deemed to have been allowed in full and no further deduction shall be allowed. Accordingly, no deduction shall be allowed for bad debts since the same is deductible under section 36(1)(vii) and similarly unabsorbed depreciation is not deductible since the same is deductible under section 32(2).

3. Due to omission of proviso to section 44AD(2), interest on capital and

working partner salary are also not deductible while computing the presumptive income of a partnership firm from the assessment year 2017-18 onwards.

Particulars Rs.

Presumptive income under section 44AD (8% of Rs.175 lakh) [See

Note 1]

14,00,000

Less: Brought forward business loss under section 72 [See Note 4] 50,000

Income of the firm chargeable under the head “Profits and Gains of business or profession”

13,50,000

Tax liability at @ 30.9% 4,17,150



4. However, business loss of previous year 2015-16 can be set-off against current year business income as per section 72.

5. Since the partnership firm has opted for computation of income on

presumptive basis under section 44AD, it must pay the whole amount of advance tax in one installment on or before 15.03.2017. Further, any

amount paid by way of advance tax on or before 31stMarch shall also be

treated as advance tax paid during each financial year on or before 15th

March.

In case the firm has not paid advance tax or has paid advance tax less than the whole amount, then – it has to pay interest under section 234C at 1% on the short fall in

payment of advance tax attributable to the month of March, 2017. it has to pay interest under section 234B @1% per month or part of a

month on the short fall in payment of advance tax from 1stApril, 2017 to the date of determination of total income under section 143(1) and where regular assessment is made, to the date of regular assessment.

5. Mr. BB, a CA, aged 58 years, Gross Receipts from profession for AY 17-18 is ` 8,24,000 . Income of Mr. BB from other sources is Rs. 21,000. He pays medical insurance premium of Rs. 31,000 for insuring the health of his non-dependant parents who are senior citizens; Rs. 26,000 for self and spouse and Rs. 4,000 for his sister. He incurs expenditure of Rs. 25,000 on medical treatment of his dependant mentally retarded (severe disability) brother in an approved hospital duly certified. He pays rent of Rs. 4,000 per month. Calculate his total income for the AY 2017-18. Assume assessee opted presumption basis taxation for PGBP. Computation of total Income of Mr. BB for the A.Y. 2017-18

Particulars Amount (Rs.)

Amount (Rs.)

Professional Income (824000*50%) 44ADA [Note : 1] Income from other sources Gross Total Income Less: Deduction Under Chapter VI-A Medical insurance premium paid under section 80D – (Rs. 25,000 + Rs. 30,000) [See Note 2] Expenditure for dependant mentally retarded section 80DD [See Note 3] Rent Paid Under 80GG [See Note 4]

- Least of the following is eligible for

deduction

1) Excess of rent paid over 10% of Adj. total

income (Rs. 48,000 – Rs. 25,300) = Rs.

22,700

55,000 1,25,000

4,12,000 21,000

4,33,000



2) 25% of total income = Rs. 63,250

3) Ceiling limit Rs. 5,000 p.m. = Rs. 60,000 Total Income

22,700

(2,02,700)

2,30,300

Notes:

1. In case of resident assessee, engaged in Profession & Gross receipts is upto

50lacs can opt section 44ADA. As per section 44ADA PGBP shall be 50% of

Gross Receipts.

2. Medical insurance premium paid for self and spouse would qualify for

deduction under section 80D subject to a maximum of Rs. 25,000.

Mediclaim insurance premium paid for parents shall qualify for additional

deduction under section 80D, subject to a maximum of Rs. 30,000 (since they

are senior citizens), irrespective of whether they are dependent or non -

dependent on Mr. BB.

Medical insurance premium paid for insuring the health of sister does not

qualify for deduction under section 80D, since sister does not fall within the

definition of “family”.

3. Deduction under section 80DD is a flat amount of Rs. 1,25,000, irrespective

of the actual expenditure incurred in respect of a dependent, who is a

person with severe disability. It is assumed that Mr. BB has furnished a

copy of the certificate issued by the medical authority, in the prescribed form

and manner, along with the return of income under section 139 in respect of

A.Y. 2017-18.

4. It is presumed that all the conditions for claim of deduction under section 80GG

have been fulfilled by Mr. BB.

Adj. Total income for the purpose of section 80GG would be - Amount (Rs.)

Gross Total Income Less : Deduction under sections 80D & 80DD

Adj. Total income

4,33,000 1,80,000

2,53,000



6. Rajesh has commenced the business of manufacture of paper on 1.4.2016. He

employed 162 new employees during the P.Y.2016-17, the details of whom are as follows –

No. of Employees

Date of employment

Regular/ Contractual

Total monthly emoluments per employee (`)

I 42 1.4.2016 Regular 22,500

Ii 37 1.6.2016 Regular 25,500

Iii 55 1.8.2016 Contractual 25,500

Iv 28 1.10.2016 Regular 22,500

The regular employees participate in recognized provident fund while the contractual employees do not.

(i) Compute the deduction, if any, available to Mr. Rajesh for A.Y.2017-18, if the profits and gains derived from manufacture of paper that year is ` 82 lakh and his total turnover is ` 2.01 crore.

(ii) Would your answer change if Mr. Rajesh has commenced the business of manufacturing of apparel (and not paper) on 1.4.2016 and the above particulars related to such business?

Solution:

(i) Case 1 : Where Mr. Rajesh has commenced the business of manufacture of paper on 1.4.2016

Mr. Rajesh is eligible for deduction under section 80JJAA since he is subject to

tax audit under section 44AB for A.Y.2017-18, as his total turnover from

business exceeds ` 1 crore and he has employed “additional employees” during

the P.Y.2016-17. Since this is the first year of his new business, emoluments

paid or payable to employees employed during this year shal l be deemed

to be the additional employee cost.

Deemed additional employee cost = ` 22,500 × 12 × 42 [See Working Note

below] = ` 1,13,40,000 Deduction under section 80JJAA = 30% of ` 1,13,40,000 = ` 34,02,000.

Working Note: Number of additional employees

Particulars No. of workmen Total number of employees employed during the year

55

162

Less: Contractual employees employed on 1.8.2016,

since they do not participate in recognized provident fund and their total monthly emoluments exceed ` 25,000

Regular employees employed on 1.6.2016, since 37

their total monthly emoluments exceed ` 25,000



Regular employees employed on 1.10.2016 since

they have been employed for less than 240 days in 28 120 the P.Y.2016-17.

Number of “additional employees” 42

Note - Since contractual employees do not participate in recognized provident fund, they do not qualify as additional employees. In any case, their total monthly emoluments exceed ` 25,000, and hence do not qualify as additional

employees. Further, 37 regular employees employed on 1.6.2016 also do not qualify as additional employees since their monthly emoluments exceed `

25,000. Also, 28 regular employees employed on 1.10.2016 do not qualify as

additional employees for the P.Y.2016-17, since they are employed for less than

240 days in that year.

Therefore, only 42 employees employed on 1.4.2016 qualify as additional

employees, and the total emoluments paid or payable to them during the P.Y.2016 - 17 is deemed to be the additional employee cost.

(ii) Case 2: Where Mr. Rajesh has commenced the business of

manufacture of apparel on 1.4.2016

Yes, the answer would change, since in the case of an assessee engaged in the business of manufacture of apparel, the requirement of minimum period of employment of 240 days in the previous year to qualify as an additional employee for the purpose of deduction under section 80JJAA has been relaxed due to the seasonal nature of business of manufacture of apparel. The minimum period of employment required in case of this industry, to qualify as an additional employee for the purpose of deduction under section 80JJAA, is 150 days. Therefore, the 28 regular employees employed on 1.10.2016 would qualify as “additional employees” and the deemed additional employee cost pertaining to these employees would also be eligible for deduction under section 80JJAA. Deemed Additional Employee Cost = ` 1,13,40,000 (as calculated in (i) above) + ` 37,80,000 (28 employees × ` 22,500 × 6 months) = ` 1,51,20,000

Deduction under section 80JJAA = 30% × ` 1,51,20,000 = ` 45,36,000



7. M/s. XYZ is a firm liable to tax@30%. The following are the particulars furnished

by the firm for A.Y.2017-18:

Particulars of total income Rs

(1) As per the return of income furnished u/s 139(1) 50,00,000

(2) Determined under section 143(1)(a) 60,00,000

(3) Assessed under section 143(3) 75,00,000

(4) Reassessed under section 147 95,00,000

Can penalty be levied under section 270A on M/s. XYZ? If the answer is in the

affirmative, compute the penalty leviable under section 270A.

Solution:

M/s. XYZ is deemed to have under-reported its income since:

(1) its income assessed under 143(3) exceeds its income determined in a return

processed under section 143(1)(a); and

(2) the income reassessed under section 147 exceeds the income assessed

under section 143(3).

Therefore, penalty is leviable under section 270A for under-reporting of

income.

Computation of penalty leviable under section 270A

Particulars

Assessment under section 143(3)

Under-reported income:

Total income assessed under section 143(3) 75,00,000

(-) Total income determined u/s 143(1)(a) 60,00,000

15,00,000

Tax payable on under-reported income: Tax on under-reported income of ` 15 lakhs plus tax on total income of ` 60 lakhs determined u/s 143(1)(a) [30% of 75 lakh + EC & SHEC@3%]

Less: Tax on total income determined u/s 143(1)(a)

[30% of 60 lakh + EC & SHEC@3%]

Penalty leviable@50% of tax payable

Reassessment under section 147 Under-

reported income:

Total income reassessed under section 147

23,17,500

18,54,000

4,63,500

2,31,750

95,00,000



(-) Total income assessed under section 143(3)

Tax payable on under-reported income: Tax on under-reported income of 20 lakhs plus tax on total income of 75 lakhs assessed u/s 143(3) [30% of 95 lakh + EC & SHEC@3%]

Less: Tax on total income assessed u/s 143(3)

[30% of 75 lakh + EC & SHEC@3%] Penalty leviable@50% of tax payable

75,00,000

20,00,000

29,35,500

23,17,500

6,18,000

3,09,000

Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or

reassessment qualifies under section 270A(6); and

(2) The under-reported income is not on account of misreporting.

8. Mr. Ram, a resident individual of the age of 55 years, has not furnished his return

of income for A.Y.2017-18. However, the total income assessed in respect of such

year under section 143(3) is 12 lakh. Is penalty under section 270A attracted in

this case, and if so, what is the quantum of penalty leviable?

Solution:

Mr. Ram is deemed to have under-reported his income since he has not filed his

return of income and his assessed income exceeds the basic exemption limit of

2,50,000. Hence, penalty under section 270A is leviable in his case.


Particulars

Assessment under section 143(3)


Total income assessed under section 143(3)

12,00,000

(-) Basic exemption limit

2,50,000

9,50,000

Tax payable on under-reported income as increased by 1,85,000

the basic exemption limit [30% of 2 lakhs + 1,25,000]

Add: EC & SHEC@3%

5,550

1,90,550

Penalty leviable@50% of tax payable 95,275

Note – It is assumed that the under-reported income is not on account of

misreporting.



9. ABC Ltd. is a domestic company liable to tax@30%. The following are the

particulars furnished by the company for A.Y.2017-18:

Particulars of total income

(1) As per the return of income furnished u/s 139(1) (15,00,000)

(2) Determined under section 143(1)(a) (8,00,000)

(3) Assessed under section 143(3) (5,00,000)

(4) Reassessed under section 147 4,00,000

Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum

of penalty?

Solution: ABC Ltd. is deemed to have under-reported its income since:

(1) the assessment under 143(3) has the effect of reducing the loss determined

in a return processed under section 143(1)(a); and

(2) the reassessment under section 147 has the effect of converting the loss

assessed under section 143(3) into income.

Therefore, penalty is leviable under section 270A for under-reporting of

income.


Particulars

Assessment under section 143(3) Under-

reported income:

Loss assessed u/s 143(3)

(5,00,000)

(-) Loss determined under section 143(1)(a)

(8,00,000) 3,00,000

Tax payable on under-reported income@30% 90,000

Add: EC & SHEC@3%

2,700

92,700

Penalty leviable@50% of tax payable 46,350

Re-Assessment under section 147


Total income reassessed under section 147

4,00,000

(-) Loss assessed under section 143(3)

(5,00,000) 9,00,000

Tax payable on under-reported income@30% 2,70,000

Add: EC & SHEC@3%

8,100 2,78,100

Penalty leviable@50% of tax payable 1,39,050

Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or

reassessment qualifies under section 270A(6); and

(2) The under-reported income is not on account of misreporting.



10. Discuss the correctness or otherwise of the following statements:

(i) The provisions of minimum alternate tax under section 115JB are not applicable to all foreign companies.

(ii) Units set up in an International Financial Services Centre are entitled to

special tax concessions.

Solution: (i) The statement is not correct. The Finance Act, 2016 has inserted Explanation 4 to section 115JB with retrospective effect from 1.4.2001 to provide for non-applicability of levy of MAT under section 115JB on foreign companies subject to satisfaction of certain conditions :

Where the foreign company is a resident of a country or a specified territory with which India has a DTAA under section 90(1) or the Central Government has adopted any agreement between specified associations for double taxation relief under section 90A(1), it should not have a permanent establishment in India in accordance with the provisions of such Agreement;

• Where the foreign company is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above, it should not be required to seek registration under any law for the time being in force relating to companies.

The provisions of MAT under section 115JB would not be attracted in case of such foreign companies satisfying these conditions. Further, in the case of any foreign company (not satisfying the above conditions for non-applicability of MAT), the amount of income accruing or arising from –

• the capital gains arising on transactions in securities; or • the interest, royalty or fees for technical services chargeable to tax at the

rat e or rates specified in Chapter XII, If such income is credited to profit and loss account and the income -tax payable thereon in accordance with the provisions of this Act, other than the provisions of Chapter XII-B, is at a rate less than the rate of 18.5%, shall be reduced while computing book profit. Thus, since the non-applicability of MAT is either subject to fulfilment of the prescribed conditions, and in other cases (i.e., cases where MAT is applicable), non-applicability is restricted to only specified income, the statement that the provisions of section 115JB are not applicable in the case of all foreign companies is not correct. (ii) The statement is correct

(1) Exemption from STT and CTT: With effect from 1.6.2016, securities transaction tax is not leviable in respect of taxable securities transactions



entered into by any person on a recognised stock exchange located in an International Financial Services Centre (IFSC) where the consideration for such transaction is paid or payable in foreign currency.

Likewise, commodities transaction tax is not leviable in respect of taxable commodities transactions entered into by any person on a recognised association located in unit of IFSC where the consideration for such transaction is paid or payable in foreign currency.

(2) Exemption of LTCGs on sale of securities, even if STT is not paid :

Long- term capital gains in respect of income arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be exempt under

section 10(38) even though securities transaction tax is not paid in respect of such transaction.

(3) Concessional rate of tax on short -term capital gains, even if STT is not paid: Short term capital gains arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be taxable at a concessional rate of 15% under section 111A even though securities transaction tax is not paid in respect of such transaction.

(4) Concessional rate of MAT: In case of a company, being a unit located

in International Financial Services Centre and deriving its income solely in convertible foreign exchange, the minimum alternate tax under section 115JB shall be chargeable at the rate of 9% instead of 18.5%.

(5) Exemption from tax on distributed profits: In case of a company

being a unit located in International Financial Services Centre, deriving income solely in convertible foreign exchange, there would be no tax on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1st April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

11. ABC Ltd., a manufacturer of automobiles, sells high value cars (each of value

exceeding `10 lakh) and the middle segment cars (each of value between `5 lakh

to `10 lakh) to its dealers across the country. Discuss whether the

manufacturers are liable to collect tax at source under section 206C.

Also, discuss the liability, if any, of dealers to collect tax at source on sale of these cars to the retail customers, if no part of the consideration is received in cash? What would be your answer if part of the consideration is received in cash? Solution: Section 206C(1F) provides for collection of tax at source@1% by the seller from the buyer, at the time of receipt of consideration for sale of motor vehicle, the value of which exceeds ` 10 lakhs. CBDT Circular No.22/2016 dated 8.6.2016 clarifies that sub -section (1F) was inserted by the Finance Act, 2016



to cover all transactions of retail sales and accordingly, it will not apply to sale of motor vehicles by manufacturers to dealers. Hence, car manufacturers are not liable to collect tax at source under section 206C (1F). In respect of sale of high value cars (each of value exceeding ` 10 lakhs) by dealers to retail customers, tax has to be collected at source@1% under section 206C(1F), even if no part of the consideration is received in cash. As regards cars in the middle segment (each of value between ` 5 lakhs and ` 10 lakhs), no tax has to be collected at source if no part of the consideration is received in cash. However, if whole or part of the consideration is received in cash, tax has to be collected at source@1% under section 206C(1D) on the cash component of the sale consideration, if the same exceeds ` 2 lakhs.

These clarifications have been given by the CBDT vide its Circulars 22/2016 dated 8.6.2016 and 23/2016 dated 24.6.2016.

12. A public charitable trust registered u/s 12AA runs a hospital and also a medical

college. It furnishes you the following information for the year ended 31.03.2017

i) Gross receipt from hospital Rs. 425 Lakhs

ii) Income from business – incidental to main objects Rs. 2 Lakhs

iii) Voluntary contributions received from public Rs. 32 Lakhs. It includes corpus donation of Rs. 3 Lakhs and anonymous donation of Rs. 5 Lakhs

Note: Voluntary contributions are included in Gross receipt given in (1) above

iv) Hospital operational expenses incurred Rs. 105 Lakhs (This does not include capital expenditures and depreciation)

v) Income from Medical College (solely for education purpose) Rs. 10 Lakhs. Gross receipts of college for the year Rs. 90 Lakhs

vi) Gross receipts given in (i) above includes a sum of Rs. 55 Lakhs which has accrued but not received. Further, a sum of Rs. 18 Lakhs was received only on 31.03.2017.

vii) The trust set apart Rs. 80 lakhs for acquiring a building to expand its hospital. But the amount was paid in December, 2017 when sale deed was registered in it name.

viii) In June 2016, the trust purchased and installed new computer software for Rs. 28 Lakhs. The rate of depreciation is 60% as per Income Tax Act, 1961

ix) The trust incurred Rs. 35 Lakhs towards purchase of laptop computers and printers for the hospital

x) It repaid loan of Rs. 15 Lakhs taken earlier for construction of hospital building

Computer the total income of the trust for the A.Y. 2017-18 in order to avail maximum benefits within the four comers of law.



Solution:

Computation of total income of the trust for A.Y. 2017-18

₹ in Lakhs

Particulars ₹ ₹

Gross Receipts from Hospital (425 – 3 – 3.4)

(Excluding corpus and anonymous donation taxable under

section 115BBC)

Less: Hospital Operational Expenses

Add: Income from business – incidental to main object

Less: 15% of income eligible for accumulation or being set apart

without any condition u/s 11(1)(a)

Less: Deemed application as per Explanation 2 to Section 11(1)

i) Amount accrued but not received during the previous year

ii) Income received on 31.03.2017

Less: Amount applied for the purposes of hospital (Note 2)

- Cost of new computer software - Cost of laptops, computers and printers purchased for the

hospital - Repayment of loan taken earlier for construction of

hospital building

Less: Amount set apart for acquisition of a building to expand its

hospital (Note3) (The amount spent in December 2017 in the

immediately following year can be treated as application in the

F.Y. 2016-17, provided the statement in prescribed form (i.e.

Form 10) is given to the A.O. on or before the due date u/s

139(1))

Income of Rs. 10 Lakhs from Medical College (Exempt u/s

10(23C)(iiiad) as gross receipts do not exceed Rs. 1 Crore)

55.00

18.00

28.00

35.00

15.00

418.60

105.00

313.30

2.00

315.60

47.34

268.26

73.00

195.26

78.00

117.26

80.00

37.26

NIL

Taxable Income (Other than anonymous donation taxable u/s

115BBC)

37.26



Add: Anonymous donation taxable @ 30% 3.40

Total Income of the Trust 40.66

Notes

1) As per section 115BBC(1), the anonymous donations in excess of the higher of the following would be subject to tax @ 30%

2) Anonymous Donation Received 5,00,000 Less:

i) 5% of Rs. 32,00,000 = Rs. 1,60,000 ii) Rs. 1,00,000 = Rs. 1,00,000 1,60,000

Taxable @ 30% 3,40,000

3) As per Section 11(6), where the cost of assets is claimed as application, no deduction for depreciation on such assets would be allowed in determining income for the purposes of application. Therefore, since cost of new computer software, laptops, computers and printers purchased for the hospital has been claimed as application of income, no depreciation would be allowed on these assets while determining income for the purposes of application.

4) In order to minimize and/or reduce the tax liability, the trustees may give a notice in writing to the A.O. in the prescribed manner about their intention to accumulate minimum of Rs. 34.76 Lakhs (Rs. 37.26 Lakhs – Rs. 2.50 Lakhs (basic exemption)) specifying the period and the purpose for which the accumulation is proposed to be made and invest such sum in the modes specified u/s 11(5). This accumulation would be in compliance with Section 11(2) and in such a case, no tax will be payable on the total income (other than anonymous donations taxable @ 30% u/s 115BBC) of Rs. 37.26 Lakhs.

13. State with reasons whether return of income is to be filed in the

following cases for the Assessment Year 2017-18:

(i) Mr. X, a resident individual, aged 80 years, has a total income of `

2,85,000. He has claimed deduction of ` 1,50,000 under section 80C and exemption of ` 1,20,000 under section 10(38).

(ii) ABC, a partnership firm, has a loss of ` 10,000 during the previous year

2016-17. (iii) A registered association, eligible for exemption under section 10(23B),

has income from house property of ` 2,60,000. (iv) Mr. Y, aged 45 years, has a total income of ` 10,000. He has claimed

exemption u/s 10(38) of ` 3,50,000.

(v) Mr. Hari, aged 65 years, is a resident and ordinarily resident in India for the A.Y.2017-18. He owns a house property in Dubai, which he purchased on 30.4.2007. His total income is ` 10,000 for AY 17-18



Solution:

S.NO Return

Filing

Required?

Reason

(i) Yes As per the provisions of section 139(1), every person,

whose total income without giving effect to the provisions

of, Chapter VI-A and exemption under section 10(38)

exceeds the basic exemption, is required to furnish the

return of income for the relevant assessment year on or

before the due date. The gross total income of Mr. X

before giving effect to the exemption of ` 1,20,000 under

section 10(38) and deduction of ` 1,50,000 under

section 80C is ` 5,55,000, which exceeds the basic

exemption limit of ` 5,00,000 applicable to an individual

aged 80 years or more. Therefore, Mr. X has to furnish his

return of income for the A.Y. 2017-18.

(ii) Yes As per section 139(1), it is mandatory for a firm & company

to furnish its return of income or loss on or before the

specified due date. Therefore, M/s ABC has to furnish its

return of loss for the A.Y. 2017-18 on or before the due date.

(iii) Yes As per section 139(4C), every institution referred to, inter

alia, in section 10(23B), whose total income without giving

effect to the provisions of section 10 exceeds the maximum

amount not chargeable to tax, is required to furnish the

return of income for the relevant assessment year on or

before the due date.

In the above case, the registered association has income

from house property of ` 2,60,000 before exemption under

section 10, which exceeds the basic exemption limit of `

2,50,000. Therefore, it is under an obligation to furnish its

return of income for the A.Y. 2017-18.

(iv) Yes Before claiming exemption u/s 10(38) Total income is

more than basic exemption.

(v) Yes Section 139(1) requires every resident other than not

ordinarily resident, who at any time during the previous

year, holds as a beneficial owner or otherwise, any asset

(including financial interest in any entity) located outside

India or has signing authority in any account located

outside India or is a beneficiary of any asset located

outside India, to file a return of income compulsorily

whether or not he has income chargeable to tax.



14. Does the Assessing Officer have power to make any adjustment to income

disclosed by the Assessee in the return of income in course of processing the

return under section 143(1)?

Solution:

The procedure to be followed for summary assessment is contained in section 143(1). As per section 143(1), the total income or loss of an Assessee shall be computed after making the following adjustments to the returned income:

(i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information

in the return. (iii) disallowance of loss claimed, if return is filed beyond due date u/s 139(1)

(iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return

(v) disallowance of deduction claimed under section u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return is filed beyond due date u/s 139(1)

(vi) addition of income appearing in Form 26AS or Form 16A/16 which has not been included in computing the total income in the return

No such adjustment shall be made unless as intimation is given to the Assessee of such adjustment either in writing or electronic mode. Further, Assessing Officer shall make any adjustment after considering the response received from the Assessee, if any. Where no response is received with 30 days of the issue of such notice, the above adjustment can be made. For the purpose of section 143(1), “an incorrect claim apparent from any information in the return” means such claim on the basis of an entry, in the return of income: (a) of an item, which is inconsistent with another entry of the same or some other

item in such return; (b) in respect of which, the information required to be furnished under the

Income-tax Act, 1961 to substantiate such entry, has not been so furnished; in respect of a deduction, where such deduction exceeds specified statutory limit which may be expressed as monetary amount or percentage or ratio or fraction.

15. The following are the particulars of investments and payments made by Mr.

Bhuvan, aged 52 years, employed with Omicron Ltd., during the previous year

2016-17:

- Deposited ` 1,35,000 in public provident fund

- Paid life insurance premium of ` 25,000 on the policy taken on 1.7.2012 to

insure his life (Sum assured – ` 2,00,000).

- Deposited ` 50,000 in a five year term deposit with bank.

- Paid mediclaim premium of ` 27,000 to insure his health and that of his

spouse.

- Paid mediclaim premium of ` 23,000 to insure the health of his mother

aged 73 years and incurred medical expenses of ` 28,000 on his father,

aged 81 years, in respect of whom he was unable to take a mediclaim

policy.



- Contributed ` 50,000 to Clean Ganga Fund and ` 25,000 Swacch Bharat

Kosh.

- Contributed ` 2,25,000, being 15% of his salary, to the NPS of the Central

Government. A matching contribution was made by Omicron Ltd.

Compute the total income of Mr. Bhuvan for A.Y.2016-17, assuming that his gross

total income is ` 20 lakh [comprising of income from salaries computed (including

all taxable allowances and perquisites) ` 19,88,000 and interest on savings bank

account ` 12,000].

Solution

(i) Computation of total income of Mr. Bhuvan for the A.Y. 2017-18

Particulars `

Salaries (Computed) 19,88,000

Income from other sources [Interest on savings bank account] 12,000

Gross Total Income 20,00,000

Less: Deduction under Chapter VIA [See Working Note below] 4,90,000

Total Income 15,10,000

Working Note:

Deduction available to Mr. Bhuvan under Chapter VI-A for A.Y. 17-18

Section Particulars ` `

80C Deposit in public provident fund 1,35,000

Life insurance premium paid `

25,000 (deduction restricted to `

20,000, being 10% of ` 2,00,000, being sum assured, since the policy was taken after 31.3.2012)

20,000

Five year term deposit with bank 50,000

2,05,000

Restricted to 1,50,000

80CCD(1) Contribution to NPS of the Central Government, ` 1,75,000 [` 2,25,000 – ` 50,000, being deduction under section 80CCD(1B)], restricted to 10% of salary [` 2,25,000 x 10/15] [See Note 1]

1,50,000

3,00,000

80CCE Aggregate deduction under sections 80C and 80CCD(1), ` 3,00,000, but restricted to

1,50,000 80CCD(1B) ` 50,000 would be eligible for

deduction in respect of contribution to NPS of the Central Government

50,000

80CCD(2) Employer contribution to NPS, restricted to 10% of salary [See Note 2] [` 2,25,000 × 10/15]

1,50,000



80D Medical insurance premium of self and spouse ` 27,000, restricted to 25,000

Mediclaim premium of mother, being a senior citizen 23,000

Medical expenses of father, being a very senior citizen 28,000

51,000 Restricted to 30,000 55,000

80G Contribution to Clean Ganga Fund (100% deduction without qualifying limit)

50,000

Contribution to Swachh Bharat Kosh

(100% deduction without qualifying limit)

25,000 75,000

80TTA Interest on savings bank account `

12,000, restricted to

10,000

Deduction under Chapter VI-A 4,90,000

Notes:

(1) The deduction under section 80CCD(1B) would not be subject to

overall limit of ` 1.50 lakh under section 80CCE. Therefore, it is more

beneficial for Mr. Bhuvan to claim deduction of ` 50,000 under section

80CCD(1B) first in respect of contribution to NPS. Thereafter, the

remaining amount of ` 1,75,000 can be claimed as deduction under

section 80CCD(1), subject to a maximum of 10% of salary.

(2) The entire employer’s contribution to notified pension scheme has to

be first included under the head “Salaries” while computing gross total

income and thereafter, deduction under section 80CCD(2) would be

allowed, subject to a maximum of 10% of salary.

(3) Under section 80D, deduction for medical insurance premium paid for

self and spouse is restricted to a maximum of ` 25,000. Further,

medical insurance premium paid for mother, who is a resident senior

citizen, and medical expenses incurred for father, who is a resident

and very senior citizen, in respect of whom no mediclaim policy has

been taken, would be restricted to ` 30,000.

(4) Contribution to Clean Ganga Fund and Swachh Bharat Kosh would

qualify for 100% deduction under section 80G with effect from

A.Y.2017-18.

(5) Though income computed under the head “Salaries” is ` 19,88,000

(which includes all taxable allowances and perquisites), but for

computation of deduction under section 80CCD, salary only includes

dearness allowance, if the terms of employment so provide. It excludes

all other allowances and perquisites. In this case, “salary” for the

purpose of computation of deduction under section 80CCD would be `

15,00,000 [i.e., ` 2,25,000/15%].

16. The net profit of Phi Ltd. as per profit and loss account for the previous year

2016-17 is ` 200 lakhs after debiting/crediting the following items:

(i) Provision for income-tax: ` 17 lakhs



(ii) Dividend Distribution tax: ` 3 lakhs

(iii) Securities transaction tax: ` 2 lakh

(iv) Transfer to General Reserve: ` 5 lakhs

(v) Provision for deferred tax: ` 12 lakhs

(vi) Proposed Dividend: ` 6 lakhs

(vii) Preference Dividend: ` 4 lakhs

(viii) Provision for permanent diminution in value of investments: ` 3 lakhs

(ix) Provision for gratuity based on actuarial valuation: ` 7 lakhs

(x) Depreciation debited to Profit & Loss Account is ` 22 lakhs. This includes

depreciation on revaluation of assets to the tune of ` 6 lakhs.

(xi) Agricultural income: ` 4 lakhs (Expenditure to earn agricultural income : `

1 lakh)

(xii) Long term capital gains exempt under section 10(38) : ` 7 lakhs

(Expenditure to earn long-term capital gains : ` 1 lakh)

(xiii) Transfer from Special Reserve: ` 2 lakhs

(xiv) Transfer from Revaluation Reserve: ` 7 lakhs

Brought forward business losses and unabsorbed depreciation as per books of

the company are as follows:

Previous year Brought forward business loss

(` in lakhs)

Unabsorbed Depreciation (` in lakhs)

2013-14 4 3

2014-15 3 -

2015-16 6 2

Compute the book profit of Phi Ltd. under section 115JB for the A.Y. 2017-18.

Compute the tax liability of the company for the A.Y.2017-18, if the total income

computed as per the provisions of the Income-tax Act, 1961 is ` 130 lakhs.

Solution:



Computation of Book Profit of Phi Ltd. under section 115JB for A.Y.16-17

Particulars ` `

Net Profit as per Profit & Loss Account 2,00,00,000

Add: Net Profit to be increased by the following amounts as per Explanation 1 to section 115JB

Income-tax paid or payable or provision therefor

Provision for income-tax ` 17,00,000 Dividend distribution tax ` 3,00,000 Provision for deferred tax

20,00,000

12,00,000

Transfer to General Reserve 5,00,000

Provision for diminution in the value of investment

Dividend paid or proposed

Proposed dividend ` 6,00,000

3,00,000

Preference dividend ` 4,00,000

Expenditure to earn income exempt u/s 10 [except section 10(38)]

Expenditure to earn agricultural income [Exempt u/s 10(1)]

10,00,000

1,00,000

Depreciation

22,00,000 73,00,000

2,73,00,000

Less: Net Profit to be reduced by the following amounts as per Explanation 1 to section 115JB

Amount credited to profit and loss account from Special Reserve

2,00,000

Depreciation (excluding depreciation on account of revaluation of fixed assets) (i.e., ` 22,00,000 – `

6,00,000)

16,00,000

Amount credited to profit and loss account from revaluation reserve (to the extent of depreciation on revaluation)

6,00,000

Brought forward business loss or unabsorbed

deprecation as per books of account, whichever is less taken on cumulative basis

5,00,000

Income exempt u/s 10 [except section 10(38)]

Agricultural Income [since it is exempt under section 10(1)]

4,00,000

33,00,000

Book Profit 2,40,00,000

Computation of tax liability of Phi Ltd. for A.Y.2017-18

18.5% of book profit 44,40,000

Add: Surcharge@7% (since total income > ` 1 crore but less than ` 10 crore)

3,10,800

47,50,800

Add: Education cess @ 2% 95,016

Secondary and higher education cess @ 47,508 1,42,524



1% Tax liability on book profit under section 115JB

48,93,324

Total income computed as per the provisions of the Income-tax Act, 1961

1,30,00,000

Tax payable @ 30% 39,00,000

Add: Surcharge@7%

_2,73,000

41,73,000

Add: Education cess @ 2% 83,460

Secondary and higher education cess @ 1% Tax Payable as per the Income-tax Act, 1961

41,730

1,25,190

42,98,190

In case of a company, it has been provided that where income-tax payable on total

income computed as per the provisions of the Act is less than 18.5% of book

profit, the book profit shall be deemed as the total income and the tax payable on

such total income shall be 18.5% thereof plus surcharge, if applicable, plus

education cess @2% and secondary and higher education cess @1%. Accordingly,

in this case, since income-tax payable on total income computed as per the

provisions of the Act is less than 18.5% of book profit, the book profit of `

2,40,00,000 is deemed to be the total income and income-tax is payable @ 18.5%

thereof plus surcharge@7% plus education cess @2% and secondary and higher

education cess @1%. The tax liability, therefore, works out to ` 48,93,324.

Section 115JAA provides that where tax is paid in any assessment year in relation

to the deemed income under section 115JB(1), the excess of tax so paid, over and

above the tax payable under the other provisions of the Income-tax Act, 1961, will

be allowed as tax credit in the subsequent years. The tax credit is, therefore, the

difference between the tax paid under section 115JB(1) and the tax payable on the

total income computed in accordance with the other provisions of the Act.

Particulars `

Tax on book profit under section 115JB 48,93,324

Less: Tax on total income computed as per the other provisions of the Act Tax credit to be carried forward

42,98,190

5,95,134

This tax credit is allowed to be carried forward for ten assessment years

succeeding the assessment year in which the credit became allowable. Such

credit is allowed to be set off against the tax payable on the total income in an

assessment year in which the tax is computed in accordance with the provisions

of the Act, other than section 115JB, to the extent of excess of such tax payable

over the tax payable on book profits in that year.

Notes:

(1) Securities transaction tax does not form part of income-tax and hence,

should not be added back to net profit for computing book profit.

(2) Provision for gratuity based on actuarial valuation is a provision for

meeting an ascertained liability. Therefore, it should not be added back

for computing book profit.



(3) Long-term capital gains on sale of equity shares through a recognized

stock exchange on which securities transaction tax (STT) is paid is exempt

under section 10(38). One of the adjustments to the book profit is that

exempt income under section 10, which is credited to profit and loss

account, would be deducted in arriving at the book profit. However,

deduction of such long-term capital gains is not allowed for computing

book profit. Consequently, expenditure to earn such income should not be

added back to arrive at the book profit. Section 10(38) also provides that

such long term capital gain of a company shall be taken into account in

computing the book profit and income-tax payable under section 115JB.

17. The details given hereunder relate to US citizens, Mr. Fredrick Trotiville (aged 28),

a US football player and his sister, Ms. Susan Trotiville (aged 22), a singer, for the

A.Y. 2017-18–

Particulars Mr. Fredrick Trotiville

Ms. Susan Trotiville

(1) Participation in football tournaments in India

` 25 lakhs

(2) Winnings from lotteries in India (net) ` 69,100

(3) Contribution of an article relating to the sport of football in a sports magazine in India

` 21,000

(4) Performance in a music show in India ` 3 lakhs

With reference to the provisions of the Income-tax Act, 1961, you are required to –

(i) Compute the total tax liability of Mr. Frederick Trotiville and Ms. Susan

Trotiville for the A.Y.2017-18, assuming that both of them are non-

residents.

(ii) Discuss whether the above income are subject to deduction of tax at

source.

(iii) Explain whether it is necessary for them to file their return of income for

A.Y.2017-18

Solution:

Computation of tax liability of Mr. Frederick Trotiville for the A.Y.2017-18

Particulars ` `

Income taxable under section 115BBA Income from participation in football tournaments in India

25,00,000

Contribution of article in a magazine in India Tax@20% under section 115BBA on ` 25,21,000

21,000

5,04,200

25,21,000

Tax@30% under section 115BB on income of ` 1,00,000 (` 69,100 + ` 30,900) by way of winnings from lotteries

30,000

5,34,200



Add: Education cess@2% and Secondary and higher education cess @1%

Total tax liability of Mr. Frederick Trotiville

16,026

5,50,226

Ms. Susan Trotiville is a non-resident entertainer, whose income of ` 3 lakh from

a music show in India is taxable@20% under section 115BBA. Therefore, her

total tax liability is ` 61,800 (being 20% of ` 3 lakhs plus education cess@2%

and secondary and higher education cess@1%).

(ii) Yes, the above income are subject to deduction of tax at source.

Income referred to in section 115BBA is subject to deduction of tax at

source@20% under section 194E.

Income referred to in section 115BB (i.e., winnings from lotteries) is subject to

deduction of tax at source@30% under section 194B.

Since Mr. Frederick Trotiville and Ms. Susan Trotiville are non-residents, the

amount of tax to be deducted calculated at the prescribed rates mentioned

above, would be increased by education cess@2% and secondary and higher

education cess@1%.

If tax has been so deducted under section 194E and 194B, then the net tax

liability would be Nil for both Mr. Frederick Trotiville and Ms. Susan Trotiville.

(iii) Section 115BBA provides that if the total income of the non-resident sportsman

or non-resident entertainer comprises of only income referred to in that section

and tax deductible at source has been fully deducted, it shall not be necessary

for him to file his return of income.

In this case, although Mr. Frederick Trotiville is a non-resident sportsman, he

has winnings from lotteries as well. Therefore, he cannot avail the benefit of

exemption from filing of return of income as contained in section 115BBA.

Hence, he has to file his return of income for A.Y.2017-18.

However, since Ms. Susan Trotiville’s income comprises of only income referred

to in section 115BBA, in respect of which tax is deductible under section 194E,

she need not file his return of income for A.Y.2017-18, if tax has been so

deducted.

18. Discuss the correctness or otherwise of the following statements with reference to

the provisions of the Income-tax Act, 1961:

(i) An appeal before Income-tax Appellate Tribunal cannot be decided in the

event of difference of opinion between the Judicial Member and the

Accountant Member on any point.

(ii) A High Court does not have an inherent power to review an earlier order

passed by it on merits.

Solution

(i) The statement is NOT correct.

As per the provisions of section 255(4), in the event of difference in opinion

between the members of the Bench of the Income-tax Appellate Tribunal

on any point, the point shall be decided on the basis of the opinion of the



majority of the members. In case the members are equally divided, they

shall state the point or points of difference and the case shall be referred

by the President of the Tribunal for hearing on such point(s) by one or

more of the other members of the Tribunal. Such point or points shall be

decided according to the opinion of majority of the members of the

Tribunal who have heard the case, including those who first heard it.

(ii) The statement given is NOT correct.

The Supreme Court, in CIT v. Meghalaya Steels Ltd. (2015) observed that

the power of review would inhere on High Courts, being courts of record

under article 215 of the Constitution of India. There is nothing in article

226 of the Constitution to preclude a High Court from exercising the power

of review which inheres in every court of plenary jurisdiction to prevent

miscarriage of justice or to correct grave and palpable errors committed by

it. The Supreme Court further observed that section 260A(7) does not

purport in any manner to curtail or restrict the application of the

provisions of the Code of Civil Procedure. Section 260A(7) only states that

all the provisions that would apply qua appeals in the Code of Civil

Procedure would apply to appeals under section 260A. The Supreme Court

opined that this does not in any manner suggest either that the other

provisions of the Code of Civil Procedure are necessarily excluded or that

the High Court’s inherent jurisdiction is in any manner affected.

19. 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 ` 15

lakhs, towards charges for procuring and canvassing advertisements, from

payment of ` 1 crore due to Cloud TV, a television channel, and remitted

the balance amount of ` 85 lakhs to the television channel. Would the

provisions of tax deduction at source under section 194H be attracted on

the sum of ` 15 lakhs retained by the advertising company?

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:

a. a payment for production of content/programme as per the

specifications of the broadcaster/telecaster; and



b. 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 ` 15 lakhs retained by Mudra Adco

Ltd., the advertising company, from payment due to Cloud TV, a television

channel.



20. Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound

Indian ship engaged in carriage of passengers in international traffic departing

from Chennai port on 6th June, 2016. From the following details for the

P.Y.2016-17, determine the residential status of Mr. Anand for A.Y.2017-18,

assuming that his stay in India in the last 4 previous years (preceding P.Y.2016-

17) is 400 days and last seven previous years (preceding P.Y.2016-17) is 750

days:

Particulars Date

Date entered into the Continuous Discharge Certificate in respect of joining the ship by Mr. Anand

6th June, 2016

Date entered into the Continuous Discharge Certificate in respect of signing off the ship by Mr. Anand

9th Dec., 2016

Solution

As per section 6, an individual is treated as resident if he has stayed for 182

days in India during the previous year or if he has stayed for 60 days in the

current previous year and 365 days in total during the four preceding previous

years. However, where an Indian citizen leaves India as a member of crew of an

Indian ship or for the purpose of employment outside India, he will be resident

only if he stayed for 182 days during the previous year.

Explanation 2 has been inserted by the Finance Act, 2015 in section 6(1) to

provide that in the case of an Individual, being a citizen of India and a member

of the crew of a foreign bound ship leaving India, the period or periods of stay

in India shall, in respect of such voyage, be determined in the prescribed

manner and subject to the prescribed conditions.

Accordingly, the CBDT has prescribed the manner of determination of period

of stay. For the purposes of section 6(1), in case of an individual, being a

citizen of India and a member of the crew of a ship, the period or periods of

stay in India shall, in respect of an eligible voyage, not include the period

beginning on the date entered into the Continuous Discharge Certificate in

respect of joining the ship by the said individual for the eligible voyage and

ending on the date entered into the Continuous Discharge Certificate in respect

of signing off by that individual from the ship in respect of such voyage.

Eligible voyage refers to a voyage undertaken by a ship engaged in the carriage

of passengers or freight in international traffic where –

(i) for the voyage having originated from any port in India, has as its

destination any port outside India; and

(ii) for the voyage having originated from any port outside India, has as its

destination any port in India.

In this case, the voyage is undertaken by an Indian ship engaged in the

carriage of passengers in international traffic, originating from a port in India

(i.e., the Chennai port) and having its destination at a port outside India (i.e.,

the Singapore port). Hence, the voyage is an eligible voyage for the purposes of

section 6(1). Therefore, the period beginning from 6th June, 2016 and ending



on 9th December, 2016, being the dates entered into the Continuous Discharge

Certificate in respect of joining the ship and signing off from the ship by Mr.

Anand, an Indian citizen who is a member of the crew of the ship, has to be

excluded for computing the period of his stay in India. Accordingly, 187 days

[25+31+31+30+31+30+9] have to be excluded from the period of his stay in

India. Consequently, Mr. Anand’s period of stay in India during the P.Y.2016-

17 would be 179 days [i.e., 366 days – 187 days]. Since his period of stay in

India during the P.Y.2016-17 is less than 182 days, he is a non-resident for

A.Y.2017-18.

Note - Since the residential status of Mr. Anand is “non-resident” for A.Y.2017-

18 consequent to his number of days of stay in P.Y.2016-17 being less than

182 days, his period of stay in the earlier previous years become irrelevant.

21. Mr. Vishal gifted a sum of ` 9 lakhs to his brother's wife Mrs. Meena on

30.8.2016. On 10.9.2016, his brother, Mr. Vaibhav gifted a sum of ` 7 lakhs to

Mr. Vishal's wife, Geetha. The gifted amounts were invested as fixed deposits in

banks by Mrs. Meena and Mrs. Geetha on 1.10.2016 at 8% interest. Discuss the

consequences of the above under the provisions of the Income-tax Act, 1961 in

the hands of Mr. Vishal and Mr. Vaibhav.

Solution:

In this case, Mr. Vishal gifted a sum of ` 9 lakhs to his brother’s wife Mrs. Meena

on 30.8.2016 and simultaneously, his brother, Mr. Vaibhav gifted a sum of ` 7

lakhs to Mr. Vishal’s wife, Geetha, on 10.09.2016. The gifted amounts were

invested as fixed deposits in banks by Mrs. Meena and Mrs. Geetha. These

transfers are in the nature of cross transfers. Accordingly, the income from the

assets transferred would be assessed in the hands of the deemed transferor

because the transfers are so intimately connected to form part of a single

transaction and each transfer constitutes consideration for the other by being

mutual or otherwise.

If two transactions are inter-connected and are part of the same

transaction in such a way that it can be said that the circuitous method was

adopted as a device to evade tax, the implication of clubbing provisions would be

attracted. It was so held by the Apex Court in CIT vs. Keshavji Morarji (1967) 66

ITR 142.

Accordingly, the interest income arising to Vishal’s wife, Geetha, in the

form of interest on fixed deposits would be included in the total income of Mr.

Vishal and interest income arising in the hands of his brother Vaibhav’s wife,

Meena, would be taxable in the hands of Mr. Vaibhav as per section 64(1), to the

extent of amount of cross transfers i.e., ` 7 lakhs.

This is because both Mr. Vishal and his brother, Mr. Vaibhav are the

indirect transferors of the income to their respective spouses with an intention to

reduce their burden of taxation.

However, the interest income earned by Mrs. Meena on fixed deposit of ` 7

lakhs alone would be included in the hands of Mr. Vaibhav and not the interest

income on the entire fixed deposit of ` 9 lakhs, since the cross transfer is only to

the extent of ` 7 lakhs.



22. M/s. XYZ, a partnership firm, was dissolved on 1.4.2016. How is inventory on the

date of dissolution of a firm to be valued, where the firm’s business is to be

continued by Mr.X, one of its partners? What was the manner in which such

inventory would have been valued had the dissolution taken place on 31.1.2016

instead of 1.4.2016?

Solution:

Under section 145(1), income chargeable under the heads “Profits and gains of

business or profession” or “Income from other sources” shall be computed in

accordance with either the cash or mercantile system of accounting regularly

employed by the assessee. Section 145(2) empowers the Central Government to

notify in the Official Gazette from time to time, income computation and

disclosure standards to be followed by any class of assessees or in respect of any

class of income. Accordingly, the Central Government has, in exercise of the

powers conferred under section 145(2), notified ten income computation and

disclosure standards (ICDSs) to be followed by all assessees (except individual &

HUF not subject to audit u/s 44AB) , following the mercantile system of

accounting, for the purposes of computation of income chargeable to income-tax

under the head “Profit and gains of business or profession” or “Income from

other sources”. This notification shall come into force with effect from 1st April,

2016, and shall accordingly apply to the A.Y.2017-18 and subsequent

assessment years.

In case of dissolution of a partnership firm or association of persons or body of

individuals, Paragraph 24 of ICDS II on Valuation of Inventories requires the

inventory on the date of dissolution to be valued at the net realisable value,

notwithstanding whether business is discontinued or not.

Accordingly, where the firm M/s. XYZ is dissolved on 1.4.2016, inventory has to

be valued at net realizable value, even if the firm’s business is continued by

partner X.

This requirement in ICDS II is, however, in deviation from the Supreme Court

ruling in Shakti Trading Co. vs. CIT (2001) 250 ITR 871, where it was held that if

the firm is dissolved due to death of a partner and the surviving partners

reconstitute the firm and continue the business as before, the firm is entitled to

adopt cost or market price, whichever is lower.

Therefore, if the firm M/s.XYZ was dissolved on 31.1.2016, being a date prior to

1.4.2016, when ICDSs became effective, the valuation of inventory would be

governed by the Supreme Court ruling in Shakti Trading Company’s case and the

same has to be valued at the lower of cost or net realizable value. However, if the

dissolution takes place on 1.4.2016, it would be governed by ICDS II and the

inventory has to be valued at the net realizable value, notwithstanding whether

business is discontinued or not.



23. L, M and N are investment funds incorporated in India in the form of a limited

liability partnership (LLP). For P.Y.2016-17, the following are the particulars

relating to the income earned by these funds -

Particulars L M N

`

Business Income NIL 3,00,000 (1,50,000)

Capital Gains 12,00,000 18,00,000 (4,50,000)

Income from Other Sources [Interest on deposits]

6,00,000 7,20,000 9,00,000

(i) Compute the total income of the investment funds and unit-holders for

A.Y.2017-18, assuming that:

(1) each investment fund has 30 unit holders each having one unit; and

(2) income from investment in the investment fund is the only income of

the unitholder.

(ii) Determine the amount of loss to be carried forward by Investment Fund N

and/or its unit holders to A.Y.2018-19.

(iii) Is distribution tax payable by the Investment Funds on income distributed to

unit holders?

(iv) In case the Investment Funds do not distribute the entire income earned

during the P.Y.2016-17 to the unit holders by 31.3.2017, would the income

chargeable to tax in the hands of unit holders, as computed in (i) above,

undergo a change?

Solution:

(i) Computation of total income of the investment funds for A.Y.2017-18

Particulars L M N

`

Business Income Nil 3,00,000 Nil

Capital Gains [Exempt under section 10(23FBA)] - - -

Income from other sources [Exempt under section 10(23FBA)]

- - -

Total Income Nil 3,00,000 Nil

Computation of total income of a unit holder of the investment funds for A.Y.

17-18

Particulars L M N

` ` `

Business Income [Exempt under section 10(23FBB)] - - -

Capital Gains [` 12,00,000/30, ` 18,00,000/30, Nil] 40,000 60,000 -



Income from other sources [` 6,00,000/30, ` 7,20,000/30, (` 9,00,000 - ` 1,50,000)/30] Total Income

20,000

24,000 25,000

60,000 84,000 25,000

Notes:

(1) As per section 10(23FBA), income other than profits and gains of business or

profession is exempt in the hands of the Investment fund. Such income is

taxable in the hands of the unit holders as if he had directly made the

investment. Section 115UB(3) provides the nature of such income from

Investment Fund in the hands of unit holders.

(2) Income under the head “Profits and gains of business or profession” is taxable

in the hands of the Investment Fund. Hence, such income is exempt in the

hands of the unit holders as per section 10(23FBB).

(ii) Where in any previous year, the net result of computation of total income of the

investment fund [without providing for exemption under section 10(23FBA)] is

a loss under any head of income and such loss cannot be or is not wholly set-

off against income under any other head of income of the said previous year,

then, the same has to be carried forward for set-off as per Chapter VI at the

Fund level. Consequently, the loss incurred by the Investment Fund under any

head of income cannot be passed on to the investors.

Accordingly, in case of Investment Fund N, the business loss of ` 1,50,000 has

to be set-off against income from other sources of ` 9,00,000. The balance

income of ` 7,50,000 is taxable in the hands of the unit holders. Loss of `

4,50,000 under the head “Capital gains” cannot be set-off against income from

other sources. The same has to be carried forward by Investment Fund N for

set-off against income under the head “Capital gains” in the A.Y.2018-19.

(iii) Dividend distribution tax leviable under Chapter XII-D and tax on distributed

income leviable under Chapter XII-E would not apply to income paid by an

Investment Fund to its unit holders. Therefore, no distribution tax is payable

by the Investment Funds on income distributed to its unit holders.

(iv) Section 115UB(6) provides that if the income accruing or arising to, or received

by, an Investment Fund, during a previous year is not paid or credited to the

unit-holders, it shall be deemed to have been credited to the account of the

unit-holder on the last day of the previous year in the same proportion in

which such person would have been entitled to receive the income had it been

paid in the previous year.

Therefore, income chargeable to tax in the hands of unit holders would not

undergo a change, even if the Investment Funds do not distribute the entire

income earned by them during the P.Y.2016-17 to the unit holders by

31.3.2017

24. Mr. Vikas, an individual resident in India aged 55 years, furnishes you the

following particulars of income earned in India, Foreign Countries “A” and “B” for

the previous year 2016-17. Compute the total income and tax payable by Mr.

Vikas in India for A.Y. 2017-18 assuming that India has not entered into double

taxation avoidance agreement with countries A & B.



Particulars `

Indian Income:

Income from business carried on in Mumbai

9,20,000

Interest on savings bank with IDBI Bank 24,000

Income earned in Foreign Country “A” [Rate of tax – 12%]:

Agricultural income in Country "A"

72,000

Royalty income from a book on art from Country "A" (Gross) 8,00,000

Expenses incurred for earning royalty 70,000

Income earned in Foreign Country “B” [Rate of tax – 23%]:

Dividend received from a company incorporated in Country "B"

2,25,000

Rent from a house situated in Country "B" (gross) 3,30,000

Municipal tax paid in respect of the above house (not

allowed as deduction in Country “B”)

10,000

Computation of total income of Mr. Vikas for A.Y.2017-18

Particulars ` `

Income from House Property [House situated in Country B]

Gross Annual Value4

3,30,000

Less: Municipal taxes paid in Country B 10,000

Net Annual Value 3,20,000

Less: Deduction under section 24 – 30% of NAV 96,000

2,24,000

Profits and Gains of Business or Profession

Income from business carried on in India

9,20,000

Income from Other Sources

Interest on savings bank with IDBI Bank

24,000

Agricultural income in Country A 72,000

Dividend received from a company in Country B 2,25,000

Royalty income from a book of art in Country A (after

deducting expenses of 70,000) `

7,30,000

10,51,000

Gross Total Income 21,95,000

Less: Deduction under Chapter VIA

Under section 80QQB – Royalty income of a

resident from a work of art

3,00,000

Under section 80TTA – Interest on savings

bank account, subject to a maximum of 10,000.

10,000

` Total Income 18,85,000

Computation of tax liability of Mr. Vikas for A.Y.2017-18



Particulars `

Tax on total income [30% of ` 8,85,000 + ` 1,25,000] 3,90,500

Add: Education cess and SHEC@3% _11,715

4,02,215

Less: Rebate under section 91 (See Working Note below) 1,56,057

Tax Payable 2,46,158

Tax payable (rounded off) 2,46,160

Note:

Mr. Vikas shall be allowed deduction under section 91, since the following

conditions are fulfilled:-

He is a resident in India during the relevant previous year i.e.,

P.Y.2016-17.

Calculation of Rebate under section 91: ` `

Average rate of tax in India

[i.e., 4,02,215 /18,85,000 x 100]

21.34%

Average rate of tax in country A 12%

Doubly taxed income pertaining to country A `

Agricultural Income 72,000

Royalty Income [ ` 8,00,000 – ` 70,000 (Expenses) –

` 3,00,000 (deduction under section 80QQB)]

Rebate under section 91 on ` 5,02,000 @12%

[being the lower of average Indian tax rate

(21.34%) and foreign tax rate (12%)]

4,30,000

60,240

5,02,000

Average rate of tax in country B 23%

Doubly taxed income pertaining to country B

Income from house property

2,24,000

Dividend

2,25,000

4,49,000

Rebate under section 91 on ` 4,49,000 @21.34%

(being the lower of average Indian tax rate (21.34%)

and foreign tax rate (23%)]

95,817

Total rebate under section 91 (Country A +

Country B)

1,56,057



The income in question accrues or arises to him outside India in foreign countries A & B during that previous year and such income is not deemed to accrue or arise in India during the previous year.

The income in question has been subjected to income-tax in the foreign countries “A” and “B” in his hands and it is presumed that he has paid tax on such income in those countries.

There is no agreement under section 90 for the relief or avoidance of double taxation between India and Countries A and B where the income has accrued or arisen.

25.

(i) “In the Indian context, Advance Pricing Agreements entered into for determining arm’s length price in relation to an international transaction is valid only for a period, not exceeding 5 years, prospective to the date of agreement and cannot be applied in respect of prior period transactions” – Discuss the correctness or otherwise of this statement. (ii) XYZ Ltd., an Indian company, has entered into an agreement for sale of product M to Mr.Ganesh, an unrelated party, on 15/3/2017. Mr.Ganesh had entered into an agreement on 10/3/2017 (for sale of product M) with ABC Inc., a non-resident entity, which is a specified foreign company in relation to XYZ Ltd. Would the transaction between XYZ Ltd. and Mr.Ganesh be deemed as an international transaction entered into between two associated enterprises, if Mr. Ganesh is a resident and ordinarily resident for the P.Y.2015-16?

Solution (i) The statement is not correct.

Under section 92CC, the CBDT may, with the approval of the Central

Government, enter into an advance pricing agreement with any person for

determining the Arm’s Length Price or specifying the manner in which the arm’s

length price is to be determined in relation to an international transaction to be

entered into by that person.

The agreement entered into is valid for a period, not exceeding five previous

years, as may be mentioned in the agreement. Once the agreement is entered

into, the arm’s length price of the international transaction, which is subject

matter of the advance pricing agreement, would be determined in accordance

with such an advance pricing agreement, except where there is a change in law

or facts having a bearing on the agreement so entered.

In order to reduce current pending as well as future litigation in respect of

the transfer pricing matters, sub-section (9A) has been inserted in section

92CC by the Finance (No.2) Act, 2014 to provide roll back mechanism in

the advance pricing agreement scheme.

The “roll back” provisions refer to the applicability of the methodology of

determination of arm’s length in relation to the international transactions which

have already been entered into in a period prior to the period covered under an

advance pricing agreement.

Accordingly, the advance pricing agreement may, subject to such prescribed

conditions, procedure and manner, provide for determining the arm’s length



price or for specifying the manner in which arm’s length price is to be

determined in relation to an international transaction entered into by a person

during any period not exceeding four previous years preceding the first of the

previous years for which the advance pricing agreement applies in respect of the

international transaction.

(ii) Section 92B(2) extends the scope of the definition of international transaction

given in section 92B(1) by deeming a transaction entered into with a person

other than an associated enterprise as a transaction with an associated

enterprise, if the following conditions are satisfied:

• there exists a prior agreement in relation to the relevant transaction

between the other person and the associated enterprise or,

• where the terms of the relevant transaction are determined in

substance between such other person and the associated enterprise;

and

• either the enterprise or the associated enterprise or both of them are

non residents.

In such a case, a transaction entered into between the enterprise and the other

person shall be deemed to be an international transaction entered into

between two associated enterprises, whether or not such other person is a

non-resident.

In this case, the agreement between the Indian company, XYZ Ltd. and

unrelated party, Mr. Ganesh for sale of product M was entered into on

15/3/2017. Prior to that date (i.e., on 10/3/2017), Mr. Ganesh has entered

into an agreement, for sale of product M, with ABC Inc., a non-resident entity.

ABC Inc. is deemed to be an associated enterprise of XYZ Ltd. since it is a

specified foreign company in relation to XYZ Ltd., which implies that XYZ Ltd.

holds 26% or more in the nominal value of the equity share capital of ABC Inc.

In this case, there exists a prior agreement in relation to the transaction for sale of product M between the unrelated party, Mr.Ganesh and the associated enterprise, ABC Inc., which is a non-resident entity. Hence, the transaction entered into between XYZ Ltd., an Indian company and Mr. Ganesh for sale of product M is deemed to be an international transaction entered into between two associated enterprises, irrespective of the residential status of Mr. Ganesh.

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