WORK BOOK

DIRECT TAX LAWS AND

INTERNATIONAL TAXATION

FINAL

GROUP – III

PAPER – 16

The Institute of Cost Accountants of India

(Statutory body under an Act of Parliament)
www.icmai.in
First Edition : March 2019
Second Edition : September 2019
Third Edition : March 2020

Fourth Edition : September 2020

Fifth Edition : April 2021

Published By :

Directorate of Studies

The Institute of Cost Accountants of India

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www.icmai.in

Copyright of these study notes is reserved by the Institute of Cost Accountants

of India and prior permission from the Institute is necessary for reproduction of
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 Preface

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The Directorate of Studies,

The Institute of Cost Accountants of India
 Work Book : Direct Tax Laws and International Taxation

DIRECT TAX LAWS AND INTERNATIONAL TAXATION

FINAL
GROUP – III
PAPER – 16

INDEX

Sl.
Page No.
No.
1 Assessment of Various Entities 1 – 20
2 Non-Resident 21 – 34
3 Return of Income 35 – 46
4 Assessment Procedure 47 – 60
5 Interest 61 – 71
6 Survey, Search and Seizure 72 – 81
7 Collection, Recovery and Refund 82 – 88
8 Appeals, Rectification, Revision, Settlement Commission 89 – 95
9 Advance Ruling 96 – 101
10 Penalties and Prosecution 102 – 109
11 Business Restructuring and Reorganisation 110 – 122
12 Different aspects of Tax Planning 123 – 132
13 Income Tax Authorities 133 – 136
14 Liability in special cases 137 – 144
15 Income Computation & Disclosure Standards 145 – 152
16 Black Money & Imposition of Tax Act 153 – 158
17 International Taxation 159 – 174

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Direct Tax Laws and International Taxation

Study Note – 1

ASSESSMENT OF VARIOUS ENTITIES

Learning Objective: There are certain special provisions relating to computation of

income and tax liability for class of entities depending on nature, form, business carried on
by it, etc. The goal of the study note is to learn special provision relating to computation of
income and tax liability of various entities

1. Choose the correct alternative and also provide your justification

(i) MAT shall not apply to

(a) Any income accruing or arising to a company from Life insurance business

(b) Any person who has exercised the option referred to u/s 115BAA

(c) Any person who has exercised the option referred to u/s 115BAB

(d) All of the above

(ii) While computing book profit u/s 115JB, following amount of income being credited to the statement of
Profit and Loss shall not be reduced –

(a) Income covered u/s 115BBF

(b) Income from Other Sources

(c) Income covered u/s 86

(d) All of the above

(iii) Rate of MAT is ____

(a) 15%

(b) 18.5%

(c) 18%

(d) 20%

(iv) As per sec. 115BBF, where the total income of an eligible assessee includes any income by way of
royalty in respect of a patent developed and registered in India, tax @ ______ shall be payable on
such royalty income.

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(a) 10%

(b) 5%

(c) 7.5%

(d) 12.5%

(v) Provision relating to taxation on income from transfer of carbon credit is provided in sec. ______ of the
Income-tax Act

(a) 115BBE

(b) 115BBD

(c) 115AD

(d) 115BBG

(vi) A foreign company means a company which is not —

(a) An Indian company

(b) A domestic company

(c) Either an India company or a domestic company

(d) An Indian company as well as a domestic company.

(vii) The registration of a charitable trust can be cancelled by the:

(a) Assessing officer

(b) Commissioner of Income-tax

(c) Central Board of Direct Taxes

(d) All of the above

(viii) Generally, income of a mutual concern from mutual activity is not taxable. However, exception to this
rule is / are:

(a) Where the mutual concern is a mutual insurance society and the income is derived from the
carrying on of any business of insurance

(b) Where the mutual concern is a tr ade, professional or similar association and t he income is
derived from specific service performed for its member

(c) Both (a) and (b)

(d) None of the above

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(ix) The person responsible for making payment to a resident individual investor in respect of an
investment in a s ecuritisation trust being referred to in sec. 115TCA, is required to deduct tax at
source @

(a) 25%

(b) 30%

(c) 10%

(d) 15%

(x) A domestic company for any amount paid as dividend shall be charged to additional income tax at
following rate

(a) 0%

(b) 15%

(c) 17.5%

(d) 20%

Answer:
(i) (d) All of the above

Reason:

The provision of section 115JB is not applicable to any income accruing or arising to a company from
life insurance business referred to in sec. 115B. Further, the provision of sec. 115JB is not applicable to
any person who has exercised the option referred to u/s 115BAA or 115BAB.

(ii) (b) Income from Other Sources

Reason:

While computing book profit, following income shall be reduced:

(a) Income by way of royalty in respect of patent chargeable to tax u/s 115BBF
(b) Share of profit from AOP, if such share is exempt u/s 86
It is to be noted that computation of book profit does not categorize the income in different heads.

(iii) (a) 15%

Reason:

W.e.f. A.Y. 2020-21, MAT is levied @ 15%

(iv) (a) 10%

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Reason:

Where the total income of an eligible assessee includes any income by way of royalty in respect of a
patent developed and registered in India, tax @ 10% shall be payable on such royalty income.

(v) (d) 115BBG

Reason:

Provision relating to taxation on income from transfer of carbon credit is provided in sec. 115BBG of
the Income-tax Act

(vi) (b) A domestic company

Reason:

As per sec. 2(23A), foreign company means a company which is not a domestic company.

(vii) (b) Commissioner of Income-tax

Reason:

Where a trust or an institution has been granted registration and subsequently the Principal
Commissioner or Commissioner is satisfied that the activities of such trust or institution are -

• not genuine; or

• not being carried out in accordance with the objects of the trust or institution,

then, Principal Commissioner or Commissioner can cancel the registration.

(viii) (c) Both (a) and (b)

Reason:

The Act provides for assessment of income (from mutual activity) of mutual concern in the following
cases:

• Where the mutual concern is a mutual insurance society and the income is derived from the
carrying on of any business of insurance [Sec. 44 read with sec. 2(24)(vii)]
• Where the mutual concern is a trade, professional or similar association and the income is derived
from specific service performed for its member [Sec. 28(iii) read with sec. 44A]
• To some extent, co-operative bank [Deduction u/s 80P]

(ix) (a) 25%

Reason:

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The person responsible for making payment to a resident individual investor in respect of an
investment in a securitisation trust being referred to in sec. 115TCA, is required to deduct tax at source
@ 25%

(x) (a) 30%

Reason:

W.e.f. A.Y. 2021-22, the provision of sec. 115-O has been omitted. Dividend is taxable in the hands of
the recipient and consequently, the company distributing dividend is not liable to pay any corporate
dividend tax.

2. (a) Discuss the provision relating to concessional rate of tax in respect of domestic manufacturing
company.

Answer:

Tax on income of new manufacturing domestic companies [Sec. 115BAB]

Applicable to: Domestic Company

Conditions:

(a) The company has been set-up and registered on or after 01-10-2019, and has commenced manufacturing
or production of an article or thing on or before 31-03-2023.

(b) The business is not formed by splitting up, or the reconstruction, of a business already in existence.

Exception:

Where business is formed as a result of the re-establishment, reconstruction or revival by the person of the
business of any such undertaking as is referred to in sec. 33B, in the circumstances and within the period
specified in that section.

(c) The company does not use any machinery or plant previously used for any purpose.
 Any machinery or plant which was used outside India by any other person shall not be regarded as
machinery or plant previously used for any purpose, if the following conditions are fulfilled:

A. such machinery or plant was not, at any time previous to the date of the installation used in India;

B. such machinery or plant is imported into India from any country outside India; and

C. no deduction on account of depreciation in respect of such machinery or plant has been allowed
or is allowable under the provisions of this Act in computing the total income of any person for any
period prior to the date of the installation of machinery or plant by the person.
 Where in the case of a person, any machinery or plant or any part thereof previously used for any
purpose is put to use by the company and the total value of such machinery or plant or part thereof

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does not exceed 20% of the total value of the machinery or plant used by the company, then, this
condition shall be deemed to have been complied with.

(d) The company does not use any building previously used as a hotel or a convention centre, as the case
may be, in respect of which deduction u/s 80-ID has been claimed and allowed.

(e) The company is not engaged in any business other than the business of manufacture or production of any
article or thing and research in relation to, or distribution of, such article or thing manufactured or
produced by it.

Exception:

The business of manufacture or production of any article or thing shall not include business of:

(i) development of computer software in any form or in any media;

(ii) mining;

(iii) conversion of marble blocks or similar items into slabs;

(iv) bottling of gas into cylinder;

(v) printing of books or production of cinematograph film; or

(vi) any other business as may be notified by the Central Government in this behalf; and

(f) The total income of the company has been computed:

A. Without any deduction u/s 10AA or 32(1)(iia) or 32AD or 33AB or 33ABA or 35(1)(ii) or 35(1)(iia) or
35(1)(iii) or 35(2AA) or 35(2AB) or 35AD or 35CCC or 35CCD or under any provisions of Chapter VI-A
under the heading “C.— Deductions in respect of certain incomes” other than the provisions of sec.
80JJAA.

B. Without set off of any loss carried forward from any earlier assessment year if such loss is attributable to
any of the deductions referred above; and

C. Depreciation u/s 32 [other than 32(1)(iia)], is determined in the manner as may be prescribed.

Rate of Tax: 15% + SC @ 10% + Cess

Other Points
 Income taxable at special rate shall be taxable at special rate of tax applicable on that income. E.g., short
term capital gain covered u/s 111A is taxable @ 15%.
 Where the total income of the person, includes any income, which has neither been derived from nor is
incidental to manufacturing or production of an article or thing and in respect of which no specific rate of
tax has been provided separately under this Chapter, such income shall be taxed @ 22% and no deduction
or allowance in respect of any expenditure or allowance shall be allowed in computing such income.
 The income-tax payable in respect of income being short term capital gains derived from transfer of a
capital asset on which no depreciation is allowable under the Act shall be computed @ 22%

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 Where the person fails to satisfy the conditions in any previous year, the option shall become invalid in
respect of the assessment year relevant to that previous year and subsequent assessment years and other
provisions of the Act shall apply to the person as if the option had not been exercised for the assessment
year relevant to that previous year and subsequent assessment years.
 The loss referred to in the conditions shall be deemed to have been already given full effect to and no
further deduction for such loss shall be allowed for any subsequent year.
 The scheme is optional. The option is exercised by the person in the prescribed manner 1 on or before the
due date specified u/s 139(1) for furnishing the first of the returns of income which the person is required to
furnish under the provisions of this Act. Further, once the option has been exercised for any previous year, it
cannot be subsequently withdrawn for the same or any other previous year.
 Where a person has exercised the option u/s 115BAB, the provision of sec. 115JB (i.e. MAT) is not applicable.
 If any difficulty arises regarding fulfilment of the conditions, the Board may, with the approval of the Central
Government, issue guidelines for the purpose of removing the difficulty and to promote manufacturing or
production of article or thing using new plant and machinery. Every guideline issued by the Board shall be
laid before each House of Parliament, and shall be binding on the person, and the income-tax authorities
subordinate to it.
 Where it appears to the Assessing Officer that, owing to the close connection between the person to which
this section applies and any other person, or for any other reason, the course of business between them is so
arranged that the business transacted between them produces to the person more than the ordinary profits
which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and
gains of such business for the purposes of this section, take the amount of profits as may be reasonably
deemed to have been derived therefrom:
Taxpoint:
 In case the aforesaid arrangement involves a specified domestic transaction referred to in sec. 92BA, the
amount of profits from such transaction shall be determined having regard to arm’s length price as defined
in sec. 92F(ii).
 The amount, being profits in excess of the amount of the profits determined by the Assessing Officer, shall be
deemed to be the income of the person. Such income is computed @ 30%

2. (b) Following is the profit and loss account of Z Ltd. for the year ended on 31-3-2021

Particulars Amount Particulars Amount

To Raw material consumed 23,25,000 By Sale 1,60,00,000

To Rent 3,50,000 By Closing Stock 10,00,000

1 Uploading Form 10-IB

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To Salary & Wages 12,00,000 By Revaluation Reserve 25,000

To Depreciation 5,00,000 By General Reserve 1,00,000

To Provision for contingencies 75,000

To Wealth Tax 50,000

To Provision for bad debts 40,000

To Proposed dividend 1,00,000

To Provision for Income tax 1,05,000

To Net Profit 1,23,80,000

1,71,25,000 1,71,25,000

Additional Information

a. The amount of depreciation includes depreciation on revaluation of assets ` 50,000. Further, for
the purpose of Income tax, depreciation is ` 4,00,000.

b. Turnover of the company during the previous year was ` 530 crores. However, during the financial
year 2018-19, turnover of the company was ` 250 crores only.

c. In past few years, company had suffered losses, following balances are still unabsorbed:

As per Income tax Act As per books of Accounts

Depreciation ` 66,00,000 Nil
Losses ` 35,50,000 Nil

Compute tax liability of the company.

Answer:

Computation of total income of Z Ltd. for the A.Y.2021-22 (as per other provisions of the Act)

Particulars Details Amount

Net profit as per books of accounts 1,23,80,000

Add: Expenditure disallowed but debited in P/L A/c

Excess Depreciation 1,00,000

Provisions for Contingencies 75,000

Wealth Tax 50,000

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Provision for bad debts 40,000

Proposed Dividend 1,00,000

Provision for income tax 1,05,000 4,70,000

1,28,50,000

Less: Amount credited to P/L A/c

Revaluation Reserve 25,000

General Reserve 1,00,000 1,25,000

1,27,25,000

Less: Brought forward business loss 35,50,000

91,75,000

Less: Unabsorbed Depreciation 66,00,000

Total Income 25,75,000

Computation of Book Profit of Z Ltd. for the A.Y.2021-22

Particulars Details Amount

Net profit as per books of accounts 1,23,80,000

Add:

Provision for contingencies 75,000

Proposed Dividend 1,00,000

Provision for income tax 1,05,000

Provision for Bad Debts 40,000

Depreciation 5,00,000 8,20,000

1,32,00,000

Less:

Depreciation (ignoring depreciation on revaluation) 4,50,000

Amount transferred from Revaluation Reserve 25,000

Amount transferred from General Reserve 1,00,000 5,75,000

Book Profit 1,26,25,000

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Computation of tax liability of Z Ltd.

Particulars Amount

Total income as per other provisions of the Act 25,75,000

Tax on above @ 25% [A] 6,43,750

Book profit u/s 115JB 1,26,25,000

15% of book profit [B] 18,93,750

Tax [Higher of A & B] 18,93,750

Add: Surcharge [As total income is ` 1,26,25,000] 1,32,563

Tax & Surcharge 20,26,313

Add: Health & Education Cess @ 4% 81,053

Tax Liability (Rounded off u/s 288B) 21,07,370

3. (a) Discuss the provision relating to first time adoption of Ind AS while computing book profit u/s 115JB.

Answer:

First time adoption of Ind AS [Sec. 115JB(2C)]

In case of Ind AS compliant company, the book profit of the year of convergence and each of the following 4
previous years, shall be further increased or decreased, as the case may be, by 1/5th of the transition amount.

 “Transition Amount” means the amount or the aggregate of the amounts adjusted in the other equity
(excluding capital reserve, and securities premium reserve) on the convergence date but not including the
following:

A. Aggregate of the amounts adjusted in the other comprehensive income on the convergence date
which shall be subsequently re-classified to the profit or loss;

B. Revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian
Accounting Standards 38 adjusted on the convergence date;

C. Gains or losses from investments in equity instruments designated at fair value through other
comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the
convergence date;

D. Adjustments relating to items of property, plant and equipment and intangible assets recorded at fair
value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards
101 on the convergence date;

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E. Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value
as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the
convergence date; and

F. Adjustments relating to cumulative translation differences of a foreign operation in accordance with

paragraph D13 of the Indian Accounting Standards 101 on the convergence date.

 The book profit of the previous year in which the asset or investment referred to in (B) to (E) (supra) is retired,
disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the
aggregate of the amounts relatable to such asset or investment.

 The book profit of the previous year in which the foreign operation referred to in (F) is disposed or otherwise
transferred, shall be increased or decreased, as the case may be, by the aggregate of the amounts
relatable to such foreign operations.

 “Year of Convergence” means the previous year within which the convergence date falls;

 “Convergence Date” means the first day of the first Indian Accounting Standards reporting period as
defined in the Indian Accounting Standards 101.

3. (b) Compute total income of each investment fund for A.Y. 2021-22 from the following details:

Income Fund A Fund B Fund C

Business Income Nil 5,00,000 (2,00,000)

Capital Gains 20,00,000 15,00,000 (5,00,000)

Income from Other Sources 5,00,000 3,00,000 10,00,000

Further, it is also given that there are 20 unitholders each holding one unit. You are also requested to
compute income of unit holder assuming that income from investment fund is the only income of unit
holder.

Answer:
Computation of total income of the investment fund for the A.Y. 2021-22

Particulars Fund A Fund B Fund C

Business Income Nil 5,00,000 Nil

Total Income Nil 5,00,000 Nil

Such income is taxable at the rate @ 30% if the fund is a company or firm else at maximum marginal rate of tax.

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Computation of total income of the unit holder for the A.Y. 2021-22

Particulars Fund A Fund B Fund C

Capital Gains [Income / 20] 1,00,000 75,000

Income from Other Sources [Income / 20] [#(` 10 lakh – ` 2 lakh) / 20] 25,000 15,000 40,000#

Total Income 1,25,000 90,000 40,000

4. (a) Bangur Charitable Trust has earned income of ` 70 lacs during the previous year 2020-21. It has
applied the income of ` 15 lacs, during the previous year 2020-21 and also applied before the due
date u/s 139(1) for deferment of application of income of -

Case 1) ` 32 lacs

Case 2) ` 45 lacs

- as such income has not yet been received by the trust.

During the previous year 2023-24 such income is received and applied as under -

Previous Amount applied for charitable purposes

Year
Case 1 Case 2

2023-24 ` 12 lacs ` 15 lacs

2024-25 ` 11 lacs ` 10 lacs

2025-26 ` 9 lacs ` 20 lacs

Compute taxable income of the A.Y. 2021-22 and 2025-26

Answer:

Computation of income of Bangur Charitable Trust for the A.Y. 2021-22

Particulars Amount

Case 1 Case 2

Income earned 70 lacs 70 lacs

Less: Free accumulation of income @ 15% 10.5 lacs 10.5lacs

Balance 59.5 lacs 59.5 lacs

Less: Application of income during the previous year 15 lacs 15 lacs

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44.5 lacs 44.5 lacs

Less: Amount for which deferment is allowed [Max. of taxable income before 32 lacs 44.5 lacs
deferment]

Taxable income 12.5 lacs Nil

Computation of income of Bangur Charitable Trust for the A.Y.2025-26

Particulars Amount

Case I Case II

Amount deferred in the P.Y. 2020-21 and are to be applied till P.Y.2024-25 i.e. 32 44.5
one year after the year in which such income is received

Less: Amount applied before 31/3/2025 23 25

Taxable income 9 19.5

4. (b) Discuss the cases when exemption u/s 11 is forfeited.

Answer:

Forfeiture of Exemption [Sec.13]

Nothing contained in section 11 [or section 12] shall operate in respect of —
 Income for private purposes: Any part of the income from the property held under a trust for private religious
purposes, which does not ensure for the benefit of the public.
 Income for the benefit of particular religious community: in the case of a trust for charitable purposes or a
charitable institution created or established after the commencement of this Act, any income thereof if the
trust or institution is created or established for the benefit of any particular religious community or caste.
 Funds are not invested in securities/deposits as per sec.11(5). It is to be noted that holding shares in a public
sector company would not disqualify the trust from claiming exemption.
 Income applied for the benefit of Interested person: in the case of a trust for charitable or religious purposes,
any income thereof:
● if such trust or institution has been created or established after the commencement of this Act and
under the terms of the trust, any part of such income ensures, directly or indirectly for the benefit of
interested person
● if any part of such income or any property of the trust or the institution (whenever created or
established) is during the previous year used or applied, directly or indirectly for the benefit of any
interested person.

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Note: The above provision shall not apply to a trust or institution created or established before the
commencement of this Act, to any use or application, whether directly or indirectly, of any part of such income
or any property of the trust or institution for the benefit of any Interested person, if such use or application is by
way of compliance with a mandatory term of the trust or a mandatory rule governing the institution

5. Compare ‘minimum alternate tax’ u/s 115JB and ‘alternate minimum tax’ u/s 115JC?

Answer:

Comparison between ‘minimum alternate tax’ and ‘alternate minimum tax’ are as under:

Particulars Alternate Minimum Tax (AMT) Minimum Alternate Tax (MAT)

Applicability It is applicable on all assessee (other It is applicable on Companies (Subject

than company) who has claimed any to few exceptions)
deduction under:

• Sec. 80H to Sec. 80RRB (other than

sec. 80P); or

• Sec. 35AD less depreciation u/s 32

• Sec.10AA

Exception:

The provisions shall not apply to an

individual or a HUF or an AOP or a BOI,
whether incorporated or not, or an
artificial juridical person, if the adjusted
total income of such person does not
exceed ` 20 lakh.

Income It is calculated on Adjusted Total It is calculated on Book Profit.

Income.

Meaning of income Adjusted total income means the total Book Profit means the profit as per profit
income as per income tax provisions in and loss account of the company
normal course as increased by prepared in accordance with Schedule
deduction under: III of the Companies Act 2013 as
increased/decreased by certain items
• Sec. 80H to Sec. 80RRB (other than
specified in Explanation to Section 115JB.
sec. 80P); or

• Sec. 35AD less depreciation u/s 32

• Sec.10AA

Rate of Tax Rate of AMT is 18.5%. + surcharge + Rate of MAT is 15% + surcharge + cess

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cess

Credit AMT paying assessee can claim its MAT paying companies can claim their
credit for 15 assessment years. credit for 15 assessment years.

Change of constitution AMT credit in case of change in Change in constitution, that is,
constitution is not available. conversion of private limited company
or unlisted public company into LLP shall
result in lapse of MAT credit which would
have been available to be set off to the
company if such conversion had not
taken place.

Brought forward loss & While computing AMT, brought forward While computing MAT, what is allowable
unabsorbed losses and unabsorbed depreciation to be deducted is brought forward loss
depreciation both shall be taken into account. or unabsorbed depreciation whichever
is less and not both. [DCIT Vs. Costal
Resorts (I) Ltd. (2010) 125 ITD 170
(Cochin)]

For the calculation of AMT brought For the calculation of MAT brought
forward loss and unabsorbed forward loss and unabsorbed
depreciation liable to be set-off shall depreciation liable to be set off shall be
be in accordance with normal in accordance with books of account.
provisions of the Income-tax Act, 1961.

Such set-off of losses or de preciation Such set off of losses or depreciation

shall reduce the amount of loss or shall not affect the amount of loss or
depreciation to be carried forward in depreciation to be carried forward in
next year. next year.

Deductions Deductions, rebates, allowances and Deductions, rebates, allowances and

adjustments except that provided in adjustments except to the extent
Chapter VI-A under the heading “C - covered by the Explanation to Section
Deductions in respect of certain 115JB are not available in computation
incomes” and Section 10AA are of Book Profit. [Growth Avenue Securities
available in computing Adjusted Total (P.) Ltd. vs. DCIT (2010) 126 ITD 179 (Del.)]
Income.

6. (a) Discuss the tax treatment of income of a professional institution.

Answer:

Income of professional institutions [Sec. 10(23A)]

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Any income (other than income chargeable under the head “Income from house property” or any income
received for rendering any specific services or income by way of interest or dividends derived from its
investments) of professional association shall be exempt provided -

(a) Such association or institution is established in India having as its object the control, supervision, regulation
or encouragement of the profession of law, medicine, accountancy, engineering or architecture or other
specified profession;

(b) Such association or institution applies its income, or accumulates it for application, solely to the objects for
which it is established; and

(c) The association or institution is approved by the Central Government.

6. (b) A is an as sociation governed by the provisions of sec. 44A of the Income-tax Act. The subscription
receipts for the year ended 31st March, 2021 were ` 60,000. The expenditure in the normal course of its
activities was ` 85,000. Its other income taxable under the Act works out to ` 75,000. On these facts,
you are consulted as to:

(a) How A’s taxable income will be determined for assessment year 2021-22.

(b) In case the association did not have the other income taxable will there be any difference in the
computation of its income?

Answer:

Computation of total income

Particulars Amount

Other Income 75,000

Less: Deficiency (Note 1) 25,000

Total Income 50,000

Note 1: Calculation of deficiency

Particulars Amount

Subscription received 60,000

Less: Expenditure 85,000

Deficiency 25,000

Maximum deficiency can be set off against other income is lower of the following:

a. Actual Deficiency i.e. ` 25,000

b. 50% of other income i.e., ` 37,500 being 50% of ` 75,000

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In case, association do not have any other taxable income, then the total income shall be nil and the
deficiency of ` 25,000 shall not be carried forward.

7. Mention any six items which are required to added while computing book profit u/s 115JB

Answer

Following items are required to be added while computing book profit u/s 115JB (if following amount is debited
in the Statement of Profit & Loss):
(a) the amount of income-tax paid or payable, and the provision therefore;
 It includes:
● Any interest under Income Tax Act;
● Dividend distribution tax
● Surcharge and cess on income-tax.
 It does not include:
● Penalty paid or payable under this Act
● Any tax, interest or penalty paid or payable under Wealth Tax Act or other Act;
● Securities Transaction Tax;
(b) the amounts carried to any reserves, by whatever name called;
(c) the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities;
 Any provision made to meet unascertained liabilities like provision for gratuity or future losses, etc.
should be added back. However, if the provision for gratuity has been made on the basis of actuarial
valuation, it becomes ascertained liability, hence should not be added back [Shree Sajjan Mills Ltd. -vs.-
CIT (SC)]
(d) the amount by way of provision for losses of subsidiary companies;
(e) the amount or amounts of dividends paid or proposed;
(f) the amount or amounts of expenditure relatable to any income to which sec. 10 or sec. 11 o r sec. 12
apply.
(g) the amount or amounts of expenditure relatable to income being share of profit from AOP, if such share is
exempt u/s 86

8. Write short note:

(a) Tax on income from patent u/s 115BBF

(b) TDS on income of units of Investment Fund [Sec. 194LBB]
(c) Business Trust and its taxability
(d) Meaning of Securitisation Trust

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Answer:

(a) Tax on income from patent u/s 115BBF

Where the total income of an eligible assessee includes any income by way of royalty in respect of a
patent developed and registered in India, tax @ 10% shall be payable on such royalty income.

 Eligible Assessee means a person resident in India and who is a patentee;

 Patentee means the person, being the true and first inventor of the invention, whose name is entered
on the patent register as the patentee, in accordance with the Patents Act, and includes every such
person, being the true and first inventor of the invention, where more than one person is registered as
patentee under that Act in respect of that patent.

 Developed means at least 75% of the expenditure incurred in India by the eligible assessee for any
invention in respect of which patent is granted under the Patents Act, 1970

 Royalty, in respect of a patent, means consideration (including any lump sum consideration but
excluding any consideration which would be the income of the recipient chargeable under the head
“Capital gains” or consideration for sale of product manufactured with the use of patented process or
the patented article for commercial use) for the:

i. transfer of all or any rights (including the granting of a licence) in respect of a patent; or

ii. imparting of any information concerning the working of, or the use of, a patent; or

iii. use of any patent; or

iv. rendering of any services in connection with the activities referred above

Lump sum includes an advance payment on account of such royalties which is not returnable.

Other Provisions

 No deduction for expenditure: No deduction in respect of any expenditure or allowance shall be

allowed to the eligible assessee in computing his royalty income.

 Option to the assessee: The eligible assessee is required to exercise the option for taxation of such
royalty income in accordance with the provisions of this section, in the prescribed manner, on or before
the due date for furnishing the return of income for the relevant previous year.

 Concessional Rate is not applicable: Where an eligible assessee opts for taxation of his royalty income
in accordance with the provision of this section and he offers the royalty income for any of the 5
assessment years relevant to the previous year succeeding the previous year not in accordance with
the provisions this section, then, the assessee shall not be eligible to claim the benefit of this section for 5
assessment years subsequent to the assessment year relevant to the previous year in which such
income has not been offered to tax in accordance with this section.

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(b) TDS on income of units of Investment Fund [Sec. 194LBB]

Who is responsible to deduct tax: The person responsible for making the payment of any income, other than
that proportion of income which is of the same nature as income referred to in sec. 10(23FBB), to a unit holder in
respect of units of an investment fund specified in clause (a) of the Explanation 1 to sec. 115UB

When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.

Rate of TDS:

Payee Rate of TDS

Resident 10% [From 14-05-2020 to 31-03-2021: 7.5%]

Non-resident (not being a company) 30%

Foreign Company 40%

Note: Where the payee is a non-resident (not being a company) or a foreign company, deduction shall not be
made in respect of any income that is not chargeable to tax.

Exemption or relaxation from the provision

When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorising the payer to
deduct tax at lower rate or deduct no tax

(c) Business Trust and its taxability

Meaning [Sec. 2(13A)]

Business Trust means a trust registered as:

(i) an Infrastructure Investment Trust under the SEBI (Infrastructure Investment Trusts) Regulations, 2014; or

(ii) a Real Estate Investment Trust under the SEBI (Real Estate Investment Trusts) Regulations, 2014,

Tax treatment in hands of Business Trust

1. Following income are exempt:

A. Income of Business Trust [Sec 10(23FC)]
Any income of a business trust by way of
a) interest received or receivable from a special purpose vehicle; or
b) dividend received or receivable from a special purpose vehicle

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 “Special purpose vehicle” means an Indian company in which the business trust holds
controlling interest and any specific percentage of shareholding or interest, as may be required
by the regulations under which such trust is granted registration
 Special purpose vehicle is not required to deduct tax at source on interest paid to the business
trust [Sec. 194A(3)(xi)]. However, business trust is required to deduct tax at source @ 10% 2 (5% in
case of non-corporate non-resident or foreign company) on interest component of income
distributed to the unitholders [Sec. 194LBA]

B. Income of Real Estate Investment Trust [Sec. 10(23FCA)]

Any income of a business trust, being a real estate investment trust, by way of renting or leasing or
letting out any real estate asset owned directly by such business trust.
Taxpoint: Where rent is credited or paid to a business trust, being a real estate investment trust, in respect of
any real estate asset, referred to in sec. 10(23FCA), owned directly by such business trust, TDS u/s 194-I is not
required to be deducted. Business trust is required to deduct tax at source @ 10%6 (30% in case of non-
corporate non-resident and 40% in case of foreign company) on distribution of such rental income to the
unit holders [Sec. 194LBA]
2. Other Income of Business Trust
Subject to the provisions of sec. 111A and sec. 112, the total income of a business trust shall be charged to
tax at the maximum marginal rate.

(d) Meaning of Securitisation Trust

Securitisation Trust means a trust, being a:

(i) Special purpose distinct entity as defined in regulation 2(1)(u) of the SEBI (Public Offer and Listing of
Securitised Debt Instruments) Regulations, 2008 made under the SEBI Act, 1992 and the Securities
Contracts (Regulation) Act, 1956, and regulated under the said regulations; or

(ii) Special Purpose Vehicle as regulated by the guidelines on securitisation of standard assets issued by
the RBI; or

(iii) Trust set-up by a securitisation company or a reconstruction company formed, for the purposes of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act), or in pursuance of any guidelines or directions issued by the RBI

which fulfils such conditions, as may be prescribed.

2 From 14-05-2020 to 31-03-2021: 7.5%. In some cases, TDS rate is 5%

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Study Note – 2

NON-RESIDENT

Learning Objective: The goal of the study note is to learn various provisions applicable to
an assessee being non-resident. Further, students are required to understand special
provision relating to computation of income and tax liability of a non-resident assessee
engaged in certain business.

1. Choose the correct alternative and also provide your justification

(i) Sec. 44B of the Income-tax Act relates to the –
(a) shipping business in the case of non-resident assessee
(b) foreign company engaged in the business of turnkey power project
(c) business of operation of aircraft of non-resident assessee
(d) business of exploration of mineral oils of non-resident assessee

(ii) Section 115A to section 115BBD provides special tax rates on certain income of non-resident. Some of
these provisions also states that assessee is not required to furnish return of income if his total income
consists of such specified income only and tax has been deducted from such income. Following
section(s) have such provision?
(a) Sec. 115AC
(b) Sec. 115BBA
(c) Both (a) and (b)
(d) None of the above

(iii) Section 44C of the Income tax Act imposes restriction on deduction in respect of head office
expenditure in the case of non-residents. As per such provision, head office expenditure cannot
exceed:
(a) 5% of adjusted total income
(b) 3% of adjusted total income
(c) 8% of adjusted total income
(d) 10% of adjusted total income

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(iv) Special rate of tax as provided in sec. 115A on interest on infra-bond being issued to non-resident is:
(a) 5%
(b) 20%
(c) 10%
(d) 15%

(v) Royalty or fees for technical services (other than income covered u/s 44DA) received by a non-
resident is taxable at the rate of –
(a) 20%
(b) 10%
(c) 25%
(d) 5%

(vi) Income of a non-resident sportsman by way of participation in India in any game or sport is taxable at
the rate of –
(a) 20%
(b) 25%
(c) 10%
(d) not taxable in India

(vii) As per sec. 115ACA, long term capital gain in hands of resident individual on transfer of GDR of an
Indian company engaged in s pecified knowledge based industry or service shall be taxable at the
rate of –
(a) 10%
(b) 20%
(c) 5%
(d) Exempt

(viii) The rate of tax u/s 115AD, on short-term capital gains arising from the transfer of equity shares in a
company or a unit of an equity oriented funds where such transaction is chargeable to securities
transaction tax (STT) is –
(a) 15%

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(b) 10%
(c) 20%
(d) 25%

(ix) As per sec. 115JG, capital gain arising from conversion of an Indian branch of foreign company into
Indian subsidiary company is not chargeable to tax subject to certain conditions. In this context, you
are requested to choose business of foreign company for which such section provides such relief –
(a) business of operation of aircraft
(b) business of shipping
(c) business of banking
(d) any business

(x) Any person who is responsible for paying interest (at the rate notified by the Central Government) to a
person being a Foreign Institutional Investor or a Qualified Foreign Investor in r espect of investment
made by the payee in a rupee denominated bond of an Indian company, is liable to deduct tax @ ___
(a) 5%
(b) 10%
(c) 20%
(d) 30%
Answer:

(i) (a) Shipping business in the case of non-resident assessee

Reason:
As per sec. 43B, in the case of an assessee, being a non-resident, engaged in the business of
operation of ships, 7.5% of the specified amounts shall be deemed to be the profits and gains of such
business chargeable to tax under the head “Profits and gains of business or profession”.

(ii) (c) Both (a) and (b)

Reason:
As per sec. 115AC(4) and 115BBA(2), it shall not be necessary for a non-resident to furnish a return of
his income u/s 139(1) if:

a) his total income in respect of which he is assessable during the previous year consisted only of
income referred to in respective sections; and

b) the TDS has been deducted from such income.

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(iii) (a) 5% of adjusted total income

Reason:
As per sec. 44C, in the case of an assessee, being a non-resident, no allowance shall be made, in
computing the income chargeable under the head “Profits and gains of business or profession”, in
respect of so much of the expenditure in the nature of head office expenditure as is in excess of the
amount computed as hereunder:

a) an amount equal to 5% of the adjusted total income; or

b) the amount of so much of the expenditure in the nature of head office expenditure incurred by
the assessee as is attributable to the business or profession of the assessee in India,

whichever is the least.

(iv) (a) 5%

Reason:
As per sec. 115A, interest received from an infrastructure debt fund referred to in sec. 10(47) shall be
taxable @ 5%.

(v) (b) 10%

Reason:
Royalty or fees for technical services (other than income covered u/s 44DA) received by a non
resident is taxable @ 10%. However, income covered u/s 44DA shall be computed under the head
“Profits and gains of business or profession” in accordance with the provisions of this Act.

(vi) (a) 20%

Reason:
As per sec. 115BBA, income of a non-resident sportsman by way of participation in India in any game
or sport is taxable @ 20%.

(vii) (a) 10%

Reason:
As per sec. 115ACA, long term capital gain in hands of resident individual on transfer of GDR of an
Indian company engaged in specified knowledge based industry or service shall be taxable @ 10%.

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(viii) (a) 15%

Reason:
The rate of tax u/s 115AD, on short-term capital gains arising from the transfer of equity shares in a
company or a unit of an equity oriented funds where such transaction is chargeable to securities
transaction tax (STT) is 15%, whereas long term capital gain is taxable @ 10%.

(ix) (c) business of banking

Reason:
Where a foreign company is engaged in the business of banking in India through its branch situated in
India and such branch is converted into a subsidiary company thereof, being an Indian company
(hereafter referred to as an Indian subsidiary company) in accordance with the scheme framed by
the Reserve Bank of India (and subject to the conditions as may be notified by the Central
Government), then, the capital gains arising from such conversion shall not be chargeable to tax in
the assessment year relevant to the previous year in which such conversion takes place.

(x) (a) 5%

Reason:
As per sec. 194LD, any person who is responsible for paying interest (at the rate notified by the Central
Government) to a person being a Foreign Institutional Investor or a Qualified Foreign Investor in
respect of investment made by the payee in a rupee denominated bond of an Indian company, is
liable to deduct tax @ 5%

2. (a) How could you compute income of a non-resident engaged in the business of exploration of mineral
oils?

Answer:
Profits & Gains in connection with the Business of Exploration, etc. of Mineral Oils [Sec. 44BB]

Applicable to Non-resident assessee

Assessee must be engaged in the business of -

• Providing services or facilities in connection with; or
• Supplying plant1 and machinery on hire, used or to be used in,
Conditions – the prospecting for, or extraction or production of, mineral oils2.
1. Plant includes ships, aircraft, vehicles, drilling units, scientific apparatus and
equipment, used for the purpose of the said business
2. Mineral oil includes petroleum and natural gas.

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A sum equal to 10% of the aggregate of the following amount shall be deemed to
be the profits and gains of such business chargeable to tax -
• The amount paid or payable (whether in or out of India) to the assessee (or to
any person on his behalf) on account of the provision of services and facilities in
Estimated income connection with, or supply of plant and machinery on hire used, or to be used,
in the prospecting for, or extraction or production of, mineral oils in India; and

• The amount received or deemed to be received in India by or on behalf of the

assessee on account of the provision of services and facilities in connection
with, or supply of plant and machinery on hire used, or to be used, in the
prospecting for, or extraction or production of, mineral oils outside India.

An assessee may claim lower profits and gains if he keeps and maintains books of
account as per sec. 44AA and gets his accounts audited and furnishes the report
Assessee may claim
u/s 44AB and thereupon the Assessing Officer shall proceed to make an
lower profit
assessment of the total income of the assessee u/s 143(3) & determine the sum
payable by, or refundable to, the assessee

2. (b) What do you mean by place of effective management?

Answer:
Place of effective management
“Place of effective management” means a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole, are in substance made. Circular 6/2017
dated 24-01-2017 provides that the process of determination of POEM would be primarily based on the fact as
to whether or not the company is engaged in active business outside India (ABOI).

Particulars POEM

Company is engaged in active business outside India

- If the majority meetings of the board of directors of the company are held outside India Outside India

- If Board of directors of the company are standing aside and not exercising their powers In India
of management and such powers are being exercised by either the holding company
or any other person (s) resident in India

Company is not engaged in active business outside India then following are required to be ascertained:
1. The person(s) who actually make the key management and commercial decision for conduct of the
company’s business as a whole
2. Place where these decisions are in fact being made

- If such place is in India In India

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Taxpoint
 A company shall be said to be engaged in “active business outside India” if
(a) the passive income is not more than 50% of its total income; and
(b) the passive income is less than 50% of its total assets are situated in India; and
(c) the passive income is less than 50% of total number of employees are situated in India or are resident in
India; and
(d) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

 Passive income of a company shall be aggregate of:

(i) income from the transactions where both the purchase and sale of goods is from / to its associated
enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest (except for banking company or public
financial institution) or rental income.

3. (a) USA Airlines incorporated as a c ompany in USA operates its flights to India and vice versa during the
year 2020-21 and collects charges of `150 lakh for carriage of passengers and cargo out of which `90
lakh were received in US Dollars for the passenger fare booked from New York to Mumbai. The total
expenses for the year on operation of s uch flights were `195 lakh. Income chargeable to tax of the
foreign airlines may please be computed.
Answer:

Computation of income of USA Airlines

Particulars Fare booked from Fare booked from New York to Mumbai
Mumbai to New York If paid in India If paid outside
whether paid in India (or deemed to be India
or outside India received in India)
Fare ` 60 lakh [` 150 – ` 90] ` 90 lakh ` 90 lakh
Taxable Income @ 5% of the above ` 3,00,000 ` 4,50,000 -

3. (b) Write notes on conversion of an Indian branch of Foreign Company into Subsidiary Indian Company.

Answer:
Conversion of an Indian branch of Foreign Company into Subsidiary Indian Company [Sec. 115JG]

Where a foreign company is engaged in the business of banking in India through its branch situated in India
and such branch is converted into a subsidiary company thereof, being an Indian company (hereafter referred

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to as an Indian subsidiary company) in accordance with the scheme framed by the Reserve Bank of India (and
subject to the conditions as may be notified by the Central Government), then,

(a) The capital gains arising from such conversion shall not be chargeable to tax in the assessment year
relevant to the previous year in which such conversion takes place.

(b) The provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward and set
off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the
computation of income in the case of the foreign company and the Indian subsidiary company shall apply
with such exceptions, modifications and adaptations as may be specified in that notification.

Consequence of failure to Comply with any of the Conditions:

In case of failure to comply with any of the conditions specified in the scheme or in the notification, all the
provisions of this Act shall apply to the foreign company and the said Indian subsidiary company without
aforesaid benefit, exemption or relief.

Consequence of failure to Comply with any of the conditions after Claiming Benefit:

Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign
company or the Indian subsidiary company and, subsequently, there is failure to comply with any of the
conditions specified in the scheme or in the notification, then:

(a) Such benefit, exemption or relief shall be deemed to have been wrongly allowed;

(b) The Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income of
the assessee for the said previous year and make the necessary amendment; and

(c) The provisions of sec. 154 shall, so far as may be, apply thereto and the period of 4 years specified in that
section being reckoned from the end of the previous year in which the failure to comply with the condition
takes place.

4. Discuss the provisions of withholding of tax in respect of following:

- TDS on payment to non-resident sportsman or sports associations u/s 194E

- TDS on certain income from units of a Business Trust u/s 194LBA

- Interest on certain bonds, etc u/s 194LD

Answer:
TDS on payment to non-resident sportsman or sports associations [Sec. 194E]
Who is responsible to deduct tax: Any person who is responsible to pay the following income –

Payee Income by way of

Sportsman (including an 1. Participation in India in any game (excluding card game or gambling) or
athlete) or an entertainer sport

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being non-resident foreign 2. Advertising

citizen
3. Contribution of articles relating to any game or sports in any newspaper,
magazine or journal.

Sports association being Any game (other than card game) or sports organised in India
non- resident

Rate of TDS: 20% (+ Surcharge + Health & Education Cess)

When tax shall be deducted: At the time of payment or crediting the party whichever is earlier.

TDS on certain income from units of a Business Trust [Sec. 194LBA]

Who is responsible to deduct tax: Any business trust distributing income referred to in sec. 115UA [being of the
nature referred to in sec. 10(23FC) or 10(23FCA)] to its unit holder
When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.
Rate of TDS:

Payee Rate of TDS

Payment referred to in Payment referred to in
sec. 10(23FC) sec. 10(23FCA)
If payment is made to a resident unit holder 10%* 10%*
If payment is made to a unit holder being non- Dividend income: 10% 30% + SC + Health &
resident (not being a company) Other Income: 5% Education Cess
If payment is made to a unit holder being a Dividend income: 10% 40% + SC + Health &
foreign company Other Income: 5% Education Cess

* From 14-05-2020 to 31-03-2021: 7.5%

Other Point
The provision is not applicable in respect of income of the nature referred to in sec. 10(23FC)(b) [i.e., dividend],
if the special purpose vehicle has not exercised the option u/s 115BAA.
Income by way of interest on certain bonds, Govt. securities [Sec. 194LD]
Any person who is responsible for paying interest (at the rate notified by the Central Government) to a person
being a Foreign Institutional Investor or a Qualified Foreign Investor 1 . Such interest shall be payable:
a. on or after 01-06-2013 but before 01-07-2023 in respect of the investment made by the payee in:

1 “Qualified Foreign Investor” shall have the meaning assigned to it in the Circular No. Cir/IMD/DF/14/2011, dated the 9th August, 2011, as

amended from time to time, issued by the Securities and Exchange Board of India, under section 11 of the Securities and Exchange
Board of India Act, 1992.

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i. a rupee denominated bond of an Indian company [provided rate of interest shall not exceed the
notified rate]; or
ii. a Government security;
b. on or after 01-04-2020 but before 01-07-2023 in respect of the investment made by the payee in municipal
debt securities

When tax shall be deducted: At the time of payment or crediting the payee, whichever is earlier.

Rate of TDS: 5% (+ SC + Health & Education Cess)

5. Mr. Crown, a non-resident, gives you the following information for the year ended 31-3-2021

Interest on Government securities (gross) 21,000

Dividend on shares of foreign companies received aboard 52,000
Interest from deposits in Indian companies (gross) 30,000
Income from horse races in India 20,000

He has donated a sum of ` 10,000 to Municipal Corporation of Delhi for promotion of family planning. He has
paid ` 2,000 by cheque to New India Assurance Co. for mediclaim for himself. He has also spent ` 16,000 on
medical treatment of his minor son who is physically handicapped.

Compute total income of Mr. Crown for the assessment year 2021-22.

Answer:
Computation of Total Income of Mr. Crown, a non-resident, for the A.Y.2021-22

Particulars Working Amount Amount

Income from other sources

Dividend from

Foreign company Non-resident Nil

Interest from

Government securities 21,000

Indian company deposits 30,000 51,000

Casual income

Winning from horse races 20,000

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Gross Total Income 71,000

Less: Deduction
U/s 80D (Medical insurance) 2,000
U/s 80DD (Handicapped son) Non-resident Nil
U/s 80G (Donation) Note 6,900 8,900
Total Income 62,100

Note: Computation of Deduction u/s 80G

Computation of Adjusted GTI:

Adj. GTI = GTI – Deduction u/s 80CCC to 80U other than 80G

= ` 71,000 – ` 2,000 = ` 69,000

Qualifying amount for donation = 10% of Adjusted GTI = 10% of ` 69,000 = ` 6,900

Deduction: In case of donation to Municipal Corporation for family planning, rate of deduction is 100% of
qualifying amount. Hence, deduction u/s 80G shall be ` 6,900 (being 100% of ` 6,900).

6. Mr. Q, a non-resident, operates an aircraft between Singapore and C hennai. He received the following
amounts in the course of the business of operation of aircraft during the previous year:
(i) ` 2 crores in India on account of carriage of passengers from Chennai.
(ii) ` 1 crore in India on account of carriage of goods from Chennai.
(iii) ` 3 crores in India on account of carriage of passengers from Singapore.
(iv) ` 1 crore in Singapore on account of carriage of passengers from Chennai.
(v) The total expenditure incurred by Mr. Q for the purposes of the business during the year was ` 6.75
crores.

Compute income chargeable to tax of the foreign airlines

Answer:

Computation of income of Mr. Q for the A.Y. 2021-22

Particulars Amount
Amount received in India on account of carriage of passengers from Chennai 2,00,00,000
Amount received in India on account of carriage of goods from Chennai 1,00,00,000
Amount received in India on account of carriage of passengers from Singapore 3,00,00,000
Amount received in Singapore on account of carriage of passengers from Chennai 1,00,00,000
Total 7,00,00,000
Total Income (as per sec. 44BBA being 5% of above) 35,00,000

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7. A non-resident foreign company has a pe rmanent establishment (PE) in India, in respect of which royalty
`101 lakh was earned from an Indian company in pursuance of an agreement dated 10th June, 2015
(expenditure incurred on PE in India ` 12,37,600). Compute the gross tax liability of foreign company
ignoring TDS/advance tax for the assessment year 2021-22, assuming that there is no other income of the
company for the year.

Answer:
Computation of Total Income and Tax Liability

Particulars Amount
Royalty covered u/s 44DA 1,01,00,000
Less: Expenses 12,37,600
Income 88,62,400
Tax on above [104% {` 88,62,400 * 40%} [Rounded off] 36,86,760

8. Discussion the provision relating to deduction of Head Office Expenditure in the case of Non-residents
u/s 44C

Answer:
Deduction of Head Office Expenditure in the case of Non-residents [Sec. 44C]

In case of a n on-resident assessee, head office expenditure shall not be allowed (in computing the income
chargeable under the head “Profits and gains of business or profession”) in excess of the higher of the following
amount:
(i) an amount equal to 5% of the adjusted total income; or
(ii) the amount of so much of the expenditure in the nature of head office expenditure incurred by the
assessee as is attributable to the business or profession of the assessee in India,

Other Points
Adjusted total income means the total income without giving effect to:
(a) Head-office expenditure u/s 44C; or
(b) Unabsorbed depreciation u/s 32(2); or
(c) The first proviso to sec. 36(1)(ix) i.e. capital expenditure on family planning; or
(d) Any loss carried forward u/s 72 or 73 or 74 or 74A; or
(e) The deductions under Chapter VIA;

 Where the adjusted total income of the assessee is a loss, then (i) shall be computed at the rate of 5% of
the average adjusted total income of the assessee.

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 Average adjusted total income means average of adjusted total income of 3 a ssessment years
immediately preceding the relevant assessment year. However, where the total income of the assessee is
assessable only for last 2 or 1 year(s), then average of last 2 or 1 year(s) shall be considered.
 Head office expenditure means executive and general administration expenditure incurred by the
assessee outside India, including expenditure incurred in respect of:
(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the
business or profession;
(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in
addition to salary, whether paid or allowed to any employee or other person employed in, or
managing the affairs of, any office outside India;
(c) travelling by any employee or other person employed in, or managing the affairs of, any office outside
India; and
(d) such other matters connected with executive and general administration as may be prescribed.

9. Discuss the provision u/s 115JH which states that foreign company said to be resident in India.

Answer:
Foreign company said to be resident in India [Sec. 115JH]
Where,

(i) a foreign company is said to be resident in India in any previous year; and

(ii) such foreign company has not been resident in India in any of the previous years preceding the said
previous year,

then, the provisions relating to the computation of total income, treatment of unabsorbed depreciation, set off
or carry forward and set off of losses, collection and recovery and special provisions relating to avoidance of
tax shall apply with such exceptions, modifications and adaptations as may be specified in notification 2 issued
by the Government for the said previous year.

Consequences when such company fails to comply with the conditions

 Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign
company and, subsequently, there is failure to comply with any of the conditions specified in the
notification, then,:

(i) such benefit, exemption or relief shall be deemed to have been wrongly allowed;

(ii) the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income
of the assessee for the said previous year and make the necessary amendment as if the exceptions,
modifications and adaptations did not apply; and

2 Notification No. 29/2018 dated 22/06/2018

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(iii) the provisions of sec. 154 shall, so far as may be, apply thereto and the period of 4 years specified
therein being reckoned from the end of the previous year in which the failure to comply with the
conditions takes place.

Other Point

 Where the determination regarding foreign company to be resident in India has been made in the
assessment proceedings relevant to any previous year, then the provisions shall also apply in respect of any
other previous year, succeeding such previous year, if the foreign company is resident in India in that
previous year and the previous year ends on or before the date on which such assessment proceeding is
completed.

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Study Note – 3

RETURN OF INCOME

Learning Objective: Certain class of person is required to file its return of income
mandatorily. This study note will help to understand the various provisions relating to filing of
return of income.

1. Choose the correct alternative and also provide your justification

(i) Where the karta of a HUF is absent from India, the return of income can be verified by:
(a) any member of the family
(b) any male member of the family
(c) any other adult member of the family
(d) any member holding power of attorney

(ii) Where assessment has not been completed, belated income tax return for assessment year 2021-22
can be filed upto
(a) 31.03.2022
(b) 31.12.2021
(c) 31.03.2021
(d) 31.12.2022

(iii) Following form number is to be used for filing the return of income by an indiv idual having business
income?
(a) ITR 1
(b) ITR 2
(c) ITR 3
(d) ITR 5

(iv) Quoting ‘Permanent Account Number’ (PAN) is compulsory in the following transaction –
(a) Payment of LIP exceeding ` 50,000 in a financial year
(b) Sale or purchase of any immovable property valued at ` 4,00,000

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(c) Time deposit upto ` 35,000 with a bank

(d) None of the above

(v) When assessment has not been completed, revised return can be filed:
(a) Before the end of the relevant assessment year.
(b) Within one year from the end of the relevant assessment year.
(c) Within two years from the end of the relevant assessment year.
(d) None of the above

(vi) In case of companies deriving loss for any assessment year, filing of return of income within due date
laid down in section 139(1) is compulsory -
(a) only where the Department issues notice to the assessee-company
(b) for domestic companies only
(c) for foreign companies only
(d) for all companies

(vii) Due date of furnishing return of income for a p artner of a firm whose accounts are required to be
audited is –
(a) 31st July of the assessment year
(b) 31st October of the assessment year
(c) 31st December of the assessment year
(d) 31st March of the assessment year

(viii) Which return of income cannot be revised by the assessee?

(a) Return of loss
(b) Belated return
(c) Both of the above
(d) None of the above

(ix) For an individual assessee, who is absent from India, the return should be verified by –
(a) His guardian
(b) Any person duly authorized by him
(c) His tax consultant
(d) Either of the above

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(x) A return filed u/s 139(4) is called –

(a) Belated Return
(b) Original return
(c) Revised return
(d) Loss return

Answer:

(i) (c) any other adult member of the family

Reason:
As per sec. 140, where the karta of a HUF is absent from India, the return of income can be verified by
any other adult member of the family.

(ii) (a) 31.03.2022

Reason:
As per sec. 139(4), assessee may file belated return -
• before the end of the relevant assessment year; or
• before the completion of assessment,
- whichever is earlier.

(iii) (c) ITR 3

Reason:
Individuals and HUFs having income from a proprietary business or profession is required to file return of
income in ITR 3.

(iv) (a) Payment of LIP exceeding ` 50,000 in a financial year

Reason:
Every person shall quote its PAN in all documents pertaining to specified transactions entered into by
him. Among other, payment of LIP exceeding ` 50,000 in a financial year is a specified transaction. In
respect of other options given, the threshold limit is higher than given with the option (in respect of
time deposit, the limit is ` 50,000 and in case of transaction relating to immovable property the limit is
`10 lakh).

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(v) (a) Before the end of the relevant assessment year.

Reason:
As per sec. 139(5), assessee may file revised return -
• before the end of the relevant assessment year; or
• before the completion of regular assessment,
- whichever is earlier.

(vi) (d) for all companies

Reason:
As per sec. 139(1), every company is required to file its return of income irrespective of size of income.

(vii) (b) 31st October of the assessment year

Reason:
As per Explanation 2 to sec. 139(1), where the assessee is a partner in a firm and the accounts of the
firm are required to be audited under any law, then he can file his return by 31st October of the
assessment year.

(viii) (d) None of the above

Reason:
Any return of income filed by the assessee can be revised within stipulated time given u/s 139(5).

(ix) (b) Any person duly authorized by him

Reason:
As per sec. 140, where an individual is absent from India, the return of income can be verified by any
person duly authorized by him.

(x) (a) Belated Return

Reason:
Sec. 139(4) deals with filing of belated return.

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2. (a) State mandatory provision of filing return of income in case of high value transaction.

Answer:

Mandatory furnishing of return in case of high value transactions [7th Proviso to Sec. 139(1)]

A person (other than firm and company), who is not required to furnish a return as per aforesaid provision, and
who during the previous year:

(a) has deposited an aggregate amount exceeding ` 1 crore in one or more current accounts maintained
with a banking company or a co-operative bank; or

(b) has incurred expenditure of an aggregate amounts exceeding ` 2 lakh for himself or any other person for
travel to a foreign country; or

(c) has incurred expenditure of an aggregate amount exceeding ` 1 lakh towards consumption of electricity;
or

(d) fulfils such other conditions as may be prescribed,

shall furnish a return of his income on or before the due date in such form and verified in such manner and
setting forth such other particulars, as may be prescribed.

2. (b) State the steps for filing ITR 1 online.

Answer:
Following are the steps for e-filing of Return Form 1 and Form 4 (online)

Step 1 Logon to ‘e-Filing’ Portal

Step 2 Go to the ‘e-File’ menu located at upper-left side of the page ⇒ Click ‘Income Tax Return’
Step 3 Select the ‘Assessment Year’, ‘ITR Form Name’ from the dropdown list
Step 4 Select the ‘Submission Mode’ as ‘Prepare and Submit Online’ from the dropdown list
Step 5 Choose any one of the following option to verify the Income Tax Return:
• Digital Signature Certificate (DSC). If you do not have DSC
• Aadhaar OTP
• EVC using Prevalidate Bank Account Details
• EVC using Prevalidate Demat Account Details
• Already generated EVC through My Account ⇒ Generate EVC Option or Bank ATM. Validity
of such EVC is 72 hours from the time of generation
• Don’t want to e-verify this Income Tax Return and would like to send signed ITR-V to
Bengaluru
Click ‘Continue’
Step 6 Read the instructions ⇒ Fill in Required details while filling the details in ITR, under category ‘Return
Filed’

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Note: Before submitting the data, kindly save the data you have entered by clicking on ‘Save as
Draft’ to recheck any mistakes.
Step 7 Click ‘Preview and Submit’ button to preview your ITR from before submitting it.
Step 8 Click ‘Submit’
Taxpayer will get an option to enter OTP for e-verifying the ITR, if an EVC or Aadhaar OTP option is
chosen or To attach DSC, if DSC option is chosen to e-verify the ITR.
After successful submission, ITD will process your ITR and send an email confirmation stating the
same.

3. Manu furnishes the following information for the previous year 2020-21:
(a) Loss from business : ` 16,00,000
(b) Long-term capital loss : ` 10,00,000
(c) Loss from House property : ` 2,00,000
Does Manu require to submit return? Also state the consequences for non filing of return. What is the due
date of submission of such return?

Answer:
An individual-assessee is not compulsorily required to furnish return of loss. However, the following losses cannot
be carried forward if the return of loss is not submitted within the time allowed u/s 139(1):
a. Business loss (speculative or otherwise);
b. Capital loss;
c. Loss from the activity of owning and maintaining race horses.
Manu is required to file his return of income by 31-07-2021 (if audit is not required) else 31-10-2020 (if audit is
compulsory) 1

4. Write the correct answer from the following statements as per provision of 139(1) of Income Tax Act, 1961.
(i) Mr. Rahaman, a salaried employee of Calcutta based company having Taxable Income ` 4,00,000 for
the Previous year 2020-21, whose due date of filing income tax return is 30th November, 2021.
(ii) Mr. Raghab, a s alaried employee of Tata M otors having Taxable income ` 8,00,000 for the previous
year 2020-21, and fails to file Income Tax Return within Due date as per Income Tax Act. He wants to
file Belated Return. The time limit of filing Belated return is within 31st March 2023.
(iii) Mr. Ananda, a B usinessman filed Belated Return for the Previous year 2020-21. He wants to submit
Revised Return on 31st March 2022, after he discovered that he failed to claim a deduction allowable
u/s 80.

1 In some case he is required to file his return on or before 30th day of November of the assessment year

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(iv) M/s ABC, a Kolkata based partnership firm is required to get its Accounts Audited under Income Tax
Act. The Due Date of filing Income Tax Return of the firm for the Previous Year 2020-21 is within 31st July
2021.
(v) Ms. Ankita is the working partner of a partnership firm and the accounts of the firm is required to be
audited. Due Date of filing Income Tax Return of Ms. Ankita for the Previous Year 2020-21 is within 31st
December, 2020.

Answer:

(i) Due Date of filing Income Tax Return shall be 31st July, 2021.

(ii) He can file belated return upto 31-03-2022.

(iii) A belated return can be revised.

(iv) Partnership firm, whose accounts are required to be audited, is required to submit the return of income by
31-10-2021

(v) Due date of filing return shall be 31-10-2020.

5. State whether the following persons have to mandatorily furnish their return of income for the assessment
year 2021-22:
(i) Mr. Choudhury, aged 52 years whose gross total income ` 3,00,000 and total income after deduction
u/s 80C is ` 2,00,000.
(ii) M/s ROXY, a partnership firm, whose total income during the previous year 2020-21 ` 50,000.
(iii) Smt. R. Bose aged 62 years, having total income ` 2,80,000.
(iv) Renbo India Ltd., a registered company in India, has incurred loss during the previous year 2020-21
`2,20,000.
(v) Smt. I. Shing, aged 50 years, whose total income is ` 2,40,000 before adjustment of unabsorbed
business loss of ` 1,00,000.

Answer:

(i) Yes, as his gross total income exceeds basic exemption limit

(ii) Yes, partnership firm is required to file its return of income irrespective of its size of turnover or income

(iii) No, as her gross total income does not exceed basic exemption limit applicable to her (i.e., ` 3,00,000)

(iv) Yes, company is required to file its return of income irrespective of its size of turnover or income

(v) An assessee is not compulsorily required to furnish return of loss. However, business loss (among other
specified losses) cannot be carried forward if the return of loss is not submitted within the time allowed u/s
139(1).

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6. Enumerate the functionalities available at e-filing portal.

Answer:
Few of the functionalities available at e-filing portal are as follow:

• View Form 26AS

• View (with download facility) e-Filed Return / Form

• Tax Credit mismatch

• Download pre-filled XML

• e-Verify Return

• Generate EVC

• Add / Disengage CA or e-Return Intermediary

• Add / Register as Representative

• Filing of Returns

• Filing of Rectification

• Filing of return in response of notice u/s 139(9)

• Status of refund issue or status of demand

• Aadhar linking

• e-Proceedings

• Filing of appeal to CIT(Appeals)

• Registration or updation of Digital Sign

• Refund reissue request

• Validation of Bank Account or Demat Account

• Profile updation

7. What is defective return?

Answer:
Defective Return [Sec. 139(9)]
When a return is termed defective - A return of income is said to be defective where all the following conditions
are not fulfilled:
• The return is furnished without paying self-assessment tax along with interest, if any.
• The annexure, statements and columns in the return of income have been duly filled in.
• The return is accompanied by the following documents -

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a. a statement showing the computation of tax liability;

b. the audit report u/s 44AB (where the report has been submitted prior to the furnishing of return, a copy
of audit report together with proof of furnishing the report);
c. the proof of tax deducted or collected at source, advance tax paid and tax paid on self-assessment;
d. where regular books of account are maintained by the assessee:
i. copies of Manufacturing A/c, Trading A/c, Profit and Loss A/c or Income and Expenditure A/c or
any other similar account and Balance Sheet;
ii. in the case of –
• A proprietary business or profession - the personal account of the proprietor;
• A firm, AOP or BOI - personal account of the partners or members; or
• A partner or member of the firm, AOP or BOI - his personal account in the firm, association of
persons or body of individuals;
where regular books of account are not maintained by the assessee –
e. where regular books of account are not maintained by the assessee:
i. a statement indicating the amount of turnover or gross receipts, gross profit, expenses and net
profit of the business or profession and the basis on which such amount have been computed;
and

ii. the amount of sundry debtors, sundry creditors, stock and cash balance as at the end of the
previous year.

f. where the accounts of the assessee have been audited, copies of the audited Profit and Loss A/c,
Balance Sheet and a copy of the Auditor’s report;
g. Cost audit report u/s 233B of the Companies Act, 1956 (if any).

Effect: Where the Assessing Officer considers that the return of income furnished by the taxpayer is defective, he
may intimate the defect to the taxpayer and give him an opportunity to rectify the defect(s).
Time limit for rectification: The assessee must rectify the error within a period of 15 d ays from the date of
intimation (served on the assessee) or within such extended time as allowed by the Assessing Officer. Where the
taxpayer rectifies the defect after the expiry of the period of 15 days or such extended period but before the
assessment is completed, the Assessing Officer can condone such delay.
Consequence when defect is not rectified: If defect is not rectified within the time limit, the Assessing Officer will
treat the return as an invalid return and provisions of the Act will apply as if the taxpayer had failed to furnish the
return at all.
Note: Currently, the assessee is required to furnish paper-less return. i.e., no documents, proof or report (other
than some specified report required to be furnished electronically) is required to be attached with return of
income. In this regard, return of income shall not be considered as defective return. However, the assessee
should retain these documents, proof or report with himself. If called for by the income-tax authority during any
proceeding, it shall be incumbent upon the assessee to furnish/produce the same.

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8. Discuss the provision relating to filing of return of income in respect of following:

– Political Party
– University
– Business Trust
– Investment Fund

Answer:
Return of income of Political Party [Sec. 139(4B)]
The chief executive officer (whether such chief executive officer is known as Secretary or by any other
designation) of any political party is required to furnish a return in respect of income of such political party, if the
amount of gross total income before allowing exemption u/s 13A exceeds the maximum amount not
chargeable to tax.

Return of income by a University/ College etc. [Sec. 139(4D)]

Every University, college or other institutions referred to in sec. 35(1)(ii) or (iii) is required to furnish a return in
respect of income or loss irrespective of size of income or loss.

Return of income of a Business Trust [Sec. 139(4E)]

Every business trust, which is not required to furnish return of income or loss under any other provisions of this
section, shall furnish the return of its income in respect of its income or loss in every previous year and all the
provisions of this Act shall, so far as may be, apply if it were a return required to be furnished u/s 139(1).

Return of income of Investment Fund [Sec. 139(4F)]

Every investment fund referred to in sec. 115UB, which is not required to furnish return of income or loss under
any other provisions of this section, shall furnish the return of income in respect of its income or loss in every
previous year and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be
furnished u/s 139(1)

9. Who can verify return of income?

Answer:
As per sec. 140, the return of income is required to be verified:

Assessee Case Verified by

Individual In general Individual himself

Where the individual concerned is absent Individual himself or by the duly authorized
from India person of such individual

Where the individual is mentally Guardian of such individual or any other

incapacitated person competent to act on his behalf

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Where by any other reason it is not Any person duly authorised by him
possible for the individual to verify the
return.

Note: When return is verified by any authorised person in that case the return should be
accompanied with power of attorney.

HUF In general Karta

Where the ‘karta’ is absent from India or Any adult member of the family.
is mentally incapacitated

Firm In general Managing partner

If due to any reason it is not possible for Any adult partner

managing partner to verify or where
there is no managing partner

Limited liability In general Designated partner

partnership
If due to any unavoidable reason such Any partner or any other prescribed person
designated partner is not able to verify
the return, or where there is no
designated partner as such

Local authority Principal Officer

Political party Chief Executive Officer

Company In general Managing Director (MD)

If due to any reason it is not possible for Any director

MD to verify or where there is no MD

Where an application for corporate Insolvency professional appointed by such

insolvency resolution process has been Adjudicating Authority
admitted by the Adjudicating Authority
under Insolvency and Bankruptcy Code,
2016

Non-resident company A person holding a valid power of attorney.

Copy of such power of attorney must be
attached with the return.

Company in process of winding up Liquidator of the company

Where the management of the Principal officer

company has been taken over by the
Central or State Government.

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Any other Any member or principal officer

association

Any other person Such person or any other person competent to act on its behalf.

10. What is the due date for filing return of income in case of various assessee?

Answer:
Time limit for filing return of income [Explanation 2 to Sec. 139(1)]
A return should be filed on or before the following due date (of respective assessment year):

Assessee Due date

• Where the assessee is required to furnish a report in Form 3CEB u/s 92E pertaining to 30th November
international transaction(s)
• Where the assessee is a company not having international transaction(s) 31st October
• Any other assessee
− Where accounts of the assessee are required to be audited under any law 31st October
− Where the assessee is a partner in a firm and the accounts of the firm are 31st October
required to be audited under any law
− In any other case 31st July

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Study Note – 4

ASSESSMENT PROCEDURE

Learning Objective: The income-tax authorities have right to assess the income of the
assessee. This study note will help to understand the provisions relating to various types of
assessment.

1. Choose the correct alternative and also provide your justification

(i) Assessment under section 143(3) shall be made within a pe riod of _____ months from the end of the
relevant assessment year.

(a) 18

(b) 12

(c) 36

(d) 24

(ii) Assessment under section 143(3) r.w.s. 147 shall be made within a period of ____ months from the end
of the financial year in which notice u/s 148 was ______ .

(a) 21, issued

(b) 9, served

(c) 9, issued

(d) 21, served

(iii) Intimation u/s 143(1) can be send within a pe riod of _____year from the end of t he financial year in
which the return of income is filed.
(a) 2
(b) 1
(c) 3
(d) 4

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(iv) Which of the following can be corrected while processing the return of income under section 143(1)?
(a) any arithmetical error in the return
(b) any mistake in the return of income
(c) any error in the return of income
(d) any claim by the taxpayer which is against law

(v) Notice under section 143(2) (i.e. notice of scrutiny assessment) should be served within a period of
_______ from the end of the financial year in which the return is filed.
(a) six months
(b) one years
(c) eighteen months
(d) two years

(vi) Section 144C envisages an alte rnate dispute resolution mechanism by empowering the CBDT to
constitute a ______.
(a) Securities and Exchange Board of India
(b) Dispute Resolution Panel
(c) Constitution of India
(d) Central Board of Direct taxes

(vii) The time limit for rectification of mistakes is a period of ____ from the end of the financial year in which
the order sought to be amended was passed.
(a) four years
(b) three years
(c) two years
(d) one year

(viii) Regular assessment means assessment made under section —

(a) 143(3)

(b) 147

(c) Both (A) and (B) above

(d) None of the above

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(ix) If the Assessing Officer has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year, he may initiate proceedings of —
(a) Re-assessment

(b) Regular assessment

(c) Self assessment

(d) Best judgement assessment

(x) Assessment is required to be completed within specified time frame. However, while computing such
time following period shall be excluded –
(a) Time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the
assessee to be re-heard under the proviso to sec. 129
(b) Period during which the assessment proceeding is stayed by an order or injunction of a court
(c) Both (a) and (b)
(d) None of the above as time limit for assessment cannot be increased in any circumstances

Answer:

(i) (b) 12

Reason:

As per sec. 153(1), assessment must be completed within 12 months from the end of the relevant
assessment year.

(ii) (b) 9, served

Reason:

Assessment under section 143(3) r.w.s. 147 shall be made within a period of 9 months from the end of
the financial year in which notice u/s 148 was served.

(iii) (b) 1

Reason:
No intimation shall be sent after the expiry of 1 year from the end of the financial year in which the
return is made. The period of limitation will run from the date of filing of latest revised return.

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(iv) (a) any arithmetical error in the return

Reason:
Where a return has been made u/s 139 or in response to a notice u/s 142(1), such return shall be
processed. During processing, the total income or loss shall be computed after making the adjustment
(among other) any arithmetical error in the return.

(v) (a) six months

Reason:
No notice u/s 143(2) shall be served on the assessee after the expiry of 6 months from the end of the
financial year in which the return is furnished.

(vi) (b) Dispute Resolution Panel

Reason:
Sec. 144C envisages an alternate dispute resolution mechanism by empowering the CBDT to
constitute a Dispute Resolution Panel. Dispute Resolution Panel means a collegium comprising of 3
Commissioners of Income-tax constituted by the Board for this purpose.

(vii) (a) four years

Reason:
As per sec. 154(7), rectification can be made within 4 years from the end of the financial year in which
the order sought to be amended was passed. However, in respect of an application made by the
assessee or deductor or collector, the authority shall, within a period of 6 months from the end of the
month in which the application is received by it, pass an order -
a. making the amendment; or
b. refusing to allow the claim.

(viii) (a) 143(3)

Reason:
Assessment made u/s 143(3) is regular assessment. Assessment u/s 147 is income escaping assessment.

(ix) (a) Re-assessment

Reason:
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year, he may initiate proceedings of re-assessment u/s 147.

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(x) (c) Both (a) and (b)

Reason:
As per Explanation 1 to sec. 153, in computing the time limitation for completion of assessment,
following (among other) period shall be excluded —

1. Time taken in reopening the whole or any part of the proceeding or in giving an opportunity to
the assessee to be re-heard under the proviso to sec. 129; or

2. Period during which the assessment proceeding is stayed by an order or injunction of a court.

2. “The assessing officer has no power to make adjustment of any kind to income returned by an assessee at
the time of processing the return of income under section 143(1).” Critically examine the statement

Answer:

Where a return has been made u/s 139 or in response to a notice u/s 142(1), such return shall be processed in
the following manner, namely:—

(a) the total income or loss shall be computed after making the following adjustment:

(i) any arithmetical error in the return;

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

(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was
furnished after the due date;

(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 u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return is
furnished after the due date; or

Such adjustments shall not be made unless an intimation is given to the assessee of such adjustments either
in writing or in electronic mode. The response received from the assessee, if any, shall be considered
before making any adjustment, and in a case where no response is received within 30 days of the issue of
such intimation, such adjustments shall be made.

(b) the tax, interest and fee, if any, shall be computed on the total income computed above;

(c) the sum payable by (or the amount of refund due to), the assessee shall be determined after adjustment
of the tax, interest and fee, if any, by any TDS, TCS, advance tax paid, any relief, tax paid on self-
assessment and any amount paid otherwise by way of tax, interest or fee;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to
be payable by, or the amount of refund due to, the assessee; and

(e) the amount of refund due to the assessee in pursuance of the determination shall be granted to the
assessee.

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(f) An intimation shall also be sent to the assessee in a case where the loss declared in the return by the
assessee is adjusted but no tax or interest or fee is payable by, or no refund is due to, him.

3. Please state the time limit and conditions for issue of notice of reassessment under Section 148 and 149 of
the income-tax Act, 1961

Answer:
Issue of notice [Sec. 148]
Before making the assessment u/s 147, the Assessing Officer shall serve on the assessee a notice requiring him to
furnish a return within such period, as may be specified in the notice.

Note: Notice u/s 148 cannot be issued during pendency of assessment proceedings

Time limit for notice [Sec. 149]

Notice u/s 148 can be issued subject to the following time limit—

Time limit for issue of notice Size of escaped income Person authorised to issue notice

Where assessment has already been completed u/s 143(3) or 147

Upto 4 years from the end of the Any amount Any Assessing Officer with the permission of
relevant assessment year Joint Commissioner.

Beyond 4 years and upto 6 years ₹ 1,00,000 or more Assessing Officer after approval of the
from the end of relevant Principal Chief Commissioner or Chief
assessment year. Commissioner or Principal Commissioner or
Commissioner.

Where assessment has not been completed u/s 143(3) or 147

Upto 4 y ears from the end of Any amount Any Assessing Officer with the permission of
relevant assessment year. Joint Commissioner.

Beyond 4 years and upto 6 years ₹ 1,00,000 or more Assessing Officer after approval of the
from the end of relevant Principal Chief Commissioner or Chief
assessment year. Commissioner or Principal Commissioner or
Commissioner.

If the person on whom a notice u/s 148 is to be served, is a person treated as the agent of a non-resident
u/s 163

Up to 6 years from the end of Escaped income is of any Assessing Officer

relevant assessment year. amount

Taxpoint: The above time limit is for issuance of notice and not for service of notice. If the notice is issued
within the above time limit but served to the assessee after the above time limit, shall be a valid notice.

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Exceptions to the above time limit

1. Where an assessment u/s 143(3) or 147 has been made for the relevant assessment year, no action shall be
taken under this section after the expiry of 4 yea rs from the end of relevant assessment year, unless any
income chargeable to tax has escaped assessment by reason of failure on the part of the assessee -

• to file a return u/s 139 or in response to a notice issued u/s 142(1) or u/s 148; or
• to disclose fully and truly all material facts necessary for his assessment for that assessment year.
Note:

a. The aforesaid exception is not applicable where any income in relation to any asset (including financial
interest in any entity) located outside India, chargeable to tax, has escaped assessment for any
assessment year

b. Production before the Assessing Officer of books of account or other evidence from which material
evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily
amount to disclosure within the meaning of the foregoing proviso.

2. Where the income in relation to any asset (including financial interest in any entity) located outside India,
chargeable to tax, has escaped assessment, notice shall be issued upto 16 years from the end of the
relevant assessment year,

3. As per sec. 150(1), the notice u/s 148 may be issued at any time for the purpose of making assessment or
reassessment in consequence of or to give effect to any findings or directions contained in an order passed
by -

• any authority in any proceedings under this Act by way of appeal, reference or revision; or

• a court in any proceeding under any other law.

Exception
The provisions shall not apply in any case where any such assessment (reassessment or recomputation) relates
to an assessment year in respect of which an assessment (reassessment or recomputation) could not have
been made at the time the order which was the subject-matter of the appeal, reference or revision, as the
case may be, was made by reason of aforesaid time-limitation.

4. Briefly discuss the provisions of section 142(2A) of the Income-tax Act, 1961 relating to special audit.

Answer:
Giving direction to get books of account audited [Sec. 142(2A) to (2D)]

The Assessing Officer (after giving reasonable opportunity to the assessee) may direct the assessee to get his
accounts audited if he is of the opinion that it is necessary to do so having regard to the -

• nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the
accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the
assessee; and

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• interest of revenue.

Such direction can be issued even if the accounts of the assessee have already been audited u/s 44AB or any
other law for the time being in force

Notes

a. Such direction can be issued only with the prior approval of the Principle Chief Commissioner / Principle
Commissioner / Chief Commissioner / Commissioner.
b. The Principle Chief Commissioner / Principle Commissioner / Chief Commissioner / Commissioner nominates
such auditor.

c. Such order can be issued at any stage of the proceedings before the Assessing Officer. However, no such
order shall be issued after the completion of assessment/reassessment.

Time Limit for audit report: The audit report shall be furnished by the assessee within the period specified by the
Assessing Officer. The Assessing Officer has power to extend such period on an application made by the
assessee or suomotu. However, the aggregate period (fixed originally and extended) shall not exceed 180 days
from the date on which such direction is received by the assessee.

Form of audit report: The chartered accountant shall submit the report in Form 6B to the assessee. Thereafter
such report is to be submitted by the assessee to the Assessing Officer within such period as allowed by the
Assessing Officer.

Audit fees: The audit fees and audit expenditure shall be determined by the Principle Chief Commissioner /
Principle Commissioner / Chief Commissioner / Commissioner (which shall be final) and paid by the Central
Government.

Consequences of failure to get books of account audited: In case assessee fails to get books of account
audited, it -

• will be liable to Best Judgment Assessment u/s 144; and

• attracts penalty and prosecution.

Note: Penalty etc. are attracted only if there is a default by the assessee. If accountant nominated by the
Commissioner refuses to audit the accounts, the assessee cannot be held responsible

5. State the time limit prescribed for passing the following order the Income Tax Act:
(i) An order of assessment by the Assessing Officer u/s 143(3);

(ii) An order of assessment by the Assessing Officer u/s 147;

(iii) An order of assessment by the Assessing Officer u/s 144;

(iv) A suo-moto rectification order by the Assessing Officer u/s 154;

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Answer:

(i) 12 months from the end of relevant assessment year.

(ii) 9 months from the end of the financial year in which notice u/s 148 was served.

(iii) 12 months from the end of relevant assessment year.

(iv) 4 years from the end of the financial year in which the order sought to be amended was passed

6. Write short note of self assessment u/s 140A

Answer:

Self-Assessment [Sec. 140A]

In self-assessment, assessee itself is responsible to determine its taxable income, tax liability and to pay tax
accordingly. Provision of sec. 140A is as follows -

(a) Where any tax is payable (after deducting relief, rebate, advance payment of tax or tax deducted or
collected at source or MAT or AMT credit, if any, or any tax or interest payable u/s 191(2)) on the basis of
return furnished the assessee is required to pay such tax before filing the return.

Taxpoint: A return furnished without paying self-assessment tax & interest, if any, shall be treated as
defective return.

(b) If any interest is payable for delayed filing of return (u/s 234A) or default in payment of advance tax (u/s
234B) or for deferment of advance tax (u/s 234C) or fee (u/s 234F) is payable for filing return after due
date, then such interest or fee should be paid along with self-assessment tax.

Note: While calculating above interest for the purpose of self-assessment, tax on the total income declared
in the return shall be considered.

(c) Where the amount paid by the assessee falls short of the aggregate of tax, interest and fee, the amount so
paid shall first be adjusted towards fee and thereafter towards interest payable and the balance, if any,
shall be adjusted towards tax payable.

(d) After assessment, any amount paid under this section shall be deemed to have been paid towards such
assessment.

(e) If an assessee fails to pay whole or any part of such tax or interest or both in accordance with the
provisions of sec. 140A, he shall be deemed to be an assessee in default.

7. Can the Assessing Officer issue notice u/s 148 to reopen the same assessment order on the same grounds
for which the CIT had issued notice u/s 263 of the Act? Discuss
Answer:
Third proviso to sec. 147 provides that the Assessing Officer may assess or reassess an income which is
chargeable to tax and has escaped assessment, other than the income involving matters which are the subject

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matter of any appeal, reference or revision. Therefore, if the income relates to a matter which is the subject
matter of revision u/s 263, then the Assessing Officer cannot issue notice u/s 148 to reopen the assessment order.

8. The Assessing Officer has the power to make an assessment to the best of his judgment, in certain situations.
What are they?

Answer:
In the following situations assessment shall be made under sec. 144:

a. If the person fails to file the return u/s 139(1), 139(4) or 139(5); or
b. If the person fails to comply with the terms of notice u/s 142(1); or
c. If the person fails to comply with the directions u/s 142(2A) requiring him to get his accounts audited; or
d. If the person fails to comply with the terms of notice u/s 143(2), requiring his presence or production of
evidence and documents.
Further, as per sec. 145(3), if the Assessing Officer is not satisfied with the correctness or the completeness of the
accounts of the assessee or if no regular method of accountancy or accounting standards [as notified by the
Central Government u/s 145(2)] is followed by the assessee, the Assessing Officer may make an assessment in
the manner provided u/s 144.

9. Write a brief note on provision relating to dispute resolution panel u/s 144C

Answer:

Reference to Dispute Resolution Panel [Sec. 144C]

The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is
attained only after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to
prolonged uncertainity in tax related matter. Therefore, the Income-tax Act is amended to provide for an
alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track
basis. The provision relating to alternate dispute resolution mechanism are as under:
1. The Assessing Officer shall, in the first instance, forward a draft of the proposed order of assessment
(hereafter in this section referred to as the draft order) to the eligible assessee# if he proposes to make any
variation in the income or loss returned which is prejudicial to the interest of such assessee.
# Eligible assessee means:
(i) Any person in whose case the variation referred to arises as a consequence of the order of the Transfer
Pricing Officer passed u/s 92CA(3); and
(ii) Any foreign company
2. On receipt of the draft order, the eligible assessee shall, within 30 days of the receipt by him of the draft
order:
(a) File his acceptance of the variations to the Assessing Officer; or

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(b) File his objections, if any, to such variation with,—

(i) The Dispute Resolution Panel; and
(ii) The Assessing Officer.
$Dispute Resolution Panel means a collegium comprising of 3 Commissioners of Income-tax constituted
by the Board for this purpose.
3. The Assessing Officer shall complete the assessment on the basis of the draft order, if:
(a) The assessee intimates to the Assessing Officer the acceptance of the variation; or
(b) No objections are received within 30 days as specified above.
Time limit for passing of order: The Assessing Officer shall pass such order within 1 month from the end of the
month in which,—
(i) The acceptance is received; or
(ii) The period of filing of objections (i.e. 30 days) expires.
The time limit is irrespective of time limit given u/s 153 (or 153B) for passing an assessment order.
4. The Dispute Resolution Panel shall, in a case where any objections are received, issue such directions, as it
thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.
5. The Dispute Resolution Panel shall issue the directions, for guidance of the Assessing Officer, after
considering the following:
a. Draft order;
b. Objections filed by the assessee;
c. Evidence furnished by the assessee;
d. Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;
e. Records relating to the draft order;
f. Evidence collected by it; and
g. Result of any enquiry made by it.
6. The Dispute Resolution Panel may, before issuing any directions:
a. Make such further enquiry, as it thinks fit; or
b. Cause any further enquiry to be made by any income tax authority and report the result of the same to
it.
7. The Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it
shall not set aside any proposed variation or issue any direction for further enquiry and passing of the
assessment order.
8. If the members of the Panel differ in opinion on any point, the point shall be decided according to the
opinion of the majority of the members.
9. Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.

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10. No direction shall be issued unless an opportunity of being heard is given to the assessee and the Assessing
Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue,
respectively.
11. No direction shall be issued after 9 months (irrespective of any limitation given u/s 153) from the end of the
month in which the draft order is forwarded to the eligible assessee.
12. Upon receipt of the directions, the Assessing Officer shall, in conformity with the directions, complete, the
assessment without providing any further opportunity of being heard to the assessee, within 1 month from
the end of the month in which the direction is received.
13. The provisions of this section shall not apply to any assessment or reassessment order passed by the
Assessing Officer with the prior approval of the Principal Commissioner or Commissioner as provided in sec.
144BA
14. The Board may make rules for the efficient functioning of the Dispute Resolution Panel and expeditious
disposal of the objections filed by the eligible assessee.
15. The Central Government may make a scheme for the purposes of issuance of directions by the dispute
resolution panel, so as to impart greater efficiency, transparency and accountability by—
a. eliminating the interface between the dispute resolution panel and the eligible assessee or any other
person to the extent technologically feasible;
b. optimising utilisation of the resources through economies of scale and functional specialisation;
c. introducing a mechanism with dynamic jurisdiction for issuance of directions by dispute resolution
panel.
16. The Central Government may, for the purpose of giving effect to the scheme, direct (upto 31-03-2022) that
any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and
adaptations as may be specified.

10. Distinguish between: ‘Tax audit under section 44AB’ and ‘special audit under section 142(2A)’

Answer:
The difference between tax audit u/s 44AB and audit u/s 142(2A) are as under:

Point of Tax Audit u/s 44AB Special Audit u/s 142(2A)

difference

Requirement The tax audit is mandatory in nature The special audit is at the direction of the Assessing
and is required to be done in all Office
applicable case.

Appointmen Auditor is appointed by the assessee Auditor is appointed is appointed by the Assessing
t of auditor Officer with the prior approval of the Chief
Commissioner or commissioner.

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Completion Tax audit is required to be uploaded The audit report shall be furnished by the assessee
of Audit one month prior to the due date of within the period specified by the Assessing Officer.
furnishing return of income The Assessing Officer has power to extend such
period on an application made by the assessee or
suomotu. However, the aggregate period (fixed
originally and extended) shall not exceed 180 days
from the date on which such direction is received by
the assessee.

Form Form 3CA (or Form 3CB) with Form Form 6B

3CD

Fees Fees to the auditor is required to be Fees to the auditor shall be paid by the Central
paid by the assessee Government.

Penalty Failure to complete and furnish tax Failure to comply with direction issued u/s 142(2A)
audit report within prescribed time attracts penalty of ` 10,000 u/s 271(1)(b).
attracts penalty u/s 271B. The
quantum of penalty is lower of the
following:
a. ½% of turnover; or
b. ` 1,50,000

11. Certain period is required to be excluded from time limit for completion of assessment. State any five such
period.

Answer:
Period excluded from time limit for completion of assessment [Expl. 1 to sec. 153]

In computing the time limitation for completion of assessment, following period shall be excluded —

1. Time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the assessee
to be re-heard under the proviso to sec. 129; or

2. Period during which the assessment proceeding is stayed by an order or injunction of a court; or
3. Period commencing from the date on which the Assessing Officer intimates under proviso to sec. 143(3) to
the Central Government or the prescribed authority, the contravention of the provisions of sec. 10(21) or
(22B) or (23A) or (23B) or (23C)(iv) or (23C)(v) or (23C)(vi) or (23C)(via), and ending with the date on which
the copy of the order withdrawing the approval or rescinding the notification, as the case may be, under
those clauses is received by the Assessing Officer;
4. Period commencing from the date on which the Assessing Officer directs the assessee to get his accounts
audited u/s 142(2A) and ending with the last date on which the assessee is required to furnish a report of

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such audit (where such direction is challenged before a court, ending with the date on which the order
setting aside such direction is received by the Commissioner); or

5. Period commencing from the date on which the Assessing Officer makes a reference to the Valuation
Officer u/s 142A and ending with the date on which the report of the Valuation Officer is received by the
Assessing Officer; or
6. In a case, where an application made before the Settlement Commission u/s 245C is rejected, the period
commencing from the date on which such application is made and ending with the date on which the
rejection order is received by the Principal Commissioner or Commissioner; or

7. Period commencing from the date on which an application is made before the Authority for Advance
Rulings u/s 245Q and ending with the date on which the order rejecting the application is received by the
Principal Commissioner or Commissioner; or

8. Period commencing from the date on which an application is made before the Authority for Advance
Rulings u/s 245Q and ending with the date on which the order of the advance ruling pronounced by the
authority is received by the Principal Commissioner or Commissioner; or

9. Period (maximum period of 1 year) commencing from the date on which a reference (or first reference, if
many references are made) for exchange of information is made by an authority competent under an
agreement referred to in sec. 90 / 90A and ending with the date on which the information so requested is
last received by the Principal Commissioner or Commissioner; or

10. Period commencing from the date on which a reference for declaration of an arrangement to be
impermissible avoidance arrangement is received by the Principal Commissioner or Commissioner u/s
144BA(1) and ending on the date on which a direction u/s 144BA (3) or (6) or an order u/s 144BA(5) is
received by the Assessing Officer

Note: However, where immediately after the exclusion of the aforesaid time or period, the period available to
the Assessing Officer for making an assessment, is less than 60 days, such remaining period shall be extended to
60 days.

Taxpoint
 Where the period available to the Transfer Pricing Officer is extended to 60 days [as per proviso to sec.
92CA(3A)] and the period of limitation available to the Assessing Officer for making an order of assessment
(reassessment or recomputation) is less than 60 days, such remaining period shall also be extended to 60
days.

 Where a proceeding before the Settlement Commission abates u/s 245HA, the period of limitation available
to the Assessing Officer for making an order of assessment (reassessment or recomputation) shall, after the
exclusion of the period u/s 245HA(4), deemed to have been extended to 1 year.

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Study Note – 5

INTEREST

Learning Objective: The assessee is required to pay interest in certain circumstances. This
study note will help to understand the various provisions relating to computation of interest.

1. Choose the correct alternative and also provide your justification

(i) An assessee who is entitled to get refund shall also be entitled to interest on such refund. Interest on
refund is granted @ of –

(a) ½% per month or part thereof

(b) 1½% per month or part thereof
(c) nil as assessee is not entitled for any interest on refund
(d) 1% per month or part thereof

(ii) Interest on refund due to TDS or TCS or Advance tax shall be allowed, provided the amount of refund is
not _____ of the tax determined u/s 143(1) or on regular assessment.

(a) less than 90%

(b) less than 10%
(c) more than 10%
(d) less than 20%

(iii) As per sec. 234D, where any refund is granted to the assessee u/s 143(1) and –
• No refund is due on regular assessment; or
• The amount refunded exceeds the amount refundable on the regular assessment

then he is liable to pay simple interest on the whole or excess amount refunded. What will be the rate
of such interest?

(a) 1% for every month or part of the month

(b) 1½% for every month or part of the month
(c) ½% for every month or part of the month
(d) there is no such provision in the Income tax Act

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(iv) The provisions relating to interest on delay in payment of refund are given in section _________.
(a) 244A
(b) 244B
(c) 234A
(d) None of these

(v) Interest u/s 234B is not levied if _____ of assessed tax is paid by way of advance tax.
(a) 90%
(b) 100%
(c) 85%
(d) 60%

(vi) Interest u/s 234A / 234B / 234C is payable at the rate of –

(a) one-half percent per month
(b) two percent per month
(c) one percent per month
(d) depends on income

(vii) An assessee is required to pay interest u/s 234B on shortfall of ` 1,02,355.43, such amount is rounded off
to –

(a) ` 1,02,300
(b) ` 1,02,355
(c) ` 1,02,360
(d) ` 1,02,400

(viii) The following particulars are furnished by Ms. Madhuri for the financial year 2020-21:
• Tax on total income (paid on 31.7.2021) ` 50,000.
• Date of filing the return 1.8.2021
• Due date for filing the return 31.7.2021

Compute the total interest payable under sections 234A, 234B & 234C.

(a) ` 4,350
(b) ` 5,025

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(c) ` 3,850
(d) None of the above

(ix) Interest under section ______ is levied from the first day of the assessment year, i.e., from 1st April till the
date of determination of income under section 143(1) or when a regular assessment is made, then till
the date of such a regular assessment.

(a) 234C
(b) 234A
(c) 234B
(d) 234D

(x) Section ______ provides for levy of interest for default in payment of instalment(s) of advance tax.
(a) 234C
(b) 234A
(c) 234B
(d) 234D

Answer:

(i) (a) ½% per month or part thereof

Reason:
As per sec. 244A, an assessee who is entitled to get refund shall also be entitled to interest @ ½% per
month or part thereof on such refund.

(ii) (b) less than 10%

Reason:
As per sec. 244A, where refund is due by reason of excess TDS or TCS or Advance tax, no interest on
refund shall be allowed if the amount of refund is less than 10% of the tax determined u/s 143(1) or on
regular assessment.

(iii) (c) ½% for every month or part of the month

Reason:
As per sec. 234D, in case, where excess refund is granted to the assessee, he is liable to pay simple
interest @ ½% for every month or part thereof on the whole or excess amount refunded.

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(iv) (a) 244A

Reason:
Sec. 244A deals with interest on delay in payment of refund.

(v) (a) 90%

Reason:
As per sec. 234B, where a person, who is required to pay advance tax, fails to pay -
(a) advance tax at all; or
(b) 90% of assessed tax as advance tax
- then he is liable to pay interest u/s 234B

(vi) (c) one percent per month

Reason:
Interest u/s 234A / 234B / 234C is payable at the rate of 1% per month or part thereof.

(vii) (a) ` 1,02,300

Reason:
As per rule 119A, amount on which interest is calculated will be rounded off to the multiple of 100 by
ignoring any fraction of 100.

(viii) (b) ` 5,025

Reason:
Calculation of Interest Payable by Ms. Madhuri

Particulars Sec Details Amount Amount

Interest for delayed filing of return of 234A ` 50,000 × 1% 500
income
Interest for default in payment of 234B ` 50,000 × 1% × 4 months 2,000
advance tax for the months of April 20
to July 20
Interest for deferment of advance tax 234C

- Default in payment of 1st installment (` 50,000 × 15%) × 1% × 3 months 225

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- Default in payment of 2nd instalment (` 50,000 × 45%) × 1% × 3 months 675

- Default in payment of 3rd instalment (` 50,000 × 75%) × 1% × 3 months 1125

- Default in payment of 4th instalment ` 50,000 × 1% × 1 month 500 2,525

Total interest 5,025

(ix) (c) 234B

Reason:
Interest u/s 234B is payable for every month or part of a month commencing from 1st day of April of
the relevant assessment year and ending on the date of determination of tax u/s 143(1) or on regular
assessment.

(x) (a) 234C

Reason:
Payment of advance tax is to be made as per the schedule. In case assessee fails to pay the amount
or pays lesser amount as required by the schedule, then assessee will have to pay interest u/s 234C
for such deferment.

2. In the case of Ms Laxmi, you are required to compute the interest u/s 234A, 234B & 234C from the following
details –
Tax on total income ` 1,00,000; Due date for filing the return 31-10-2021; Actual date of filing the return 1-11-
2021 and tax paid on 31-10-2021 ` 1,00,000.

Answer:

Computation of Interest u/s 234A

Particulars As per assessed income

Tax 1,00,000

Less: Advance tax paid Nil

TDS Nil Nil

Amount on which interest is payable 1,00,000

Period of default (November being part of a month shall be considered) 1 month

Interest u/s 234A (1% × ` 1,00,000 × 1) 1,000

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Computation of Interest u/s 234B

Since assessee did not pay any amount by way of advance tax, hence she is liable to pay interest u/s 234B.

Particulars Assessed income

Shortfall 1,00,000

Period of default (From April to October) 7 months

Interest (1% × ` 1,00,000 × 7) 7,000

Computation of interest payable u/s 234C

Particulars Installment of Advance tax

15-6 15-9 15-12 15-3

Rate of Advance tax 15% 45% 75% 100%

Amount payable as advance tax 15,000 45,000 75,000 1,00,000

Less: Amount paid till date Nil Nil Nil Nil

Shortfall (a) 15,000 45,000 75,000 1,00,000

Period of default (b) 3 months 3 months 3 months 1 month

Interest (1% × a × b) ` 450 ` 1,350 ` 2,250 ` 1,000

Total interest payable u/s 234C ` 5,050

Total interest payable

Particulars Amount
U/s 234A 1,000
U/s 234B 7,000
U/s 234C 5,050
Total 13,050

3. State the provision in respect of payment of interest where assessee fails to deduct and pay TDS
Answer:

Interest for failure to deduct and pay tax at source [Sec. 201(1A)]

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Condition: Where a person, responsible for deducting tax at source, fails to -

(a) deduct tax at source; or
(b) deposit such tax after deducting the same.
Amount on which interest is to be charged: On the amount of such tax.

Rate of Interest:

Period Rate of Interest

From the date on which such tax was deductible to the date on Simple interest @ 1% per month or
which such tax is deducted part thereof

From the date on which such tax was deducted to the date on Simple interest @ 1.50% per month or
which such tax is actually paid part thereof

Period: From the date on which such tax was deductible to the date on which such tax is actually paid.

Note: In case any person fails to deduct such tax on the sum paid or payable to a resident but is not deemed
to be an assessee in default (as per first proviso to sec. 201(1)), the interest shall be payable from the date on
which such tax was deductible to the date of furnishing of return of income by such resident.

4. In specified circumstances, interest u/s 234A or 234B or 234C can be waived off. Please provide 5 such
circumstances and also state who is empowered to waive such interest.

Answer:
Waiver or reduction of interest u/s 234A, 234B & 234C
1. The Chief Commissioners and the Directors-General (Investigation) is empowered to reduce or waive penal
interest u/s 234A, 234B and 234C in the following circumstances* -

(a) Where, in the course of search and seizure operation, books of account have been taken over by the
Department and were not available to the taxpayers to prepare his return of income.

(b) Where, in the course of search and seizure operation, cash had been seized, which was not permitted
to be adjusted against arrears of tax or payment of advance tax installments falling due after the date
of the search.

(c) Any income other than capital gains which was received or accrued after the date of first or
subsequent installment of advance tax, which was neither anticipated nor contemplated by the
taxpayer and on which advance tax was paid by the taxpayer after the receipt of such income.

(d) Where, as a result of any retrospective amendment of law or the decisions of the Supreme Court after
the end of the relevant previous year, certain receipts, which were earlier treated as exempted
income, now become taxable.

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(e) Where return of income is filed voluntarily without detection by the Income tax Department and due to
circumstances beyond control of the taxpayer such return of income was not filed within the stipulated
time-limit or advance tax was not paid at the relevant time.

2. The Chief Commissioner of Income Tax/Director–General are empowered to waive or reduce interest u/s
234A, 234B and 234C on income which accrues or arises for any previous year due to the operation of any
order of a Court, statutory authority or of the Government (other than an order of assessment, appeal
reference or revision passed under the provisions of the Income tax Act) passed after the close of the said
previous year [Order F. No. 212/495/92-ITA-II dt. 2-5-1994]

Notes
(a) Board can grant relief u/s 234A, 234B or 234C
(b) Waiver of interest can be considered only if the return of income is filed voluntarily without detection by the
Assessing Officer.

5. Interest u/s 234C is payable for deferment of advance tax. However, there are certain exception. You are
requested to mention those exception.

Answer:
No interest u/s 234C will be levied in respect of any shortfall in the payment of advance tax due on the returned
income, if -
(a)The shortfall is on account of under-estimation or failure to estimate the amount of:

(i) capital gains; or

(ii) income of the nature referred to in section 2(24)(ix) [i.e. lottery, cross-word, etc.];

(iii) income under the head “Profits and gains of business or profession” in cases where the income accrues
or arises under the said head for the first time; or

(iv) income of the nature referred to in sec. 115BBDA (i.e., dividend in excess of specified limit)

(b)The assessee has paid the whole of the amount of tax payable in respect of such income as part of the
remaining installment(s) of advance tax which were due or where no installment is due, by March 31 of the
previous year.

6. State the provisions relating to interest on excess refund granted to the assessee.

Answer:

Interest for excess refund granted to the assessee [Sec. 234D]

Condition: Where any refund is granted to the assessee u/s 143(1) and –
a) no refund is due on regular assessment; or

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b) the amount refunded exceeds the amount refundable on regular assessment;

Rate of interest: Simple interest @ ½% for every month or part of the month

Amount on which interest is to be charged: On the whole or excess amount refunded

Period: From the date of grant of refund to the date of such regular assessment

Adjustment in interest: Where amount of refund is reduced or increased by an order u/s 154, 155, 245D, 250, 254,
260, 262, 263 & 264, the amount of interest shall be reduced or increased accordingly.

7. Write short notes:

(a) Fee for defaults in furnishing TDS return

(b) Fee for default in furnishing return of income

Answer:
(a) Fee for defaults in furnishing statements [Sec. 234E]

Condition: Where a person fails to deliver a quarterly TDS / TCS return within the prescribed time.
Amount of Fee: ` 200 for every day during which the failure continues subject to maximum of amount of
TDS / TCS
Note:

- The fee shall be paid before delivering a statement.

- The fee is in addition to other consequences of non-delivering such return

(b) Fee for default in furnishing return of income [Sec. 234F]

Where a person required to furnish a return of income u/s 139(1), fails to do so within the due date, he shall
pay fee of:

Case Fee

Total income does not exceed ` 5 lakh ` 1,000

Total income exceeds ` 5 laks

If the return is furnished on or before 31st December of the assessment year ` 5,000

In any other case ` 10,000

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8. A Ltd. made the following payments of advance tax during the financial year 2020-21:

` in lakh ` in lakh

June 15, 2020 3.70 September 15, 2020 3.50

December 15, 2020 10.25 March 18, 2021 8.80

The return of income is filed on 31-7-2021 showing -

Business income ` 80 lakh
Long term capital gain taxable @ 20% (as on 1-12-2020) ` 10 lakh
Compute interest payable u/s 234C.

Answer:
Computation of tax liability for A.Y. 2021-22
(` in lakh)

Particulars Business income Long term capital gain

Income 80.00 10.00

Tax rate 30% 20%

Tax liability before surcharge 24.00 2.00

Add: Surcharge Nil Nil

Tax liability after surcharge 24.00 2.00

Add: Education cess 0.96 0.08

Tax liability after surcharge and cess 24.96 2.08

Computation of interest payable u/s 234C

Particulars Installment of Advance tax

15/6/2020 15/9/2020 15/12/2020 15/3/2021

Rate of Advance tax 15% 45% 75% 100%

Amount payable

(24,96,000 x 15%) 3,74,400

(24,96,000 x 45%) 11,23,200

[(24,96,000 + 2,08,000) x 75%] 20,28,000

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[(24,96,000 + 2,08,000) x 100%] 27,04,000

Less: Amount paid till date 3,70,000 7,20,000 17,45,000 17,45,0003

Shortfall Nil1 4,03,2002 2,83,000 9,59,000

Rounded off (a) Nil 4,03,200 2,83,000 9,59,000

Period of default (b) -- 3 months 3 months 1 month

Interest (1% x a x b) -- ` 12,096 ` 8,490 ` 9,590

Total interest payable u/s 234C ` 30,176

1. Since assessee has paid at least 12% of tax (i.e. ` 2,99,520) on or before 15th June, 2020, hence no interest
u/s 234C shall be levied.

2. Since assessee fails to pay 36% of tax (i.e. ` 8,98,560) on or before 15th September, 2020, hence interest u/s
234C shall be levied. It is to be noted that interest shall be payable considering 45% of tax.

3. As payment has not been made within due date, hence advance tax paid on 18-03-2021 has not been
considered.

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Study Note – 6

SURVEY, SEARCH & SEIZURE

Learning Objective: The income-tax authorities have power to conduct survey in the
premises of the assessee. Further, in certain cases, the authorities may conduct search and
seizure operation. This study note will help to understand the various provisions relating to
survey, search and seizure along with provision relating to assessment procedure in case of
search.

1. Choose the correct alternative and also provide your justification

(i) The examination on oath u/s 132(4) of a person searched can be done by:
(a) The Assistant Director / Deputy Director / Joint / Additional Director
(b) All the officers accompanying the search party including the Inspectors
(c) The authorised officers
(d) The Income-tax Officer

(ii) U/s 131(3), an income tax authority can not retain in his custody any books or documents for a period
_______ without obtaining approval from higher authorities.
(a) exceeding 30 days
(b) exceeding 15 days
(c) upto completion of assessment
(d) None of the above

(iii) Door to door survey is covered by section

(a) 133B
(b) 133
(c) 133A
(d) 133C

(iv) For conducting survey u/s 133A, the income-tax authority may enter into a place, where it is deemed
as business or profession is carried on,:

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(a) Only after sunrise and before sunset

(b) During the business hours
(c) Any time
(d) None of these

(v) While search u/s 132, one of the following assets shall not be seized:
(a) Bullion
(b) Cash
(c) Stock-in-trade
(d) None of the above

(vi) As per sec. 132B, asset or any portion thereof shall be released within a period of ________ days from
the date on which the last of the authorisations for search u/s 132 or for requisition u/s 132A, as the
case may be, was executed.
(a) 30
(b) 60
(c) 120
(d) 180

(vii) In case of an assessee, where search is initiated, assessment shall be made u/s
(a) 153A
(b) 143
(c) 144
(d) 147

(viii) Where a s earch is initiated under section 132, the Assessing Officer shall assess or reassess the total
income of:
(a) four assessment year immediately preceding the assessment year relevant to the previous year in
which such search is conducted
(b) five assessment year immediately preceding the assessment year relevant to the previous year in
which such search is conducted
(c) six assessment year immediately preceding the assessment year relevant to the previous year in
which such search is conducted

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(d) sixteen assessment year immediately preceding the assessment year relevant to the previous
year in which such search is conducted

Answer:

(i) (c) The authorised officers

Reason:
As per sec. 132(4), the authorised officer may, during the course of the search or seizure, examine on
oath any person who is found to be in possession or c ontrol of any books of account, documents,
money, bullion, jewellery or other valuable article or thing and any statement made by such person
during such examination may thereafter be used in evidence in any proceeding under this Act.

(ii) (b) exceeding 15 days

Reason:
Power to impound or retain books [Sec. 131(3)]

Any income tax authority [referred in sec. 131(1) or (1A) or (2)] may impound and retain in its custody
any books of account or other documents produced before it in any proceedings under this Act.
However, an Assessing Officer or an Assistant Director or Deputy Director shall not -

a) Impound any books of account or other documents without recording his reasons for doing so; or
b) Retain in his custody any such books or documents for a period exceeding 15 days (exclusive of
holidays) without obtaining (prior) approval of the Principal Chief Commissioner or Chief
Commissioner or Principal Director General or Director General or Principal Commissioner or
Commissioner or Principal Director or Director.

(iii) (a) 133B

Reason:
As per sec. 133B, the income-tax authority may, for the purpose of collecting any information, which
may be useful for, or relevant to the purposes of this Act, enter into:

• Any building or place within the limits of the area assigned to such authority; or
• Any building or place occupied by any person in respect of whom he exercises jurisdiction,
- where a business or profession is carried on.

(iv) (a) Only after sunrise and before sunset

Reason:
An income-tax authority may enter into –

Place where business or profession is carried on During the business hours

In case of deemed place of business or profession Only after sunrise and before sunset

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(v) (c) Stock-in-trade

Reason:
Bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, shall not be
seized but the authorized officer shall make a note or inventory of such stock-in-trade.

(vi) (c) 120

Reason:
Asset or any portion thereof shall be released within a period of 120 days from the date on which the
last of the authorisations for search u/s 132 or for requisition u/s 132A, as the case may be, was
executed.

(vii) (a) 153A

Reason:
Where a s earch is initiated u/s 132 or books of account, other documents or any assets are
requisitioned u/s 132A, save as otherwise provided in sec. 153A, 153B, 153C and 153D all other
provisions shall apply to the assessment made under this section also.

(viii) (c) six assessment year immediately preceding the assessment year relevant to the previous year in
which such search is conducted

Reason:
The Assessing Officer shall issue notice to such person requiring him to furnish the return of income in
respect of each assessment year falling within 6 assessment years immediately preceding the
assessment year relevant to the previous year in which such search is conducted or requisition is made
and for the relevant assessment year or years.

2. Write notes on deemed or constructive seizure.

Answer:

Deemed or constructive Seizure [Second Proviso to Sec. 132(1)]

Conditions
Where it is not possible or practicable to take physical possession of any valuable article or thing and remove it
to a safe place due to reason of its -
• volume, weight or other physical characteristics; or
• being of a dangerous nature.

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Procedure
The authorised officer may serve an order on -
• the owner; or
• the person who is in immediate possession or control of any valuable article or things,
- that he shall not remove, part with or otherwise deal with such article or thing without the prior permission of
such authorised officer.

Effect
Such action of the authorised officer shall be deemed to be seizure of such article or thing.
Notes
a) No such order can be passed for any article or thing, being stock-in-trade.
b) Though such order can also be passed for reasons other than those mentioned above, but in that case, the
order shall not be deemed to be seizure of such article or things and it shall not be in force for a period
exceeding 60 days from the date of the order [Sec. 132(3) & (8A)]

3. What are the presumptions in case of search?

Answer:
Presumption in case of search [Sec. 132(4A)]
Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are,
or is found in the possession or control of any person in the course of search, it may be presumed that -
• Such books of account, other documents, money, bullion, jewellery or other valuable article or thing
belongs to such person;
• The contents of such books of account and other documents are true;
• The signature and every other part of such books of account and other documents which purport to be in
the handwriting of any particular person, are in that person’s handwriting; and
• In the case of a document stamped, executed or attested, it was duly stamped and executed or attested
by the person by whom it purports to have been so executed or attested.

4. A search was conducted u/s 132 in the business premises of Rana on 15th September, 2020. At that ti me,
assessments u/s 143(3) for A.Y. 2018-19 and A.Y. 2019-20 and reassessment proceeding u/s 147 for A.Y.
2017-18 were pending before the Assessing Officer.
(i) What are the assessment years for which notice can be issued for making post-search assessment?

(ii) What would be the fate of pending assessments and reassessment?

(iii) What would be the effect, if the post-search assessment orders are annulled by the Income-tax
Appellate Tribunal?

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Answer:

(i) The notice u/s 153A can be issued for 6 assessment years preceding the assessment year relevant to the
previous year in which the search is conducted. In the instant case, the search is conducted in the
previous year 2020-21, the relevant assessment year for which is A.Y.2021-22. Therefore, notice can be
issued for the 6 preceding assessment years i.e. for assessment years 2015-16 to 2020-21. Further, notice for
assessment or reassessment can be issued by Assessing Officer for the relevant assessment year or years
(i.e. for A.Y.2011-12 to A.Y.2014-15) if certain conditions are satisfied.

(ii) As per section 153A, the assessment or reassessment relating to any assessment year, falling within the
aforesaid period of six assessment years and for the relevant assessment year or years, pending on the
date of initiation of the search u/s 132, shall abate. Therefore, the assessments u/s 143(3) for assessment
years 2018-19 and 2019-20 and the reassessment proceeding u/s 147 for assessment year 2017-18 shall
abate.

(iii) Section 153A provides that where the post-search assessment order is annulled in any appeal or any other
legal proceeding, the abated assessment and reassessment proceedings shall stand revived. Therefore,
the assessments u/s 143(3) relating to assessment years 2018-19 and 2019-20 and the reassessment
proceeding relating to assessment year 2017-18, which abated on initiation of search, shall stand revived
with effect from the date of receipt of the order of such annulment by the Principal Commissioner or
Commissioner.

5. During the course of s urvey operations u/s 133A, the Income-tax authority, impounded the books of
account and other documents inspected by him, relating to the assessee and retained in his custody. Is the
action of the officer justified under law?

Answer:

As per sec. 133A(3), an income-tax authority shall not -

(a) Impound any books of account or other documents without recording his reasons for doing so; or

(b) Retain in his custody any books of account or other documents for a period exceeding 15 days (exclusive
of holidays) without obtaining the approval of the Principal Chief Commissioner or the Chief Commissioner
or the Principal Director General or the Director General or the Principal Commissioner or the Commissioner
or the Principal Director or the Director thereof, as the case may be;

(c) Remove or cause to be removed any cash, stock or other valuable article or thing.

6. Write short notes:

(a) Survey of certain expenditure

(b) Circumstances when search u/s 132 can be conducted

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Answer:
(a) Survey of certain expenditure [Sec. 133A(5)]

a) The income tax authority (including Inspector), having regard to the nature and scale of expenditure
incurred by an assessee, in connection with any function, ceremony or event, is of the opinion that it is
necessary or expedient to do so, he may, at any time after such function, ceremony or event, require-

• Assessee, who incurred such expenditure; or

• Any person, who is likely to possess information in respect of such expenditure,

- to furnish such information as he may require as to any matter which may be useful for, or relevant
to, any proceeding under this Act.

b) He may record the statements of the assessee or any other person in this regard and such recorded
statement may thereafter be used as evidence in any proceeding under this Act.

(b) Circumstances when search u/s 132 can be conducted

Any authority (mentioned above) can direct proceedings u/s 132 against the following person where he has
reason to believe (in consequence of information in his possession, which is something more than mere rumor or
gossip) that:

Person Circumstances

Any person to whom a summons u/s 131(1) or a Such person has omitted or failed to do so
notice u/s 142(1) was issued to produce any books
of account or other documents

Any person to whom a summons or notice as Such person will fail to do so

aforesaid has been or might be issued

Any person is in possession of any money, bullion, Such money, bullion, jewellery or other valuable article
jewellery or other valuable article or thing or thing represents either wholly or partly undisclosed
income or undisclosed property

Taxpoint: The reason to believe, as recorded by the income-tax authority, shall not be disclosed to any person
or any authority or the Appellate Tribunal.

7. Discuss the provision relating to application of assets seized u/s 132.

Answer:

Application of seized or requisitioned assets [Sec. 132B]

The seized assets may be adjusted with:

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(a) The amount of any existing liability under -

(i) The Income-tax Act, 1961;

(ii) The Wealth-tax Act, 1957 (now abolished);

The existing liability does not include advance tax payable.

(b) The amount of liability determined on completion of the assessment u/s 153A;

(c) The amount of liability determined on completion of the assessment of the year relevant to the previous
year in which search is initiated or requisition is made;

(including any penalty levied or interest payable in connection with such assessment); and

(d) The amount in respect of which such person is in default or is deemed to be in default or the amount of
liability arising on an application made before the Settlement Commission.

8. An income-tax authority visits to the registered office of a company and ask to inspect certain register of the
companies which is required to be maintained by the company as per Company law. The company denies
to show such registers of the company stating that s uch registers can be inspected by any member,
debenture-holder, other security holder or beneficial owner only. Discuss.

Answer:
As per sec. 134 of the Income-tax Act, the Income tax authority [being Assessing Officer, Deputy Commissioner
(Appeals), Joint Commissioner, Commissioner (Appeals) or any other authorized person] may inspect and take
copies of any register of the members, debenture-holders or mortgagees of any company or of any entry in
such register.
In the light of aforesaid provision, the plea of the company is not correct.

9. Discuss the power of the income tax authority u/s 131 while trying a suit.

Answer:
The income-tax authority [being Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner,
Commissioner (Appeal), Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner and the Dispute Resolution Panel] have the same powers as are vested in a court under the
Code of Civil Procedure, 1908, when trying a suit in respect of the following matters —

(a) Discovery and inspection;

(b) Enforcing the attendance of any person, including any officer of a banking company and examining him
on oath;
(c) Compelling the production of books of account and other documents; and
(d) Issuing commissions

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10. Describe the power of authorized officer while conducting search u/s 132.

Answer:
While conducting search, authorized officer has following powers -
a. Enter and search any building, etc.: Enter and search any building, place, vessel, vehicle or aircraft where
he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other
valuable article or thing are kept.
b. Break open the lock of any door, etc.: Break open the lock of any door, box, locker, safe, almirah or other
receptacle, where the keys thereof are not available.
c. Search person: Search any person who -
• has got out of; or
• is about to get into; or
• is in,
the building, place, vessel, vehicle or aircraft if the authorised officer has reason to suspect that such person
has secreted about his person any books of account, other documents, money, bullion, jewellery or other
valuable article or thing.
d. Require any person to facilitate the authorised officer: Require any person who is found to be in possession
or control of any books of account or o ther documents maintained in the form of electronic record, to
afford the authorised officer the necessary facility to inspect such books of account or other documents.
e. Seizure: Seize any such books of account, other documents, money, bullion, jewellery or other valuable
article or thing found as a result of such search.
f. Place marks of identification: Place marks of identification on any books of account or other documents or
make extracts or copies therefrom.
g. Make inventory: Make a note or an inventory of any such money, bullion, jewellery or other valuable article
or thing.
h. Examine on oath: Examine on oath any person who is found to be in possession or control of any books of
account, documents, money, bullion, jewellery or other valuable article or thing. Any statement made by
such person during such examination may thereafter be used as evidence in any proceeding.
The examination of any person may be not merely in respect of any books of account, other documents or
assets found as a result of the search, but also in respect of all matters relevant for the purposes of any
investigation connected with any proceeding under Act

11. State the power of the income tax authority to call for information u/s 133.

Answer:
The income-tax authority [being Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner or
Commissioner (Appeals)] may -

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1. Require any firm to furnish him with a return of the names and addresses of the partners of the firm and their
respective shares;
2. Require any Hindu undivided family to furnish him with a return of the names and addresses of the manager
and the members of the family;
3. Require any person whom he has reason to believe to be a trustee, guardian or agent, to furnish him with a
return of the names of the persons for or of whom he is a trustee, guardian or agent, and of their addresses;
4. Require any assessee to furnish a statement of the names and addresses of all persons to whom he has
paid in any previous year rent, interest, commission, royalty or brokerage, or any annuity (not being any
annuity taxable under the head “Salaries”) amounting to more than Rs.1000, together with particulars of all
such payments made;
5. Require any dealer, broker or agent or any person concerned in the management of a stock or commodity
exchange to furnish a statement of the names and addresses of all persons -
a) to whom he or the exchange has paid any sum in connection with the transfer of assets; or
b) on whose behalf or from whom he or the exchange has received any such sum,
- together with particulars of all such payments and receipts;
6. Require any person, including a banking company or any officer thereof, to furnish information in relation to
such points or matters, or to furnish statements of accounts and affairs,
- which will be useful for, or relevant to, any enquiry or proceeding under this Act.

Taxpoint
 Where no proceeding is pending, the power u/s 133 shall not be exercised by any income-tax authority
below the rank of Principal Director or Director or Principal Commissioner or Commissioner, other than the
Joint Director or Deputy Director or Assistant Director, without the prior approval of the Principal Director or
Director or the Principal Commissioner or Commissioner.

 It is to be noted that power referred in point (6) above may also be exercised by the Principal Director
General or Director-General, the Principal Chief Commissioner or Chief Commissioner, the Principal Director
or Director or the Principal Commissioner or Commissioner or the Joint Director or Deputy Director or Assistant
Director.

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Study Note – 7

COLLECTION, RECOVERY & REFUND

Learning Objective: This study note will help to understand the various provisions relating
to various mode of collection and recovery of tax. Further, in certain circumstances,
assessee is eligible for refund. This study note also covers the provision relating to refunds.

1. Choose the correct alternative and also provide your justification

(i) Where, during the pendency of any proceeding under Income tax Act or after the completion thereof,
but before the service of notice by TRO, any assessee creates a charge on or parts with the possession
(by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his
assets in f avour of any other person, such charge or transfer shall be void as against any claim in
respect of any tax or any other sum payable by the assessee as a result of the completion of the said
proceeding or otherwise. Such provision is mentioned in which section of the Income-tax Act.

(a) Section 281

(b) Section 282

(c) Section 281A

(d) Section 282A

(ii) Where, during the pendency of any proceeding for the assessment or reassessment, the Assessing
Officer is of the opinion that for the purpose of protecting the interests of the revenue it is necessary so
to do, he may, with the previous approval of the Chief Commissioner, Commissioner, Director General
or Director, by order in writing, attach provisionally any property belonging to the assessee in the
manner provided in th e Second Schedule. Such provision is mentioned in w hich section of the
Income-tax Act.

(a) Section 281B

(b) Section 281A

(c) Section 281

(d) Section 282

(iii) As per section 222 of the Income tax Act, 1961, when an assessee is in default or is deemed to be in
default in m aking a pa yment of tax, the Tax Recovery Officer may draw up unde r his signature a
statement in the prescribed form specifying the amount of arrears due from the assessee (such

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statement being hereafter referred to as “certificate”) and shall proceed to recover from such
assessee the amount specified in the certificate by one or more of the modes (in accordance with the
rules laid down in the Second Schedule). Such mode, inter alia, includes:

(a) attachment and sale of the assessee’s movable property

(b) arrest of the assessee and his detention in prison;

(c) both (a) and (b)

(d) none of the above

(iv) As per section 221, when an assessee is in default or is deemed to be in default in making a payment
of tax, he shall, in addition to the amount of the arrears and the amount of interest payable _____, be
liable, by way of penalty, to pay such amount as the Assessing Officer may direct.

(a) u/s 220(2)

(b) u/s 234B

(c) u/s 220(1)

(d) u/s 234D

(v) On completion of assessment, a demand notice is served for demand raised in the assessment. The
assessee should make the payment of amount demanded within _________ of service of such notice

(a) 30 days

(b) 60 days

(c) 15 days

(d) 7 days

(vi) As per section 220(2A), the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner may reduce or waive the amount of i nterest paid or payable by an
assessee u/s 220(2), if he satisfied that –

(a) payment of such amount has caused or would cause genuine hardship to the assessee

(b) default in the payment of the amount on which interest has been paid or was payable under the
said sub-section was due to circumstances beyond the control of the assessee

(c) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the
recovery of any amount due from him

(d) all of the above

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(vii) As per section 223, the Tax Recovery Officer competent to take action u/s 222 shall be –

(a) the Tax Recovery Officer within whose jurisdiction the assessee carries on his business or
profession or within whose jurisdiction the principal place of his business or profession is situate

(b) the Tax Recovery Officer within whose jurisdiction the assessee resides or any movable or
immovable property of the assessee is situate

(c) any of the above

(d) none of the above

(viii) As per section 222, an appeal from any original order passed by the Tax Recovery Officer shall lie to
the –

(a) Chief Commissioner or Commissioner

(b) Commissioner (Appeals)

(c) No appeal is possible

(d) ITAT

Answer:

(i) (a) Section 281

Reason:

As per sec. 281, where, during the pendency of any proceeding under this Act or after the completion
thereof, but before the service of notice by TRO, any assessee creates a charge on or parts with the
possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of,
any of his assets in favour of any other person, such charge or transfer shall be void as against any
claim in respect of any tax or any other sum payable by the assessee as a result of the completion of
the said proceeding or otherwise.

(ii) (a) Section 281B

Reason:

As per sec. 281B, where, during the pendency of any proceeding for the assessment or reassessment,
the Assessing Officer is of the opinion that for the purpose of protecting the interests of the revenue it is
necessary so to do, he may, with the previous approval of the Chief Commissioner, Commissioner,
Director General or Di rector, by order in writing, attach provisionally any property belonging to the
assessee in the manner provided in the Second Schedule.

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(iii) (c) both (a) and (b)

Reason:

When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax
Recovery Officer may draw up under his signature a statement in the prescribed form (Form 57)
specifying the amount of arrears due from the assessee (such statement being hereafter referred to as
“certificate”) and shall proceed to recover from such assessee the amount specified in the certificate
by one or more of the modes mentioned below (in accordance with the rules laid down in the
Second Schedule)
a. attachment and sale of the assessee’s movable property;
b. attachment and sale of the assessee’s immovable property;
c. arrest of the assessee and his detention in prison;
d. appointing a receiver for the management of the assessee’s movable and immovable
properties.

(iv) (a) u/s 220(2)

Reason:

When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in

addition to the amount of the arrears and the amount of interest payable u/s 220(2), be liable, by way
of penalty, to pay such amount as the Assessing Officer may direct.

(v) (a) 30 days

Reason:

As per sec. 220(1), the assessee should make the payment of amount demanded within 30 days of
service of notice.

(vi) (d) all of the above

Reason:

The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner

may reduce or waive the amount of interest paid or payable by an assessee u/s 220(2), if he satisfied
that:

a) payment of such amount has caused or would cause genuine hardship to the assessee;

b) default in the payment of the amount on which interest has been paid or was payable under the
said sub-section was due to circumstances beyond the control of the assessee; and

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c) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the
recovery of any amount due from him.

(vii) (c) any of the above

Reason:

The Tax Recovery Officer competent to take action u/s 222 shall be:

a) the Tax Recovery Officer within whose jurisdiction the assessee carries on his business or profession
or within whose jurisdiction the principal place of his business or profession is situate; or

b) the Tax Recovery Officer within whose jurisdiction the assessee resides or any movable or
immovable property of the assessee is situate,

(viii) (a) Chief Commissioner or Commissioner

Reason:

An appeal from any original order passed by the Tax Recovery Officer shall lie to the Chief
Commissioner or Commissioner. Such appeal must be presented within 30 days from the date of the
order appealed against. Pending the decision of any appeal, execution of the certificate may be
stayed if the appellate authority so directs, but not otherwise.

2. What is Garnishee order?

Answer:

Garnishee order

The Assessing Officer or Tax Recovery Officer may by notice in writing require, any person from whom money is
due or any person holds or may subsequently hold money for or on account of the assessee, to pay to the
Assessing Officer or Tax Recovery Officer so much of the money (subject to maximum of amount payable to
assessee) as is sufficient to pay the amount due by the assessee.

If the person to whom a notice is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax
Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the
notice and further proceedings may be taken against him for the realisation of the amount as if it were an
arrear of tax due from him, in the manner provided in sec. 222 to 225.

Any person discharging any liability to the assessee after receipt of a notice shall be personally liable to the
Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee so discharged or to the
extent of the assessee’s liability for any sum due under this Act, whichever is less.

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A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing Officer or Tax
Recovery Officer.

Where a person to whom a notice is sent objects to it by a statement on oath that the sum demanded or any
part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee,
then, nothing shall be deemed to require such person to pay any such sum or part thereof. But if it is discovered
that such statement was false in any material particular, such person shall be personally liable to the Assessing
Officer or Tax Recovery Officer to the extent of his own liability to the assessee on the date of the notice, or to
the extent of the assessee’s liability for any sum due under this Act, whichever is less.

3. Explain the circumstances under which the Assessing Officer can resort to provisional attachment of the
property of the assessee.

Answer:

Where, during the pendency of any proceeding for the assessment or reassessment, the Assessing Officer is of
the opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, he may, with
the previous approval of the Chief Commissioner, Commissioner, Director General or Dire ctor, by order in
writing, attach provisionally any property belonging to the assessee in the manner provided in the Second
Schedule.

Every such provisional attachment shall cease to have effect after the expiry of a period of 6 months from the
date of such order.

However, Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or Commissioner,

Principal Director General or Director General or Principal Director or Director may, for reasons to be recorded
in writing, extend the aforesaid period by such further period or periods as he thinks fit, so, however, that the
total period of extension shall not in any case exceed 2 years or 60 days after the date of order of assessment or
reassessment, whichever is later.

4. State the provision when certain transfers are considered as void under the Income-tax Act.

Answer:

Certain transfers to be void [Sec. 281]

 Where, during the pendency of any proceeding under this Act or after the completion thereof, but before
the service of notice by TRO, any assessee creates a charge on or parts with the possession (by way of sale,
mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any
other person, such charge or transfer shall be void as against any claim in respect of any tax or any other
sum payable by the assessee as a result of the completion of the said proceeding or otherwise.

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 Assets means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to
which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.
 However, such charge or transfer shall not be void if it is made:

(i) for adequate consideration and without notice of the pendency of such proceeding or without notice
of such tax or other sum payable by the assessee; or

(ii) with the previous permission of the Assessing Officer.

 This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds
` 5,000 and the assets charged or transferred exceed ` 10,000 in value.

5. Who can claim refund?

Answer:

Following person can claim refund -

1. A person who has paid tax more than the amount for which he is chargeable under this Act [Sec. 237];

2. Where the income of one person is included in the total income of other person, such other person is
entitled to claim refund on tax paid on such income [Sec. 238(1)]

3. Where due to death, incapacity, insolvency, liquidation or any other cause, a person is unable to claim or
receive any refund due to him, his legal representative, trustee, guardian or receiver, as the case may be,
can claim and receive such refund for the benefit of such person or his estate [Sec. 238(2)]

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Study Note – 8

APPEALS, RECTIFICATION, REVISION, SETTLEMENT COMMISSION

Learning Objective: This study note will help to understand the various grievance
redressal mechanism like appeals, revision and settlement of cases. The study note also
covers procedure to file appeals or other petition before various authorities.

1. Choose the correct alternative and also provide your justification

(i) Fee for filing an appe al u/s 249(1) to the Commissioner of Income tax (Appeals) when the assessed
income is more than ` 2 lakh is –
(a) ` 250

(b) ` 500

(c) ` 1,000

(d) None of the above

(ii) An assessee aggrieved by the order of C ommissioner of In come–tax (Appeals) can file an appe al
before the Income tax Appellate Tribunal within certain period from the date on which the order
sought to be appealed against is communicated to him. Such appeal has to be filed within –

(a) 60 days

(b) 30 days

(c) 90 days

(d) 120 days

(iii) An appeal to the High Court u/s 260A of the Income-tax Act, 1961 shall lie only if ____________.
(a) a substantial question of law is involved

(b) a substantial question of fact is involved

(c) a substantial question is involved

(d) the assessee is not satisfied with the order passed by Hon’ble ITAT

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(iv) Generally, first appeal by Income-tax Department lies with –

(a) ITAT

(b) Commissioner (Appeals)

(c) High Court

(d) Central Government

(v) Appeal to Commissioner of Income-tax (Appeals) is to be made in Form –

(a) 35

(b) 36

(c) 36A

(d) plain paper

(vi) An assessee aggrieved with the order of the ITAT can file appeal before High Court within __________.

(a) 120 days

(b) 30 days

(c) 60 days

(d) 180 days

(vii) On whose motion revision by Commissioner u/s 264 of the Income-tax Act, 1961 is possible.

(a) Commissioner’s own motion

(b) Application by assessee

(c) Any of the above two options

(d) Assessing Officer

(viii) Time limit for passing a revision order by Commissioner u/s 264, when initiated on his own motion, is –

(a) within 1 year from the date of original order

(b) within 1 year from the end of the financial year in which original order was passed

(c) within 2 year from the date of original order

(d) within 2 year from the end of the financial year in which original order was passed

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Answer:

(i) (c) ` 1,000

Reason:

The statement showing fee for filing an appeal before the Commissioner (Appeals)

Where assessed income as computed by the Assessing Officer is -

Up to ` 1,00,000 – ` 250

Exceeds ` 1,00,000 but does not exceed ` 2,00,000 – ` 500

Exceeds ` 2,00,000 – ` 1,000

Where the subject matter of appeal is not covered in above cases – ` 250

(ii) (a) 60 days

Reason:

An appeal before ITAT can be filed within 60 days from the date on which the order sought to be
appealed against is communicated to the assessee.

(iii) (a) a substantial question of law is involved

Reason:

Any order of the Tribunal, if the High Court is satisfied that the case involves a substantial question of
law, is appealable before High Court.

(iv) (a) ITAT

Reason:

First appeal by Income-tax Department lies with ITAT.

(v) (a) 35

Reason:

Appeal to Commissioner of Income-tax (Appeals) is to be made in Form 35. Appeal to ITAT is to be

made in Form 36. Memorandum of cross objection is to be made in Form 36A.

(vi) (a) 120 days

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Reason:

An assessee aggrieved with the order of the ITAT can file appeal before High Court within 120 days.

(vii) (c) Any of the above two options

Reason:

Either on own motion of the Principal Commissioner / Commissioner or on an application by the

assessee, revision u/s 264 is possible.

(viii) (a) within 1 year from the date of original order

Reason:

Where the Principal Commissioner or Commissioner acts on his own motion, revision order u/s 264 shall
be passed within 1 year from the date of original order.

2. (a) Who can file memorandum of cross objection before the ITAT. Is there any fees for filing such
memorandum? What is the time limit for filing the same?

Answer:

As per sec. 253(4), Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal
against the order of the Commissioner (Appeals) has been filed by the other party, may file a memorandum of
cross objection in Form 36A with the Tribunal within 30 days of receipt of notice that appeal has been filed by
the other party. However, Tribunal may admit belated memorandum of cross objection on sufficient cause
being shown. There is no fee to file such memorandum.

2. (b) Commissioner (Appeals) can enhance the assessment. Discuss

Answer:

As per sec. 251, in disposing of an appeal, the Commissioner (Appeals) shall have the following powers:

a. in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment;

b. in an appeal against the order of assessment in respect of which the proceeding before the Settlement
Commission abates u/s 245HA, he may, after taking into consideration all the material and other
information produced by the assessee before, or the results of the inquiry held or evidence recorded by,
the Settlement Commission, in the course of the proceeding before it and such other material as may be
brought on his record, confirm, reduce, enhance or annul the assessment;

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c. in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as
either to enhance or to reduce the penalty;

d. in any other case, he may pass such orders in the appeal as he thinks fit.
 The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of
refund unless the appellant has had a reasonable opportunity of showing cause against such
enhancement or reduction.
 In disposing of an appeal, the Commissioner (Appeals) may consider and decide any matter arising out
of the proceedings in which the order appealed against was passed, notwithstanding that such matter
was not raised before the Commissioner (Appeals) by the appellant.

3. (a) Commissioner of Income-tax has power only to revise an order in favour of the assessee. Comment.

Answer:

The Commissioner has power u/s 263 to revise any erroneous order, which are prejudicial to the interest of
revenue. The Commissioner may call for and examine the records of any proceeding under the Act. If he
considers that any order passed by the Assessing Officer is prejudicial to the interest of the revenue, he can
revise and rectify the assessment. No revision order shall be passed u/s 263 without giving the assessee an
opportunity of being heard. Such order can be passed by the Commissioner within 2 years from the end of the
financial year in which the order sought to be revised was passed.

3. (b) With reference to the provisions of the Income-tax, 1961, critically examine the proposition that ‘the
Commissioner (Appeals) has no power to decide a matter that was not raised before him’.

Answer:

According to explanation to sec. 251, while disposing an appeal, the CIT(Appeals) may consider and decide
any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding
that such matter was not raised before the Commissioner (Appeals) by the appellant. Thus, the given statement
is not correct

4. What are pre-conditions to be fulfilled for exercising revisionary powers by the Commissioner of Income tax
under Section 263 of the Income-tax Act, 1961? Can he revise an order without affording an opportunity to
the assessee? What is the time limit to exercise such powers? Briefly explain.

Answer:

Any order passed by the Assessing Officer, which is -

a) Erroneous;

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b) Prejudicial to the interests of the revenue; and

c) Passed by an authority subordinate to the Principal Commissioner or Commissioner.

- is revised by the Commissioner u/s 263

If the aforesaid conditions are satisfied, the Principal Commissioner or Commissioner may call for and examine
the records of any proceeding under the Act. If he considers that any order passed by the Assessing Officer is
prejudicial to the interest of the revenue, he can revise and rectify the assessment. No revision order shall be
passed u/s 263 without giving the assessee an opportunity of being heard. Such order can be passed by the
authorities within 2 years from the end of the financial year in which the order sought to be revised was passed.

In computing the above period of limitation following period shall be excluded -

• Time taken in giving an opportunity to the assessee of being re-heard u/s 129; &

• Any period during which any proceeding under this section is stayed by an order or injunction of any court.

Exception: There is no time limit for passing a revision order to give effect to, or in consequence of, an order of
the ITAT, the High Court or the Supreme Court.

5. The ITAT can grant indefinite stay for the demand disputed in appeals before it. Discuss

Answer:

The Tribunal, after considering the merits, may pass an order of stay in any proceedings for a period not
exceeding 180 days (provided the assessee deposits not less than 20% of the amount of tax, interest, fee,
penalty, or any other sum payable or furnishes security of equal amount in respect thereof) from the date of
such order and the Tribunal shall dispose of the appeal within the said period of stay specified in that order.

However, no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed
of within the said period of stay as specified in the order of stay, unless the assessee makes an application and
has complied with the condition and the Appellate Tribunal is satisfied that the delay in disposing of the appeal
is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and
the period of stay so extended shall not exceed 365 days and the Appellate Tribunal shall dispose of the
appeal within the period or periods of stay so extended or allowed.

Further if such appeal is not so disposed of within the period allowed (original and extended), the order of stay
shall stand vacated after the expiry of such period (i.e., 365 days), even if the delay in disposing of the appeal is
not attributable to the assessee.

6. State the provision regarding avoidance of repetitive appeals.

Answer:

Special provision for avoiding repetitive appeals [Sec. 158A]

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 Where an assessee claims (a declaration in the Form 8 and verified in the prescribed manner) that:

─ any question of law arising in his case for an assessment year which is pending before the Assessing
Officer or any appellate authority (such case being hereafter in this section referred to as the relevant
case) is identical

─ with a question of law arising in his case for another assessment year which is pending before the High
Court or the Supreme Court (such case being hereafter in this section referred to as the other case),

─ and if the Assessing Officer or the appellate authority, as the case may be, agrees to apply in the
relevant case the final decision on the question of law in the other case,

─ he shall not raise such question of law in the relevant case in appeal before any appellate authority.

 The Assessing Officer or the appellate authority, as the case may be, may, by order in writing:

i. admit the claim of the assessee if he or it is satisfied that the question of law arising in the relevant case is
identical with the question of law in the other case; or

ii. reject the claim if he or it is not so satisfied.

 Such order shall be final and shall not be called in question in any proceeding by way of appeal or revision
under this Act.

 Where a claim is admitted:

a. the Assessing Officer or the appellate authority may make an order disposing of the relevant case
without awaiting the final decision on the question of law in the other case; and

b. the assessee shall not be entitled to raise, in relation to the relevant case, such question of law in appeal.

 When the decision on the question of law in the other case becomes final, it shall be applied to the relevant
case and the Assessing Officer or the appellate authority, shall, if necessary, amend the order conformably
to such decision.

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Study Note – 9

ADVANCE RULING

Learning Objective: Certain class of person is eligible to obtain advance ruling with the
view to avoid needless litigation and promoting better tax-payer relations. This study note
will help to understand the provision relating to advance ruling.

1. Choose the correct alternative and also provide your justification

1. The authority for advance ruling will not allow consideration of any question involving determination of
__________ of any property.

(a) fair market value

(b) income

(c) reasonable expected rent

(d) none of the above

2. An application for advance ruling under section 245Q(1) of the Incomer-tax Rules, 1962 should made
in –

(a) Form No. 34B

(b) Form No. 43

(c) Form No. 34C

(d) Form No. 3AA

3. The authority for advance ruling is required to pronounce its advance ruling in writing within __________
from the date of application.

(a) 150 days

(b) 120 days

(c) 60 days

(d) None of these

4. An application (in quadruplicate) for advance ruling by a resident applicant for determination of his
tax liability arising out of one or more transactions valuing ` 100 crore or more in total which has been
undertaken or is proposed to be undertaken by him is to be made in Form No._____.

(a) 34DA

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(b) 34EA

(c) 34E

(d) 34D

5. Provisions relating to advance ruling are provided in sections _______.

(a) 245N to 245V

(b) 245A to 245L

(c) 237 to 245

(d) 119 to 126

Answer:

1. (a) fair market

Reason:

The Authority may, after examining the application and the records called for, by order, either allow or
reject the application. However, where the question raised in the application -

(i) is already pending before any income-tax authority or Appellate Tribunal [except in the case of a
resident applicant falling in sec. 245N(b)(iii)] or any court;

(ii) involves determination of fair market value of any property;

(iii) relates to a transaction or issue which is designed prima facie for the avoidance of income-tax
[except in the case of a resident applicant falling in sec. 245N(b)(iii)]

- shall be rejected by the authority.

2. (c) Form No. 34C

Reason:

An application for advance ruling under section 245Q(1) of the Incomer-tax Rules, 1962 should made
in Form No. 34C

3. (d) None of these

Reason:

The Authority shall pronounce its advance ruling in writing within 6 months of the receipt of
application.

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4. (a) 34DA

Reason:

An applicant desirous of obtaining an advance ruling may make an application stating the question
on which the advance ruling is sought in quadruplicate in Form No. 34DA in respect of a resident
applicant referred to in sec. 245N(b)(iia) falling within any such class or category of person as notified
by the Central Government.

5. (a) 245N to 245V

Reason:

Provisions relating to advance ruling are provided in sections 245N to 245V.

2. (a) Write short note on “Applicability of advance ruling”.

Answer:

Advance ruling has been introduced in the Income-tax Act providing a scheme for giving Advance Ruling on
transaction involving non-residents and certain notified residents with the view to avoid needless litigation and
promoting better tax-payer relations. As per section 245S:

(1) The advance ruling pronounced by the Authority u/s 245R shall be binding only—

(a) on the applicant who had sought it;

(b) in respect of the transaction in relation to which the ruling had been sought; and

(c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant
and the said transaction.

(2) The advance ruling shall be binding as aforesaid unless there is a change in law or facts on the basis of
which the advance ruling has been pronounced.

2. (b) What is the procedure for making an application for obtaining advance rulings u/s 245Q?

Answer:

Application for Advance Ruling [Sec. 245-Q]

 An applicant desirous of obtaining an advance ruling may make an application stating the question on
which the advance ruling is sought in quadruplicate in:

(a) in Form No. 34C in respect of a non-resident applicant;

(b) in Form No. 34D in respect of a resident applicant seeking advance ruling in relation to a transaction
undertaken or proposed to be undertaken by him with a non-resident;

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(c) in Form No. 34DA in respect of a resident applicant referred to in sec. 245N(b)(iia) falling within any such
class or category of person as notified by the Central Government; and

(d) in Form No. 34E in respect of a notified resident referred to in sec. 245N(b)(iii)

(e) in Form No. 34EA in respect of a applicant referred to in sec. 245N(b)(iiia)

and shall be verified in the manner indicated therein.

Taxpoint: From the date of appointment of the Customs Authority for Advance Rulings u/s 28EA of the
Customs Act, 1962, no application relating to Customs laws shall be admitted.
 The application shall be accompanied by a fee of

a. ` 10,000 or

b. such fees as may be prescribed.

– whichever is higher
 An applicant may withdraw an application within 30 days from the date of the application.

 An application shall be presented by the applicant in person or by an authorised representative to the

Secretary or any other officer notified in writing by the Secretary or sent by registered post addressed to the
Secretary along with a fee (in the form of a Demand Draft drawn in favour of “Authority for Advance
Rulings” payable at New Delhi).

 An application sent by registered post shall be deemed to have been made on the date on which it is
received in the office of the Authority.

 If the applicant is not hitherto assessed in India, he shall indicate in Annexure I to the application:

(a) his head office in any other country,

(b) the place where his office and residence is located or is likely to be located in India, and

(c) the name and address of his representative in India, if any, authorised to receive notices and papers
and act on his behalf.
 The Secretary may send the application back to the applicant if it is defective in any manner for removing
the defects within such time as he may allow. Such application shall be deemed to have been made on
the date when it is represented after correction.

3. Who is applicant for advance ruling?

Answer:

Applicant [Sec. 245N(b)]

Applicant means any person who is:

(a) a non-resident referred to in sub-clause (i) of clause (a) above; or

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(b) a resident referred to in sub-clause (ii) of clause (a) above; or

(c) a resident who has undertaken or propose to undertake one or more transactions of value of ` 100 crore or
more in total [Notification No. 73, dated 28-11-2014]

(d) a public sector company [Notification No. 725, dated 03-08-2000]

(e) a resident or a non-resident referred to in sub-clause (iv) of clause (a) above

(f) an applicant as defined in sec. 28E(c) of the Customs Act, 1962

(g) an applicant as defined in sec. 23A(c) of the Central Excise Act, 1944

(h) an applicant as defined in sec. 96A(b) of the Finance Act, 1994

- makes an application u/s 245Q(1).

4. The Authority for Advance Ruling has the power of compelling the production of books of account. Discuss.

Answer:

Powers of the Authority [Sec. 245U]

The Authority shall, for the purpose of exercising its powers, have all the powers of a civil court under the Code
of Civil Procedure, 1908 as are referred to in section 131 of this Act.

Further, sec. 131 provides following power to the income tax authority while trying a suit:

(a) Discovery and inspection;

(b) Enforcing the attendance of any person, including any officer of a banking company and examining him
on oath;

(c) Compelling the production of books of account and other documents; and

(d) Issuing commissions

Thus, the Authority for Advance Ruling has the power of compelling the production of books of account

5. When can an advance ruling become void? Explain

Answer:

Advance ruling to be void in certain circumstances [Sec. 245-T]

 Where the Authority finds, on a representation made to it by the Commissioner or otherwise, that an
advance ruling pronounced by it has been obtained by the applicant by fraud or misrepresentation of
facts, it may, by order, declare such ruling to be void ab initio and thereupon all the provisions of this Act
shall apply to the applicant as if such advance ruling had never been made.
 A copy of such order shall be sent to the applicant and the Commissioner.

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6. What is the composition of AAR?

Answer:

The Authority shall consist of a Chairman and such number of Vice-chairmen, revenue Members and law
Members as the Central Government may, by notification, appoint.

 A person shall be qualified for appointment as—

(a) Chairman, who has been a Judge of the Supreme Court or the Chief Justice of a High Court or for at
least 7 years a Judge of a High Court;

(b) Vice-chairman, who has been Judge of a High Court;

(c) a revenue Member:

(i) where the Authority is dealing with an application seeking advance ruling in any matter relating to
this Act; the revenue member shall be appointed from the Indian Revenue Service, who is (or is
qualified to be), a Member of the Board; or

(ii) in other case, revenue member shall be appointed from the Indian Customs and Central Excise
Service, who is (or is qualified to be), a Member of the Central Board of Excise and Customs,

on the date of occurrence of vacancy

(d) a law Member from the Indian Legal Service, who is (or is qualified to be), an Additional Secretary to
the Government of India on the date of occurrence of vacancy.

The Authority for Advance Rulings shall cease to operate from notified date.
It will be replaced by Board for Advance Rulings

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Study Note – 10

PENALTIES AND PROSECUTION

Learning Objective: Non-compliance of provisions of the Act leads to penalty and

prosecution. This study note will help to understand the various provisions relating to penalty
and prosecution.

1. Choose the correct alternative and also provide your justification

(i) Failure to keep, maintain or retain books of accounts, etc., as required under section 44AA will attract
minimum and maximum penalty of –

(a) ` 25,000 and ` 25,000 respectively

(b) ` 25,000 and ` 50,000 respectively

(c) ` 50,000 and ` 50,000 respectively

(d) ` 25,000 and ` 1,50,000 respectively

(ii) Failure to comply with notice u/s 143(2) will attract minimum and maximum penalty of –

(a) ` 10,000 and ` 10,000 respectively

(b) ` 5,000 and ` 10,000 respectively

(c) ` 10,000 and ` 25,000 respectively

(d) ` 5,000 and ` 5,000 respectively

(iii) Maximum penalty u/s 270A for misreporting or under-reporting of income is –

(a) 200% of tax payable on misreported income

(b) 50% of tax payable on misreported income

(c) 3 times of the amount of tax payable on misreported income

(d) 70% of the amount of tax payable on misreported income

(iv) Taking or accepting any loan or deposit in contravention of the provisions of sec. 269SS of the Income-
tax Act attracts penalty which is equal to the amount of such loan or deposit. Such penalty is levied
under section –

(a) 271D

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(b) 271E

(c) 271C

(d) 271A

(v) Relief under section 273A(1) regarding waiver of certain penalty levied under the Income-tax Act can
be availed by the assessee _________.

(a) once in lifetime

(b) twice in lifetime

(c) any number of time as and when he satisfies the conditions of such provision

(d) none of the above

(vi) No order imposing a pe nalty shall be made by the Assistant Commissioner of the Income-tax or
Deputy Commissioner of the Income-tax, where the penalty exceeds ` 20,000, except with the prior
approval of the ___________.

(a) Joint Commissioner

(b) Commissioner

(c) Chief Commissioner

(d) No approval from any higher authority is required

(vii) The Department is empowered to put on prosecution proceeding u/s 276BB for failure to pay tax
collected at source u/s 206C to the credit of the Central Government. In such case minimum
punishment shall be –

(a) rigorous imprisonment for 3 months with fine

(b) rigorous imprisonment for 6 months with fine

(c) rigorous imprisonment for 12 months with fine

(d) none of the above

Answer:

(i) (a) ` 25,000 and ` 25,000 respectively

Reason:

As per sec. 271A, if any person fails to keep and maintain any such books of account and other
documents as required by sec. 44AA, in respect of any previous year or to retain such books of

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account and other documents for the specified period, the Assessing Officer or the Commissioner
(Appeals) may direct that such person shall pay, by way of penalty, a sum of ` 25,000.

(ii) (a) ` 10,000 and ` 10,000 respectively

Reason:

As per sec. 272A(1)(d), if any person fails to comply with a notice u/s 142(1) or 143(2) or fails to comply
with a direction issued u/s 142(2A), he shall pay, by way of penalty, a sum of ` 10,000 for each such
default or failure.

(iii) (a) 200% of tax payable on misreported income

Reason:

As per sec. 270A, where under-reported income is in consequence of any misreporting thereof by any
person, the penalty shall be equal to 200% of the amount of tax payable on under-reported income.

(iv) (a) 271D

Reason:

As per sec. 271D, if a person takes or accepts any loan or deposit or specified sum in contravention of
the provisions of sec. 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of
the loan or deposit or specified sum so taken or accepted.

(v) (a) once in lifetime

Reason:

Where an order of waiver u/s 273A(1) has been made in favour of any person, whether such order
relates to one or more assessment years, he shall not be entitled to any relief under this section in
relation to any other assessment year at any time after the making of such order. That means such
waiver can be done once in life of assessee. An assessee can claim relief u/s 273A(1) or 273A(4) after
claiming relief u/s 273A(4). However, if assessee already claimed relief u/s 273A(1), then no relief u/s
273A(4) or 273A(1) can be granted.

(vi) (a) Joint Commissioner

Reason:

As per sec. 274(2), in the following cases, penalty can be imposed only with the prior approval of the
Joint Commissioner:

Where penalty is imposed by the Income-tax Officer Exceeds ` 10,000

Where penalty is imposed by the Assistant Commissioner or Deputy Exceeds ` 20,000

Commissioner

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(vii) (a) rigorous imprisonment for 3 months with fine

Reason:

As per sec. 276BB, if a person fails to pay to the credit of the Central Government, the tax collected by
him as required under the provisions of sec. 206C, he shall be punishable with rigorous imprisonment
for a term which shall not be less than three months but which may extend to seven years and with
fine.

2. Compute penalty leviable u/s 270A in case of X Ltd from the following details:

Particulars Total Income Tax on Total Income Book Profit Tax on Book Profit

Return of income 80,00,000 24,96,000 2,00,00,000 33,38,400

Assessed income 1,20,00,000 40,06,080 2,10,00,000 35,05,320

Answer:

Computation of penalty

Particulars Amount

Under-reported income

Total income computed by the Assessing Officer A 1,20,00,000

Total income as per return of income B 80,00,000

Book profit computed by the Assessing Officer C 2,10,00,000

Book profit as per return of income D 2,00,00,000

Under-reported income [(A – B) + (C – D)] 50,00,000

Tax on under-reported income

Tax on A P 40,06,080

Tax on B Q 24,96,000

Tax on C R 35,05,320

Tax on D S 33,38,400

Tax on Under-reported income [(P – Q) + (R – S)] T 16,77,000

Penalty u/s 270A

Minimum (being 50% of T) 8,38,500

Maximum (being 200% of T) 33,54,000

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3. Which cases are treated cases of misreporting of income for levy of penalty u/s 270A.

Answer:

Cases of misreporting of income [Sec. 270A(9)]

The cases of misreporting of income shall be the following:

a. misrepresentation or suppression of facts;

b. failure to record investments in the books of account;

c. claim of expenditure not substantiated by any evidence;

d. recording of any false entry in the books of account;

e. failure to record any receipt in books of account having a bearing on total income; and

f. failure to report any international transaction or any transaction deemed to be an international transaction
or any specified domestic transaction, to which the provisions of Chapter X apply.

4. Which cases are treated cases of under-reporting of income for levy of penalty u/s 270A.

Answer:

Cases of under-reporting of income [Sec. 270A(2)]

A person shall be considered to have under-reported his income, if:

a. the income assessed is greater than the income determined in the return processed u/s 143(1)(a);

b. the income assessed is greater than the maximum amount not chargeable to tax, where no return of
income has been furnished or where return has been furnished for the first time u/s 148;

c. the income reassessed is greater than the income assessed or reassessed immediately before such
reassessment;

d. the amount of deemed total income assessed or reassessed u/s 115JB or 115JC is greater than the deemed
total income determined in the return processed u/s 143(1)(a);

e. the amount of deemed total income assessed u/s 115JB or 115JC is greater than the maximum amount not
chargeable to tax, where no return of income has been filed or where return has been furnished for the first
time u/s 148;

f. the amount of deemed total income reassessed u/s 115JB or 115JC is greater than the deemed total
income assessed or reassessed immediately before such reassessment;

g. the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

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5. Discuss the power of Principal Commissioner or Commissioner to Grant Immunity from Penalty u/s 273AA

Answer:

Power of Principal Commissioner or Commissioner to Grant Immunity from Penalty [Sec. 273AA]

1. A person may make an application to the Principal Commissioner or Commissioner for granting immunity
from penalty, if —

(a) he has made an application for settlement u/s 245C and the proceedings for settlement have abated
u/s 245HA; and

(b) the penalty proceedings have been initiated under this Act.

2. The application to the Principal Commissioner or Commissioner shall not be made after the imposition of
penalty after abatement.

3. The Principal Commissioner or Commissioner may, subject to such conditions as he may think fit to impose,
grant to the person immunity from the imposition of any penalty under this Act, if he is satisfied that the
person has, after the abatement, co-operated with the income-tax authority in the proceedings before him
and has made a full and true disclosure of his income and the manner in which such income has been
derived.

4. The order, either accepting or rejecting the application in full or in part, shall be passed within a period of
12 months from the end of the month in which the application is received by the Principal Commissioner or
the Commissioner. Further, no order rejecting the application, either in full or in part, shall be passed unless
the assessee has been given an opportunity of being heard.

5. The immunity granted to a person shall stand withdrawn, if such person fails to comply with any condition
subject to which the immunity was granted and thereupon the provisions of this Act shall apply as if such
immunity had not been granted.

6. The immunity granted to a person may, at any time, be withdrawn by the Principal Commissioner or
Commissioner, if he is satisfied that such person had, in the course of any proceedings, after abatement,
concealed any particulars material to the assessment from the income-tax authority or had given false
evidence, and thereupon such person shall become liable to the imposition of any penalty under this Act
to which such person would have been liable, had not such immunity been granted.

6. Discuss the limitation for imposing penalties.

Answer:

Bar of limitation for imposing penalties [Sec. 275]

No order imposing a penalty under this Chapter shall be passed after following time limit:

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Where the relevant assessment or other order is An order imposing penalty shall be passed
the subject-matter of an appeal to the
a. before the expiry of the financial year in which the
Commissioner (Appeals) and the Commissioner
proceedings, in the course of which action for
(Appeals) passes the order on or after 01-06-2003
imposition of penalty has been initiated, are
disposing of such appeal
completed; or

b. within 1 year from the end of the financial year in

which the order of the Commissioner (Appeals) is
received by the Principal Chief Commissioner or
Chief Commissioner or Principal Commissioner or
Commissioner,

whichever is later

Where the relevant assessment or other order is Penalty order shall not be passed after the expiry of 6
the subject-matter of revision u/s 263 or 264 months from the end of the month in which such order
of revision is passed

In any other case Penalty order shall not be passed:

a. after the expiry of the financial year in which the

proceedings, in the course of which action for the
imposition of penalty has been initiated, are
completed; or

b. six months from the end of the month in which

action for imposition of penalty is initiated,

whichever period expires later

7. What do you understand by ‘wilful attempt to evade tax’? Mention the consequences of a willful attempt to
evade tax, etc., under section 276C of the income tax Act, 1961.

Answer:

For the purposes of section 276C, a wilful attempt to evade any tax, penalty or interest chargeable or
imposable under this Act or the payment thereof shall include a case where any person:

(a) has in his possession or control any books of account or other documents (being books of account or other
documents relevant to any proceeding under this Act) containing a false entry or statement; or

(b) makes or causes to be made any false entry or statement in such books of account or other documents; or

(c) wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other
documents; or

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(d) causes any other circumstance to exist which will have the effect of enabling such person to evade any
tax, penalty or interest chargeable or imposable under this Act or the payment thereof.

If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or
imposable, or under reports his income, or evade the payment of it, he shall, without prejudice to any penalty
that may be imposable on him under any other provision of this Act, be punishable,—

Attempt to evade tax, penalty or interest

chargeable/imposable, or under-reports income

- If amount sought to be evaded exceeds ` 25,00,000 6 months (with fine) 7 years (with fine)

- If such amount involved does not exceed ` 25,00,000 3 months (with fine) 2 years (with fine)

Attempt to evade the payment of any tax, penalty or interest. 3 months (with fine) 3 years (with fine)

8. Discuss the provision u/s 270AA relating to immunity from imposition of penalty

Answer:

Immunity from imposition of penalty, etc. [Sec. 270AA]

 An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty
u/s 270A and initiation of proceedings u/s 276C or 276CC, if he fulfils the following conditions:

a. the tax and interest payable as per the order of assessment or reassessment u/s 143(3) or 147, as the
case may be, has been paid within the period specified in such notice of demand; and

b. no appeal against aforesaid order has been filed.

 An application shall be made within 1 month from the end of the month in which the said order has been
received and shall be made in such form (Form 68) and verified in prescribed manner.

 The Assessing Officer shall (on fulfilment of the aforesaid conditions) and after the expiry of the period of
filing the appeal to the Commissioner (Appeals), grant immunity from imposition of penalty u/s 270A and
initiation of proceedings u/s 276C or 276CC, where the proceedings for penalty u/s 270A has not been
initiated due to misreporting of income.

 The Assessing Officer shall, within a period of 1 month from the end of the month in which the application is
received, pass an order accepting or rejecting such application after giving an opportunity of being heard
to the assessee.

 The order made by the assessing officer in this regard is final.

 Where immunity is granted to the assessee, then appeal to Commissioner (Appeals) or an application for
revision u/s 264 shall not be admissible against the order of assessment or reassessment.

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Study Note – 11

BUSINESS RESTRUCTURING AND REORGANISATION

Learning Objective: Restructuring is term used for the act of reorganizing the legal,
ownership, operational, or other structures of a company for the purpose of making it more
profitable, or better organized for its present needs. This study note will help to understand
taxation issues involved in such restructuring.

1. Choose the correct alternative and also provide your justification

(i) A loss incurring company and a profit making company may _______ in order to reduce the overall
incidence of _____ under the Income-tax Act, 1961.
(a) merge, income
(b) merge, tax liability
(c) income, merge
(d) tax liability, merge

(ii) According to section 2(1B), “amalgamation, in relation to companies means, the merger of one or
more companies with another company or the merger of two or more companies to form one
company” provided all conditions except the following are satisfied:
(a) All assets to be transferred from amalgamating company to the amalgamated company
(b) All liabilities including contingent liabilities to be transferred from amalgamating company to
amalgamated company
(c) Shareholders holding at least 3/4th in value of shares of the amalgamating company should
become shareholders of the amalgamated company
(d) Shareholders holding at least 9/10th in value of shares of the amalgamating company should
become shareholders of the amalgamated company

(iii) One of the following is not treated as amalgamation u/s 2(1B):

(a) Merger as a result of acquisition of the property of one company by another company pursuant
to the purchase of such property by the other company
(b) Merger as a result of distribution of such property to the other company after the winding up of the
first-mentioned company
(c) Both (a) and (b)
(d) None of the above

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(iv) Where a sole proprietary concern is succeeded by a company in the business carried on by it as a
result of w hich the sole proprietary concern sells or otherwise transfers any capital asset to the
company, the transaction is not regarded as transfer provided certain conditions are satisfied. One of
those condition is:

(a) Proprietor holds not less than 51% of the total voting power in the company and his shareholding
continues to remain as such for a period of 3 years from the date of succession

(b) Proprietor holds not less than 51% of the total voting power in the company and his shareholding
continues to remain as such for a period of 5 years from the date of succession

(c) Proprietor holds not less than 50% of the total voting power in the company and his shareholding
continues to remain as such for a period of 3 years from the date of succession

(d) Proprietor holds not less than 50% of the total voting power in the company and his shareholding
continues to remain as such for a period of 5 years from the date of succession

(v) Capital gain on Slump sale is –

(a) always short-term capital gain
(b) always long-term capital gain
(c) Depends on period of holding of capital asset being undertaking transferred
(d) Not taxable

Answer:

(i) (b) merge, tax liability

Reason:
Loss of amalgamating company shall be adjusted with income of amalgamated company. Such
adjustment will overall reduce the tax liability of the amalgamated company.

(ii) (d) Shareholders holding at least 9/10th in value of shares of the amalgamating company should
become shareholders of the amalgamated company

Reason:
As per sec. 2(1B), amalgamation (in relation to companies) means:

• the merger of one or more companies with another company; or

• the merger of two or more companies to form one company;

in such a manner that—

(a) all assets and liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the assets and liabilities of the amalgamated company;

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(b) shareholders (both equity or preference) holding not less than 75% in value of the shares in the
amalgamating company or companies (other than shares already held therein immediately
before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary)
become shareholders (equity or preference) of the amalgamated company.

(iii) (c) Both (a) and (b)

Reason:
As per sec. 2(1B), following mergers shall not be treated as amalgamation -

• Merger as a result of acquisition of the property of one company by another company pursuant
to the purchase of such property by the other company; or

• Merger as a result of distribution of such property to the other company after the winding up of
the first-mentioned company.

(iv) (d) Proprietor holds not less than 50% of the total voting power in the company and his shareholding
continues to remain as such for a period of 5 years from the date of succession

Reason:
As per sec. 47(xiv), where a sole proprietary concern is succeeded by a company in the business
carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital
asset to the company, the transaction is not regarded as transfer provided following conditions are
satisfied:

a) All assets and liabilities of the sole proprietary concern relating to the business immediately before
the succession become the assets and liabilities of the company;

b) Proprietor holds not less than 50% of the total voting power in the company and his shareholding
continues to remain as such for a period of 5 years from the date of succession; and

c) The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form
or manner, other than by way of allotment of shares in the company.

(v) (c) Depends on period of holding of capital asset being undertaking transferred

Reason:

In case of slump sale, if undertaking is owned and held by the assessee for not more than 36 months
immediately preceding the date of its transfer, then capital gain shall be deemed to be short-term
capital gain otherwise long-term capital gain. It makes no difference that few of the assets of the
undertaking are newly acquired (i.e. for less than 36 months).

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2. What is ‘’slump sale’’? Explain provisions in Income Tax Act relating to slump sale.

Answer:
‘Slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration
without values being assigned to the individual assets and liabilities in such sales. If value of an asset or liability is
determined for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees, that
should not be regarded as assignment of values to individual assets and liabilities.

Capital gains in case of slump sale [Sec. 50B]

Cost of Net worth# of the undertaking

Acquisition or
Improvement

Indexation Not available

Benefit

Nature of gain If undertaking is owned and held by the assessee for not more than 36 months, then
whether short term capital gain shall be deemed to be short-term capital gain otherwise long-term
or long term capital gain.
Note: Where an undertaking is owned and held by an assessee for more than 36
months immediately preceding the date of its transfer, then it shall be treated as a
long-term capital asset. It makes no difference that few of the assets of the
undertaking are newly acquired (i.e. for less than 36 months).

Net worth shall be the –

Aggregate value of total assets of the undertaking ****

Less: Value of liabilities of such undertaking as appearing

In the books of account ****

Net worth ****

Notes

1. Effect of revaluation: If any change has been made in the value of assets on account of revaluation of
assets etc. then such change in value shall be ignored.

2. The aggregate value of total assets, in case of:

• Depreciable assets - WDV of block of assets

• Capital assets in respect of which the whole - Nil

of the expenditure has been allowed as a

deduction under section 35AD

• Other assets - Book value of such assets

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3. Treatment of stock: In case of slump sale, no profit under the head ‘Profits & gains of business or
profession’ shall arise even if the stock of the said undertaking is transferred along with other assets.
4. Carry-forward of losses: In c ase of slump sale, benefit of unabsorbed losses and depreciation of the
undertaking transferred shall be available to the transferor company and not to the transferee
company.

3. Discuss the tax issues including cost of acquisition and pe riod of holding, determined in the hands of the
shareholder determined after demerger, covering deemed dividend and capital gains.

Answer:
Capital gain on transfer of shares in demerged company or resulting company [Sec. 49(2C)/(2D)]
By virtue of sec. 47(vid), any transfer of shares in demerged company (old shares) in lieu of shares of resulting
company (new shares) is not liable to capital gain. However, such transaction has following tax impact:

(Cost of acquisition of * (Net book value of assets

Original shares) transferred to resulting company)
Resulting
company Net worth# of the company immediately before such demerger

# Net worth= Paid-up share capital + General reserves (as per books of
Cost of shares account of the demerged company immediately before demerger)

Demerged Cost of acquisition of the original shares

company Less: Cost of shares of resulting company (calculated above)
(after Cost of shares of demerged company (after demerger)
demerger)

Resulting To find whether shares in resulting company are long-term or short

company term capital asset, the period of holding shall be calculated from
Determination of date of acquisition of original shares in demerged company (before
nature of asset demerger).
Demerged
company

Resulting Indexation benefit shall be available from the year in which shares in
company resulting company were acquired by the assessee.
Indexation benefit
Demerged Indexation benefit shall be available from the year in which original
company shares in demerged company were acquired by the assessee.

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4. What are the tax concessions available under the Income-tax Act, 1961 in the case of conversion of a firm
into a private limited company?

Answer:
Carry forward & Set off of losses on conversion of proprietary concern or partnership firm into company [Sec.
72A(6)]

Condition: A firm is succeeded by a company fulfilling the following conditions as laid down in sec. 47(xiii)
(a) All the assets and liabilities of the firm relating to the business immediately before the succession become
the assets and liabilities of the company.
(b) All the partners of the firm immediately before the succession become the shareholders of the company in
the same proportion in which their capital account stood in the books of the firm on the date of
succession.
(c) The partners of the firm do not receive any consideration or benefit, directly or indirectly in any form or
manner, other than by the way of allotment of shares in the company,
(d) The aggregate of the share-holding in the company of the partners of the firm is not less than fifty per cent
of the total voting power in the company and their shareholding continue to be as such for a period of five
years from the date of succession.
Tax Treatment: The accumulated loss and unabsorbed depreciation of the predecessor firm shall be deemed to
be the loss or allowance for depreciation of the successor company for the purpose of previous year in which
re-organisation of business was effected.
Taxpoint: Accumulated loss of such firm can be carried forward for further 8 years.
Effect of non compliance of conditions given u/s 47(xiii) and (xiv) – If any of the conditions laid down in the sec.
47(xiii) are not complied with, the set off of loss or allowance of depreciation made in any previous year by the
successor company shall be deemed to be the income of the company and chargeable to tax in the year in
which such conditions are violated.
• “Accumulated Loss” means so much of the loss of the predecessor firm or the proprietary concern or the
private company or unlisted public company before conversion into limited liability partnership or the
amalgamating company or the demerged company, as the case may be, under the head “Profits and
gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor
firm or the proprietary concern or the company or amalgamating company or demerged company, would
have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of
business or conversion or amalgamation or demerger had not taken place.

• “Unabsorbed Depreciation” means so much of the allowance for depreciation of the predecessor firm or
the proprietary concern or the private company or unlisted public company before conversion into limited
liability partnership or the amalgamating company or the demerged company, as the case may be, which
remains to be allowed and which would have been allowed to the predecessor firm or the proprietary
concern or the company or amalgamating company or demerged company, as the case may be, under
the provisions of this Act, if the re-organisation of business or conversion or amalgamation or demerger had
not taken place.

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5. Define ‘demerger’, ‘demerged company’ and ‘resulting company’ under the Income-tax Act, 1961.

Answer:

As per sec. 2(19AA), demerger (in relation to companies) means the transfer, pursuant to a scheme of
arrangement u/s 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more
undertakings to any resulting company in such a manner that:

(i) All assets and liabilities are transferred: All assets and liabilities of the undertaking, being transferred by the
demerged company, immediately before the demerger, becomes the assets and liabilities of the resulting
company.

(ii) Transfer at Book value: Assets and liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at its book-value (without considering revaluation) immediately
before the demerger.

Note: Any change in the value of assets consequent to their revaluation shall be ignored.

Exception: The provisions is not applicable where the resulting company records the value of the property
and the liabilities of the undertaking or undertakings at a value different from the value appearing in the
books of account of the demerged company, immediately before the demerger, in compliance to the
Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards)
Rules, 2015.

(iii) Consideration in shares: Resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis except where the resulting company
itself is a shareholder of the demerged company.

(iv) Common share-holders: Shareholders holding not less than 75% in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a nominee for,
the resulting company or, its subsidiary) become shareholders of the resulting company or companies by
virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting company.

(v) Going concern: Transfer of the undertaking is on a going concern basis.

(vi) Other specified condition: The demerger is in accordance with the conditions, if any, notified u/s 72A(5) by
the Central Government in this behalf.

As per section 2(19AAA), “Demerged Company” mean the company whose undertaking is transferred
pursuant to a demerger to a resulting company.

As per section 2(41A), the term “resulting company” means one or more companies (including a wholly owned
subsidiary) to which the undertaking of the demerged company is transferred in a demerger and the resulting
company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged
company and includes any authority or b ody or l ocal authority or p ublic sector company or a company
established, constituted or formed as a result of demerger.

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6. Smile Ltd. is a wholly-owned subsidiary company of Happy Ltd., an Indian company. Smile Ltd. owns Plant-A
and Plant-B (depreciation rate 40%, depreciated value of the block ` 3,00,000 on 1st April, 2020). Plant-B was
purchased and put to use on 10th November, 2018 (cost being ` 70,000). Plant-B is transferred by Smile Ltd. to
Happy Ltd. on 14th December, 2020 for ` 20,000. It is put to use by Happy Ltd. on the same day. Happy Ltd.
owns Plant-C on 1st April, 2020 (depreciation rate 40%, depreciated value ` 60,000). Find out the amount of
depreciation in the hands of Smile Ltd. and Happy Ltd. for the assessment year 2021-22.

Answer:
Depreciation in the hands of Smile Ltd. for the assessment year 2021-22:

Particulars Amount

Depreciated value of the Plant A and B on 1st April, 2020 3,00,000

Less: Plant B transferred to Happy Ltd 20,000

WDV as on 31st March, 2021 2,80,000

Depreciation for the block P.Y.2020-21 1,12,000

WDV at the end of the year 1,38,000

Depreciation in the hands of Happy Ltd. for the assessment year 2021-22:

Particulars Amount

Depreciated value of the block on 1st April, 2020 60,000

Add: Actual Cost of Plant B acquired from Smile Ltd (See Note) 33,600

WDV as on 31st March, 2021 93,600

Depreciation on transferred asset [` 33,600* ½ * 40%] 6,720

Other Asset @ 40% of ` 60,000 24,000

Total Depreciation 30,720

Note: Actual Cost of Plant B in the hands of Happy Ltd.

Particulars Amount
Actual Cost of Plant B in the hands of Smile Ltd on Nov 10, 2018 70,000
Less: Depreciation for P.Y 2018-19 (1/2 of 40% of ` 70,000) 14000
Balance on April 1, 2019 56,000
Less: Depreciation for the P.Y.2019-20 22,400
Balance on April 1, 2020 33,600

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7. Dona purchases 600 equity shares in XY (P) Ltd. on 1-04-2020 @ ` 150 each. On 31-12-2020, XY (P) Ltd. is
demerged. In the scheme of demerger, division Y was transferred to Y (P) Ltd. (resulting company). On that
date balance sheet of XY (P) Ltd. is as follow –

Liabilities Division Total Asset Division Total

X Y X Y

6,000 E. Shares 6,00,000 Land - 2,50,000 2,50,000

General Reserve 4,00,000 Plant 1,75,000 1,00,000 2,75,000

Loan (General) 2,00,000 Investment 2,50,000 - 2,50,000

Loan (Specific) 60,000 75,000 1,35,000 Stock 1,95,000 2,30,000 4,25,000

Creditors 25,000 40,000 65,000 Debtors 55,000 45,000 1,00,000

Cash and Bank 25,000 75,000 1,00,000

14,00,000 14,00,000

Y (P) Ltd., in consideration of the demerger, issued equity share of ` 100 each (at par) to the shareholders of
XY (P) Ltd. on proportionate basis. You are required to compute –
- Number of shares of Y (P) Ltd. received by Dona and cost thereof.
- Cost of acquisition of shares held by Dona in XY (P) Ltd. after demerger.
- Capital gain, if Dona sold 200 shares of XY (P) Ltd.@ ` 125 & 100 shares of Y(P) Ltd.@ ` 110 on 31-03-2021.

Answer:
Calculation of number of shares of Y (P) Ltd. received by Dona

Particulars Amount Amount

Net asset taken over by Y (P) Ltd
Assets taken over
Land 2,50,000
Plant 1,00,000
Stock 2,30,000
Debtors 45,000
Cash and bank 75,000
7,00,000
Less: Liabilities
Loan (Specific) 75,000

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Creditors 40,000
Share of General loan (` 2,00,000 x ` 7,00,000) / ` 14,00,000 1,00,000 2,15,000
Net asset taken over 4,85,000
No. of shares issued by Y (P) Ltd. 4,850 shares
(Consideration of ` 4,85,000 was discharged by issuing equity shares of ` 100 each)
% of Dona’s holding in XY (P) Ltd. (600 shares, out of 6,000 shares of XY (P) Ltd.) 10%
No. of shares allotted in Y (P) Ltd to Dona (10% of 4,850 shares) 485 shares

Cost of such shares is –

Cost of acquisition of shares in XY (P) Ltd. x Net book value of asset transferred to Y (P) Ltd.

Net worth of XY (P) Ltd. immediately before demerger (i.e. Paid up capital + General Reserve)

= (600 x ` 150) x ` 4,85,000

` 6,00,000 + ` 4,00,000

= ` 43,650

b) Cost of acquisition of shares of XY (P) Ltd. = Original cost of acquisition – Cost of acquisition of shares of
(after demerger) Y (P) Ltd. (as computed above)

= ` 90,000 – ` 43,650 = ` 46,350

Computation of capital gain in the hands of Dona for the A.Y. 2021-22
Particulars Details Shares of
XY (P) Ltd. Y (P) Ltd.
Sale Consideration 200 x ` 125 25,000 -
100 x ` 110 - 11,000

Less: Expenses on transfer Nil Nil

Net Sale Consideration 25,000 11,000

Less: i) Cost of acquisition [(` 46,350 x 200)/600] 15,450 -

[(` 43,650 x 100)/485] - 9,000

ii) Cost of improvement Nil Nil

Short Term Capital Gain 9,550 2,000

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8. Discuss the effect of demerger on resulting company.

Answer:

Following are the effect of demerger on the resulting company:

Actual cost of assets to the resulting company

Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company
and the resulting company is an Indian company, the actual cost of the transferred capital asset to the
resulting company shall be taken to be the same as it would have been if the demerged company had
continued to hold the capital asset for the purpose of its own business.
However, such actual cost shall not exceed the written down value of such capital asset in the hands of the
demerged company. [Explanation 7A to sec. 43(1)]

WDV of depreciable asset in hands of resulting company

Where in a previous year, any asset forming part of a block of assets is transferred by a demerged company to
the resulting company, then, the written down value of the block of assets in the case of the resulting company
shall be the written down value of the transferred assets of the demerged company immediately before the
demerger [Explanation 2B to Sec. 43(6)]

Allocation of depreciation in the year of demerger

The aggregate deduction, in respect of depreciation allowable to the demerged company and the resulted
company in the case of demerger shall not exceed in any previous year the deduction calculated at the
prescribed rates as if the demerger had not taken place and such deduction shall be apportioned between
the demerged company and the resulting company in the ratio of the number of days for which the assets
were used by them.

Set off and carry forward [Sec. 72A]

In the case of a demerger, the accumulated business loss (other than speculation loss) and the allowance for
unabsorbed depreciation of the demerged company shall:

(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the
resulting company, be allowed to be carried forward and set off in the hands of the resulting company;

(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the
resulting company, be apportioned between the demerged company and the resulting company in the
same proportion in which the assets of the undertakings have been retained by the demerged company
and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of
the demerged company or the resulting company, as the case may be.

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9. M/s S & Co., a sole proprietary concern is converted into a company, Sid Co. Ltd. with effect from November
29, 2020. The written down value of assets as on April 1, 2020 are as follows:

Items Rate of Depreciation WDV as on 1 April, 2020

Building 10% ` 3,50,000
Furniture 10% ` 50,000
Plant & Machinery 15% ` 2,00,000

Further, on 15-10-2020, M/s S & Co. purchased a plant f or ` 1,00,000 (rate of depreciation 15%). After
conversion, the company added another plant worth ` 50,000 (rate of depreciation 15%). Compute the
depreciation available to (i) M/s S & Co. and (ii) Sid Co. Ltd. for the A.Y. 2021-22

Answer:
Computation of depreciation on assets if there were no succession

Particulars Building Furniture Plant & Machinery

Rate of depreciation 10% 10% 15%

W.D.V. as on 1/4/2020 3,50,000 50,000 2,00,000

Add: Purchase during the year Nil Nil 1,00,000*

3,50,000 50,000 3,00,000

Less: Sale during the year Nil Nil Nil

3,50,000 50,000 3,00,000

Depreciation 35,000 5,000 37,500

It is assumed that the assessee is not entitled for additional depreciation.

* Without considering assets acquired after succession.** [(` 2,00,000 * 15%) + (` 1,00,000 * 15% * ½)]
Allocation of depreciation between sole proprietary concern and the successor company
The depreciation is to be allocated in the ratio of number of days the assets were used by the sole proprietary
concern and the successor company.
Calculation of allowable depreciation to sole proprietary concern

Particulars Amount

Depreciation on assets held as on 01/04/2020

Assets are used by sole proprietary concern from 1/4/2020 to 28/11/2020 i.e. 242 days, hence
depreciation shall be allowed for 242 days

- Building (` 35,000 x 242/365) 23,205

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- Furniture (` 5,000 x 242/365) 3,315

- Plant and Machinery (` 30,000 x 242/365) 19,890

Depreciation on newly acquired assets

New asset has been used by it from 15/10/2020 to 28/11/2020 i.e. 45 days, hence depreciation
shall be allowed for 45 days

- Plant and Machinery (` 7,500 x 45/168) 2,009

Depreciation allowable u/s 32 48,419

Calculation of allowable depreciation to successor company

Particulars Amount

Depreciation on assets held by sole-proprietary concern as on 01/04/2020

Asset of sole proprietary concern used by the successor company from 29/11/2020 to
31/3/2021 i.e. 123 days, hence depreciation shall be allowed for 123 days

- Building (` 35,000 x 123/365) 11,795

- Furniture (` 5,000 x 123/365) 1,685

- Plant and Machinery (` 30,000 x 123/365) 10,110

Depreciation on assets acquired by sole-proprietary concern during the year

New asset has been used by it from 29/11/2020 to 31/03/2021 i.e. 123 days, hence depreciation
shall be allowed for 123 days

- Plant and Machinery (` 7,500 x 123/168) 5,491

After conversion

Depreciation in respect of plant purchased by the successor company is fully allowable in the
hands of successor company [50% of 15% on ` 50,000]. 3,750

Total depreciation 32,831

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Study Note – 12

DIFFERENT ASPECTS OF TAX PLANNING

Learning Objective: Tax liability can be reduced through proper tax planning. This study
note will help to understand importance of tax planning. Further, it also covers various
aspect involved in tax planning.

1. Choose the correct alternative and also provide your justification

(i) In respect of which are tax planning cannot be attempted at the time of setting-up of new business
entity —
(a) Form of organization
(b) Locational aspects
(c) Nature of business
(d) Corporate restructuring

(ii) Filing return of income within prescribed time limit is __________.

(a) tax planning
(b) tax management
(c) tax evasion
(d) tax avoidance

(iii) “We think time has come for us to depart from Westminster principle ______ tax planning may be
legitimate provided it is within the framework of law. Colourable devices cannot be part of tax
planning and i t is wrong to encourage or entertain the belief that i t is honourable to avoid the
payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the honestly
without resorting to subterfuges.”
The aforesaid statement is observed by:
(a) the Apex Court in McDowell & Co. Ltd. case
(b) the Delhi High Court in McDowell & Co. Ltd. case
(c) the Apex Court in Arvind Narotham case
(d) the Finance Minister while presenting Finance Bill, 1985

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(iv) What are the objectives of tax planning:

(a) reduction of tax liability through proper utilisation of choices and options given under the Income-
tax Act
(b) economic stability by way of productive investment by the tax payer
(c) both (a) and (b)
(d) maximisation of litigation

(v) It is an exercise by which the assessee legally takes advantage of the loopholes in the Act. It is –
(a) tax avoidance
(b) tax management
(c) tax planning
(d) tax evasion

(vi) An exercise undertaken to minimize tax liability through the best use of all av ailable allowances,
deductions, exclusions, exemptions, etc., to reduce income-tax liability is known as —
(a) Tax evasion

(b) Tax planning

(c) Tax avoidance

(d) Tax dodging

(vii) Payment of advance tax on or before due date is termed as —

(a) Tax planning
(b) Tax management
(c) Tax avoidance
(d) None of the above.

Answer:

(i) (d) Corporate restructuring

Reason:
Corporate restructuring can not be attempted at the time of setting-up of new business entity.
(ii) (b) tax management

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Reason:
Tax management is a procedure to comply with the provisions of the law. Filing of return of income
within prescribed time limit is compliance of law.

(iii) (a) the Apex Court in McDowell & Co. Ltd. Case

Reason:
The Apex Court in McDowell & Co. Ltd. –vs.- CTO (1985) has observed that “tax planning may be
legitimate provided it is within the framework of law. Colourable devices cannot be part of tax
planning and it is wrong to encourage or e ntertain the belief that it is honourable to avoid the
payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay tax honestly
without resorting to subterfuges.” In deciding whether a transaction is a genuine or colourable device,
it is open for the tax authorities to go behind the transaction and examine the “substance” and not
merely the “form”.

(iv) (c) both (a) and (b)

Reason:
The basic objectives of tax planning are:
a. Reduction of Tax liability
b. Minimisation of litigation
c. Productive investment
d. Healthy growth of economy
e. Economic stability

(v) (a) tax avoidance

Reason:
Tax avoidance is an exercise by which the assessee legally takes advantage of the loopholes in the
Act

(vi) (b) Tax palnning

Reason:
Tax planning is a way to reduce tax liability by taking full advantages provided by the Act through
various exemptions, deductions, rebates & relief.

(vii) (b) Tax management

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Reason:
Tax management is a procedure to comply with the provisions of the law. Payment of advance tax is
compliance of law.

2. Write short notes on organisation tax planning cell

Answer:
Organisation Tax Planning Cells

Various organisation have separate tax planning departments to plan their transactions with a view to attract
the least incidence of tax. Organisation of such a cell can be justified on the following grounds:

a. Complexity and volume of work: Where the volume of tax work to be handled is large and highly complex,
then it is required to appoint a special tax expert along with the required staff.

b. Separate Documentation: Documentation is an indispensable ingredient of tax management. An assessee

has to keep reliable, complete and updated documentation for all the relevant tax files so that the
documentary evidence can be made available at a short notice whenever it is required. In absence
thereof, an assessee may lose a case for want of proper documentary evidence. Not only that the
company has to maintain proper account books, records, vouchers, bills, correspondence and
agreements, etc. as a part of tax management. In the case of new industrial undertaking it is better to keep
separate accounts for the same.

c. Data Collection: The staff concerned with taxation has to collect and keep on collecting data relating to
latest circulars, case laws, rules and provisions, and other government notifications to keep abreast of the
current developments.

d. Integration: Tax planner should be consulted by all the departments of the company to know the impact of
taxation on their decisions. It would be necessary to integrate and properly link all the departments of the
company with the tax planning department.

e. Constant Monitoring: In order to obtain the intended tax benefits, persons connected with tax
management should ensure compliance of all the pre-requisites, like procedures, rules etc. Besides, there
should be constant monitoring, so that all the tax obligations are discharged and penal consequences
avoided.

f. Developing Tax effective Alternatives: Tax laws provides various options for entering into a transactions. A
tax planner could guide management in taking important decisions, by considering varieties of alternatives
and choices.

g. Take advantage of variance allowances and deductions: An expert tax manager has to keep track of the
provisions relating to various allowances, deductions, exemptions, and rebates so as to initiate tax planning
measures.

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3. Star Gas Ltd. commenced operations of the business of laying and o perating a c ross country natural gas
pipeline network for distribution of 1st April, 2020 The company incurred capital expenditure of ` 1,490 lakh
(including cost of financial instrument ` 2 lakh) during the period January to March, 2020 exclusively for the
above business and capitalized the same in its books of account as on 1st April, 2020.
Further, during the financial year 2020-21, it incurred capital expenditure of ` 6,600 lakh (including cost of
land ` 1,100 lakh) exclusively for the above business. Compute the amount of deduction under section 35AD
for the assessment year 2021-22, assuring that the company has fulfilled all the conditions specified in
section 35AD.

Answer:
Computation of the Amount of Deduction under Section 35AD for the Assessment Year 2021-22

Particulars ` in lakh

Capital expenditure incurred during the Year (excluding cost of land) 5,500
[` 6,600 lakh – ` 1,100 lakh]

Capital expenditure incurred prior to commencement of business & capitalized (excluding 1,488
cost of Financial Instrument) [` 1,490 lakh – ` 2 lakh]

Total Deduction u/s 35AD 6,988

4. Explain the doctrine of form and substance in the context of tax planning.

Answer:
Doctrine of form and substance in the context of tax planning

The following are certain principles enunciated by the Courts on the question as to whether it is the form or
substance of a transaction, which will prevail in income-tax matters:

1. Form of transaction is to be considered in case of genuine transactions: It is well settled that when a
transaction is arranged in one form known to law, it will attract tax liability whereas, if it is entered into in
another form which is equally lawful, it may not. Therefore, in considering whether a transaction attracts tax
or not, the form of the transaction put through is to be considered and not the substance. This rule cannot
naturally apply where the transaction, as put through by the assessee, is not genuine but colourable or is a
mere device. For here, the question is not one between ‘form’ and ‘substance’ but between appearance
and truth. [Motor and General Stores (P) Ltd. -vs.- CIT (1967)]

2. True legal relation is the crucial element for taxability: A firm transferred its business assets to a company
formed for its purposes. The same business was carried by the company consisting of the erstwhile partners
as its shareholders. The Income-tax Officer sought to withdraw the depreciation allowed (the difference
between sale price and written-down value) on machinery. Tribunal and High Court has held that there
was change only in the form of ownership as persons behind both firm and company were the same. The

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Apex Court has held that it is open for the authorities to pierce the corporate veil and look behind the legal
facade at the reality of the transaction. The taxing authority is entitled as well as bound to determine the
true legal relation resulting from a transaction. The true legal relation arising from a transaction alone
determines the taxability of a receipt arising from the transaction [CIT -vs.- B.M. Kharwar (1969) (SC)]

3. Substance (i.e. actual nature of expense) is relevant and not the form: Where the authorities are charged
under the Act with the duty of determining the nature or purpose of and payment or receipt on the facts of
a case, it is open to them to work at the substance of the matter and the formal aspect may be ignored.

• In the case of an expenditure, the mere fact that the payment is made under an agreement does not
preclude the department from enquiring into the actual nature of the payment [Swadeshi Cotton Mills
Co. Ltd. -vs.- CIT (1967) (SC)].

• In order to determine whether a particular item of expenditure is of revenue or capital nature, the
substance and not merely the form should be looked into. [Assam Bengal Cement Co. Ltd. -vs.- CIT
(1955) (SC)]. Where the terms of a transaction are embodied in a document, it should not be construed
only in its formal or technical aspect. While the words used should be looked at, too much importance
should not be attached to the name or label given by the parties and the document should be
interpreted so as to accord with the real intention of the parties as appearing from the instrument.

• Certain shares were held in the name of others, but the deceased was the real owner of the shares as
was found with reference to evidence. The High Court had held that the shares were not includible in
the estate of the deceased as they were not in his name. The Supreme Court pointed out that, in
substance, the deceased was the owner though only beneficially and upheld the inclusion for estate
duty purposes [CED -vs.- Aloke Mitra (1980)]

5. Write notes on Tax Evasion and Tax Avoidance

Answer:

Tax evasion is the illegal way to reduce tax liability by deliberately suppressing income or sale or by increasing
expenses, etc., which results in reduction of total income of the assessee. Dishonest taxpayers try to reduce their
taxes by concealing income, inflation of expenses, submitting misleading information, falsification of accounts
and willful violation of the provisions of the Income-tax Act. Such unethical practices often create problems for
the tax evaders. Tax department not only imposes huge penalties but also initiate prosecution in such cases. It is
illegal, both in script & moral. It is the cancer of modern society and work as a clog in the development of the
nation. It is a grave problem in a developing country like ours as it leads to a creation of a ‘resource crunch’ for
developmental activities of the State.

Tax avoidance is an exercise by which the assessee legally takes advantages, with malafide motive, of
loopholes in the Act. Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner
that although it is within the four corners of the laws, it is done with a purpose to defraud the revenue. It is a

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practice of dodging or bending the law without breaking it. It is a way to reduce tax liability by applying script
of law only. E.g. if A gives gift to his wife, the income from the asset gifted will be clubbed in the hand of A. But
to avoid this clubbing provision “A” decides to give gift to B’s wife and B reciprocates it by giving gift to A’s wife.
This is not tax planning but tax avoidance. Most of the amendments are aimed to curb such loopholes.

6. What are the essentials of tax planning?

Answer:
Following are the essentials of tax planning:
• Uptodate Knowledge of tax laws alongwith circulars, notifications, clarifications and Administrative
instructions issued by the CBDT.
• Disclosure of full and true material information
• Avoid sham transactions or make-believe transactions or colourable devices
• Foresight of future development or changes and enterprise’s goal.

7. Naresh, who is neither a director nor he has substantial interest in any company, is offered an employment
by Freewheel Ltd., Mumbai with the following two alternatives:

Particulars I II
Basic pay 66,000 66,000
Bonus 9,000 9,000
Education allowance for 2 children 30,200 -
Education facility for 2 children in school maintained by employer - 30,200
Sweeper allowance 10,000 -
Sweeper facility - 10,000
Entertainment allowance 6,000 -
Club facility - 6,000
Transport allowance for personal use 1,800 pm -
Free car (1200 cc) facility for performing journey between office to home and - 12,000
vice versa (car owned by employer)
Medical allowance 18,000 -
Medical bills reimbursement facility - 18,000
Allowance for gas, electricity and water supply 4,500 -
Free gas, electricity and water supply (bills will be in the name of the employer) - 4,500
Holiday home allowance 8,000 -
Holiday home facility - 8,000

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Lunch allowance 18,000 -

Free lunch (` 70 x 200 days + ` 80 x 50 days) - 18,000
Diwali gift allowance 7,500 -
Gift on Diwali - 7,500
A rent free unfurnished home – lease rent 14,000 14,000

Which of the two alternatives Naresh should opt for on the assumption that both employer and employee will
contribute 10% of salary towards unrecognized provident fund? Interest free loan of ` 20,000 will be given to
him for purchasing household items.

Answer:

As both the options are yielding equivalent facilities, hence the option where tax liability can be minimized is
the better choice for the assessee. Accordingly, computation of taxable salary of Naresh under both options
are as under

Particulars Working Option1 Option2

Details Amount Details Amount

Basic salary 66,000 66,000

Bonus 9,000 9,000

Allowances

Children education 30,200

allowance

Less: Exemption u/s 10(14) 100 x 2 x 12 2,400 27,800

Rule 2BB

Transport allowance 21,600

Less: Exemption u/s 10(14) Nil 21,600

Holiday home allowance 8,000

Medical allowance 18,000

Sweeper allowance 10,000

Entertainment allowance 6,000

Lunch allowance 18,000

Gas, electricity & water 4,500

allowance

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Diwali gift allowance 7,500

Perquisites u/s 17(2)

Rent free
accommodation

(Being minimum of the

following):

Rent paid by employer 14,000 14,000

15% of salary* 26,580 14,000 11,250 11,250

Car facility for performing Exempted Nil

journey between office to
home and vice versa

Education facility 30,200

Less: Exempted 24,000 6,200

Interest free loan Nil Nil

exempted up to ` 20,000

Sweeper facility 10,000

Club facility 6,000

Holiday home facility 8,000

Medical facility 18,000

Gift 7,500 – 5,000 2,500

Gas, electricity & water 4,500

facility

Free lunch facility (20x200)+(30x50) 5,500

Gross Taxable Salary 2,10,400 1,46,950

Less: Standard Deduction u/s 16(ia) 50,000 50,000

Taxable Salary 1,60,400 96,950

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* Salary for the purpose of -

Particulars Rent free accommodation

Option 1 Option 2
Basic 66,000 66,000
Bonus 9,000 9,000
Children education allowance 27,800 -
Transport allowance 21,600 -
Holiday home allowance 8,000 -
Medical allowance 18,000 -
Sweeper Allowance 10,000 -
Entertainment allowance 6,000 -
Lunch allowance 18,000 -
Gas, electricity & water allowance 4,500 -
Diwali gift allowance 7,500 -
Total 1,96,400 75,000

Note: Contribution to URPF is not taxable.

Conclusion: Option 2 is better.

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Study Note – 13

INCOME TAX AUTHORITIES

Learning Objective: This study note will help to understand hierarchy of the income-tax
authorities alongwith their power and duties.

1. Choose the correct alternative and also provide your justification

(i) Who among the following is not considered as income-tax authorities u/s 116

(a) CBDT

(b) ITAT

(c) Tax Recovery Officer

(d) Inspector of income-tax

(ii) The Central Board of Direct Taxes consists of a Chairman and _______ Members:

(a) 5

(b) 6

(c) 3

(d) 2

(iii) Out of the following, which is the power of the CBDT

(a) Instructions to subordinate authorities

(b) Issue General or Special order to subordinates

(c) Admit application or claim after expiry of time limit

(d) All of the above

Answer:

(i) (b) ITAT

Reason:

ITAT is quasi-judicial authority.

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(ii) (b) 6

Reason:

The Central Board of Direct Taxes consists of a Chairman and following six Members: -

1. Member (Income-tax)

2. Member (Legislation & Computerisation)

3. Member (Personnel & Vigilance)

4. Member (Investigation)

5. Member (Revenue)

6. Member (Audit & Judicial)

(iii) (d) All of the above

Reason:

All of these power are prescribed u/s 119.

2. The jurisdiction of an Assessing Officer cannot be objected by the assesee. Discuss

Answer:

As per sec. 124(3), no person shall be entitled to call in question the jurisdiction of an Assessing Officer:

a. where he has made a return u/s 139(1), after the expiry of 1 month from the date on which he was served
with a notice u/s 142(2) or 143(2) or after the completion of the assessment, whichever is earlier.

b. where he has made no such return, after the expiry of the time allowed by the notice u/s 142(1) or 148 for
the making of the return or by the notice under the first proviso to sec. 144 to show cause why the
assessment should not be completed to the best of the judgment of the Assessing Officer, whichever is
earlier.

c. where an action has been taken u/s 132 or 132A, after the expiry of 1 month from the date on which he
was served with a notice u/s 153A or 153C or after the completion of the assessment, whichever is earlier.

Where an assessee calls in question the jurisdiction of an Assessing Officer, then the Assessing Officer shall, if not
satisfied with the correctness of the claim, refer the matter for determination by the Principal Director General or
Director General or the Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or
Commissioner before the assessment is made.

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3. Write notes on provision relating to succession of income tax authority.

Answer:

Succession of income-tax authority [Sec. 129]

• Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise
jurisdiction and another income tax authority exercises jurisdiction.

• The income-tax authority so succeeding may continue the proceeding from the stage at which the
proceeding was left by his predecessor.

Opportunity of being re-heard

The assessee may demand that before -

• Such succeeding authority reopens previous proceeding or any part thereof; or

• any order of assessment is passed against him,

- he must be given an opportunity of being re-heard.

4. Write notes on jurisdiction of income-tax authorities

Answer:

Jurisdiction of income-tax authorities [Sec. 120]

 Income-tax authorities shall exercise all or any of the powers and perform all or any of the functions assigned
to such authorities in accordance with directions of the Board

 The directions of the Board may authorise any other income-tax authority to issue orders in writing for the
exercise of the powers and performance of the functions by any of its subordinate.

 The Board or other authorised income-tax authority may have regard to any one or more of the following
criteria:

a) territorial area;

b) persons or classes of persons;

c) incomes or classes of income; and

d) cases or classes of cases.

 The Board may, by general or special order, and subject to such conditions, restrictions or limitations as may
be specified therein:

a. authorise any Principal Director General or Director General or Principal Director or Director to perform
such functions of any other income-tax authority as may be assigned to him by the Board;

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b. empower the Principal Director General or Director General or Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner to issue orders in writing that the powers and
functions assigned to, the Assessing Officer in respect of any specified area or persons or classes of
persons or incomes or classes of income or cases or classes of cases, shall be exercised or performed by
an Additional Commissioner or an Additional Director or a Joint Commissioner or a Joint Director; and
 Where it is considered necessary or appropriate for the proper management of the work, jurisdiction with
more than one income tax authority in relation to any case may be conferred or assigned.

 The Board may direct that for the purpose of furnishing of the return of income or the doing of any other act
or thing under this Act or any rule made thereunder by any person or class of persons, the income-tax
authority exercising and performing the powers and functions in relation to the said person or class of
persons shall be such authority as may be specified in the notification.

5. Who can appoint income-tax authorities?

Answer:

Appointment of income-tax authorities [Sec. 117]

(1) The Central Government may appoint such persons as it thinks fit to be income-tax authorities.

(2) The Central Government may authorise the Board, or a Principal Director General or Director-General, a
Principal Chief Commissioner or Chief Commissioner or a Principal Director or Director or a Principal
Commissioner or Commissioner to appoint income-tax authorities below the rank of an Assistant
Commissioner or Deputy Commissioner.

(3) An income-tax authority authorised in this behalf by the Board may appoint such executive or ministerial
staff as may be necessary to assist it in the execution of its functions.

All these appointments can be made subject to the rules and orders of the Central Government.

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Study Note – 14

LIABILITY IN SPECIAL CASES

Learning Objective: This study note will help to understand the provision of income tax in
special cases like death of the assessee, liquidation of company, etc.

1. Choose the correct alternative and also provide your justification

(i) Equalisation levy u/s 165 shall be payable @ ____ of the consideration for any specified service
received or receivable by a person, being a non-resident.

(a) 5%

(b) 6%

(c) 7.5%

(d) 12%

(ii) If a person makes a false statement in any verification or delivers an account or statement, which is
false, and which he either knows or believes to be false, or does not believe to be true, he shall be
punishable with imprisonment for a term which may extend to:

(a) 3 years and with fine

(b) 7 years and with fine

(c) 6 months and with fine

(d) 2 years and with fine

(iii) Tonnage taxation scheme is applicable in case of:

(a) Shipping business

(b) Aircraft operation business

(c) Road transport business

(d) All of the above

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(iv) As per sec. 115VG, daily tonnage income of a qualifying ship having net tonnage upto 1000 ton is:

(a) ` 60 for each 100 tons

(b) ` 65 for each 100 tons

(c) ` 70 for each 100 tons

(d) ` 72 for each 100 tons

Answer:

(i) (b) 6%

Reason:

Equalisation levy shall be payable @ 6% of the consideration for any specified service received or
receivable by a person, being a non-resident from:
i. a person resident in India and carrying on business or profession; or
ii. a non-resident having a permanent establishment in India.

(ii) (a) 3 years and with fine

Reason:
As per sec. 176, if a person makes a false statement in any verification or delivers an account or
statement, which is false, and which he either knows or believes to be false, or does not believe to be
true, he shall be punishable with imprisonment for a term which may extend to 3 years and with fine.

(iii) (a) Shipping business

Reason:

Tonnage Scheme is a scheme of presumptive taxation whereby the notional income arising from the
operation of a ship is determined based on the tonnage of the ship.

(iv) (c) ` 70 for each 100 tons

Reason:

Daily tonnage income of a qualifying ship shall be:

Qualifying ship having net tonnage Amount of daily tonnage income

Upto 1,000 ` 70 for each 100 tons
Exceeding 1,000 but not more than 10,000 ` 700 plus ` 53 for each 100 tons exceeding 1,000 tons
Exceeding 10,000 but not more than ` 5,470 plus ` 42 for each 100 tons exceeding 10,000
25,000 tons
Exceeding 25,000 ` 11,770 plus ` 29 for each 100 tons exceeding 25,000
tons

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2. The directors of a private company are personally liable to pay the income tax due from the company but
their liability does not include liability towards interest and penalty payable by the company. Comment

Answer:

Liability of directors of private company in liquidation [Sec. 179]

Where any tax due from a private company -

 in respect of any income of any previous year; or

 from any other company in respect of any income of any previous year during which such other company
was a private company

cannot be recovered, then, every person who was a director of the private company at any time during the
relevant previous year shall be jointly and severally liable for the payment of such tax. However, no such
director shall be liable if he proves that the non-recovery cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in relation to the affairs of the company.

Here, tax due includes penalty, interest or any other sum payable under the Act.

In light of aforesaid provision, the statement is not correct.

3. Write short notes on

a. Service of notice when family is disrupted or firm, etc., is dissolved

b. Service of notice in the case of discontinued business

Answer:

a. Service of notice when family is disrupted or firm, etc., is dissolved [Sec. 283]
 After a finding of total partition has been recorded by the Assessing Officer u/s 171 in respect of any
Hindu family, notices under this Act in respect of the income of the Hindu family shall be served on the
person who was the last manager of the Hindu family, or, if such person is dead, then on all adults who
were members of the Hindu family immediately before the partition.

 Where a firm or other association of persons is dissolved, notices under this Act in respect of the income
of the firm or association may be served on any person who was a partner (not being a minor) or
member of the association, as the case may be, immediately before its dissolution.

b. Service of notice in the case of discontinued business [Sec. 284]

Where an assessment is to be made u/s 176, the Assessing Officer may serve on the person whose income is
to be assessed, or, in the case of a firm or an association of persons, on any person who was a member of
such firm or association at the time of its discontinuance or, in the case of a company, on the principal
officer thereof, a notice containing all or any of the requirements which may be included in a notice u/s
139(2), and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a
notice issued under that section.

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4. Explain the provision relating to restrictions on receipt of cash u/s 269ST.

Answer:

Mode of undertaking transactions [Sec. 269ST]

No person shall receive an amount of ` 2,00,000 or more:

a. in aggregate from a person in a day; or

b. in respect of a single transaction; or

c. in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing
system through a bank account or through other prescribed electronic modes.

Exception

The provisions shall not apply to:

(i) any receipt by:

a) Government;

b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in sec. 269SS

(iii) such other persons or class of persons or receipts, which the Central Government may notify.

 The Central Government vide Notification No. 28/2017 dated 05-04-2017 & 57/2017 dated 03-07-2017
has specified following receipt on which the provision is not applicable:

a) receipt by a business correspondent on behalf of a banking company or co-operative bank, in

accordance with the guidelines issued by the Reserve Bank of India;

b) receipt by a white label automated teller machine operator from retail outlet sources on behalf of
a banking company or co-operative bank, in accordance with the authorisation issued by the
Reserve Bank of India under the Payment and Settlement Systems Act, 2007

c) receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the
authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act,
2007

d) receipt by a company or institution issuing credit cards against bills raised in respect of one or more
credit cards;

e) receipt which is not includible in the total income u/s 10(17A)

f) receipt by any person from any banking company, post office savings bank or co-operative bank;

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Clarification vide Circular No. 22/2017 dated 03-07-2017

In respect of receipt in the nature of repayment of loan by Non-Banking Financial Companies (NBFCs) and
Housing Finance Companies (HFCs), the receipt of one instalment of loan repayment in respect of a loan shall
constitute a ‘single transaction’ as specified in sec. 269ST(b) and all the instalments paid for a loan shall not be
aggregated for the purposes of determining applicability of the provisions sec. 269ST.

Penalty [Sec. 271DA]

If a person receives any sum in contravention of the provisions of sec. 269ST, he shall be liable to pay, by way of
penalty, a sum equal to the amount of such receipt. However, no penalty shall be imposable if such person
proves that there were good and sufficient reasons for the contravention.

Taxpoint: Such penalty shall be imposed by the Joint Commissioner.

5. Representative assessee have right to recover tax paid by him. Comment

Answer:

Right of representative assessee to recover tax paid [Sec. 162]

 Every representative assessee who, as such, pays any sum under this Act, shall be entitled to recover the
sum so paid from the person on whose behalf it is paid, or to retain out of any moneys that may be in his
possession or may come to him in his representative capacity, an amount equal to the sum so paid.

 Any representative assessee who apprehends that he may be assessed as a representative assessee, may
retain out of any money payable by him to the person on whose behalf he is liable to pay tax (hereinafter in
this section referred to as the principal), a sum equal to his estimated liability.

 In the event of any disagreement between the principal and such representative assessee, such
representative assessee may secure from the Assessing Officer a certificate stating the amount to be so
retained pending final settlement of the liability, and the certificate so obtained shall be his warrant for
retaining that amount.

 The amount recoverable from such representative assessee at the time of final settlement shall not exceed
the amount specified in such certificate, except to the extent to which such representative assessee may,
at such time, have in his hands additional assets of the principal.

6. Who is termed as representative assessee?

Answer:

Representative assessee [Sec. 160]

Representative assessee means:

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In respect of the income Representative Assessee

(i) of a non-resident specified in Sec. 9(1) Agent of the non-resident, including a person
who is treated as an agent u/s 163
(ii) of a minor, lunatic or idiot A guardian or manager who is entitled to
receive or is in receipt of such income on behalf
of such minor, lunatic or idiot.
(iii) which is received by Such –
• the Court of Wards; • Court of Wards;
• the Administrator-General; • Administrator-General;
• the Official Trustee; or • Official Trustee; or
• any receiver or manager, • Receiver or Manager
appointed by or u nder any order of a court on
behalf of or for the benefit of any person.

(iv) which is received by trustee [appointed under a trust Such trustee or trustees
declared by a duly executed instrument in writing
whether testamentary or otherwise (including any
valid wakf deed)] on behalf of or for the benefit of
any person
(v) which is received receives or entitled to receive by Such trustee or trustees
trustee (appointed under an oral trust) on behalf of or
for the benefit of any person

Taxpoint: Every representative assessee shall be deemed to be an assessee.

7. Discuss the special provision regarding assessment of a person leaving India.

Answer:

Assessment of persons leaving India [Sec. 174]

 When it appears to the Assessing Officer that any individual may leave India during the current assessment
year or shortly after its expiry and that he has no present intention of returning to India, the total income of
such individual for the period from the expiry of the previous year for that assessment year up to the
probable date of his departure from India shall be chargeable to tax in that assessment year.
 The total income of each completed previous year or part of any previous year included in such period shall
be chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be
made in respect of each such completed previous year or part of any previous year.

 The Assessing Officer may estimate the income of such individual for such period or any part thereof, where
it cannot be readily determined in the manner provided in this Act.

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 For the purpose of making an assessment, the Assessing Officer may serve a notice upon such individual
requiring him to furnish, within such time, not being less than 7 days, as may be specified in the notice, a
return in the same form and verified in the same manner as a return u/s 142(1)(i), setting forth his total
income for each previous year and his estimated total income for any part of the previous year and the
provisions of this Act shall, so far as may be, and subject to the provisions of this section, apply as if the
notice were a notice issued u/s 142(1)(i).

8. Are producers of cinematograph films required to submit any statement. If yes, please explain the provision
relating thereto?

Answer:

Submission of statements by producers of cinematograph films [Sec. 285B]

Any person carrying on the production of a cinematograph film during the whole or any part of any financial
year shall, in respect of the period during which such production is carried on by him in such financial year,
prepare and deliver to the Assessing Officer, within 30 days from the end of such financial year or within 30 days
from the date of the completion of the production of the film, whichever is earlier, a statement in the
prescribed form (Form 52A) containing particulars of all payments of over ` 50,000 in the aggregate made by
him or due from him to each such person as is engaged by him in such production.

9. Discuss the chargeability provision of equalisation levy u/s 165A.

Answer:

Charge of equalisation levy on e-commerce supply of services [Sec. 165A]

Equalisation levy shall be charged @ 2% of the amount of consideration received or receivable by an e-
commerce operator from e-commerce supply or services made or provided or facilitated by it—
a. to a person resident in India; or
b. to a non-resident in the specified circumstances; or
• “Specified circumstances” mean—
i. sale of advertisement, which targets a customer, who is resident in India or a customer who
accesses the advertisement though internet protocol address located in India; and
ii. sale of data, collected from a person who is resident in India or from a person who uses internet
protocol address located in India
c. to a person who buys such goods or services or both using internet protocol address located in India.
Exception
The equalisation levy shall not be charged:
a. where the e-commerce operator making or providing or facilitating e-commerce supply or services has a
permanent establishment in India and such e-commerce supply or services is effectively connected with
such permanent establishment;

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b. where the equalisation levy is leviable u/s 165 [i.e. A supra]; or

c. sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce
supply or services made or provided or facilitated is less than ` 2 crore during the previous year.

10. Define qualifying ship in the context of tonnage tax scheme.

Answer:

Qualifying ship [Sec. 115VD]

A ship is a qualifying ship if:

a. it is a sea going ship or vessel of 15 net tonnage or more;

 Seagoing ship means a ship if it is certified as such by the competent authority of any country.

b. it is a ship registered under the Merchant Shipping Act, 1958 or a ship registered outside India in respect of
which a licence has been issued by the Director-General of Shipping u/s 406 or section 407 of the Merchant
Shipping Act, 1958; and

c. a valid certificate in respect of such ship indicating its net tonnage is in force,—

In nutshell, qualifying ship means a sea-going ship having valid certificate

- but does not include —

i. Factory ships;
 Factory ship includes a vessel providing processing services in respect of processing of the fishing
produce.

ii. Pleasure crafts;

 Pleasure craft means a ship of a kind whose primary use is for the purposes of sport or recreation.

iii. Harbour and river ferries;

iv. A seagoing ship or vessel if the main purpose for which it is used is the provision of goods or services of
a kind normally provided on land;

v. Off-shore installations;

vi. Fishing vessels

vii. a qualifying ship, which is used as a fishing vessel for a period of more than 30 days during a previous
year.

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Study Note – 15

INCOME COMPUTATION & DISCLOSURE STANDARDS

Learning Objective: The Central Government has notified the ICDS. The rationale behind
issuing ICDS is to lessen the uncertainty of alternative accounting treatment due to flexibility
offered by Accounting Standards (AS) & also to reduce litigation that crops up when the
stand taken by income tax authorities is not in alignment with the AS. This study note will
help to understand the provision of various ICDS.

1. Choose the correct alternative and also provide your justification

(i) ICDS ____ deals with Government Grants
(a) VI
(b) VII
(c) VIII
(d) X

(ii) The ICDS is required to be followed:

(a) by all assessee (other than an individual or a Hindu undivided family who is not required to get his
accounts of the previous year audited u/s 44AB)
(b) by all assessee
(c) by all assessee (other than an individual or a Hindu undivided family)
(d) None of the above

(iii) ICDS II shall be applied for valuation of inventories, except:

(a) Work-in-progress arising under ‘construction contract’
(b) Shares, debentures and other financial instruments held as stock-in-trade
(c) Machinery spares, which can be used irregularly in connection with a tangible fixed asset
(d) All of the above

(iv) The comparative Accounting Standard with ICDS III is

(a) AS 7

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(b) AS 9
(c) AS 2
(d) AS 10

(v) Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of
funds and include:
(a) commitment charges on borrowings;
(b) amortised amount of discounts or premiums relating to borrowings;
(c) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings;
(d) All of the above

Answer:

(i) (b) VII

Reason:
ICDS VII deals with Government Grants.

(ii) (a) by all assessee (other than an individual or a Hindu undivided family who is not required to get his
accounts of the previous year audited u/s 44AB)

Reason:
The standards are required to be followed:

• by all assessee (other than an individual or a Hindu undivided family who is not required to get his
accounts of the previous year audited u/s 44AB)

• who follows the mercantile system of accounting,

• for the purposes of computation of income chargeable to income-tax under the head “Profits
and gains of business or profession” or “Income from other sources”.

(iii) (d) All of the above

Reason:
ICDS II shall be applied for valuation of inventories, except
i. Work-in-progress arising under ‘construction contract’
ii. Work-in-progress which is dealt with by other Standard
iii. Shares, debentures and other financial instruments held as stock-in-trade

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iv. Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to
the extent that they are measured at net realisable value
v. Machinery spares, which can be used only in connection with a tangible fixed asset and their use
is expected to be irregular

(iv) (a) AS 7

Reason:
ICDS III and AS 7 deals with construction contract.

(v) (d) All of the above

Reason:
As per ICDS IX, borrowing costs are interest and other costs incurred by a person in connection with
the borrowing of funds and include:
a) commitment charges on borrowings;
b) amortised amount of discounts or premiums relating to borrowings;
c) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings;
d) finance charges in respect of assets acquired under finance leases or under other similar
arrangements.

2. Preamble of ICDS-I states that this ICDS is applicable for computation of income chargeable under the head
“Profits and gains of business or profession” or “Income from other sources” and no t for the purposes of
maintenance of books of accounts. However, Para 1 of ICDS I states that it deals with significant accounting
policies. Accounting policies are applied for maintenance of books of accounts and pr eparing financial
statements. What is the interplay between ICDS-I and maintenance of books of accounts?

Answer:
As stated in the Preamble, ICDS is not meant for maintenance of books of accounts or preparing financial
statements. Persons are required to maintain books of accounts and prepare financial statements as per
accounting policies applicable to them. For example, companies are required to maintain books of account
and prepare financial statements as per requirements of Companies Act 2013. The accounting policies
mentioned in ICDS-I being fundamental in nature shall be applicable for computing income under the heads
“Profits and gains of business or profession” or “Income from other sources”.

3. Distinguish between AS 29 and ICDS X

Answer:
Distinguish between AS 29 and ICDS X are as under

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Basis of difference AS 29 ICDS X

Onerous executory Includes onerous executory contracts Onerous executory contracts excluded
contracts within its scope from the scope of ICDS

Upfront recognition of liabilities required

under onerous contracts

Recognition of Provision shall be recognized when it is Provision shall be recognized when it is

provision “probable” that an outflow of economic “reasonably certain” that an outflow of
resources will be required to settle an economic resources will be required to
obligation settle an obligation

Recognition of Reimbursement claims are recognized Reimbursement claims are recognized

reimbursement claims when the realization of related income is when the realization of related income
“virtually certain” is “reasonably certain”

Meaning of obligation Clarifies that obligations may be legally No specific guidance on meaning of
enforceable and may also arise from ‘obligation
normal business practice, custom and a
desire to maintain good business relations
or act in an equitable manner.

4. Whether ICDS shall apply to computation of Minimum Alternate Tax (MAT) u/s 115JB of the Act or Alternate
Minimum Tax (AMT) under section 115JC of the Act?

Answer:
MAT u/s 115JB of the Act is computed on ‘book profit’ that is net profit as shown in the Profit and Loss Account
prepared under the Companies Act subject to certain specified adjustments. Since, the provisions of ICDS are
applicable for computation of income under the regular provisions of the Act, the provisions of ICDS shall not
apply for computation of MAT.
AMT u/s 115JC of the Act is computed on adjusted total income which is derived by making specified
adjustments to total income computed as per the regular provisions of the Act. Hence, the provisions of ICDS
shall apply for computation of AMT.

5. State the method of computation of income from construction and service contract.

Answer:
Computation of income from construction and service contracts [Sec. 43CB]
The profits and gains arising from a construction contract or a contract for providing services shall be
determined on the basis of percentage of completion method in accordance with the ICDS.

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Taxpoint:
 Profits and gains arising from a contract for providing services:

Case Method

Contract for providing services with duration of not more than 90 days Project completion method

A contract for providing services involving indeterminate number of acts Straight line method
over a specific period of time

 For the purpose of percentage of completion method:

• the contract revenue shall include retention money;
• the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or
capital gains.

6. Discuss the various rules prescribed in ICDS IV regarding recognition of revenue.

Answer:
Scope
 The Standard deals with the bases for recognition of revenue arising in the course of the ordinary activities of
a person from:
a) the sale of goods;
b) the rendering of services;
c) the use by others of the person’s resources yielding interest, royalties or dividends.
 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of a person from the sale of goods, from the rendering of services, or from the
use by others of the person’s resources yielding interest, royalties or dividends. In an agency
relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables
or other consideration.

 The Standard does not deal with the aspects of revenue recognition which are dealt with by other
ICDS.

Sale of Goods

 Revenue from sales transactions should be recognized when the following conditions are fulfilled -

a) The seller of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer;

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b) The seller retains no effective control of the goods transferred to a degree usually associated with
ownership;

c) There is reasonable certainty of its ultimate collection.

Rendering of Services
 Revenue from service transactions shall be recognised by the percentage completion method.

 Under this method, revenue from service transactions is matched with the service transaction costs incurred
in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which
can be attributed to the proportion of work completed.

 However, when services are provided by an indeterminate number of acts over a specific period of time,
revenue may be recognised on a straight line basis over the specific period.

 Revenue from service contracts with duration of not more than 90 days may be recognised when the
rendering of services under that contract is completed or substantially completed.

Interest

 Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable.

 Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in which
such interest is received.

 Discount or premium on debt securities held is treated as though it were accruing over the period to
maturity.

Royalty

 Royalties shall accrue in accordance with the terms of the relevant agreement and shall be recognised on
that basis unless, having regard to the substance of the transaction, it is more appropriate to recognise
revenue on some other systematic and rational basis.

Dividend

 Dividends are recognised in accordance with the provisions of the Act

7. What are the fundamental accounting assumptions?

Answer:

As per ICDS I, following are the fundamental accounting assumptions

a. Going Concern,

b. Consistency and

c. Accrual

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8. Distinguish between AS 16 and ICDS IX

Answer:

Distinguish between AS 16 and ICDS IX are as under

Basis of difference AS 16 ICDS IX

Borrowing cost Borrowing cost includes exchange difference to Borrowing cost does not include
the extent that they are regarded as an exchange differences arising
adjustment to interest costs from foreign currency borrowings

Qualifying assets Qualifying asset defined to be an asset which Qualifying assets means
necessarily takes a substantia period of time to get
 Inventory that require a
ready for its intended use or sale
period of 12 months or more
to bring them to a saleable
condition

 Specified tangible and

intangible assets are
qualifying assets (regardless of
substantial period condition)

Commencement Capitalisation will commence when all the three In case of specific borrowing:
and cessation of conditions are satisfied (a) incurrence of capital
Capitalization will commence
capitalization expenditure (b) incurrence of borrowing cost (c)
from date of borrowing of funds
construction activity is in progress and cessation
and cessation from the date
from the date when asset is ready to use
when asset is put to use

In case of general borrowing

Capitalization will commence

from date of utilization of funds
and cessation from the date
when asset is put to use

Methodology of In case of specific borrowing: In case of specific borrowing:

capitalization
Directly attributable to borrowing cost Directly attributable to borrowing
cost
In case of general borrowing:
In case of general borrowing:
Weighted average cost of borrowing applied to
capital expenditure Prorate borrowing cost allocation
as per normative formulae

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Income from Income from temporary deployment of unutilised No similar provision in ICDS
temporary funds from specific loans to be reduced from
deployment of borrowing cost
funds

Suspension of Capitalization of borrowing costs should be No similar provision in ICDS

capitalization suspended during extended periods in which
active development is interrupted

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Study Note – 16

BLACK MONEY & IMPOSITION OF TAX ACT

Learning Objective: This study note will help to understand the provision of this Act. The
Act to make provisions to deal with the problem of the Black money that is undisclosed
foreign income and assets, the procedure for dealing with such income and assets and to
provide for imposition to tax on any undisclosed foreign income and asset held outside
India and for matters connected therewith or incidental thereto.

1. Choose the correct alternative and also provide your justification

(i) The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 extends to
(a) Whole of India except the state of Jammu and Kashmir.
(b) Whole of India
(c) Whole of India except the state of Arunachal Pradesh
(d) Whole of India except the state of Jammu and Kashmir & Assam

(ii) The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 provides
that tax @ ______% shall be charged on every assessee for every assessment year in respect of total
undisclosed foreign income and asset of the previous year
(a) 30
(b) 20
(c) 60
(d) 50

(iii) Any variation made in the income from a source outside India in the assessment or reassessment of
the total income of any previous year, of the assessee under the Income-tax Act in accordance with
the provisions of section 29 to section 43C (Profits and gains of business or profession) or section 57 to
section 59 (Income from other sources) or section 92C (Transfer pricing) of the said Act, ________
included in the total undisclosed foreign income.
(a) shall not be
(b) shall
(c) may be
(d) are

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(iv) As per sec. 5, in computing the total undisclosed foreign income and asset of any previous year of an
assessee:
(a) No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed
(b) Deduction in respect of any expenditure or allowance or set off of any loss shall be allowed
(c) Deduction in respect of any expenditure or allowance shall be allowed but set off of any loss shall
not be allowed
(d) No deduction in respect of any expenditure or allowance shall be allowed but set off of any loss
shall be allowed

(v) As per sec. 10, return is _______

(a) required to be furnished in Form 1
(b) not required to be filed under this Act
(c) required to be furnished in Form 2
(d) None of the above

Answer:

(i) (b) Whole of India

Reason:
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 extends to
whole of India.

(ii) (a) 30

Reason:

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 provides
that tax @ 30% shall be charged on every assessee for every assessment year in respect of total
undisclosed foreign income and asset of the previous year.

(iii) (a) shall not be

Reason:
Any variation made in the income from a source outside India in the assessment or reassessment of
the total income of any previous year, of the assessee under the Income-tax Act in accordance with
the provisions of section 29 to section 43C (Profits and gains of business or profession) or section 57 to
section 59 (Income from other sources) or section 92C (Transfer pricing) of the said Act, shall not be
included in the total undisclosed foreign income.

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(iv) (a) No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed

Reason:
As per sec. 5, in computing the total undisclosed foreign income and asset of any previous year of an
assessee, no deduction in respect of any expenditure or allowance or set off of any loss shall be
allowed.

(v) (b) not required to be filed under this Act

Reason:
No separate return is required to be filed under this Act.

2. How to compute total undisclosed foreign income and asset u/s 5 of Bl ack Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax Act, 2015.

Answer:
 In computing the total undisclosed foreign income and asset of any previous year of an assessee:

• No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the
assessee, whether or not it is allowable in accordance with the provisions of the Income-tax Act.

• Any income,—

a) which has been assessed to tax for any assessment year under the Income-tax Act prior to the
assessment year to which this Act applies; or

b) which is assessable or has been assessed to tax for any assessment year under this Act,

shall be reduced from the value of the undisclosed asset located outside India, if, the assessee furnishes
evidence to the satisfaction of the Assessing Officer that the asset has been acquired from the income
which has been assessed or is assessable, as the case may be, to tax.

 The amount of deduction in case of an immovable property shall be the amount which bears to the value
of the asset as on the first day of the financial year in which it comes to the notice of the Assessing Officer,
the same proportion as the assessable or assessed foreign income bears to the total cost of the asset.

Illustration

A house property located outside India was acquired by an assessee in the previous year 2010-11 for ` 50 lakh.
Out of the investment of ` 50 lakh, ` 20 lakh was assessed to tax in the total income of the previous year 2010-11
and earlier years. Such undisclosed asset comes to the notice of the Assessing Officer in the year 2019-20. If the
value of the asset in the year 2019-20 is ` 1 crore, the amount chargeable to tax shall be ` 60,00,000 i.e.,:

` 1,00,00,000 – (` 20,00,000 / ` 50,00,000) = ` 60,00,000

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3. State the provision relating to assessment u/s 10 of the Black Money (Undisclosed Foreign Income and
Assets) and Imposition of Tax Act, 2015.

Answer:
Assessment [Sec. 10]
 The Assessing Officer may, on receipt of an information from an income-tax authority or any other authority
under any law for the time being in force or on coming of any information to his notice, serve on any
person, a notice requiring him, on the specified date, to produce such accounts or documents or evidence
as the Assessing Officer may require for the purposes of this Act.

• No separate return is required to be filed under this Act

• There is no time limit for issuance of the aforesaid notice. The Assessing Officer may issue such notice any
time on the basis of information.
 The Assessing Officer may, from time to time, serve further notices requiring the production of such other
accounts or documents or evidence as he may require.
 The Assessing Officer may make such inquiry, as he considers necessary, for the purpose of obtaining full
information in respect of undisclosed foreign income and asset of any person for the relevant financial year
or years.
 The Assessing Officer, after considering such accounts, documents or evidence, as he has obtained, and
after taking into account any relevant material which he has gathered and any other evidence produced
by the assessee, shall by an order in writing, assess the undisclosed foreign income and asset and determine
the sum payable by the assessee.
 Such order shall be made within 2 years from the end of the financial year in which the notice was issued by
the Assessing Officer [Sec. 11]
 Best Judgment Assessment: If any person fails to comply with all the terms of the notice, the Assessing Officer
shall, after taking into account all the relevant material which he has gathered, make the assessment of
undisclosed foreign income and asset to the best of his judgment and determine the sum payable by the
assessee. [Sec. 10(4)]

• Before making such an assessment, an opportunity of being heard is required to be given to the
assessee.

4. State the provision relating to rounding off of undisclosed foreign income and asset. Also state the provision
relating to rounding off of amount payable thereon.

Answer:
Rounding off
a. The amount of undisclosed foreign income and asset computed shall be rounded off to the nearest
multiple of ` 100.
b. Any amount payable or receivable by the assessee shall be rounded off to the nearest multiple of ` 10.

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5. Does Central Government enter into an agreement with the government of any other country for exchange
of information? If yes, the state the provision.

Answer:

Agreement with foreign countries or specified territories [Sec. 73]

The Central Government may enter into an agreement with the Government of any other country:

a. for exchange of information for the prevention of evasion or avoidance of tax on undisclosed foreign
income chargeable under this Act or under the corresponding law in force in that country, or investigation
of cases of such evasion or avoidance;

b. for recovery of tax under this Act and under the corresponding law in force in that country.

Taxpoint:
 The Central Government may enter into an agreement with the Government of any specified territory
outside India
 The Central Government may, by notification, make such provisions as may be necessary for implementing
the agreements
 Any specified association in India may enter into an agreement with any specified association in the
specified territory outside India and the Central Government may by notification make such provisions as
may be necessary for adopting and implementing such agreement.

6. Who shall be treated as tax authorities under the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015?

Answer:

Tax authorities [Sec. 6]

 The income-tax authorities shall be the tax authorities for the purposes of this Act.

 Every such authority shall exercise the powers and perform the functions of a tax authority under this Act in
respect of any person within his jurisdiction.
 The jurisdiction of a tax authority under this Act shall be the same as he has under the Income-tax Act

 The tax authority having jurisdiction in relation to an assessee who has no income assessable to income-tax
under the Income-tax Act shall be the tax authority having jurisdiction in respect of the area in which the
assessee resides or carries on its business or has its principal place of business.

7. What do you mean by:

a. Undisclosed asset located outside India

b. Undisclosed foreign income and asset

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Answer:
a. Undisclosed asset located outside India means an asset (including financial interest in any entity) located
outside India, held by the assessee in his name or in respect of which he is a beneficial owner, and he has
no explanation about the source of investment in such asset or the explanation given by him is in the
opinion of the Assessing Officer unsatisfactory [Sec. 2(11)]

b. Undisclosed foreign income and asset means the total amount of undisclosed income of an assessee from
a source located outside India and the value of an undisclosed asset located outside India, referred to in
section 4, and computed in the manner laid down in section 5 [Sec. 2(12)]

8. Discuss the scope of t otal undisclosed foreign income and asset u/s 4 of t he Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015

Answer:

Scope of total undisclosed foreign income and asset [Sec. 4]

 The total undisclosed foreign income and asset of any previous year of an assessee shall be:

a) the income from a source located outside India, which has not been disclosed in the return of income
furnished u/s 139 of the Income-tax Act;

b) the income, from a source located outside India, in respect of which a return is required to be furnished
u/s 139 of the Income-tax Act but no return of income has been furnished u/s 139 of the Income-tax
Act; and

c) the value of an undisclosed asset located outside India.

 Any variation made in the income from a source outside India in the assessment or reassessment of the total
income of any previous year, of the assessee under the Income-tax Act in accordance with the provisions of
section 29 to section 43C (Profits and gains of business or profession) or section 57 to section 59 (Income
from other sources) or section 92C (Transfer pricing) of the said Act, shall not be included in the total
undisclosed foreign income.

 To avoid double taxation, the income included in the total undisclosed foreign income and asset under this
Act shall not form part of the total income under the Income-tax Act.

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Study Note – 17

INTERNATIONAL TAXATION

Learning Objective: International taxation is the study or determination of tax on a person

or business subject to the tax laws of different countries or the international aspects of an
individual country’s tax laws. Governments usually limit the scope or their income taxation
in some manner territorially or provide for offsets to taxation relating to extraterritorial
income. The manner of limitation generally takes the form of a territorial, residency, or
exclusionary system. This study note will help to understand the law relating to international
taxation.

1. Choose the correct alternative and also provide your justification

(i) Countries that employ explicit policies designed to attract international trade-oriented activities by
minimization of taxes and reduction or elimination of other restrictions on business operations is
described as _______.

(a) Tax Havens

(b) Tax Planning

(c) Tax Evasion

(d) Tax Management

(ii) The credit for tax paid ______ should be allowed in the year in w hich the foreign taxed income is
________ in India.

(a) overseas, remitted

(b) overseas, doubly taxed

(c) income, doubly taxed

(d) income, remitted

(iii) Relief from double taxation is provided by way of –

(a) Bilateral Relief

(b) Unilateral Relief

(c) Both (a) and (b)

(d) None of the above

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(iv) Where there is double taxation avoidance agreement exists with particular foreign country, relief from
double taxation on income from such country is available under section –

(a) 90

(b) 90A

(c) 91

(d) 92

(v) Generally, in Indian context, the term permanent establishment” means a f ixed place of business
through which the business of an e nterprise is wholly or partly carried on. The term “permanent
establishment” shall also include –

(a) the use of facilities solely for the purpose of s torage or display of g oods or merchandise
belonging to the enterprise

(b) the maintenance of a stock of g oods or merchandise belonging to the enterprise solely for the
purpose of storage or display

(c) a warehouse in relation to a person providing storage facilities for others

(d) the maintenance of a stock of g oods or merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise

(vi) Transfer Pricing provisions are applicable if –

(a) There is an international transaction between associated enterprises

(b) There is an inte rnational transaction between two enterprises and the transaction is not at ar m’s
length price

(c) There is an international transaction between any two parties

(d) None of these

(vii) As per section 92B of the Income-tax Act, international transaction means a transaction between two
or more associated enterprises, ________ are non-residents, of specified nature.

(a) either or both of whom

(b) both of whom

(c) one of whom

(d) none of them

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(viii) An advance pricing agreement shall not be valid for more than —

(a) 3 Years

(b) 5 Years

(c) 4 Years

(d) 7 Years

(ix) As per provision of sec. 92A, two enterprises shall be deemed to be associated enterprises if, at any
time during the previous year fulfill any of the prescribed conditions. In this context fill in the blanks of
the following condition:

• The manufacture or processing of g oods or articles or business carried out by one enterprise is
________ dependent on the use of know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention, model, design, secret
formula or process, of which the other enterprise is the owner or in respect of which the other
enterprise has __________.

(a) wholly or partially; exclusive rights

(b) wholly; exclusive rights

(c) 90%; exclusive rights

(d) wholly; 90% rights

(x) The following methods as per section 92C are used in determination of arm’s length prices for
international transactions and specified domestic transaction except —

(a) Comparable uncontrolled price method

(b) Resale price method

(c) Cost method

(d) Transactional net margin method

(xi) The monetary limit for aggregate transactions between two enterprises to fall in t he category of
specified domestic transaction is —

(a) ` 5 crore

(b) ` 3 crore

(c) ` 20 crore

(d) ` 25 crore

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(xii) When an as sessee fails to furnish any information relating to a s pecified domestic transaction, the
quantum of penalty as a percentage of value of the transaction would be —

(a) 2%

(b) 1%

(c) 5%

(d) 3%

Answer:

(i) (a) Tax Havens

Reason:

Any country which modifies its tax laws to attract foreign capital could be considered a tax haven.

(ii) (b) overseas, doubdly taxed

Reason:

The credit for tax paid overseas should be allowed in the year in which the foreign taxed income is
doubly taxed in India.

(iii) (c) Both (a) and (b)

Reason:

Relief from double taxation is provided by way of

 Bilateral Relief [Sec. 90]

 Unilateral Relief [Sec. 91]

(iv) (a) 90

Reason:

Bilateral relief for avoidance of double taxation is available u/s 90.

(v) (c) a warehouse in relation to a person providing storage facilities for others

Reason:

The term permanent establishment” means a fixed place of business through which the business of an
enterprise is wholly or partly carried on. The term “permanent establishment” shall also include:

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a. a place of management;

b. a branch;

c. an office;

d. a factory;

e. a workshop;

f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

g. a warehouse in relation to a person providing storage facilities for others;

h. a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are
carried on;

i. premises used as a sales outlet or for receiving or soliciting orders;

j. an installation or structure, or plant or equipment, used for the exploration for or exploitation of
natural resources;

k. a building site or construction, installation or assembly project, or supervisory activities in

connection with such a site or project, where that site or project exists or those activities are
carried on (whether separately or together with other sites, projects or activities) for more than
specified months (generally 6 months).

(vi) (a) There is an international transaction between associated enterprises

Reason:

The provision of transfer pricing is applicable if there is an international transaction between

associated enterprises. In some case of specified domestic transactions, provision is also applicable.

(vii) (a) either or both of whom

Reason:

International transaction means a transaction between two or more associated enterprises, either or
both of whom are non-residents.

(viii) (b) 5 Years

Reason:

The agreement shall be valid for such period not exceeding 5 consecutive previous years as may be
specified in the agreement.

(ix) (b) wholly; exclusive rights

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Reason:

The manufacture or processing of goods or articles or business carried out by one enterprise is wholly
(not partially) dependent on the use of know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or any data, documentation,
drawing or specification relating to any patent, invention, model, design, secret formula or process, of
which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights.

(x) (c) Cost method

Reason:

There is no method like cost method. Though one of the method for determination of arm’s length
price is cost plus method.

(xi) (c) ` 20 crore

Reason:

As per sec. 92BA, the monetary limit for aggregate transactions between two enterprises to fall in the
category of specified domestic transaction is ` 20 crore.

(xii) (a) 2%

Reason:

Failure to keep and maintain information and document in respect of international transaction or
specified domestic transaction [Sec. 271AA]

If any person in respect of an international transaction or specified domestic transaction:

i. fails to keep and maintain any such information and document as required by sec. 92D;

ii. fails to report such transaction which he is required to do so; or

iii. maintains or furnishes an incorrect information or document,

the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of
penalty, a sum equal to 2% of the value of each international transaction or specified domestic
transaction entered into by such person.

2. What is thin capitalization?

Answer:

Thin Capitalization

A company is typically financed or capitalized through a mixture of debt and equity. The way a company is
capitalized often has a significant impact on the amount of profit it reports for tax purposes as the tax

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legislations of countries typically allow a deduction for interest paid or payable in arriving at the profit for tax
purposes while the dividend paid on equity contribution is not deductible. Therefore, the higher the level of
debt in a company, and thus the amount of interest it pays, the lower will be its taxable profit. For this reason,
debt is often a more tax efficient method of finance than equity. Multinational groups are often able to
structure their financing arrangements to maximize these benefits. For this reason, country’s tax administrations
often introduce rules that place a limit on the amount of interest that can be deducted in computing a
company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through
excessive interest payments, and thus aim to protect a country’s tax base.

Under the initiative of the G-20 countries, the Organization for Economic Co-operation and Development
(OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue of base erosion and profit
shifting by way of excess interest deductions by the MNEs in Action plan 4. The OECD has recommended
several measures in its final report to address this issue.

In view of the above, sec. 94B was inserted in line with the recommendations of OECD BEPS Action Plan 4, to
provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its
earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to
associated enterprise, whichever is less.

3. Explain how the arms’s length price in relation to an international transaction is computed under the resale
price method as per Rule 10B of the Income-tax Rule, 1962.

Answer:

The Arm’s Length Price as per resale price method shall be determined as under:

i. the price at which property purchased or services obtained by the enterprise from an associated enterprise
is resold or are provided to an unrelated enterprise, is identified;

ii. such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to
an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and
providing the same or similar services, in a comparable uncontrolled transaction, or a number of such
transactions;

iii. the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the
purchase of property or obtaining of services;

iv. the price so arrived at is adjusted to take into account the functional and other differences, including
differences in accounting practices, if any, between the international transaction or the specified domestic
transaction and the comparable uncontrolled transactions, or between the enterprises entering into such
transactions, which could materially affect the amount of gross profit margin in the open market;

v. the adjusted price arrived at under (iv) is taken to be an arm’s length price in respect of the purchase of
the property or obtaining of the services by the enterprise from the associated enterprise.

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4. Discuss when an enterprise is taken as ‘associated enterprise’ under section 92A.

Answer:

Meaning of associated enterprise [Sec. 92A]

Associated enterprise, in relation to another enterprise, means an enterprise:

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or
control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital, are the same persons who participate, directly or
indirectly, or through one or more intermediaries, in the management or control or capital of the other
enterprise.

Deemed associated enterprise [Sec. 92A(2)]

For the above purpose, two enterprises shall be deemed to be associated enterprises if, at any time during the
previous year fulfill any of the following conditions (if one of following conditions are not satisfied, then mere
participation in management or control or capital of the other enterprise, etc. shall not make them associate):

(a) one enterprise holds (directly or indirectly) shares carrying not less than 26% of the voting power (i.e., equity
shares in case of company) in the other enterprise; or

(b) any person or enterprise holds (directly or indirectly) shares carrying not less than 26% of the voting power in
each of such enterprises; or

(c) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly (not
partially) dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data, documentation, drawing or specification
relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is
the owner or in respect of which the other enterprise has exclusive rights; or

(d) 90% or more of the raw materials and consumables required for the manufacture or processing of goods or
articles carried out by one enterprise, are supplied by the other enterprise or by persons specified by the
other enterprise, and the prices and other conditions relating to the supply are influenced by such other
enterprise; or

(e) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to
persons specified by the other enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise; or

(f) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual
or his relative or jointly by such individual and relative of such individual; or

(g) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a
member of such Hindu undivided family, or by a relative of a member of such Hindu undivided family, or
jointly by such member and his relative; or

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(h) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not
less than 10% interest in such firm, association of persons or body of individuals; or

(i) a loan advanced by one enterprise to the other enterprise constitutes not less than 51% of the book value
of the total assets of the other enterprise; or

Taxpoint: Revaluation of asset shall not be ignored.

(j) one enterprise guarantees not less than 10% of the total borrowings of the other enterprise; or

(k) more than ½ of the board of directors or members of the governing board, or one (not ½ of total number
of executive director) or more executive directors or executive members of the governing board of one
enterprise, are appointed by the other enterprise; or

Taxpoint: Mere power to appoint director is not sufficient, such power must be exercised.

(l) more than ½ of the directors or members of the governing board, or one or more of the executive directors
or members of the governing board, of each of the two enterprises are appointed by the same person or
persons; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

5. You are a t ax consultant to an overseas manufacturing company which is going to start a permanent
establishment in India with manufacturing facility in M adurai District of Tamilnadu. Prepare a r eport for the
Chairman of the company highlighting latest transfer pricing provisions applicable in India.

Answer:

The increasing participation of multinational groups in economic activities in the country has given rise to new
and complex issues emerging from transactions entered into between two or more enterprises belonging to the
same multinational group. The profits derived by such enterprises carrying on business in India can be controlled
by the multinational group, by manipulating the prices charged and paid in such intra-group transactions,
thereby, leading to erosion of tax revenues. In other words, the course of business between a resident person
and an associated non-resident or not ordinarily resident person, is so arranged that the resident makes either
no profit or less than the ordinary profit in that business. Such an arrangement would deprive that Indian
revenue of the tax which would otherwise be payable by the resident. With a view to provide a statutory
framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in case of
such multinational enterprise, new set of special provisions relating to avoidance of tax have been introduced
under chapter X in the Income tax Act. These provisions relate to computation of income from international
transaction having regard to arm’s length price, meaning of associated enterprises, meaning of international
transaction, determination of arm’s length price, keeping and maintaining of information and documents by
persons entering into international transaction, furnishing of a report from an accountant by persons entering
into such transactions.

Transfer pricing provisions are enumerated here-in-below for your ready reference:

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Computation of income from international transaction having regard to arm’s length price [Sec. 92]

The provisions are as under:

 Any income arising from an international transaction shall be computed having regard to the arm’s length
price.
 The allowance for any expense or interest arising from an international transaction or specified domestic
transaction1 shall also be determined having regard to the arm’s length price.
 Where in an international transaction or specified domestic transaction,
• two or more associated enterprises
• enter into a mutual agreement or arrangement for the apportionment of, or any contribution to, any
cost incurred
• in connection with a benefit, service or facility provided to any such enterprises,

the cost apportioned to (contributed by), any such enterprise shall be determined having regard to the
arm’s length price of such benefit, service or facility.
 The provisions (in any of aforesaid situation) shall not apply in a case where the computation of income or
the determination of the allowance for any expense or interest or the determination of any cost or expense
allocated or contributed has the effect of reducing the income chargeable to tax or increasing the loss, as
the case may be, computed on the basis of entries made in the books of account in respect of the previous
year in which the international transaction or specified domestic transaction was entered into.
 Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation
to the specified domestic transaction shall be computed having regard to the arm’s length price.

6. What are the transactions covered by section 92BA as ‘specified domestic transactions’?

Answer:

“Specified Domestic Transaction” in case of an assessee means any of the following transactions, not being an
international transaction, namely:

i. any transaction referred to in sec. 80A;

ii. any transfer of goods or services referred to in sec. 80-IA(8);

iii. any business transacted between the assessee and other person as referred to in sec. 80-IA(10);

iv. any transaction, referred to in any other section under Chapter VI-A or sec. 10AA, to which provisions of
sec. 80-IA(8) or (10) are applicable; or

v. any business transacted between the persons referred to in sec. 115BAB(4);

vi. any other transaction as may be prescribed,

and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum
of ` 20 crore.

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7. Explain the importance of provision for transfer pricing

Answer:
Transfer pricing mechanism is very important for following reasons:
1. Helpful in correct pricing of Product/Services: An effective transfer pricing mechanism helps an organization
in correctly pricing its product and services. Since in any organization, transaction between associated
parties occurs frequently, it is necessary to value all transaction correctly so that the final product/ services
may be priced correctly.
2. Helpful in Performance Evaluation: For the performance evaluation of any entity, it is necessary that all
economic transactions are accounted. Calculation of correct transfer price is necessary for accounting of
inter related transaction between two Associated enterprises.
3. Helpful in complying Statutory Legislations: Since related party transaction have a direct bearing on the
profitability or cost of a company, the effective transfer pricing mechanism is very necessary. For example,
if the related party transactions are measured at less value, one unit may incur loss and other unit may earn
undue profit. This will result in income tax imbalances at both parties end. Similarly, wrong transfer pricing
may lead to wrong payment of excise duty, custom duty /sales tax (if applicable) as well.

8. Khazana Ltd is an I ndian Company engaged in the business of developing and m anufacturing Industrial
components. Its Canadian Subsidiary Techpro Inc. supplies technical information and o ffers technical
support to Khazana for manufacturing goods, for a c onsideration of Euro 1,00,000 per year. Income of
Khazana Ltd is ` 90 Lakhs. Determine the Taxable Income of Khazana Ltd if Techpro charges Euro 1,30,000
per year to other entities in India. What will be the answer if Techpro charges Euro 60,000 per year to other
entitles. (Rate per Euro may be taken at ` 50.)

Answer:

Computation of Total Income of Khazana Ltd

Particulars Amount Amount

When price charged for Comparable Uncontrolled Transaction € 1,00,000 € 50,000
Price actually paid by Khazana Ltd [€1,00,000 x ` 50] 50,00,000 50,00,000
Less: Price charged in Rupees (under ALP)

[€1,30,000 x ` 50] 65,00,000

[€60,000 x ` 50] 30,00,000

Incremental Profit on adopting ALP (A) (15,00,000) 20,00,000

Total Income before adjusting for differences due to Arm’s Length Price 90,00,000 90,00,000
Add: Difference on account of adopting Arms Length Price [if (A) is positive] NIL 20,00,000
Total Income of Khazana Ltd. 90,00,000 1,10,00,000

Note: u/s 92(3), Taxable Income cannot be reduced on applying ALP. Therefore, difference on account of ALP
which reduces the Taxable Income is ignored.

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9. Videsh Ltd., a US company has a subsidiary, Hind Ltd. in India. Videsh Ltd. sells mobile phones to Hind Ltd. for
resale in I ndia. Videsh Ltd. also sells mobile phones to Bharat Ltd. another mobile phone reseller. It sold
48,000 mobile phones to Hind Ltd. at ` 12,000 per unit. The price fixed for Bharat Ltd. is ` 11,000 per unit.

The warranty in case of sale of mobile phones by Hind Ltd. is handled by itself, whereas, for sale of mobile
phones by Bhart Ltd., Videsh Ltd. is responsible for warranty for 6 months. Both Videsh Ltd. and Hind Ltd.
extended warranty at a standard rate of ` 500 per annum.

On the above facts, how is the assessment of Hind Ltd. going to be affected? Show your calculations also.

Answer:

Computation of Arm’s Length Price

Particulars Amount

Cost of Mobile Phone sold to Bharat Ltd. 11,000

Less: Cost of Warranty 250

Arm’s Length Price 10,750

Computation of Increase in Total Income

Particulars Amount
(in lacs)

Cost of mobile phone acquired from Videsh Ltd. [` 12,000 x 48,000] 5,760

Less: Arm’s length Value [` 10,750 x 48,000] 5,160

Therefore, Increase in Total Income 600

10. Compute the ‘arm length price’ (ALP) in the following cases :

Medical Instruments Ltd. is a 100% India subsidiary of a US company. The parent company sells one of its
products to the Indian subsidiary at a price of US$ 100 per unit. The same product is sold to unrelated buyers
in India at a price of US$ 125 per unit.

Answer:

Computation of Arm’s Length price – Price charged by the US parent company for supply to its 100% subsidiary
per unit = 100 US$

And sale price to Unrelated buyers in India per unit = 125 US$

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Arm’s Lengths price is computed where the international transaction may result in loss to the Government.
However, in the instant case, since the price charged from the associated enterprise is lesser than the normal
price. Hence, there is no loss to the government. So, arm’s Length Price is not required to be calculated in this
case.

11. Shri Anuj, an ordinarily resident in I ndia, provides following details of his income for the previous year
relevant to the A.Y. 2021-22

- Income from India ` 3,40,000

- Income from Country Z ` 2,00,000

- Investment in PPF ` 10,000

Further, it is to be noted that:

a) India has avoidance of double taxation agreement with Country Z. According to said agreement,
income is taxable in the country in which it is earned and not in other country. However, in the other
country such income can be included for the purpose of computation of tax rate.

b) Foreign income has been taxed in Country Z @ 20%.

Compute Indian tax payable.

Answer:

Computation of total income and tax liability of Shri Anuj for the A.Y. 2021-22

Particulars Amount

Income from India 3,40,000

Income from Country Z 2,00,000

Gross Total Income 5,40,000

Less: Deduction u/s 80C [Investment in PPF] 10,000

Total income 5,30,000

Tax on above 18,500

Add: Health & Education cess 740

Tax and cess payable 19,240

Less: Relief u/s 90 [` 2,00,000 x 3.63%1] 7,260

Tax payable in India (Rounded off u/s 288B) 11,980

1. Average rate of Indian tax = ` 19,240 / ` 5,30,000 x 100 = 3.63%

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12. Define:

(a) Secondary adjustment

(b) Arm’s length price

(c) Enterprise

(d) Berry Ratio

Answer:

(a) “Secondary adjustment” means an adjustment in the books of account of the assessee and its associated
enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise
are consistent with the transfer price determined as a result of primary adjustment, thereby removing the
imbalance between cash account and actual profit of the assessee.

(b) Arm’s length price means

(i) a price which is applied or proposed to be applied in a transaction

(ii) between persons other than associated enterprises (i.e., unrelated person, resident or non-resident),

(iii) in uncontrolled conditions [Sec. 92F(ii)]

(c) Enterprise means a person (including a permanent establishment1 of such person) who is, or has been, or is
proposed to be, engaged:

 in any activity, relating to the production, storage, supply, distribution, acquisition or control of:

(a) articles or goods; or

(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature; or

(c) any data, documentation, drawing or s pecification relating to any patent, invention, model,
design, secret formula or process, of which the other enterprise is the owner or in respect of which
the other enterprise has exclusive rights; or

 in the provision of services of any kind; or

 in carrying out any work in pursuance of a contract; or

 in investment, or providing loan; or

 in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities
of any other body corporate,

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whether such activity or b usiness is carried on, directly or through one or m ore of its units or divisions or
subsidiaries; or

whether such unit or division or subsidiary is located at the same place where the enterprise is located or at
a different place or places.

1. Permanent establishment includes a fixed place of business through which the business of the enterprise
is wholly or partly carried on [Sec. 92F(iiia)]

(d) Berry ratio is the ratio of gross profit to operating expenses. It measures the return on operating expenses.
As the functions performed by the tax-payers are often reflected in the operating expenses, this ratio
determines the relationship of the income earned in relation to the functions performed. This ratio helps in
overcoming the difficulties in applying the RPM, which does not explain the creation of gross profit. This
ratio is used in conducting an arm’s length analysis of service-oriented industry such as limited risk
distributor, advertising, marketing and engineering services. The Berry ratio may be used to test whether
service providers have earned enough mark-up on their operating expenses. In essence, the Berry ratio
implicity assumes that there is a relationship between the level of operating expenses and the level of gross
profits earned by routine distributors and service providers.

13. Megabyte Inc. of France and R Ltd. of India are associated enterprises. R Ltd. imports 3,000 compressors for
Air Conditioners from Megabyte Inc. at ` 7,500 per unit and these are sold to Pleasure Cooling Solutions Ltd
at a pr ice of ` 11,000 per unit. R Ltd. had als o imported similar products from Cold Inc. Poland and s old
outside at a Gross Profit of 20% on Sales. Megabyte Inc. offered a quantity discount of ` 1,500 per unit. Cold
Inc. could offer only ` 500 per unit as Quantity Discount. The freight and customs duty paid for imports from
Cold Inc. Poland had cost R Ltd. ` 1,200 per piece. In respect of purchase from Cold Inc., R Ltd. had to pay `
200 only as freight charges. Determine the Arm’s Length Price and the amount of increase in Total Income
of R Ltd.

Answer:

Computation of Arm’s Length Price

Particulars Amount

Resale Price of Goods Purchased from Megabyte Inc. 11,000

Less: Adjustment for Differences –

a) Normal Gross Profit Margin at 20% of Sale Price [20% x ` 11,000] 2,200

b) Incremental Quantity Discount by Megabyte Inc. [` 1,500 – ` 500] 1,000

c) Difference in Purchase related expenses [` 1,200 – ` 200] 1,000

Arms Length Price 6,800

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Computation of Increase in Total Income of R Ltd

Particulars Amount

Price at which actually bought from Megabyte Inc. of France 7,500

Less: Arms Length Price per unit under Resale Price Method 6,800

Decrease in Purchase Price per unit 700

No. of units purchased from Megabyte Inc. 3,000 units

Increase in Total Income (3,000 units x ` 700) ` 21,00,000

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