ANSWERS OF MODEL TEST PAPER 2

FINAL COURSE
PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
SOLUTIONS
Division A – Multiple Choice Questions
MCQ No. Most MCQ No. Most Appropriate
Appropriate Answer
Answer
1. (c) 9. (c)
2. (c) 10. (b)
3. (a) 11. (c)
4. (c) 12. (b)
5. (c) 13. (a)
6. (d) 14. (a)
7. (b) 15. (b)
8. (d)

Division B – Descriptive Questions

1. Computation of total income and tax liability of Sheetal Ltd. for
A.Y.2025-26 under the regular provisions of the Act
Particulars ` `
Profits and gains of business or
profession
Net profit from Chemical 3,00,00,000
manufacturing unit, Jaipur
Add: Items debited but to be
disallowed
- Royalty on which tax is not 3,00,000
deducted
[30% of ` 10 lakhs, being payment
of royalty without deduction of tax
would be disallowed under section

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 40(a)(ia) while computing the
business income of A.Y.2025-26.
However, since the payee has
admitted the income, paid tax and
filed his return of income before
due date, the same would be
allowable in the P.Y. 2025-26
relevant to A.Y.2026-27, being the
year in which tax was deducted and
paid]
- Employer’s contribution to 11,20,000
notified pension scheme
[As per section 36(1)(iva),
employer’s contribution to the
account of an employee under a
Pension Scheme as referred to in
section 80CCD would be allowed
as deduction while computing
business income only to the
extent of 14% of salary and DA of
the employee in the previous
year. Therefore,
` 11,20,000 representing the
excess 1% (i.e., ` 1,68,00,000 x
1%/15%) debited to profit and
loss account has to be added
back while computing business
income]
3,14,20,000
Net profit from Furniture 90,00,000
manufacturing unit, Pune
Add: Items debited but to be
disallowed or to be treated
separately
- Trademark 25,00,000
[Trademark is an intangible asset
which is eligible for depreciation
as per section 32. Since purchase
cost of trademark has been
debited to profit and loss account,
the same has to be added back

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 while computing business
income]
- Interest on loan taken from a NIL
non-resident
[No disallowance under section
40(a)(i) is attracted in respect of
interest, since tax has been
deducted during the P.Y. 2024-25
and remitted on or before the due
date of filing of return of income
for A.Y. 2025-26]
- Income-tax paid on non- 7,00,000
monetary perquisites
[As per section 40(a)(v), tax paid by
employer on non-monetary
perquisites is not allowable as
deduction. Since the same has
been debited to profit and loss
account, the same has to be added
back while computing business
income]
1,22,00,000
Less: Depreciation on trademark u/s 32
[` 25 lakhs x 25%] 6,25,000
1,15,75,000
Net profit from Fertilizer producing 2,20,00,000
unit, Narmada
Add: Items debited but to be
disallowed or to be treated
separately
- Depreciation on building of ` 25
lakhs and on plant and machinery
of ` 45 lakhs 70,00,000
[As per section 35AD, no deduction
would be allowed under any other
section in any previous year in
respect of capital expenditure
referred to in section 35AD. Hence,
depreciation on building and plant
and machinery is not allowable as

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 deduction and the same has to be
added back.]
2,90,00,000
Less: Deduction u/s 35AD [Since fertilizer 5,50,00,000
unit commenced operation on or after
1.4.2011, it is a specified business eligible
for 100% deduction u/s 35AD in respect of
capital expenditure. However, deduction is
not available on expenditure incurred on
acquisition of land. Deduction u/s 35AD is
` 5.50 crores, being ` 2.50 crore on
building and ` 3 crore on plant and
machinery. Since it is more beneficial for
the company to claim deduction u/s 35AD,
it is assumed that the company has opted
to claim such deduction.]
As per section 73A, loss from the specified (2,60,00,000)
business u/s 35AD can be set-off only
against profits from another specified
business. Since there is no other specified
business, such loss has to be carried
forward to A.Y. 2026-27.
Net profit from Warehousing facility 70,00,000
for storage of edible oils at Delhi
Less: Depreciation u/s 32
On building of ` 3 30,00,000
crores@10%
On Plant & machinery 75,00,000 1,05,00,000
of ` 5 crores@15%
As per section 70(1), Business loss from (35,00,000)
one source is allowed to be set off from
other source under the same head.
Net profit of Sheetal Ltd. 3,94,95,000
Add: Interest on share application -
money deposited in bank
[The interest on share application
money deposited in a bank is not
liable to be taxed, as the deposit was
not for making additional income but
to comply with the statutory

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 requirement. The interest accrued on
such deposit is merely incidental. The
interest is eligible for set-off against
share issue expenses. 5]
3,94,95,000
Income from Other Sources
Dividend from ABC Inc., a foreign 56,00,000
company
Gross Total Income 4,50,95,000
Less: Deduction under section 80M [In
respect of inter-corporate dividends to the
extent of dividend distributed by it one 40,00,000
month prior to the date for filing return of
income u/s 139(1)]
Total Income 4,10,95,000
Computation of tax liability under the
regular provisions of the Act
Tax liability on ` 4,10,95,000@25% [Since 1,02,73,750
the turnover of the company for the
previous year 2022-23 does not exceed `
400 crore]
Add: Surcharge @ 7%, since the total 7,19,163
income of the company > ` 1 crore but ≤ `
10 crores
1,09,92,913
Add: Health and education cess @ 4% 4,39,717
Tax liability 1,14,32,630

Computation of tax liability of Sheetal Ltd. for the A.Y. 2025-26

under section 115JB
Particulars `
Minimum Alternate Tax @15% on book profit of 78,00,000
` 5,20,00,000
Add: Surcharge@7%, since the book profit of the 5,46,000
company > ` 1 crore but ≤ ` 10 crores
83,46,000

5 CIT v. Sree Rama Multi Tech Ltd. [2018] 403 ITR 426 (SC)

243
Add: Health and Education cess@4% 3,33,840
Tax liability under section 115JB 86,79,840

Since the regular income-tax liability is more than the minimum alternate
tax liability, Sheetal Ltd. is liable to pay tax under normal provisions of
the Act.

Tax liability under the regular provisions of the Income- 1,14,32,630

tax Act, 1961
Less: MAT Credit of A.Y. 2016-17 20,00,000
94,32,630
Note - Sheetal Ltd. is eligible for concessional rate under section
115BAA @25.168% i.e., tax@22% plus surcharge@10% plus
HEC@4% subject to tax at the rates mentioned in the said sections in
Chapter XII. In case Sheetal Ltd. opted for concessional rate of tax u/s
115BAA, it would not be eligible for deduction u/s 35AD in respect of
fertilizer producing unit, however, it can claim depreciation u/s 32 on
building and plant and machinery. In that case, its total income u/s
115BAA would be -
Particulars `
Profit from Chemical manufacturing unit, Jaipur 3,14,20,000
Profit from Furniture manufacturing unit, Pune 1,15,75,000
Profit from Fertilizer producing unit, Narmada 2,20,00,000
Profit from Warehousing facility for storage of edible oils
at Delhi (35,00,000)
6,14,95,000
Dividend from ABC Inc., a foreign company 56,00,000
Gross Total Income 6,70,95,000
Less: Deduction under section 80M [In respect of inter- 40,00,000
corporate dividends to the extent of dividend distributed
by it one month prior to the date for filing return of income
u/s 139(1)]
Total Income 6,30,95,000

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 Tax liability under section 115BAA (22% + surcharge
10% + HEC 4%) = 25.168% on ` 6,30,95,000
Tax liability 1,58,79,750
Suggestion to Sheetal Ltd.
Sheetal Ltd. should not opt for section 115BAA for assessment year
2025-26, since the tax liability under section 115BAA is higher under the
regular provisions of the Act and section 115JB.

2. (a) Tax treatment in the hands of ABC LLP on conversion of ABC

Pvt. Ltd. into ABC LLP
(i) Business loss of ` 54 lakhs (relating to P.Y. 2020-21)
As per section 72A(6A), the business loss of ` 54 lakhs of ABC
Pvt. Ltd. would be deemed to be the loss of ABC LLP for P.Y.
2024-25 and it would be able to set off and carry forward such
loss.
The carry forward is for 8 assessment years subsequent to
the assessment year 2025-26.
However, if subsequent to the conversion, ABC LLP fails to
fulfill any of the conditions mentioned in section 47(xiiib), the
set-off of business loss so made in any previous year would
be deemed to be the income chargeable to tax in the year in
which such conditions are not complied with.
(ii) Depreciation and written down value of assets
In case of conversion of ABC Pvt. Ltd. into ABC LLP,
depreciation on assets shall be apportioned between the
company and LLP in the ratio of the number of days for which
the assets were used by them.
Total Depreciation
Plant and machinery (15%) = ` 14 lakhs x 15% = ` 2,10,000
Building (10%) = ` 40 lakhs x 10% = ` 4,00,000

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 In the hands of ABC LLP (for 182 days)
Plant and machinery (15%) = ` 2,10,000 x 182/365 =
` 1,04,712
Building (10%) = ` 4,00,000 x 182/365 = ` 1,99,452
WDV in the hands of ABC LLP
As per section 43(6), the actual cost of the block of assets in the
hands of ABC LLP shall be the WDV of the block of assets as in
the case of ABC Pvt. Ltd. on the date of conversion.
WDV of P & M (15%) = ` 14 lakhs – ` 1,04,712 ` = ` 12,95,288
WDV of Building (10%) = ` 40 lakhs – ` 1,99,452 ` = ` 38,00,548
Actual cost of Plant and machinery on which deduction has
been allowed or is allowable to the assessee under section
35AD would be ‘NIL’ in the hands of ABC Pvt. Ltd. and ABC
LLP.
(iii) Cost of land acquired in 2012 at ` 80 lakhs (Market value
` 120 lakhs)
The cost of acquisition of land in the hands of ABC LLP would
be the cost for which ABC Pvt. Ltd. acquired it, i.e., ` 80 lakhs.
(iv) Expenditure on voluntary retirement benefit of ` 28 lakhs
As per section 35DDA, in case of conversion of ABC Pvt. Ltd.
into ABC LLP, deduction would be available to ABC LLP for
the remaining periods from the previous year in which
conversion took place. Since deduction of ` 5.6 lakhs each
has been claimed by ABC Pvt Ltd. in P.Y. 2022-23 and P.Y.
2023-24, ABC LLP would be eligible for deduction of ` 5.6
lakhs each for the remaining three previous years, namely
P.Y.2024-25, P.Y.2025-26 and P.Y.2026-27 under section
35DDA.
(v) Unadjusted MAT credit u/s 115JJAA of ` 8.6 lakhs
As per section 115JAA(7), in case of conversion of ABC Pvt.
Ltd. into ABC LLP, the credit for MAT paid by ABC Pvt. Ltd.
cannot be availed by the successor LLP i.e., ABC LLP.

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 (vi) Unabsorbed depreciation of ` 48 lakhs
As per section 72A(6A), ABC LLP would be able to carry
forward and set-off the unabsorbed depreciation of ` 48 lakhs
of ABC Pvt. Ltd.
However, if subsequent to the conversion, ABC LLP fails to
fulfill any of the conditions mentioned in section 47(xiiib), the
set-off of depreciation so made in any previous year would be
deemed to be the income chargeable to tax in the year in
which such conditions are not complied with.
(b) Since Mr. Mani Prasad is resident in India for the P.Y.2024-25, his
global income would be subject to tax in India. Therefore, income
earned by him in Country M and Country N would be taxable in
India. He would, however, be entitled to deduction under section 91,
since India does not have a DTAA with Country M and Country N,
and all conditions under section 91 are satisfied.
Computation of total income of Mr. Mani Prasad for A.Y.
2025-26
Particulars ` `
Income under the head “Salaries”
Pension from State Government 4,80,000
Less: Standard deduction u/s 16(ia) 75,000
[Allowable as per section 115BAC]
4,05,000
Income from House Property
Rental income from property in 3,20,000
Country N 6
Less: Municipal taxes 21,000
2,99,000
Less: Deduction u/s 24(a)@30% 89,700
2,09,300
Profits and Gains of Business or
Profession
Speculative income in India 1,56,000

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

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

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 Less: Set-off of business loss from 1,16,000
proprietary business in Country N
under section 70
40,000
Capital Gains
Short-term capital gains on sale of 3,20,000
plot in India
Income from Other Sources
Agricultural income from Country M 86,000
[not exempt u/s 10(1), since it is
earned from land situated outside
India]
Dividend from a company in Country 68,000
M
1,54,000
Gross Total Income 11,28,300
Less: Deduction under Chapter VI-
A [No deduction allowable as per - -
section 115BAC]
Total Income 11,28,300
Computation of net tax liability of Mr. Mani Prasad for
A.Y.2025-26
Particulars `
Tax on ` 11,28,300
Upto ` 3,00,000 Nil
` 3,00,001 to ` 7,00,000 @5% 20,000
` 7,00,001 to ` 10,00,000 @10% 30,000
` 10,00,001 to ` 11,28,300 @15% 19,245
69,245
Add: Health and education cess@4% 2,770
72,015
Less: Rebate under section 91 (See Working Note 10,154
below)
Net tax liability 61,861
Net tax liability (Rounded off) 61,860

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 Calculation of Rebate under section `
91:
Average rate of tax in India [i.e.,
` 72,015/ ` 11,28,300 x 100] = 6.3826%
Doubly taxed income pertaining to
Country M
Agricultural income 86,000
Dividend from a company in Country M
[Not includible, since exempt in -
Country M]
86,000
Rebate under section 91 on ` 86,000
@6.3826% [being the lower of average 5,489
Indian tax rate (6.3826%) and Country
M tax rate (10%)]
Doubly taxed income pertaining to
Country N
Income from house property less 93,300
business loss set-off against income
chargeable to tax in India (` 2,09,300 –
` 1,16,000)
Rebate under section 91 on ` 93,300
@5% [being the lower of average 4,665
Indian tax rate (6.3826%) and Country
N tax rate (5%)]
Total rebate under section 91
(Country M + Country N) 10,154

3. (a) (i) As per section 11(1A), where a capital asset held under trust
(building, in this case) is transferred and only a part of the net
consideration is utilized for acquiring another capital asset,
the amount of capital gains deemed to have been utilised for
charitable or religious purposes shall be the excess of the
proceeds utilised over the cost of the asset transferred.
In the present case, short-term capital gain of ` 2,00,000
[` 4,20,000 less ` 2,20,000] would arise on transfer of building
held under trust, as building is held for a period of not more

249
 than 24 months. Further, the trust has invested part of the net
consideration i.e., ` 3,00,000 out of ` 4,20,000, in fixed
deposits for the tenure of 2 years.
Where the net consideration on sale of a capital asset is
invested in fixed deposits, it is regarded as utilised for
acquiring another capital asset 7. Accordingly, capital gains
utilised for investing in fixed deposits is deemed to be applied
for charitable purpose.
Since only a part of the net consideration of ` 3,00,000 out of
` 4,20,000 is utilized for investing in fixed deposits, the amount
of short-term capital gains to the extent of ` 80,000 (being the
excess of proceeds utilized i.e., ` 3,00,000 over cost of
transferred asset i.e., ` 2,20,000) would be deemed to be utilised
for charitable purpose.
The balance of ` 1,20,000 is taxable in the hands of the trust.
Applying such income to the objects of the trust would make
the transaction, tax neutral.
(ii) As per section 115BBC, anonymous donations received inter
alia by trust or institution referred u/s 11 would be taxable @
30% in excess of higher of -
- 5% of the total donations received by the assessee; or
- ` 1 lakh
However, the provisions of section 115BBC would not apply
to anonymous donation received by trusts/institutions created
or established wholly for religious and charitable purposes
(i.e. partly charitable and partly religious institutions/trusts)
other than anonymous donation made with a specific direction
that such donation is for any university or other educational
institution or any hospital or other medical institution run by
such trust or institution.
In the present case, HelpAge trust is established for religious
and charitable purposes and runs a temple and a school.
During the P.Y. 2024-25, it received anonymous donation of

7CIT v. Ambalal Sarabhai Trust No. 3 [1988] 173 ITR 683 (Guj)/ CIT v. Hindustan
Welfare Trust [1994] 206 ITR 138 (Cal)/ CBDT instruction no. 883, dated 24.09.1975.

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 ` 3 crores for Temple and ` 8 crores for School. Since it
received anonymous donation separately for temple and
school, the provisions of section 115BBC would not be
attracted in respect of donations of ` 3 crores received for
Temple.
However, the provisions of section 115BBC would be
attracted in respect of anonymous donation received for
school.
(iii) Any voluntary contribution received by an electoral trust would
be exempt, if such electoral trust:
(i) distributes to a registered political party during the
previous year, 95% of the aggregate donations received
by it during the year along with the surplus if any,
brought forward from any earlier previous year and
(ii) functions in accordance with the rules made by the
Central Government.
The electoral trust may, for the purposes of managing its
affairs, spend up to 5% of the total contributions received in a
year subject to an aggregate limit of ` 5 lakh in the first year
of incorporation and ` 3 lakh in subsequent years.
The total contributions received in any financial year alongwith
the surplus from any earlier financial year, if any, as reduced
by the amount spent on managing its affairs, shall be the
distributable contributions for the financial year.
In the present case, M/s XYZ, an electoral trust incorporated
in the year 2022, received voluntary contributions of ` 420
lakhs and has brought forward surplus from earlier previous
years is ` 18 lakhs. It spent ` 8 lakhs for the purpose of
managing its affairs. However, it is eligible to spend ` 3 lakhs
being lower of -
- ` 21 lakhs, being 5% of total contributions i.e., ` 420
lakhs or
- ` 3 lakhs, since P.Y. 2024-25, being the subsequent
year
for the purpose of managing its affairs.

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 Accordingly, M/s XYZ, an electoral trust can distribute its
distributable contribution of ` 435 lakhs [i.e., ` 420 lakhs plus
` 18 lakhs less ` 3 lakhs] as the same exceeds ` 416.10 lakhs
(i.e., 95% of ` 438 lakhs).
(b) (i) Provision of scientific research services falls within the scope
of international transaction under section 92B. Trax & Co. and
Olive Inc. are deemed to be associated enterprises as per
section 92A(2)(d), since Olive Inc. guarantees not less than
10% of the total borrowings of Trax & Co. Since there is an
international transaction between associated enterprises,
transfer pricing provisions are attracted in this case.
(ii) Where the Assessing Officer has made a primary adjustment
of ` 310 lakhs to the transfer price and the same has been
accepted by Trax & Co., secondary adjustment has to be
made in the books of account as per section 92CE, since the
primary adjustment made by the Assessing Officer and
accepted by Trax & Co exceeds ` 100 lakhs and the primary
adjustment is in relation to P.Y.2023-24.
The excess money determined based on the primary adjustment
has to be repatriated to India within 90 days from the date of
order, failing which the same would be deemed as an advance
and interest would be computed at the one-year marginal cost
of fund lending rate of State Bank of India as on 1.4.2025 +
3.25%, since the international transaction has been
denominated in Indian Rupees.
In this case, since the excess money has not been repatriated
within 90 days, the same would be deemed to be an advance
made by Trax & Co. to Olive Inc. and interest would be
computed @12.25% (9% + 3.25%) from 1.4.2025, being the
date of the order of the Assessing Officer. The interest would
amount to ` 37.975 lakhs (i.e., 12.25% of ` 310 lakhs) for the
P.Y.2025-26.
Alternatively, Trax & Co. can opt to pay additional income-
[email protected]% (tax@18% plus surcharge@12% plus
cess@4%) on ` 310 lakhs, which would amount to
` 64,99,584. In such a case, secondary adjustment is not
required to be made.

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4. (a) As per section 269SU, Marigold Ltd. is required to provide facility
for accepting payment through the prescribed electronic modes, in
addition to the facility for other electronic modes of payment of debit
card or credit card provided by Marigold Ltd., since its total turnover
in business during the immediately preceding previous year. i.e.,
P.Y. 2023-24 is ` 70 crores, which exceeds the prescribed threshold
of ` 50 crores.
Prescribed electronic modes are
(1) Debit Card powered by RuPay;
(2) Unified Payments Interface (UPI) (BHIM-UPI); and
(3) Unified Payments Interface Quick Response Code (UPI QR
Code) (BHIM-UPI QR Code).
The failure to provide facility for electronic modes of payment
prescribed under section 269SU by Marigold Ltd. would attract a
penalty under section 271DB of a sum of ` 5,000, for every day
during which such failure continues.
However, penalty shall not be imposed, if Marigold Ltd. proves that
there were good and sufficient reasons for such failure. Further, any
such penalty shall be imposed by the Joint Commissioner.
(b) `
Gross salary, allowances and monetary perquisites 7,30,000
Non-Monetary perquisites 1,20,000
8,50,000
Less: Standard deduction under section 16(ia) 75,000
7,75,000
Tax Liability 28,600
Average rate of tax (` 28,600 / ` 7,75,000 × 100) 3.69%
The company can deduct ` 28,600 at source from the salary of the
General Manager at the time of payment.
Alternatively, the company can pay tax on non-monetary perquisites
as under –
Tax on non-monetary perquisites = 3.69% of ` 1,20,000 = ` 4,428

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 Balance to be deducted from salary = ` 24,172
If the company pays a tax of ` 4,428 on non-monetary perquisites,
the same is not a deductible expenditure as per section 40(a)(v).
The amount of tax paid towards non-monetary perquisite by the
employer, however, is not chargeable to tax in the hands of the
employee as per section 10(10CC).
(c) Capital gain arising in the hands of Angelo and James from transfer
of a capital asset situated in India would be deemed to accrue or
arise in India. Shares of Flix Inc., Country M, shall be deemed to be
situated in India if those shares derive directly or indirectly, its value
substantially from assets located in India.
Shares of Flix Inc. would be deemed to derive its value substantially
from the assets located in India, if on the specified date, the fair
market value of Indian assets (without reduction of liabilities) i.e.,
fair market value of assets of XYZ Co. –
- exceeds ` 10 crores; and
- represents at least 50% of the value of all the assets owned
by the Flix Inc.
Specified date would be the date of transfer i.e., 1.6.2024 since
book value of the assets of Flix Inc. on the date of transfer i.e.,
` 1,300 crores exceed the book value of the assets as on the last
balance sheet date preceding the date of transfer i.e., ` 1,000
crores by at least 15%.
Shares of Flix Inc. derives its value substantially from assets located
in India since the fair market value of assets located in India (without
reduction of liabilities) on 1.6.2024, being the specified date i.e.,
` 600 crores exceed ` 10 crores and represents more than 50% i.e.,
54.545% of the fair market value of assets of Flix Inc. i.e., ` 1,100
crores.
Hence, the shares of Flix Inc. would be deemed to be a capital asset
situated in India and the capital gains from the transfer of shares of
Flix Inc. by Angelo and James would be deemed to accrue or arise
in India. Accordingly, the capital gains arising from transfer of
shares of Flix Inc. would be taxable in the hands of Angelo and
James in India as per Income-tax Act, 1961.

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5. (a) (i) Issue Involved: The issue under consideration is whether
the stay order can be automatically vacated upon expiry of
extended period of stay of 365 days, where the delay in
disposing of the appeal is not attributable to the assessee.
Relevant provision of law: The third proviso to section
254(2A) provides that where the appeal filed before the
Appellate Tribunal is not disposed of within the period of stay
or extended period of stay granted by the Tribunal, the order
of stay shall stand vacated after the expiry of 365 days, even
if the delay in disposing of the appeal is not attributable to the
assessee.
Analysis & Conclusion: This provision would result in the
automatic vacation of a stay upon the expiry of 365 days, even
if the Appellate Tribunal could not take up the appeal in time
for no fault of the assessee. Thus, the vacation of stay in
favour of the Department would ensue even if the Department
is itself responsible for the delay in hearing the appeal. This
will cause undue hardship to the assessee, even where he is
not at fault. In this sense, the provision is arbitrary and
disproportionate so far as the assessee is concerned.
The contention of the revenue is not justified. Any order of
stay shall stand vacated after the expiry of the period or
periods mentioned in the section, only if the delay in disposing
of the appeal is attributable to the assessee.
Note – The facts given in the question are similar to the facts
in DCIT v. Pepsi Foods Ltd (2021) 433 ITR 295, wherein the
above issue came up before the Supreme Court. The above
answer is based on the rationale of the Supreme Court ruling
in that case.
(ii) Issue Involved: The issue under consideration is whether the
participation by the assessee in assessment proceedings
would make the omission to issue notice under section 143(2)
a curable defect on account of the deeming provision under
section 292BB.
Relevant provision of law: As per section 292BB, any notice
which is required to be served upon an assessee shall be

255
 deemed to have been duly served and the assessee would be
precluded from taking any objection that the notice was -
(a) not served upon him; or
(b) not served upon him in time; or
(c) served upon him in an improper manner,
if he had appeared in any proceedings or co-operated in any
enquiry relating to assessment or re-assessment.
Analysis & Conclusion: Issue of notice under section 143(2)
is mandatory for making a regular assessment under section
143(3). Section 292BB is a deeming provision that seeks to
cure defects in any notice issued under any provision of the
Income-tax Act, 1961, if the assessee has participated in the
proceedings.
For section 292BB to apply, the notice must have emanated
from the Department. It is only the infirmities in the manner of
service of notice that the section seeks to cure. The section is
not intended to cure the complete absence of notice itself.
Accordingly, non-issuance of notice under section 143(2) is
not a curable defect under section 292BB inspite of
participation by the assessee in assessment proceedings.
In the present case, since the assessment of Mr. Sharma was
completed u/s 143(3) without issuing notice u/s 143(2), the
assessment is bad in law and not a curable defect u/s 292BB.
Therefore, the contention of Mr. Sharma is valid and the
contention of the Assessing Officer is invalid in spite of the
fact that Mr. Sharma participated in the assessment
proceedings.
Note – The facts given in the question are similar to the facts
in CIT v. Laxman Das Khandelwal (2019) 417 ITR 325,
wherein the issue came up before the Supreme Court. The
above answer is based on the rationale of the Supreme Court
in the said case.
(iii) Issue Involved: The issue under consideration is whether
prosecution proceedings can be initiated where tax deducted
has been deposited by the assessee suo moto, after the time

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prescribed under the Act but before receiving notice from the
income-tax department, along with interest under section
201(1A) and the assessee has shown reasonable cause for
such delay.
Relevant provisions of law: Prosecution proceedings are
attracted under section 276B, if a person fails to pay to the
credit of the Central Government, the tax deducted at source
by him as required under the provisions of the Act. The
punishment is rigorous imprisonment for not less than 3
months but which may extend to 7 years and with fine.
Section 278AA, however, provides that no person would be
punishable for such failure if he proves that there was
reasonable cause for the same.
Analysis & Conclusion: The CBDT has, vide Circular No.
24/2019 dated 9.9.2019, in exercise of the powers under
section 119, listed out the offences covered under Chapter
XXII of the Income-tax Act, 1961 in respect of which
prosecution proceedings shall be launched by Approving
Authority being the Sanctioning Authority where the quantum
of offences exceed the prescribed monetary threshold.
Accordingly, in case of failure to pay TDS under section 276B
or failure to pay TCS u/s 276BB, no prosecution will be
processed if the TDS/TCS amount does not exceed ` 25 lakhs
and delay in deposit is less than 60 days.
In this case, the company has reasonable and sufficient cause
since it was facing financial hardship on account of large sum
of money stuck up with the debtors and also with the income-
tax department on account of refunds. Inspite of the financial
crisis, the company has suo moto deposited the TDS along
with interest under section 201(1A) of the Act, before
receiving any notice from the income-tax department in this
regard.
Since it has deposited the TDS along with interest suo moto
before receiving any notice from the department and it has
also shown reasonable cause for such delay in deposit, the
company cannot be punishable for the delay in deposit of
TDS. The initiation of prosecution proceedings under section

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 276B against the company and the directors is, therefore, not
correct.
Note - The facts given in the question are similar to the facts
in ACIT v. AT-Dev Prabha (JV) and others (2023) 454 ITR 59,
wherein the above issue came up before the Supreme Court.
The above answer is based on the rationale of the Supreme
Court in the said case read along with the CBDT Circular.
(b) In addition to allocating the taxing rights and elimination of double
taxation, there are various other important considerations while
entering into a tax treaty, as mentioned below:
• Ensuring non-discrimination between residents and non-
residents
• Resolution of disputes arising on account of different
interpretation of tax treaty by the treaty partner.
• Providing assistance in the collection of the fair and legitimate
share of tax.
Further, in addition to above, there are some other principles which
must be considered by countries in their tax system –
(i) Equity and fairness: Same income earned by different
taxpayers must be taxed at the same rate regardless of the
source of income.
(ii) Neutrality and efficiency: Neutrality factor provides that
economic processes should not be affected by external
factors such as taxation. Neutrality is two-fold.
(a) Capital export neutrality and
(b) Capital import neutrality (CIN).
Capital export neutrality (CEN) provides that business decision
must not be affected by tax factors between the country of residence
and the target country; whereas CIN provides that the level of tax
imposed on non-residents as well as the residents must be similar.
Promotion of mutual economic relation, trade and investment:
In some cases, it is observed that avoidance of double taxation is
not the only objective. The other objective may be to give impetus
to a country’s overall economic growth and development.

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6. (a) (i) In the present case, Shiva Ltd., an Indian company has 2
manufacturing units, unit X in the SEZ and unit Y in non-SEZ.
Though unit X only does the packaging of goods
manufactured by unit Y, the company, in its books of account,
shows the goods manufactured by unit Y as manufacture of
goods by unit X to enjoy exemption under section 10AA. This
is a case of misrepresentation of facts by showing
manufacture of non-SEZ unit as manufacture of SEZ unit.
Hence, this is an arrangement of tax evasion and not tax
avoidance.
Tax evasion, being unlawful, can be dealt with directly by
establishing correct facts. GAAR provisions need not be
invoked in such a case.
(ii) In this case, goods manufactured by unit N, a non-SEZ unit,
being a non-eligible business, are transferred to unit M, a SEZ
unit, being an eligible business, at a price significantly lower
than the market value of the goods to claim higher deduction
under section 10AA in respect of unit M.
As there is no misrepresentation of facts or false submissions,
it is not a case of tax evasion. The company has tried to take
advantage of tax provisions by diverting profits from non-SEZ
unit to SEZ unit. However, this is not the intention of the
legislation.
Such tax avoidance is specifically dealt with through the
provisions contained in section 10AA(9), as per which
provisions of section 80-IA(8) would get attracted in such a
case. Further, if the aggregate of such transactions entered
into in the relevant previous year exceed the threshold of ` 20
crore, domestic transfer pricing regulations under section
92BA would be attracted. Hence, the Revenue need not
invoke GAAR in such a case, though GAAR and SAAR can
co-exist as per clarification given in the CBDT Circular.
(b) Deduction under section 80JJAA is allowable to an assessee to
whom section 44AB applies and whose gross total income includes
any profits and gains derived from business, in respect of
employment of new employees. The amount of deduction is 30% of
additional employee cost incurred in the course of such business in

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the previous year, for three assessment years including the
assessment year relevant to the previous year in which such
employment is provided.
“Additional employee cost” means the total emoluments paid or
payable to additional employees employed during the previous
year. However, in the case of an existing business, the additional
employee cost shall be nil, if emoluments are paid otherwise than
by an account payee cheque or account payee bank draft or use of
ECS through bank account or other prescribed electronic mode.
“Emoluments” means any sum paid or payable to an employee in
lieu of his employment by whatever name called but does not
include, inter alia, contribution by employer to provident fund.
“Additional employee” means an employee who has been employed
during the previous year and whose employment has the effect of
increasing the total number of employees employed by the
employer as on the last day of the preceding year, but does not
include, inter alia, an employee whose total emoluments are more
than ` 25,000 p.m.
In this case, the contention of the chartered accountant that the
emoluments do not include employer contribution to PF is correct.
However, emoluments include ` 3,500 paid in cash by way of
transport allowance to the employee. Hence, the total emoluments
per employee is ` 28,000 p.m. Due to this reason, the 30 employees
employed on 1.4.2024 will not qualify as “additional employees” for
the purpose of deduction under section 80JJAA, since their total
emoluments are more than ` 25,000 p.m. Hence, Right & Co. is not
eligible for any deduction under section 80JJAA due to failure to
fulfil the condition for being treated as an “additional employee”. In
this case, the chartered accountant has failed to ensure compliance
with the condition stipulated for claim of deduction under section
80JJAA and has wrongly issued the report in Form 10DA certifying
the deduction claimed by the assessee under section 80JJAA.
Also, clause 33 of Form 3CD requires section-wise details of
deductions, if any, admissible under Chapter VI-A. Here again, the
tax auditor has to ensure that the assessee fulfils all the conditions
specified in the section under which the deduction is claimed.
However, in this case, the tax auditor has failed to do so.

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 On account of such failure, clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949 may be invoked.
(c) Advance ruling pronounced by Board for Advance Rulings is not
binding on LT Co. Ltd. Section 245W provides that the applicant
who is aggrieved by any ruling pronounced or order passed by the
Board for Advance Rulings may appeal to the High Court against
such ruling. He has to do so within sixty days from the date of the
communication of that ruling or order, in the prescribed form and
manner.
Accordingly, if LT Co. Ltd. is aggrieved by the advance ruling
pronounced by BAR, it can file an appeal before the High Court on
or before 29th June 2025. The High Court can grant extension of a
further period of 30 days for filing the appeal, if it is satisfied, on an
application made by LT Co. Ltd. in this behalf, that it was prevented
by sufficient cause from presenting the appeal within the 60 days
period as specified above.

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