This Answer Key is copyrighted property of AIR1CA Career Institute.

Sharing and Circulating it without

permission is punishable offence.

CA FINAL (May 2025)

GROUP II – PAPER 4
DIRECT TAX LAWS & INTERNATIONAL TAXATION
SUGGESTED ANSWERS
(Series 2)

PART – I (MCQs)

MCQ – 2 marks each

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
B C A A B B C D D C A D C D B

PART – II (Descriptive Answers)

14 Answer 1
Computation of Business Income of MP Ltd. for the A.Y.2025-26
Particulars Amount (₹)
Profits and gains of business and profession
Net profit as per the statement of profit and loss 5,60,00,000
Add: Items debited but to be considered separately or to be
disallowed
1
Depreciation as per Companies Act 52,00,000
Payment to transporter - 1
[No tax is required to be deducted at source u/s 194C on payment
to a transporter declaring income under section 44AE, who has
furnished a declaration to that effect along with PAN. Therefore,
disallowance@30% of payment for non-deduction at source u/s
40(a)(ia) would not be attracted in respect of payment of ₹ 3.50
lakhs to M/s. Bansal Transport]
Bonus paid to staff in respect of P.Y.2023-24 1,50,000 q
[Bonus for P.Y.2023-24 is stated to have been provided in the
books of account of that year. It is also allowable as deduction
under the Income-tax Act, 1961 in that year since the same has
been paid in August, 2024 i.e., on or before the due date u/s 139(1).
Since the bonus for the earlier previous year has once again been
debited to statement of profit and loss of this year, the same is
required to added back while computing business income, as it is
not allowable as deduction again in P.Y.2024-25]
Interest on loan for purchase of plant and machinery 5,00,000 1
[Interest on loan taken for purchase of plant and machinery for use

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 1
 in business is allowable as deduction u/s 36(1)(iii) for the period
after the date the asset is first put to use. Hence, such interest for
the period upto the date the asset is first put to use is not allowable
as deduction. Accordingly, out of ₹ 15 lakhs paid towards such
interest, only ₹ 10 lakhs is allowable as deduction. ₹ 5 lakhs, being
interest paid upto the date till such machinery was commissioned
has to be added back while computing business income]
Bad debts written off -
[No adjustment is required in respect of debt of ₹ 20 lakhs written
off owing to insolvency of the debtor, since bad debts written off in
the books of account is fully allowable as deduction u/s 36(1)(vii).
Since the said amount has already been debited to the statement of
profit and loss, no further adjustment is required]
Payment for online advertisement services 5,00,000 1
[Since the payment for online advertisement services is made to a
non-resident not having PE in India, equalization levy@ 6% has to
be deducted. Since the same has not been deducted, disallowance
@100% of the payment would be attracted u/s 40(a)(ib)]
Payment to Consultant for opinion on new business 2,00,000 1
[Payment to consultant for expert opinion on new business is
capital in nature. Hence, the same is not allowable as deduction u/s
37. Since the amount has been debited to the statement of profit
and loss, the same has to be added back]
Purchase of cotton at a price higher than the FMV 4,00,000 1 69,50,000
[Since the purchase is from a related party, a firm in which majority
of the directors of the company are partners, at a price higher than
the fair market value, the difference between the purchase price (₹
5,000 per bale) and the fair market value (₹ 4,600 per bale)
multiplied by the quantity purchased (1000 bales) has to be added
back]
Less: Items credited to statement of profit and loss, but not
includible in business income/permissible expenditure and
allowances
Industrial power tariff concession received from State -
Government
[Any assistance in the form of, inter alia, concession received from
the Central or State Government would be treated as income. Since
the same has been credited to statement of profit and loss, no
adjustment is required]
Contribution to National Laboratory -
[Contribution to National laboratory for scientific research qualifies
for deduction@ 100% u/s 35(2AA). Since the same has been
debited to the statement of profit and loss, no adjustment is
required]
Profit on sale of plot of land 8,00,000 1
[Short-term capital gains arise on sale of plot of land held for less
than 24 months. However, in this case, since transfer is to a 100%

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 2
 subsidiary company, which is an Indian company, the same would
not constitute a transfer for levy of capital gains tax as per section
47(iv). Since same has been credited to statement of profit and loss,
same has to be reduced while computing business income]
Additional compensation received from State Government in 5,00,000 1
respect of land
[Since the additional compensation has been received pursuant to
an interim order of the Court, the same would be deemed as
income chargeable to tax under the head “Capital Gains” in the year
of final order as per section 45(5). Since the compensation has
been credited to the statement of profit and loss, the same has to be
deducted while computing business income]
Depreciation as per Income-tax Rules, 1961 71,00,000 1
Discount on issue of debentures 9,00,000
1
[Allowable as deduction over the tenure of debentures i.e., 5 years
Hence, 1/5th allowable as deduction in P.Y.2024-25 (1/5th of ₹ 45
lakhs, being 3% of ₹ 1500 lakhs)]
Purchases omitted to be recorded in the books of account 3,00,000
1 96,00,000
Since the purchase is made in March, 2025 (i.e., P.Y. 2024-25), in
respect of which bill of ₹ 3 lakhs received in March, 2025, which
has been omitted to be recorded in the books in this year, it has to
be deducted to compute the business income. It is logical to assume
that the company is following mercantile system of accounting
Profits and gains from business and profession 5,33,50,000 2

8 Answer 2A
(i) In the case of a demerger, satisfying the conditions as laid down in section 2(19AA), the
depreciation claim is governed by the provisions as under –
(1) As per the Explanation 7A below section 43(1), where in a scheme of demerger, if the
demerged company transfers any capital asset to the resulting company, being an Indian
company, the actual cost of the capital asset transferred shall be taken to be the same
1
as it would have been if the demerged company had continued to hold the capital asset
for the purpose of its own business.
(2) The resulting company will be entitled to depreciation on the written down value of
the block of assets transferred to it, which will be the written down value of the
transferred assets of the demerged company immediately before the demerger
[Explanation 2B to section 43(6)].
(3) Explanation 2A to section 43(6) provides that the written down value of the block of
assets in the hands of the demerged company shall be the written down value of the 1
block of assets of the demerged company for the immediately preceding previous year
as reduced by the written down value of the assets transferred to the resulting company
pursuant to the demerger.
(4) As per the above provisions, the calculation of depreciation on plant and machinery in the
hands of 'X' Ltd. and 'Y' Ltd. is as under:
Particulars ₹ (in crores)

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 3
 “X‟ Ltd. “Y‟ Ltd.
WDV of plant and machinery as at 1st April, 2024 30.00 70.00
Add: Acquisition during the year Nil Nil
Less: Sale during the year Nil Nil
WDV as at 31st March, 2025 (before charging depreciation) 30.00 70.00 1
Less: Depreciation @ 15% 4.50 10.50 1
WDV as at 1st April, 2025 25.50 59.50 1
Note – It is presumed that Y Ltd. is an Indian company.
(ii) Set-off of unabsorbed depreciation:
(1) As per section 72A(4), on demerger, the unabsorbed depreciation directly relatable to
the undertakings transferred to the resulting company is allowed to be carried forward
1
and set off in the hands of the resulting company.
(2) Where such unabsorbed depreciation is not directly relatable to the undertaking
transferred to the resulting company, it has to be apportioned between the demerged
company and the resulting company in the same proportion in which the assets of the 1
undertakings have been retained by the demerged company and transferred to the
resulting company.
(3) The demerged company and the resulting company would be allowed to carry forward 1
and set-off their respective portion of unabsorbed depreciation, as calculated above,
for an unlimited period as per section 32(2).

6 Answer 2B
Computation of total income of Mr. Pravek under the default tax regime u/s 115BAC
Particulars ₹ ₹
Income from salary (computed) 8,40,000 1
Income from House Property [House situated in Country Y]
Gross Annual Value 3,00,000
Less: Municipal taxes paid 30,000
Net Annual Value 2,70,000
Less: Deduction under section 24 – 30% of NAV 81,000 1,89,000 1
Income from Other Sources
Dividend from Indian companies 10,50,000
Gifts in foreign currency from a friend (since it exceeds ₹ 50,000) 90,000
Dividend from Country Y 2,30,000
Agricultural income in Country Y 2,20,000
15,90,000
Less: Set-off of business loss in Country Y 1,60,000 14,30,000
Gross Total Income/Total Income 24,59,000 1
Computation of tax liability of Mr. Pravek
Particulars Amount
Upto ₹ 3,00,000 Nil
₹ 3,00,001 – ₹ 7,00,000 [i.e., ₹ 4,00,000@5%] 20,000

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 4
 ₹ 7,00,001 – ₹ 10,00,000 [i.e., ₹ 3,00,000@10%] 30,000
₹ 10,00,001 – ₹ 12,00,000 [i.e., ₹ 2,00,000@15%] 30,000
₹ 12,00,001 – ₹ 15,00,000 [i.e., ₹ 3,00,000@20%] 60,000
₹ 15,00,001 – ₹ 24,59,000 [i.e., ₹ 9,59,000@30%] 2,87,700 4,27,700
Add: Health & Education Cess@4% 17,108
4,44,808 1
Less: Deduction under section 91
Average rate of tax in India = ₹ 4,44,808 x 100/₹ 24,59,000 = 18.089%
Average rate of tax in Country Y = 16.933% [₹ 23,000 (₹ 2,30,000 x 10%) + ₹
1,04,000 (₹ 3,00,000 + ₹ 2,20,000) x 20%] / ₹ 7,50,000 x 100]
Doubly taxed income = ₹ 1,89,000 + ₹ 2,90,000 (₹ 2,30,000 + ₹ 2,20,000 – ₹
1,60,000) = ₹ 4,79,000
Lower of the Indian rate of tax and Country Y rate of tax is 16.933%, which has to be 81,109 1
applied on doubly taxed income of ₹ 4,79,000 [16.933% x ₹ 4,79,000]
Tax Payable 3,63,699
1
Tax Payable (rounded off) 3,63,700

8 Answer 3A
Computation of total income of Edu All Charitable Trust
Particulars ₹ ₹
Gross receipts from Hospital 6,00,00,000
Add: Anonymous donations [to the extent not chargeable to tax@30%
under section 115BBC(1)(i)] [Note 1] 3,00,000 1
6,03,00,000
Less: 15% of income eligible for being set apart without any condition 90,45,000 1
5,12,55,000
Less: Amount applied for charitable purposes
1
- On revenue account – Administrative expenses 4,15,00,000
- On capital account – Land & Building [Section 56(2)(x) is not 80,00,000 1
attracted in respect of value of property received by a trust or
institution registered u/s 12AB]
- Corpus donation to Help Aid Trust registered u/s 12AB – not
allowable even if it is out of current year income of the trust 1 - 4,95,00,000
Total income [other than anonymous donation taxable@30% 17,55,000 1
under section 115BBC(1)(i)]
Add: Anonymous donation taxable @30% u/s 115BBC(1)(i) [Note 1] 9,00,000
Total Income (including anonymous donation taxable@30%) 26,55,000 1
Computation of tax liability of the trust
Particulars ₹ ₹
Tax on total income of ₹ 17,55,000 [Excluding anonymous
donations]
Upto ₹ 2,50,000 Nil
₹ 2,50,001 – ₹ 5,00,000 [₹2,50,000 x 5%] 12,500

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 5
 ₹ 5,00,001 – ₹ 10,00,000 [₹5,00,000 x 20%] 1,00,000
> ₹ 10,00,000 [₹7,55,000 x 30%] 2,26,500
3,39,000
Tax on anonymous donations taxable@30% [₹ 9,00,000 x 30%] 2,70,000 6,09,000
Add: Health and education cess @4% 24,360
Total tax liability 6,33,360 1
Notes:
(1) Anonymous donations taxable @30% ₹ ₹
Anonymous Donations received 12,00,000
5% of total donations received, i.e. 5% of 60 lakhs 3,00,000
Monetary limit 1,00,000
Higher of the above 3,00,000
Anonymous donations taxable@30% 9,00,000
(2) Since the trust follows cash system of accounting, fees not realized from patients would not form
part of gross receipts. Therefore, there is no need of applying the provisions of Explanation 1 to
section 11(1) to exclude such income.
(3) 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
assets of the trust has been claimed as application of income, no depreciation would be allowed
on these assets while determining income for the purposes of application.

6 Answer 3B
Computation of “Book Profit” for levy of MAT under section 115JB
Particulars ₹ ₹
Net Profit as per Statement of Profit and Loss 83,00,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB:
Dividend income from listed and unlisted Indian Nil 1
companies, credited to statement of profit and loss
[Dividend income from listed and unlisted Indian companies is
Taxable u/s 115A @20% in the hands of a foreign company. No
adjustment is required]
Interest income from an Indian company as per loan 7,00,000 1
agreement, where the loan is given in foreign currency
[Since income by way of interest chargeable @5% u/s 115A,
being a rate lower than 15%, credited to statement of profit and
loss, same has to be reduced to arrive at book profit]
Fees for technical services under an agreement approved Nil 1
by the Central Government
[No adjustment is required since the foreign company carries on
business through a permanent establishment i.e., a branch in
India. Such income, being effectively connected with the branch
in India, is taxable@35% under section 44DA. Since the income

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 6
 is not taxable at a rate less than 15% it should not be reduced 7,00,000
for determining book profit]
Book Profit 76,00,000 1
Computation of tax liability
Particulars ₹ ₹
Minimum Alternate Tax on book profit under section 115JB
= 15% of ₹ 76,00,000 11,40,000
Add: Education cess @4% 45,600 11,85,600 1
Income-tax computed as per the regular provisions of the Act
- 35% [since Arnold Ltd. is a foreign company] of total income of ₹ 20 13,65,000
lakhs plus fees for technical services ₹ 19 lakhs (₹ 25 lakhs – ₹ 6
lakhs)]
- Tax@ 20% on dividend of ₹ 12 lakhs from Indian Companies 2,40,000
- Tax@ 5% on interest of ₹ 7 lakhs from MMS Ltd. as per loan
agreement, the loan being given in foreign currency 35,000
16,40,000
Add: Education cess @4% 65,600 17,05,600
Since income-tax computed as per regular provisions of the Income-
tax Act, 1961, is higher than MAT liability, income-tax payable would
be computed as per the regular provisions of the Income-tax Act,1961:
Total income-tax liability 17,05,600 1

8 Answer 4A
(i) As per section 206C(1), tax has to be collected at [email protected]% by the partnership firm, being
a seller, at the time of debiting of the amount payable by the buyer to the account of the buyer or 2
at the time of receipt of such amount, whichever is earlier.
(ii) Tax has to be deducted at source@10% under section 194J, by the nationalized bank at the
1
time of credit of fees for professional services to the account of the registered society (i.e., on
31.3.2025), even though payment is to be made after that date.
(iii) As per section 194LB, tax would be deductible @ 5% on gross interest paid/credited by a notified
infrastructure debt fund, eligible for exemption under section 10(47), to a foreign company.
In the first case, since the payment is to a foreign company, health and education cess @4% has to
be added to the applicable rate of TDS. Therefore, the tax deductible under section 194LB
would be ₹ 26,000 (i.e., 5.20% of ₹ 5 lakhs).
However, in case the notified infrastructure debt fund pays interest to a person who is a 3
resident of a notified jurisdictional area, section 94A will apply. Accordingly, tax would be
deductible @30% (plus health and education cess@4%) under section 94A, even though section
194LB provides for deduction of tax at a concessional rate of 5%. Therefore, the tax deductible
in respect of payment of ₹ 3 lakh to Mr. X, who is a resident of a notified jurisdictional area,
would be ₹ 93,600, being 31.2% of ₹ 3,00,000.
(iv) Tax has to be deducted at source under section 194J in respect of income of ₹ 5 lakh paid to
Mr. Phelps, athlete, for advertisement, on inherent presumption that Mr. Phelps is a resident. 2
Alternatively, if Mr. Phelps is assumed to be a non-resident, who is not citizen of India, tax has to

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 7
 be deducted at [email protected]% (20% plus cess 4%) under section 194E in respect of income of ₹
5 lakh paid to Mr. Phelps, an athlete, for advertisement referred under section 115BBA.

6 Answer 4B
Computation of Total income of Mr. Robert
Particulars ₹ ₹
Salary 28,00,000
[Salary deemed to accrue or arise in India, since it is paid for services
rendered in India as per section 9(1)(ii). Hence, it is taxable in the hands
of Mr. Robert.
Exemption u/s 10(6)(vi) would not be available to him, though he
stayed in India for a period of not exceeding 90 days during the previous
year since he is receiving salary from a German company which is
engaged in business and trade in India through a PE in India and such
salary is borne by Indian PE]
Less: Standard deduction u/s 16(ia) 50,000 27,50,000 1
Capital Gains
Transfer of 1200 equity shares of Nalapir Pvt. Ltd. [Taxable in India,
since shares are situated in India]
Sale Consideration (1200 x ₹ 43 per share/75, being average of ₹ 74 $ 688
(TTBR) + ₹ 76 (TTSR)/2 on 23.12.2024)
Less: Cost of acquisition (1200 x ₹ 15 per share/60, being average of ₹ $ 300
59 (TTBR) + ₹ 61 (TTSR)/2 on 28.11.2017)
$ 388 1
Long-term capital gain [$ 388 x ₹ 74, being TTBR on 23.12.2024] 28,712 1
Transfer of 2000 Equity shares of Aribitz GmbH (AG) Nil 1
[Not taxable in India, since shares of foreign company do not derive its
value substantially from assets located in India as value of Indian assets
do not exceed ₹ 10 crores]
Income from Other Sources
Dividend received in India from Aribitz Gmbh [taxable in India, since 1,11,000 1
dividend is received in India]
Gross Total Income/total income 28,89,712
Total income (rounded off) 28,89,710 1

8 Answer 5A
(i) Issue Involved: The issue under consideration is whether the High Court is justified in not 1
framing any substantial question of law itself and adjudicating merely on the questions put
forth by the appellant.
Relevant provision of law: Section 260A(1) provides that an appeal shall lie to the High Court
from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied 1
that the case involves a substantial question of law. As per section 260A(3) and 260A(4), if
the High Court is so satisfied, it shall formulate that question and the appeal shall be heard only

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 8
 on the question so formulated.
Analysis & Conclusion: There lies a distinction between the questions proposed by the appellant
for admission of the appeal to the High Court and the questions framed by the High Court. The 1
questions, which are proposed by the appellant, fall under section 260A(2)(c) whereas the
questions framed by the High Court fall under section 260A(3). Section 260A(4) provides that the
appeal is to be heard on merits only on the questions formulated by the High Court under section
260A(3) and not on the questions proposed by the appellant.
In case the High Court is of the view that the appeal did not involve any substantial question of
law, it should have recorded a categorical finding to that effect that the questions proposed by the
appellant either do not arise in the case or/and are not substantial questions of law so as to
attract the rigour of section 260A for its admission and accordingly, should have dismissed the
appeal at the preliminary stage itself. However, this was not done in this case. Instead, the appeal
was heard only on the questions urged by the appellant u/s 260A(2)(c).
The High Court was, therefore, not justified since it did not decide the appeal in conformity 1
with the mandatory procedure prescribed in section 260A.
Note – The facts given in the question are similar to the facts in CIT v. A.A. Estate Pvt. Ltd. [2019]
413 ITR 438, 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.
(ii) Issue Involved: The issue under consideration is whether the repayment of loan by the
assessee merely by passing adjustment entries in its books of account be taken as a
1
contravention of the provisions of section 269T to attract penalty under section 271E.
Provisions Applicable: Section 269T provides that it is obligatory on every person to repay any
loan by an account payee cheque or account payee bank draft, or by use of electronic clearing
1
system through a bank account or through such other prescribed electronic mode, if the amount
of loan together with interest, if any, payable thereon is ₹ 20,000 or more.
Failure to comply with the provisions of section 269T would attract penalty u/s 271E.
Analysis and Conclusion: Section 269T does not make a distinction between a bonafide or a
non-bonafide transaction neither does it require the fulfillment of the condition mentioned
therein only in case where there is outflow of funds. It merely puts a condition that in case a loan
or deposit is repaid, it should be by way of an account payee cheque/draft or by use of electronic
clearing system through a bank account or through such other prescribed electronic mode.
Therefore, in the present case, the assessee has repaid a portion of loan in contravention of
provisions of section 269T.
In effect, the assessee has violated the provisions of section 269T by repaying the loan amount by
way of passing book entries and therefore, penalty under section 271E is applicable.
However, since the transaction is bona fide in nature being a normal business transaction
and has not been made with a view to avoid tax and since the IT Finance (I) Ltd. has shown 1
reasonable cause for the failure under section 269T, no penalty under section 271E could
be imposed on the IT Finance (I) Ltd. for contravening the provisions of section 269T by virtue
of the provisions of section 273B.
Accordingly, the Assessing Officer is not justified in imposing penalty. 1
Note - The facts given in the question are similar to the facts in CIT v. Triumph International
Finance (I.) Ltd. (2012) 345 ITR 270 (Bom.). The above answer is based on the rationale of the
Bombay High Court ruling in the said case.

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 9
 6 Answer 5B
(i) A Co. Ltd, Mumbai has manufactured and supplied garments as per the variations and
customization in accordance with its AE. However, such customization is not carried by it on the
goods sold to other unrelated parties.
In cases of contract manufacturing transactions with AEs, the most appropriate method is the 2
Transactional Net Margin Method (TNMM).
(ii) DEF Co. Ltd. manufactures semi-finished drugs in bulk and sells them to related parties. In the
case of sale of semi-finished goods to related parties, the most appropriate method is the Cost
2
Plus Method, in which adjustment of gross profit mark-up is to be made on the direct and
indirect costs of production.
(iii) ZY Ltd., Bengaluru provided identical call centre services to both related and unrelated parties. In
respect of provision of services, the most appropriate method can be either the Comparable 2
Uncontrolled Price (CUP) or Cost Plus Method (CPM) and Transactional Net Margin
method (TNMM), since in all these three methods there are similar transactions with related
parties and unrelated parties; and adjustments are made for functional differences.

6 Answer 6A
The CBDT has, vide Circular No. 3/2022 dated 3.2.2022, clarified that the applicability of the Most
Favoured Nation (MFN) clause and benefit of the lower rate or restricted scope of source taxation
rights in relation to certain items of income including dividends provided in India's DTAAs with the
third State (Country Y, in this case) will be available to the first (OECD) State (Country X, in this case)
only when all the following conditions are met:
Condition Satisfaction of condition in the case on hand
(i) The second treaty (with the third State) is This condition is satisfied as India has entered into
entered into after the signature/ Entry a DTAA with Country Y on 15.5.2018, after it has 1
into Force of the treaty between India and entered into a DTAA with Country X on 1.1.2018.
the first state
(ii) The second treaty is entered into between This condition is satisfied as India has entered into
1
India and a State which is a member of the a DTAA on 15.5.2018 with Country Y, which is a
OECD at the time of signing the treaty with member of OECD since 2017. Hence, on 15.5.2018,
it; Country Y was an OECD member.
(iii) India limits its taxing rights in the second This condition is satisfied since in DTAA between
1
treaty in relation to rate or scope of India and Country Y, dividend is taxable@10%.
taxation in respect of relevant items of
income
(iv) A separate notification has been issued by In this case, conditions (i), (ii) and (iii) mentioned
India, importing the benefits of the second above have been satisfied. The concessional rate of 1
treaty into the treaty with the first State as 10% can be applied for taxing the dividend
required by the provisions of section 90(1) received by Matrix Inc. from Pilu Ltd., an Indian
of the Income-tax Act, 1961. company, only if India has issued a separate
notification importing the benefits of India-Country
Y tax treaty into India-Country X tax treaty, as
required by the provisions of sections 90(1). If
such notification has been issued, then, the
concessional rate of 10% can be applied for

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 10
 taxing the dividend received by Matrix Inc. from
Pilu Ltd., an Indian company; otherwise it cannot
be applied, even if other conditions are satisfied.
In case if Country Y became an OECD member only in the year 2020, then, the concessional rate
of 10% cannot be applied for taxing dividend received by Matrix Inc. from Pilu Ltd., since Country Y
was not an OECD member on 15.5.2018, at the time when India signed the DTAA with it.
2
Consequently, condition (ii) mentioned above would not be satisfied in such a case. Hence, dividend
received by Matrix Inc. from Pilu Ltd. would be subject to tax@15%.

4 Answer 6B
Particulars Option 1 Option 2
Own manufacture Buy and Sell
₹ in lakhs ₹ in lakhs
Profit on sale of ₹ 2500 lakhs @ 15% and 5% 375.00 125.00
Interest on bank deposit ₹ 200 lakhs @ 9% - 18.00
EBT 375.00 143.00
Tax thereon @ 30% 112.50 42.90
Profit after tax 262.50 100.10 1
Add: Depreciation being non-cash charge 175.00 -
Depreciation @15% on ₹ 500 lakhs = ₹ 75 lakhs
Additional depreciation @20% on ₹ 500 lakhs = ₹ 100
lakhs
Cash/liquid profit 437.50 100.10 2
Conclusion: Based on the cash/liquid profit, it is advisable to replace machinery and manufacture
than buy finished goods from open market and sell in its brand name. 1

4 Answer 6C
An arrangement which lacks commercial substance or is deemed to lack commercial substance
would be an impermissible avoidance agreement where the main purpose or one of the main 1
purposes of the arrangement is to obtain a tax benefit. Accordingly, GAAR provisions would be
attracted in respect of such impermissible avoidance agreement.
An arrangement, which involves or includes round tripping of funds, is deemed to lack commercial 1
substance.
Round trip financing includes any arrangement in which, through a series of transactions—
(a) funds are transferred among the parties to the arrangement; and 1
(b) such transactions do not have any substantial commercial purpose other than obtaining the
1
tax benefit (but for the purposes of Chapter X-A, on GAAR),
without having any regard to—
(A) whether or not the funds involved in the round trip financing can be traced to any funds
transferred to, or received by, any party in connection with the arrangement;
(B) the time, or sequence, in which the funds involved in the round trip financing are transferred or
received; or

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 11
(C) the means by, or manner in, or mode through, which funds involved in the round trip financing
are transferred or received

MOCK TEST SERIES – By CA Atul & Ajay Agarwal (AIR-1)

AIR1CA Career Institute (ACI)
Page 12