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C.A. Kalpesh Sanghavi Introduction - P a g e | F2 .
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C.A. Kalpesh Sanghavi Introduction - P a g e | F2 . 2
Nov 2019 Exam

Including Selected Bare Act Provisions in this material
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C.A. Kalpesh Sanghavi Residential Status - P a g e | F3 . 1
Sub-Topics Sections
A Residential Status 6
B Incidence of tax 5,7,8,9

C.A. Kalpesh Sanghavi Residential Status - P a g e | F3 . 2
REFER THIS TOPIC FROM BOOK-A

ALIAS CHAPTER ID – A3


C.A. Kalpesh Sanghavi Salary Income - P a g e | F4 . 1
Sub-Topics Sections
A Salary Income 15 to 21
B House Property Income 22 to 27
C Business Income 28 to 44
D Assessment of entities
Corporate Taxation / MAT 115J to JB
Dividend Tax 115O to TC
Assessment of Firms 182 to 189
115JC to JF
Alternate Minimum Tax / Deductions / Individuals
80
Assessment of AOP 167B, 86
Private Trust 160 to 165
Public Trust 11 to 13
Co-Operative Society 80P
Political Parties / Electoral Trust 13A and 13B
HUF (Covered with capital Gains)
E Capital Gains 45 to 55
F Income from other sources 56 to 59

C.A. Kalpesh Sanghavi Salary Income - P a g e | F4 . 2


C.A. Kalpesh Sanghavi House Property Income - P a g e | F5 . 1

ALIAS CHAPTER ID - A5

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AA . 1
Problem 1 (Business Computation Basics) (Business ID 48)
Mr. Kalpesh Sanghavi, a retail trader of Cochin gives the following Trading and Profit & Loss Account for the
Year ended 31st March, PY.
Particulars Rs. Particulars Rs.

To Opening Stock 90,000 By Sales 12,11,500
To Purchases 10,04,000 By Income from UTI 2,400
To Gross profit 3,06,000 By other business receipts 6,100
By Closing Stock 1,80,000
14,00,000 14,00,000
To Salary 60,000 By Gross Profit B/d. 3,06,000
To Rent & rates 36,000
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & Stationery 23,200
To Postage & Telegram 1,640
To Loss on sale of shares (short-term) 8,100
To other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000
Additional Information:
1) It was found, some stocks were omitted to be included in both the Opening and Closing Stock: the values
of which were- Opening Stock – Rs. 9,000; Closing Stock – Rs. 18,000
2) salary includes Rs. 10,000/- paid to his brother, which is unreasonable to the extent of Rs. 2,000/-
3) The whole amount of printing and stationery was paid in cash.
4) The depreciation provided in the profit and loss account Rs. 1,05,000/- was based on the following
information,
Kalpesh Classes - https://ca-lectures.online/

The written down value of plant and machinery is Rs. 4,20,000/-. A new plant falling under the same
block of depreciation of 15% was bought on 01.07.PY for Rs. 70,000/- two old plants were sold on
01.10.PY for Rs. 50,000/-
5) Rent and rates includes
a. GST liability of Rs. 3,400/- paid on 07-04-AY.
b. Amount paid to Indian Railways for the use of its assets Rs. 2,000 paid on 10-04-AY
6) Other business receipts include Rs. 2,200/- recovery of excess expense paid on account of printing and
stationery to shyam Stationey & co 12 years back.
7) Other general expenses included Rs. 2,000/- paid as donation to a public charitable trust.
8) Assessee has incurred expenditure relating to exempt income and the same was charged to personal
account and not debited to the P & L account.
9) There was an earthquake in Nepal, so local persons of his locality were collecting old household items
to be forwarded to Nepal to help the victims. In that regards one of his customer paid him Rs. 10,000
and requested him to buy kids garments and then forward it to Mr. Shyam who was in turn providing
honorary services to help victims of earthquake.
10) Other Business receipts include
a. non-compete charges of 300.
b. Damages received from Xolo Limited for making changes in terms of agency contract Rs. 35
c. sundry creditors written off 230.
d. Incentive from Xolo Limited for achieving sales target Rs. 100
e. Loss from trading in NIFTY derivatives Rs. 150 (STT paid)
f. Loss from trading in AGRI COMMODITIES derivatives Rs. 100 (CTT Not paid)
g. Recovery of Bad debts from Mr. A Rs. 50 (sales was effected 10 years back)
h. Receipts from his followers Rs. 75 out of his activity of teaching and preaching Jainism
1 Sundry creditors written off will be income as per the section

A 36
B 41
C 44
D 28
2 Advance received from debtor, if it is written off will be income as per the section
A 36
B 41
C 44
D It is not a taxable income of assessee

3 Bad debts recovered will be income of the assessee as per the section
A 41
B 36
C 44
D It is not a taxable income of assessee
4 Assessee in the question can opt the presumptive scheme under section
A 44AE
B 44ADA
C 44M
D None of the above
5 Mr. Amit, brother of Kalpesh Sanghavi, has GST liability for the PY 18-19 and PY 19-20 at
Rs. 60 and 40 lakhs respectively. The payment of 100 lakhs was made to government on 01-
05-21
A As per 43B deduction will be allowed in PY 21-22 Amount 60
B As per 43B deduction will be allowed in PY 21-22 Amount 40
C As per 43B deduction will be allowed in PY 21-22 Amount 100
D As per 43B deduction will be allowed in PY 21-22 Amount Nil
6 In MCQ 5 above
A As per 43B deduction allowed in PY 19-20 will be 60
B As per 43B deduction allowed in PY 19-20 will be 100
C As per 43B deduction allowed in PY 19-20 will be Nil
D As per 43B deduction allowed in PY 19-20 will be 40
It shall be safe to assume that law of all the years are same as that of PY.
You are required to

1. Compute his business income and answer the independent MCQs.
Advice whether he can offer his business income to tax as per presumptive scheme.


Following is the Profit and Loss account of Mr. Kalpesh Sanghavi for year, amounts are in thousands

To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By I.T. Refund 4,500
To Amount paid to Scientific Research
1,00,000 By Interest from Company deposits 6,400
Association approved u/s. 35
To Interest 30,000 By Dividends 3,600
To Travelling 1,30,000
To Printing & Stationery 550
To Salary to staff 80,000
To Net Profit 93,950
Total 6,15,500 Total 6,15,500
Following additional information is furnished:
Repairs on building includes Rs. 95,000 being cost of raising a compound wall for the own business premises.
Interest payments include interest payable outside India to a resident Indian on which TDS has not been deducted
of Rs. 12,000 and penalty for contravention of GST of Rs. 24,000. Assessee has incurred expenditure relating
to exempt income and the same was charged to personal account and not debited to the P & L account.
Salary to staff includes Salary paid to manager 40 lakhs. However tax has not been deducted thereon but
Manager Mr. Himmat Sahani in Banglore has filed the return of income and paid advances taxes duly.
During the course of the assessment assessing officer has demanded the ledger copy of “Repairs on building”,
bank book and bank statement, with the view to verify the correctness of the entries in books of accounts.
However assessee is not able to produce the same for the reason that books of accounts are seized by GST
authorities.
During the year assessee has paid Rs. 55,000 cash to the supplier of raw material, however material was already
Received and consumed 2 years back.
Loss on sale of Property at Mumbai Rs 1,00,000 has been debited to his capital account. Cost of the property
was 10,00,000 and acquired 4 years back. Mr. Kalpesh had entered in to agreement to sell the property on 01-
06-PY when the Stamp duty value was 910,000. However sale of property was actually registered on 01-11-PY
when the stamp duty paid was @5% Rs. 55,000. Advance money of Rs. 100,000 was taken by account payee
cheque on 01-06-PY. This property was intended for re-sale but do slump in market it could not be sold since
last few years.

Q-1 Whether assessing officer is justified in asking for ledger copies, bank book and Bank
statement, Your Options are
A Officer can ask for Books and Records
B Officer cannot ask Books and Records because they are personal things to assessee
C Officer can ask for only books of accounts
D None of above
Q-2 What are remedies available to officer to ensure that books of accounts are made available
to him for the purpose of the assessment, Your Options are
A Officer can Invoke Either 131 or 132A
B Officer can Invoke Either 132 or 132A
C Officer can Invoke Either 68 or 69
D None of above
Q-3 Cash payment to supplier Rs. 68,000 was made on 01-06-2019 by Mr. Amit, bow ever the
material was supplied on 01-12-2021.
A Expense 68,000 will be dis-allowed in the PY 21-22
B Expense 68,000 will be dis-allowed in the PY 19-20
C 68,000 will be treated as income of the PY 21-22
D 68,000 will be treated as income of the PY 19-20
Q-4 In relation to property at Mumbai,

A Stamp duty value on the date of agreement is relevant
B Stamp duty value on the date of Registration is relevant
C Stamp duty value on the date of agreement is relevant but it is less then 105 % of actual
consideration and thus not relevant
D None of above

A Profit or loss on sale of property will be under the head business income.
B Profit or loss on sale of property will be under the head House Property.
C Profit or loss on sale of property will be under the head Capital Gains.
D None of above


A Stamp duty value on the date of registration is not relevant because advance monies have
been received in by cash or cheque
B Stamp duty value on the date of registration is not relevant because stamp duty value is higher
than actual sale price
C Stamp duty value on the date of registration is not relevant because it is option available to
assessee to choose between stamp duty value on date of agreement or sale.
D Stamp duty value on the date of registration is not relevant because advance monies have
been received in by cheque
It shall be safe to assume that law of all the years are same as that of PY.
You are required to

a) Compute the income chargeable under the head ‘Profits and gains of business or profession’ .
b) Answer the above MCQs
CA Kalpesh Sanghavi

Shri.Narayanasamy is a Chartered Accountant practicing at Manglore. The following is the analysis of his
receipts and payments for the year:
Receipts Rs. Payments Rs.

To Balance b/d. 9,500 By Salaries 64,000
To Professional Income 1,90,000 By Rent 12,000
To House rent for 8 months 32,000 By Telephone expenses 5,500
To Share of Income from HUF 6,250 By Professional expenses 3,000
To Share of profit from firm 11,000 By Motor car expenses 7,500
To LIC policy matured with Bonus 77,750 By Misc. Office expenses 1,500
By Purchase of car 80,000
By Advance Income-tax 12,500
By Person expenses 42,400
By Entertainment Expenses 17,000
By House property expenses:
Municipal Taxes 6,000
Repairs 2,500
Insurance 2,000
Collection charges 600
By Penalty to customs authority 5,000
By Bribe to income tax clerks 2,000
By Kashmir tour with family 3,000
By Balance c/d 60,000
Total 3,26,500 Total 3,26,500
Compute Shri Narayanasamy’s gross total income after taking into account, the following:
1. Silver coin received from clients during the course of profession is worth Rs. 5,000/-
2. Allowable rate of depreciation on motor car is 15%;
3. Municipal value of the house property is Rs. 42,000. This house was self occupied for residence for 4
months during the year.
4. Assessee has incurred expenditure relating to exempt income and the same was charged to personal
account and not debited to the P&L account.
5. Kashmir tour with wife, 5 children and 2 servants would reasonably cost Rs. 50,000 in view of the
assessing officer.
6. Personal drawings is considered short by Rs. 50,000 by officer considering status and style of the living
of assessee.

7. Penalty is paid to customs authority for the non declaring of gold that he has brought from dubai. He
visited dubai for professional work but the foreign trip expenses are not recorded in books. Dubai
travelling expense considered reasonable is Rs. 65,000.
8. Misc. Office expenses includes stationery expense, at the end of the year when he was taking the
inventory of his stationery the court fee stamp of Rs. 220 were found to be short / lost. Officer is of the
view that it should not be allowed as deduction since it is not used for professional purposes.
9. During the course of assessment officer observed that he had taken one loan from Mr. Ghotala which is
bogus. Mr. Ghotala has given statement to officer that he is a name lender and not a money lender.
Amount of loan appearing in books if Rs. 60,000 and interest provided in past is 6,000. Closing balance
is 66,000.
10. During the year he had constructed house in his village whose cost of construction is Rs. 350,000
assessing officer does not have any doubt about genuineness of the cost of construction.
You are required to

a) Compute the business income of the assessee indicating the period for which it is computed.

K (age 26 years), a leading tax consultant, who maintains books of account on cash on basis furnishes the
following particulars of income and expenditure:
Receipts Rs. Payments Rs.

Balance brought down 12,400 Purchase of a typewriter 6,000
Fees from clients: Car expenses 18,000
of Preceding years 7,30,500 Office expenses 40,000
of Preceding years 1,11,500 Salary of staff:
Of PY 1,13,000 of Preceding years 32,000
Presents from clients 24,000 of PY 11,000
Expenses for let out property
Interest free loan in cash municipal tax: Rs. 2,000,
For Purchase of Car – 100,000 Repairs: Rs. 1,000,
For Medical Emergency – 38,000 1,38,000 Insurance: Rs. 3,000 6,000
Cash Received as Advance for the
sale of Residential house at Pune 1,00,000
Winnings from lottery 46,000 Car purchased on December 10, 2,40,000
Interest from UTI (received on
September 11,) 12,000 Repairs of office 12,000
Rent of a let out property 60,000 Interest on loan 10,000
Share of income from a firm 15,000 Income-tax payment 2,000
Life insurance premium 8,000
Balance credit down 2,77,400
13,62,400 13,62,400
Car is partly used for official purposes (40%) and partly for private purposes (60%).
You are required to

a) Determine the taxable income of K.

2(13) "BUSINESS" includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture.
2(36) "PROFESSION" includes vocation.
28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or
profession",—
(i) the profits and gains of any business or profession which was carried on by the assessee at any time
during the previous year ;
(ii) any compensation or other payment due to or received by,—
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs
of an Indian company, at or in connection with the termination of his management or the
modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the
affairs in India of any other company, at or in connection with the termination of his office or
the modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, holding an agency in India for any part of the activities
relating to the business of any other person, at or in connection with the termination of the agency
or the modification of the terms and conditions relating thereto;
(d) any person, for or in connection with the vesting in the Government, or in any corporation owned
or controlled by the Government, under any law for the time being in force, of the management of
any property or business ;
Following sub-clause (e) shall be inserted after sub-clause (d) of clause (ii) of section 28 by the
Finance Act, 2018, w.e.f. 1-4-2019 :
(e) any person, by whatever name called, at or in connection with the termination or the
modification of the terms and conditions, of any contract relating to his business;
(iii) income derived by a trade, professional or similar association from specific services performed
for its members ;
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the
Imports and Exports (Control) Act, 1947 (18 of 1947) ;
(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under
any scheme of the Government of India ;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports
under the Customs and Central Excise Duties Drawback Rules, 1971 ;

(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission
Scheme under the export and import policy formulated and announced under section 5 of the Foreign
Trade (Development and Regulation) Act, 1992 (22 of 1992);
(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission
Scheme under the export and import policy formulated and announced under section 5 of the Foreign
Trade (Development and Regulation) Act, 1992 (22 of 1992) ;
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession ;
(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received
by, a partner of a firm from such firm :
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part
thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be
adjusted to the extent of the amount not so allowed to be deducted ;
(va) any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business or profession; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other
business or commercial right of similar nature or information or technique likely to assist in the
manufacture or processing of goods or provision for services:
Provided that sub-clause (a) shall not apply to—
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to
manufacture, produce or process any article or thing or right to carry on any business or profession,
which is chargeable under the head "Capital gains";
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on
Substances that Deplete the Ozone layer under the United Nations Environment Programme, in
accordance with the terms of agreement entered into with the Government of India.
Explanation.—For the purposes of this clause,—
(i) "agreement" includes any arrangement or understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by
legal proceedings;
(ii) "service" means service of any description which is made available to potential users and includes
the provision of services in connection with business of any industrial or commercial nature such
as accounting, banking, communication, conveying of news or information, advertising,
entertainment, amusement, education, financing, insurance, chit funds, real estate, construction,
transport, storage, processing, supply of electrical or other energy, boarding and lodging;]
(vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy.
Explanation.—For the purposes of this clause, the expression "Keyman insurance policy" shall have the
meaning assigned to it in clause (10D) of section 10;
Following clause (via) shall be inserted after clause (vi) of section 28 by the Finance Act, 2018, w.e.f.
1-4-2019 :

(via) the fair market value of inventory as on the date on which it is converted into, or treated
as, a capital asset determined in the prescribed manner;
(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other
than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if
the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD.
Explanation 1.—[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.]
Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a
business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and
separate from any other business.

The income referred to in section 28 shall be computed in accordance with the provisions contained in sections
30 to [43D].
30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the
business or profession, the following deductions shall be allowed—
(a) where the premises are occupied by the assessee—
(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the
cost of repairs to the premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the
premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the
premises.
Explanation.—For the removal of doubts, it is hereby declared that the amount paid on account of the cost of
repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause
(ii), of clause (a), shall not include any expenditure in the nature of capital expenditure.
31. In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed—
(i) the amount paid on account of current repairs thereto ;
(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction
thereof.
Explanation.—For the removal of doubts, it is hereby declared that the amount paid on account of current repairs
shall not include any expenditure in the nature of capital expenditure.

37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the
nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in computing the income
chargeable under the head "Profits and gains of business or profession".
Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee
for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred
for the purpose of business or profession and no deduction or allowance shall be made in respect of
such expenditure.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any
expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to
in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred
by the assessee for the purposes of the business or profession.
(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of
expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the
like published by a political party.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted
in computing the income chargeable under the head "Profits and gains of business or profession",—
(a) in the case of any assessee—
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April,
1938), royalty, fees for technical services or other sum chargeable under this Act, which
is payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted
or, after deduction, has not been paid on or before the due date specified in sub-section (1)
of section 139 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year,
or has been deducted during the previous year but paid after the due date specified in sub-section
(1) of section 139, such sum shall be allowed as a deduction in computing the income of the
previous year in which such tax has been paid.
Explanation.—For the purposes of this sub-clause,—
(A) "royalty" shall have the same meaning as in Explanation2 to clause (vi) of sub-section (1)
of section 9;
(B) "fees for technical services" shall have the same meaning as in Explanation2 to clause (vii)
of sub-section (1) of section 9;
(ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter
XVII-B and such tax has not been deducted or, after deduction, has not been paid on or
before the due date specified in sub-section (1) of section 139 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year,
or has been deducted during the previous year but paid after the due date specified in sub-section
(1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing
the income of the previous year in which such tax has been paid :
Provided further that where an assessee fails to deduct the whole or any part of the
tax in accordance with the provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso to sub-section (1)
of section 201, then, for the purpose of this sub-clause, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of furnishing of
return of income by the resident payee referred to in the said proviso.


(i) "commission or brokerage" shall have the same meaning as in clause (i) of
the Explanation to section 194H;
(ii) "fees for technical services" shall have the same meaning as in Explanation2 to clause (vii)
(iii) "professional services" shall have the same meaning as in clause (a) of
the Explanation to section 194J;
(iv) "work" shall have the same meaning as in Explanation III to section 194C;
(v) "rent" shall have the same meaning as in clause (i) to the Explanation to section 194-I;
(vi) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1)
of section 9;
(ib) any consideration paid or payable to a non-resident for a specified service on which equalisation
levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has
not been deducted or after deduction, has not been paid on or before the due date specified in sub-
section (1) of section 139 :
Provided that where in respect of any such consideration, the equalisation levy has been deducted
in any subsequent year or has been deducted during the previous year but paid after the due date
specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing
the income of the previous year in which such levy has been paid;]
(ic) any sum paid on account of fringe benefit tax under Chapter XIIH;
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or
profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-
clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to
have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction
from the Indian income-tax payable under section 91.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-
clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax
under section 90A;

(iia) any sum paid on account of wealth-tax.

Explanation.—For the purposes of this sub-clause, "wealth-tax" means wealth-tax chargeable
under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under
any law in force in any country outside India or any tax chargeable under such law with reference
to the value of the assets of, or the capital employed in, a business or profession carried on by the
assessee, whether or not the debts of the business or profession are allowed as a deduction in
computing the amount with reference to which such tax is charged, but does not include any tax
chargeable with reference to the value of any particular asset of the business or profession;
(iib) any amount—
(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee
or charge, by whatever name called, which is levied exclusively on; or
(B) which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Explanation.—For the purposes of this sub-clause, a State Government undertaking includes—
(i) a corporation established by or under any Act of the State Government;
(ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the
State Government;
(iii) a company in which more than fifty per cent of the paid-up equity share capital is held by
the entity referred to in clause (i) or clause (ii) (whether singly or taken together);
(iv) a company or corporation in which the State Government has the right to appoint the majority
of the directors or to control the management or policy decisions, directly or indirectly,
including by virtue of its shareholding or management rights or shareholders agreements or
voting agreements or in any other manner;
(v) an authority, a board or an institution or a body established or constituted by or under any Act
of the State Government or owned or controlled by the State Government;
(iii) any payment which is chargeable under the head "Salaries", if it is payable—
(A) outside India; or
(B) to a non-resident,
and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;
(iv) any payment to a provident or other fund established for the benefit of employees of the
assessee, unless the assessee has made effective arrangements to secure that tax shall be
deducted at source from any payments made from the fund which are chargeable to tax under the
head "Salaries";
(v) any tax actually paid by an employer referred to in clause (10CC) of section 10;

201. (1) Where any person, including the principal officer of a company,—
(a) who is required to deduct any sum in accordance with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being an employer,
does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required
by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur,
be deemed to be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of
the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the
account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income;
and
(iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from an accountant in such form as may be
prescribed.
Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing
Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.
(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as
is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails
to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,—
(i) at one per cent for every month or part of a month on the amount of such tax from the date on which
such tax was deductible to the date on which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from
the date on which such tax was deducted to the date on which such tax is actually
paid,
and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section
(3) of section 200:
Provided that in case any person, including the principal officer of a company fails to deduct the whole or any
part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum
credited to the account of a resident but is not deemed to be an assessee in default under the first proviso to sub-
section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the
date of furnishing of return of income by such resident.

(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the
amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of
the person, or the company, as the case may be, referred to in sub-section (1).
(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure
to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of seven
years from the end of the financial year in which payment is made or credit is given.
(4) The provisions of sub-clause (ii) of sub-section (3) of section 153 and of Explanation 1 to section 153 shall,
so far as may, apply to the time limit prescribed in sub-section (3).
Explanation.—For the purposes of this section, the expression "accountant" shall have the meaning assigned to
it in the Explanation to sub-section (2) of section 288.

40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in
any other provision of this Act relating to the computation of income under the head "Profits and gains of
business or profession".
(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to
any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such
expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or
facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or
the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to
be excessive or unreasonable shall not be allowed as a deduction :
Provided that for an assessment year commencing on or before the 1st day of April, 2016 no disallowance, on
account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be
made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's
length price as defined in clause (ii) of section 92F.
(b) The persons referred to in clause (a) are the following, namely :—
(i) where the assessee is an any relative of the assessee;
individual
(ii) where the assessee is a company, any director of the company, partner of the
firm, association of persons or firm, or member of the association or family, or
Hindu undivided family any relative of such director, partner or
member;
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative
of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the
business or profession of the assessee or any director, partner or member of such company, firm,
association or family, or any relative of such director, partner or member or any other company carrying
on business or profession in which the first mentioned company has substantial interest;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member,
as the case may be, has a substantial interest in the business or profession of the assessee; or any director,
partner or member of such company, firm, association or family or any relative of such director, partner
or member;
(vi) any person who carries on a business or profession,—
(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in
the business or profession of that person; or
(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any
director of such company, partner of such firm or member of the association or family, or any
relative of such director, partner or member, has a substantial interest in the business or profession
of that person.
Explanation.—For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a
business or profession, if,—

(a) in a case where the business or profession is carried on by a company, such person is, at any time during
the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend
whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting
power; and
(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than
twenty per cent of the profits of such business or profession.
(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made
to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank
draft, or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no
deduction shall be allowed in respect of such expenditure.
(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by
the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as
subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank
account, the payment so made shall be deemed to be the profits and gains of business or profession and
accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments
made to a person in a day, exceeds ten thousand rupees:
Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of
business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments
made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank
draft, or use of electronic clearing system through a bank account, exceeds ten thousand rupees,]in such cases
and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities
available, considerations of business expediency and other relevant factors :
Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of
sub-sections (3) and (3A) shall have effect as if for the words ten thousand rupees", the words "thirty-five thousand
rupees" had been substituted.
(4) Notwithstanding anything contained in any other law for the time being in force or in any
contract, where any payment in respect of any expenditure has to be made by an account payee
cheque drawn on a bank or account payee bank draft or use of electronic clearing system
through a bank account in order that such expenditure may not be disallowed as a deduction
under sub-section (3), then the payment may be made by such cheque or draft or electronic
clearing system; and where the payment is so made or tendered, no person shall be allowed to
raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or
tendered in cash or in any other manner.
(5) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (5) was
inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]
(6) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (6) was
inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]
(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether
called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their
retirement or on termination of their employment for any reason.
(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of
payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment
of any gratuity, that has become payable during the previous year.
Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee
for the payment of gratuity to his employees on their retirement or termination of their employment for any
reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any
sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity
to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous
year in which the sum is so paid.
(8) [***]
(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting
up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals,
society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose,
except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause
(iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being
in force.
(10) Notwithstanding anything contained in sub-section (9), where the Assessing Officer is satisfied that the
fund, trust, company, association of persons, body of individuals, society or other institution referred to in that
sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being
in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee
referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall,
in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions
of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year
in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by
the assessee.
(11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company,
association of persons, body of individuals, society or other institution referred to in sub-section (9), then,
notwithstanding anything contained in any other law or in any instrument, he shall be entitled—
(i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust,
company, association of persons, body of individuals, society or other institution (such amount being
hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the
unutilised amount shall be repaid, as soon as may be, to him;
(ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the
fund, trust, company, association of persons, body of individuals, society or other institution out of the
sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be
transferred, as soon as may be, to him.
(12) [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
(13) No deduction or allowance shall be allowed in respect of any marked to market loss or other expected
loss, except as allowable under clause (xviii) of sub-section (1) of section 36.

Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand
rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank
or account payee bank draft.
6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to
be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or
aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank
or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified
hereunder, namely :—
(a) where the payment is made to—
(i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of
the Banking Regulation Act, 1949 (10 of 1949);
(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of
India (Subsidiary Banks) Act, 1959 (38 of 1959);
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society as defined under section
56 of the Banking Regulation Act, 1949 (10 of 1949);
(v) the Life Insurance Corporation of India established under section 3 of the Life Insurance
Corporation Act, 1956 (31 of 1956);
(b) where the payment is made to the Government and, under the rules framed by it, such payment is
required to be made in legal tender;
(c) where the payment is made by—
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.
Explanation.—For the purposes of this clause and clause (g), the term “bank” means any bank,
banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank
[not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949 (10 of 1949)], whether incorporated or not, which is established outside India;
(d) where the payment is made by way of adjustment against the amount of any liability incurred by the
payee for any goods supplied or services rendered by the assessee to such payee;
(e) where the payment is made for the purchase of—
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or
poultry farming; or
(iii) fish or fish products; or

(iv) the products of horticulture or apiculture,

to the cultivator, grower or producer of such articles, produce or products;
(f) where the payment is made for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation,
in any such village or town;
(h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in
connection with the retirement, retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such
sums payable to the employee or his heir does not exceed fifty thousand rupees;
(i) where the payment is made by an assessee by way of salary to his employee after deducting the
income-tax from salary in accordance with the provisions of section 192 of the Act, and when such
employee—
(i) is temporarily posted for a continuous period of fifteen days or more in a place other than his
normal place of duty or on a ship; and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the banks were closed either on account
of holiday or strike;
(k) where the payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person;
(l) where the payment is made by an authorised dealer or a money changer against purchase of foreign
currency or travellers cheques in the normal course of his business.
Explanation.—For the purposes of this clause, the expressions “authorised dealer” or “money
changer” means a person authorised as an authorised dealer or a money changer to deal in foreign
currency or foreign exchange under any law for the time being in force.]

41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss,
expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned
person) and subsequently during any previous year,—
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any
amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way
of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing
to him shall be deemed to be profits and gains of business or profession and accordingly chargeable
to income-tax as the income of that previous year, whether the business or profession in respect of
which the allowance or deduction has been made is in existence in that year or not; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any
amount in respect of which loss or expenditure was incurred by the first-mentioned person or some
benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation
thereof, the amount obtained by the successor in business or the value of benefit accruing to the
successor in business shall be deemed to be profits and gains of the business or profession, and
accordingly chargeable to income-tax as the income of that previous year.
Explanation 1.—For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect
of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of
any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under
clause (b) of that sub-section by way of writing off such liability in his accounts.
Explanation 2.—For the purposes of this sub-section, "successor in business" means,—
(i) where there has been an amalgamation of a company with another company, the amalgamated company;
(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the
other person;
(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;
(iv) where there has been a demerger, the resulting company.

(2) Where any building, machinery, plant or furniture,—

(a) which is owned by the assessee;
(b) in respect of which depreciation is claimed under clause (i) of sub-section (1) of section 32; and
(c) which was or has been used for the purposes of business,
is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery,
plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down
value, so much of the excess as does not exceed the difference between the actual cost and the written down
value shall be chargeable to income-tax as income of the business of the previous year in which the moneys
payable for the building, machinery, plant or furniture became due.
Explanation.—Where the moneys payable in respect of the building, machinery, plant or furniture referred to in
this sub-section become due in a previous year in which the business for the purpose of which the building,
machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall
apply as if the business is in existence in that previous year.
(2A) [***]
(3) Where an asset representing expenditure of a capital nature on scientific research within the meaning
of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35, read with clause (4) of section
43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total
amount of the deductions made under clause (i) or, as the case may be, the amount of the deduction under
clause (ia) of sub-section (2), or clause (c) of sub-section (2B), of section 35 exceed the amount of the capital
expenditure, the excess or the amount of the deductions so made, whichever is the less, shall
be chargeable to income-tax as income of the business or profession of the previous year in which the sale took
place.
Explanation.—Where the moneys payable in respect of any asset referred to in this sub-section become due in a
previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the
business is in existence in that previous year.

(4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause
(vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is
greater than the difference between the debt or part of debt and the amount so allowed, the excess shall
be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the
income of the previous year in which it is recovered, whether the business or profession in respect of
which the deduction has been allowed is in existence in that year or not.
Explanation.—For the purposes of sub-section (3),—

(1) "moneys payable" in respect of any building, machinery, plant or furniture includes—
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold,
so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1)
of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car
shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may
be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including
the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees
bears to the actual cost of the motor car to the assessee as it would have been computed before applying
the said proviso;
(2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time
being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the
amalgamating company to the amalgamated company where the amalgamated company is an Indian
company.

(4A) Where a deduction has been allowed in respect of any special reserve created and maintained
under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special
reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to
income-tax as the income of the previous year in which such amount is withdrawn.
Explanation.—Where any amount is withdrawn from the special reserve in a previous year in which the business is
no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous
year.
(5) Where the business or profession referred to in this section is no longer in existence and there is
income chargeable to tax under sub-section (1), sub-section (3), sub-section (4) or sub-section (4A) in respect
of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that
business or profession during the previous year in which it ceased to exist and which could not be set off
against any other income of that previous year shall, so far as may be, be set off against the income
chargeable to tax under the sub-sections aforesaid.
(6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the
Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed,
for the purposes of that sub-section, as if such amendment or omission had not been made.

43(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause—
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of
his manufacturing or merchanting business to guard against loss through future price
fluctuations in respect of his contracts for actual delivery of goods manufactured by him or
merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to
guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the
course of any transaction in the nature of jobbing or arbitrage to guard against loss which may
arise in the ordinary course of his business as such member; [or]
(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section
2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock
exchange; [or]
(e) an eligible transaction in respect of trading in commodity derivatives carried out in a
recognised association, which is chargeable to commodities transaction tax under Chapter VII of
the Finance Act, 2013 (17 of 2013),
shall not be deemed to be a speculative transaction.
Following second proviso shall be inserted after the existing proviso to clause (5) of section 43 by
the Finance Act, 2018, w.e.f. 1-4-2019 :
Provided further that for the purposes of clause (e) of the first proviso, in respect of trading in
agricultural commodity derivatives, the requirement of chargeability of commodity transaction
tax under Chapter VII of the Finance Act, 2013 (17 of 2013) shall not apply.

Explanation 1.—For the purposes of clause (d), the expressions—

(i) "eligible transaction" means any transaction,—
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or
such other intermediary registered under section 12 of the Securities and Exchange Board of
India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992
(15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-
laws made or directions issued under those Acts or by banks or mutual funds on a recognised
stock exchange; and
(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker
or such other intermediary to every client indicating in the contract note the unique client
identity number allotted under any Act referred to in sub-clause (A) and permanent account
number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such
conditions as may be prescribed and notified by the Central Government for this purpose;
Explanation 2.—For the purposes of clause (e), the expressions—
(i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance
Act, 2013;
(ii) "eligible transaction" means any transaction,—
(A) carried out electronically on screen-based systems through member or an intermediary,
registered under the bye-laws, rules and regulations of the recognised association for trading
in commodity derivative in accordance with the provisions of the Forward Contracts
(Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions
issued under that Act on a recognised association; and
(B) which is supported by a time stamped contract note issued by such member or intermediary
to every client indicating in the contract note, the unique client identity number allotted under
the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and
permanent account number allotted under this Act;
(iii) "recognised association" means a recognised association as referred to in clause (j) of section 2 of
the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as
may be prescribed and is notified by the Central Government for this purpose;

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise
allowable under this Act in respect of—
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any
law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or
superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial
institution or a State financial corporation or a State industrial investment corporation, in accordance
with the terms and conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-
operative bank other than a primary agricultural credit society or a primary co-operative agricultural
and rural development bank in accordance with the terms and conditions of the agreement governing
such loan or advances, or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or
(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,
shall be allowed (irrespective of the previous year in which the liability to pay such sum was
incurred by the assessee according to the method of accounting regularly employed by him)
only in computing the income referred to in section 28 of that previous year in which such sum
is actually paid by him :
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the
assessee on or before the due date applicable in his case for furnishing the return of income under sub-
section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as
aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Explanation 1.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum
referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section
28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of
April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee,
the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the
income of the previous year in which the sum is actually paid by him.
Explanation 2.—For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum
for which the assessee incurred liability in the previous year even though such sum might not have been
payable within that year under the relevant law.
Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any sum
referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section
28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of
April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee,
the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the
income of the previous year in which the sum is actually paid by him.
Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum
referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the
previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996,
or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee
shall not be entitled to any deduction under this section in respect of such sum in computing the income of the
previous year in which the sum is actually paid by him.
Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum
referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the
previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001,
or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee
shall not be entitled to any deduction under this section in respect of such sum in computing the income of the
previous year in which the sum is actually paid by him.
Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest
payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest
referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have
been actually paid.
Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest
payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest
referred to in that clause which has been converted into a loan or advance shall not be deemed to have
been actually paid.

Explanation 4.—For the purposes of this section,—

(a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act,
1956 (1 of 1956);
(aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section
(5) of section 11;
(b) "State financial corporation" means a financial corporation established under section 3 or section 3A or
an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(c) "State industrial investment corporation" means a Government company within the meaning of section
61735 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance
for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36;
(d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and
rural development bank" shall have the meanings respectively assigned to them in the Explanation to
sub-section (4) of section 80P.
Any sum received by the employer from the employees as their contribution to a provident fund (i.e. recognised
provident fund, approved superannuation fund or approved gratuity fund) is treated as business income of the
employer. Thus, it should be credited to the profits and loss account of the business.

43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset
(other than a capital asset), being land or building or both, is less than the value adopted or assessed or
assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of
such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and
gains from transfer of such asset, be deemed to be the full value of the consideration received or
accruing as a result of such transfer.
Following proviso shall be inserted in sub-section (1) of section 43CA by the Finance Act, 2018, w.e.f. 1-
4-2019 :
Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment
of stamp duty does not exceed one hundred and five per cent of the consideration received or
accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer
shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value
of the consideration.
(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation
to determination of the value adopted or assessed or assessable under sub-section (1).
(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date
of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may
be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp
duty in respect of such transfer on the date of the agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a
part thereof has been received by any mode other than cash on or before the date of
agreement for transfer of the asset.
Words "by way of an account payee cheque or an account payee bank draft or by use of electronic clearing
system through a bank account" shall be substituted for "by any mode other than cash" by the Finance Act, 2018
(w.e.f. 1-4-2019).

.
43CB. (1) 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 income
computation and disclosure standards notified under sub-section (2) of section 145:
Provided that profits and gains arising from a contract for providing services,—
(i) with duration of not more than ninety days shall be determined on the basis of project completion
method;
(ii) involving indeterminate number of acts over a specific period of time shall be determined on
the basis of straight line method.
(2) For the purposes of percentage of completion method, project completion method or straight line method
referred to in sub-section (1)—
(i) the contract revenue shall include retention money;
(ii) the contract costs shall not be reduced by any incidental income in the nature of
interest, dividends or capital gains
Refer these provisions in Chapter – F57 / F58

Section 44B
Section 44BB
Section 44BBB
Section 44BBA
Refer these provisions in Chapter – F33

Section 145
Section 145A
Section 145B

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AB . 1
Problem (Depreciation Basics) (Business ID 32) (Revision / Home work)

A Company paid the full consideration for building acquired for its administrative office and occupied the same
as the possession was taken. The registration could not take place before the end of the previous year for some
reason or other. Can the depreciation claim be made?
Your Options are

A Building will be eligible for depreciation
B Building will not be eligible for depreciation
C Building will be eligible for depreciation but depreciation will get only after registration
D None of above
Problem (Depreciation Basics) (Business ID 33) (Revision / Home work)

A Ltd wants to claim depreciation on technical know how acquired in August for manufacture of a new product
for its business at a lump sum cost of Rs.12 Lakhs. Comment.
Your Options are

A Technical Know How will be eligible for deduction u/s 35AB
B Technical Know How will be eligible for depreciation u/s 32
C Technical Know How will be eligible for deduction u/s 37
D None of the above

Problem (Depreciation Basics) (Business ID 34)

From the following figures, you are required to ascertain depreciation admissible and other liabilities, if any, -
Factory
Plant & Machinery
Building
WDV at the beginning 2,50,000 10,00,000
Air conditions in factory premises 3,00,000 Nil
Land at Bhubneshawar for construction of factory 200,000
Construction of factory (Total area 25,000 sq meter, including
800,000
1,000 sq meter for canteen.)
Construction of Independent Temple within factory complex
10,000
with the view to boost the working morale of the employees.
Installation of Lift in Factory Building 25,000
Road Development in factory complex 1,50,000
Compound wall of factory complex 15,000
Sales during the year 6,00,000 2,00,000
Company has two set of plant and machinery, and when one is idle and other is working.
Plant and Machinery was under maintenance and repairs for 20 days during the year.

Vinai Ltd acquired a pressing machine for Rs. 10,00,000. it had incurred Rs. 1,50,000 towards trial run expenses
in buying steel plates and pressing tools etc, The product generated during the trial run was sold for Rs. 40,000.
Compute the cost of the machine for the purpose of charging depreciation.
Your Options are

A Cost of Pressing machine will be 10,00,000 for the purpose of depreciation
B Cost of Pressing machine will be 11,10,000 for the purpose of depreciation
C Cost of Pressing machine will be 11,50,000 for the purpose of depreciation
D Cost of Pressing machine will be 8,50,000 for the purpose of depreciation
Your Options are, What will be the cost if the trial run income amounted to Rs.2,00,000 ?
A Cost of Pressing machine will be 10,00,000 for the purpose of depreciation
B Cost of Pressing machine will be 11,10,000 for the purpose of depreciation
C Cost of Pressing machine will be 11,50,000 for the purpose of depreciation
D Cost of Pressing machine will be 9,50,000 for the purpose of depreciation

Compute the quantum of depreciation available under section 32 and any other benefit available in respect of
the following items of plant and machinery purchased by X Ltd , which is engaged in the manufacture of textile
fabrics
(Rs. In crore)
New machinery installed on May 1, 84
New windmill purchased and installed on June 18, 22
Items purchased after November 30, –
- Lorries for transporting goods and sales deposits 3
- Fork-lift-trucks, used inside factory 4
- Computers installed inside office premises 1
- Computers installed in factory 2
- New imported machinery (arrived at Chennai port on March 30, and was
installed after 1 week) 12
Except new imported machinery, all other items were installed during the year.
Rate of depreciation for Plant and Machinery 15 % and Computers 40 %
X Ltd has commenced operation during the year.
Total depreciation u/s 32(1)(iia) will be, Your Options are

A 20 cr
B 17.025 cr
C 22.2 cr
D 39.225 cr

X purchases a machine for Rs. 3,00,000 on December 15, 2012. It is put to use on the same day. It is eligible
for depreciation @ 15 per cent. He transfers this machine to Y on January 1, 2014 for Rs, 3,20,000 (FMV on
that date : Rs. 2,50,000) Y uses the machine for his business purpose. Y again transfers it back to X on November
15, 2014 for Rs. 3,10,000.
Compute the amount of allowable depreciation and of chargeable capital gain, if any, assuming that this is the
only machine in the block of asset held by both the X and Y.


XYZ Ltd. purchased a machine on April 1, for Rs 10 crore by availing 70 per cent loan facility from bank. The
machine was required for extension of the business of the company and was put to use into effective production
on February 1. Interest on loan is charged at 12 per cent per annum. Advice XYZ Ltd. on the treatment of interest
payment made on this loan and depreciation allowable for the year. Assume that this machine is the only machine
in the related block of assets. (rate of depreciation plant and machinery 15%)
Total depreciation u/s 32(1)(ii) will be, Your Options are

A 80,25,000
B 90,25,000
C 1,87,25,000
D 1,15,00,000
Total depreciation u/s 32 will be, Your Options are

A 80,25,000
B 90,25,000
C 1,87,25,000
D 1,15,00,000

X ltd. was incorporated on for manufacture of tyres and tubes for motor vehicles. The manufacturing unit was
set up on April 30,. The company commenced it manufacturing operations on May 1,. The total cost of the plant
and machinery installed in the unit is Rs. 100 crore. The said plant and machinery included second hand plant
and machinery bought for Rs. 10 crore and new plant and machinery for scientific research relating to the
business of the assessee acquired at a cost of Rs.10 crore.
Compute the amount of depreciation allowable under section 32. (rate of depreciation plant and machinery 15%)
Furnish explanations in support of your computation.
Total depreciation u/s 32(1)(iia) will be, Your Options are

A 16 cr
B 20 cr
C 8 cr
D 10 cr


XLtd. transferred its fertilizers business to a new company Y Ltd. by way of demerger with effect from appointed
date as April 1, after satisfying the conditions of demerger. Further information given:
1. WDV of the entire block of plant and machinery held by X Ltd., as on April 1, is Rs. 100 crore.
2. Out of the above, WDV of block of plant and machinery of fertilizer division is Rs. 70 crore.
3. X Ltd. has brought forward unabsorbed depreciation of Rs. 50 lakh.
On the above facts:
You are required to explain the provisions of the income-tax as the allowability of depreciation of post-merger
in the hands of X Ltd., ad Y Ltd., duly calculating the depreciation. (rate of depreciation plant and machinery
15%)
State how the unabsorbed depreciation has to be dealt with ?
Total depreciation for the year in the hands of Y limited will be

A 35 cr
B 10.5 cr
C 45.50 Cr
D None of above

Problem (Depreciation Meaning of Actual cost) (Business ID 36)

A car purchased by S on 10th august of preceding year for Rs. 3,25,000 for personal use is brought into the
business of the assessee on 01.12.PY, when its market value is Rs. 1,50,000. Compute the actual cost of the car
and the amount of depreciation assuming the rate of depreciation to be 15%.

Doctor Kalpesh Sanghavi purchased a house property two years back in January for Rs. 10,00,000. Till 1.5.PY,
it was self-occupied as a residence. On this date, the said building was brought into use for the purpose of his
medical profession. What would be the depreciation assuming that he owns no other building. Another house
gifted to him by his father, who had purchased the same three years back in the month of may for Rs. 9,00,000
? (depreciation rate @10% on property)

How will you deal with the following issues in the computation of Income from business? A Company imported
machinery on 15-09-PY at a cost of Rs.10 Crores. The Custom Duty payable thereon was 20%, The Company
claimed Input Credit of Rs. 1 Crore. The rate of depreciation on the machinery is 15%. Assuming that it was put
to use on 15-10-PY, what is the depreciation allowable on the machinery. (rate of depreciation plant and
machinery 15%)

Problem (Depreciation Meaning of Actual cost) (Business ID 39) (Revision / Home work)
A Company was a lessee of an old building. Under an agreement with the Lessor, it demolished the old building
and built a new building on the same site at a cost of Rs.10 Lakhs and was permitted to reoccupy the new
building on the same site at a cost of Rs.10 Lakhs, and was permitted to reoccupy the new building for a further
period of 20 years at the old rent.
Your Options are

A 20 Lakhs will be allowed as deduction u/s 37
B 20 Lakhs will be eligible for depreciation u/s 32(1)
C 20 Lakhs will be eligible for depreciation u/s 32(1) Explanation 1
D 20 Lakhs will be eligible for amortisation for 5 years
Problem (Depreciation Meaning of Actual cost) (Business ID 40) (Revision / Home work)
Certain members of the Thakkar family entered into a partnership to carry on business in the name of Ashwin
Vanaspati Industries. Later on the firm was dissolved and was incorporated with all the shareholders being
erstwhile partners, viz., belonging to the Thakkar group namely Vanaspati Ltd. Upon the transfer the assets were
taken over at price higher then the 20 % value of the assets and company claimed the depreciation at enhanced
cost.
Assets Rs. W. D. V.
1. Plant and machinery 33,68,000 6,77,055
2. Factory building 3,50,000 82,523
3. Residential building 1,50,000 35,367
Your Options are

A Cost of the asset to Vanaspati Ltd will be as per Explanation 3 to 43(1)
B Cost of the asset to Vanaspati Ltd will be as per Explanation to 43(6)(c)
C Cost of the asset to Vanaspati Ltd will be as per 49
D none of above

Problem (Depreciation, Block Adjustment) (Business ID 41)

X & Co, a sole proprietary concern, was converted into a Company on 31.08.PY Before the conversion, the sole
proprietary concern had a block of Plant & Machinery (Rate of Depreciation 15%), whose opening WDV
01.04.PY was Rs.3,00,000. On 01.04.PY itself, a new plant of the same block was purchased for Rs. 1,20,000.
After conversion, the Company has purchased the same type of Plant on 01.01.PY for Rs. l ,60,000. Compute
the depreciation that would be allocated between the sole proprietary concern and the Successor Company.
Problem (Depreciation, Block Adjustment) (Business ID 42) (Revision / Home work)

V Ltd. is a mill, producing silk fabrics. A fire broke out in the premises of the mills as a result of which the
entire block of assets consisting of plant, machinery etc., was destroyed. The written down value of the plant
and machinery at the beginning of the year was Rs. 8 Lakhs. The original cost of which was Rs.12 Lakhs 6 years
back, it received a sum of Rs 15 lakhs from the insurance Co., in full settlement of its claim, which included a
sum of Rs 2 lakhs compensation for the loss of profits due to the closure of the mill.
Your Options are

A 15,00,000 will be Business Income
B 2,00,000 will be Business Income and
5,00,000 will be Short Term Capital Gains
C 2,00,000 will be Business Income and
3,00,000 will be Long Term Capital Gains (subject to indexation benefit)
D 2,00,000 will be Business Income
Problem (Depreciation Foreign Exchange Fluctuation) (Business ID 43)

U & I Ltd purchased a machinery from Germany for USD 1,00,000 on 03rd November of preceding year by
borrowing from East West Bank Ltd, The rate of exchange on the date of acquisition was Rs.43.00. The assessee
(U & I), took a forward exchange rate on 05.10.PY when the rate specified in the contract was Rs.45 per USD.
Compute depreciation for the previous year and year before that. (rate of depreciation plant and machinery 15%)
Problem (Depreciation, sale of assets) (Business ID 44)

In the case of Veeresh, there are 2 lorries (Rate of depreciation @ 30%). at the beginning of the year used in
transport business. The written down value as on 01.04. of lorry A is Rs. 7,00,000 and lorry B is Rs. 5,00,000.
During the year lorry C is purchased on 10.12. for Rs. 10,00,000. Rate of depreciation applicable is 30%. On
28.03., lorry A is sold for Rs. 8,00,000.
Determine the amount of depreciation available to the assessee for the year. What will be your answer if instead
of selling lorry A, lorry C is sold for Rs. 8,00,000 ?

A group of assets falling within a class of assets comprising, Tangible assets, being buildings, machinery,
plant or furniture, or Intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature, in respect of which the same percentage of
depreciation is prescribed.
32. (1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April,
1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession,
the following deductions shall be allowed—
(i) in the case of assets of an undertaking engaged in generation or generation and distribution
of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be
prescribed:
Provided that no deduction shall be allowed under this clause in respect of—
(a) any motor car manufactured outside India, where such motor car is acquired by the assessee after
the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used—
(i) in a business of running it on hire for tourists ; or
(ii) outside India in his business or profession in another country ; and
(b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under
an agreement entered into by the Central Government under section 42 :
Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or
the first proviso to clause (iia), as the case may be, is acquired by the assessee during the
previous year and is put to use for the purposes of business or profession for a period of less than
one hundred and eighty days in that previous year, the deduction under this sub-section in
respect of such asset shall be restricted to fifty per cent of the amount calculated at the
percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be
:

Provided also that where an asset referred to in clause (iia)or the first proviso to clause (iia), as
the case may be, is acquired by the assessee during the previous year and is put to use for the
purposes of business for a period of less than one hundred and eighty days in that previous
year, and the deduction under this sub-section in respect of such asset is restricted to fifty per
cent of the amount calculated at the percentage prescribed for an asset under clause (iia)for that
previous year, then, the deduction for the balance fifty per cent of the amount calculated at the
percentage prescribed for such asset under clause (iia) shall be allowed under this sub-
section in the immediately succeeding previous year in respect of such asset:
Provided also that where an asset being commercial vehicle is acquired by the assessee on or after
the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st
day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset
shall be allowed on such percentage on the written down value thereof as may be prescribed.
Explanation.—For the purposes of this proviso,—
(a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor
vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor
vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller";
(b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor
vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-
cab", "tractor" and "road roller" shall have the meanings respectively as assigned to them in
section 2 of the Motor Vehicles Act, 1988 (59 of 1988):
Provided also that, in respect of the previous year relevant to the assessment year commencing on
the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall,
in the case of a company, be restricted to seventy-five per cent of the amount calculated at the
percentage, on the written down value of such assets, prescribed under this Act immediately before
the commencement of the Taxation Laws (Amendment) Act, 1991:
Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery,
plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature, being intangible assets
allowable to the predecessor and the successor in the case of succession referred to in clause (xiii),
clause (xiiib) and clause (xiv)of section 47 or section 170 or to the amalgamating company and the
amalgamated company in the case of amalgamation, or to the demerged company and the resulting
company in the case of demerger, as the case may be, shall not exceed in any previous year the
deduction calculated at the prescribed rates as if the succession or the amalgamation or the
demerger, as the case may be, had not taken place, and such deduction shall be apportioned
between the predecessor and the successor, or the amalgamating company and the
amalgamated company, or the demerged company and the resulting company, as the case
may be, in the ratio of the number of days for which the assets were used by them.

Explanation 1.—Where the business or profession of the assessee is carried on in a building not
owned by him but in respect of which the assessee holds a lease or other right of occupancy and
any capital expenditure is incurred by the assessee for the purposes of the business or
profession on the construction of any structure or doing of any work in or in relation to, and by
way of renovation or extension of, or improvement to, the building, then, the provisions of this
clause shall apply as if the said structure or work is a building owned by the
assessee.
Explanation 2.—For the purposes of this sub-section "written down value of the block of assets"
shall have the same meaning as in clause (c) of sub-section (6) of section 43.
Explanation 3.—For the purposes of this sub-section, the expression "assets" shall mean—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or
any other business or commercial rights of similar nature.
Explanation 4.—For the purposes of this sub-section, the expression "know-how" means any
industrial information or technique likely to assist in the manufacture or
processing of goods or in the working of a mine, oil-well or other sources of mineral deposits
(including searching for discovery or testing of deposits for the winning of access thereto).
Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-
section shall apply whether or not the assessee has claimed the deduction in respect of
depreciation in computing his total income;

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been
acquired and installed after the 31st day of March, 2005, by an assessee engaged in the
business of manufacture or production of any article or thing or in the business of
generation, transmission or distribution of power, a further sum equal to twenty per
cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :
Provided that where an assessee, sets up an undertaking or enterprise for manufacture or
production of any article or thing, on or after the 1st day of April, 2015 in any backward area
notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of
Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new
machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or
enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day
of April, 2020 in the said backward area, then, the provisions of clause (iia)shall have effect, as if
for the words "twenty per cent", the words "thirty-five per cent" had been substituted :
Provided further that no deduction shall be allowed in respect of—
(A) any machinery or plant which, before its installation by the assessee, was used either
within or outside India by any other person; or
(B) any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest-house; or
(C) any office appliances or road transport vehicles; or
(D) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head "Profits and gains of business or profession" of any one previous
year;

(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed
and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous
year (other than the previous year in which it is first brought into use), the amount by which the
moneys payable in respect of such building, machinery, plant or furniture, together with the amount
of scrap value, if any, fall short of the written down value thereof :
Provided that such deficiency is actually written off in the books of the assessee.
(1) "moneys payable" in respect of any building, machinery, plant or furniture includes—
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold,
so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause
(1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such
motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or,
as the case may be, the amount of any insurance, salvage or compensation moneys payable in
respect thereof (including the amount of scrap value, if any) the same proportion as the amount of
twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would
have been computed before applying the said proviso;
(2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for
the time being in force but does not include a transfer, in a scheme of amalgamation, of any
asset by the amalgamating company to the amalgamated company where the amalgamated
company is an Indian company or in a scheme of amalgamation of a banking company, as
referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with
a banking institution as referred to in sub-section (15) of section 45of the said Act, sanctioned
and brought into force by the Central Government under sub-section (7) of section 45 of that
Act, of any asset by the banking company to the banking institution.
(iv) [***]
(v) [***]
(vi) [***]
(1A) [***]
(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section
(1) in any previous year, owing to there being no profits or gains chargeable for that previous year,
or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-
section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which
effect has not been given, as the case may be, shall be added to the amount of the allowance for
depreciation for the following previous year and deemed to be part of that allowance, or if there is no
such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the
succeeding previous years.

(6) "written down value" means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all
depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11
of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian
Income-tax Act, 1886 (2 of 1886), was in force:
Provided that in determining the written down value in respect of buildings, machinery or plant
for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed"
shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-
section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation
was not deductible in determining the written down value for the purposes of the said clause (vi);
(c) in the case of any block of assets,—
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day
of April, 1988, the aggregate of the written down values of all the assets falling within that
block of assets at the beginning of the previous year and adjusted,—
(A) by the increase by the actual cost of any asset falling within that block, acquired
during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that
block, which is sold or discarded or demolished or destroyed during that previous
year together with the amount of the scrap value, if any, so, however, that the
amount of such reduction does not exceed the written down value as so increased; and
(C) in the case of a slump sale, decrease by the actual cost of the asset falling
within that block as reduced—
(a) by the amount of depreciation actually allowed to him under this Act or under the
corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in
respect of any previous year relevant to the assessment year commencing before
the 1st day of April, 1988; and
(b) by the amount of depreciation that would have been allowable to the assessee for
any assessment year commencing on or after the 1st day of April, 1988 as if the
asset was the only asset in the relevant block of assets,
so, however, that the amount of such decrease does not exceed the written down value;
(ii) in respect of any previous year relevant to the assessment year commencing on or after the
1st day of April, 1989, the written down value of that block of assets in the immediately
preceding previous year as reduced by the depreciation actually allowed in respect of that
block of assets in relation to the said preceding previous year and as further adjusted by the
increase or the reduction referred to in item (i).
Explanation 1.—When in a case of succession in business or profession, an assessment is made on the
successor under sub-section (2) of section 170 the written down value of any asset or any block of assets
shall be the amount which would have been taken as its written down value if the assessment had been
made directly on the person succeeded to.

Explanation 2.—Where in any previous year, any block of assets is transferred,—

(a) by a holding company to its subsidiary company or by a subsidiary company to its holding
company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are
satisfied; or
(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and
the amalgamated company is an Indian company,
then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case
of the transferee-company or the amalgamated company, as the case may be, shall be the written down
value of the block of assets as in the case of the transferor-company or the amalgamating company for
the immediately preceding previous year as reduced by the amount of depreciation actually allowed in
relation to the said preceding previous year.
Explanation 2A.—Where in any previous year, any asset forming part of a block of assets is transferred
by a demerged company to the resulting company, then, notwithstanding anything contained in clause
(1), the written down value of the block of assets of the demerged company for the immediately
preceding previous year shall be reduced by the written down value of the assets transferred to the
resulting company pursuant to the demerger.
Explanation 2B.—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, notwithstanding anything contained in clause (1),
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 2C.—Where in any previous year, any block of assets is transferred by a private company
or unlisted public company to a limited liability partnership and the conditions specified in the proviso
to clause (xiiib) of section 47 are satisfied, then, notwithstanding anything contained in clause (1), the
actual cost of the block of assets in the case of the limited liability partnership shall be the written down
value of the block of assets as in the case of the said company on the date of conversion of the company
into the limited liability partnership.
Explanation 3.—Any allowance in respect of any depreciation carried forward under sub-section
(2) of section 32 shall be deemed to be depreciation "actually allowed".
Explanation 4.—For the purposes of this clause, the expressions "moneys payable" and "sold" shall
have the same meanings as in the Explanation below sub-section (4) of section 41.
Explanation 5.—Where in a previous year, any asset forming part of a block of assets is transferred by
a recognised stock exchange in India to a company under a scheme for corporatisation approved by the
Securities and Exchange Board of India established under section 3 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992), the written down value of the block of assets in the case of such
company shall be the written down value of the transferred assets immediately before such transfer.
Explanation 6.—Where an assessee was not required to compute his total income for the purposes of
this Act for any previous year or years preceding the previous year relevant to the assessment year under
consideration,—
(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such
asset, if any, in the books of account;
(b) the total amount of depreciation on such asset, provided in the books of account of the assessee
in respect of such previous year or years preceding the previous year relevant to the assessment

year under consideration shall be deemed to be the depreciation actually allowed under this Act
for the purposes of this clause; and
(c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation
attributable to such revaluation of the asset.
Explanation 7.—For the purposes of this clause, where the income of an assessee is derived, in part
from agriculture and in part from business chargeable to income-tax under the head "Profits and
gains of business or profession", for computing the written down value of assets acquired before the
previous year, the total amount of depreciation shall be computed as if the entire income is
derived from the business of the assessee under the head "Profits and gains of business or profession"
and the depreciation so computed shall be deemed to be the depreciation actually
allowed under this Act.

“ACTUAL COST” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof,
if any, as has been met directly or indirectly by any other person or authority.
43(1) In sections 28 to 41 and in this section, unless the context otherwise requires—
"actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost
thereof, if any, as has been met directly or indirectly by any other person or authority:
Provided further that where the assessee incurs any expenditure for acquisition of any asset
or part thereof in respect of which a payment or aggregate of payments made to a person in a
day, otherwise than by an account payee cheque drawn on a bank or an account payee bank
draft or use of electronic clearing system through a bank account, exceeds ten thousand
rupees, such expenditure shall be ignored for the purposes of determination of actual cost.
Where an asset is used in the business after it ceases to be used for scientific research related to that business
and a deduction has to be made on account of depreciation in respect of that asset, the actual cost of the asset to
the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under
section 35.
Where a capital asset referred to in clause (via) of section 28 is used for the purposes of business or profession,
the actual cost of such asset to the assessee shall be the fair market value which has been taken into account for
the purposes of the said clause.
Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the
assessee shall be the actual cost to the previous owner, as reduced by—
(a) the amount of depreciation actually allowed under this Act and the corresponding
provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year
relevant to the assessment year commencing before the 1st day of April, 1988; and
(b) the amount of depreciation that would have been allowable to the assessee for any
assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only
asset in the relevant block of assets.
Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the
purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of
such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming
depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the
Assessing Officer may with the previous approval of the Deputy Commissioner, determine having
regard to all the circumstances of the case.
Where any asset which had once belonged to the assessee and had been used by him for the purposes
of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise,
is re-acquired by him, the actual cost to the assessee shall be—
(i) the actual cost to him when he first acquired the asset as reduced by—
(a) the amount of depreciation actually allowed to him under this Act or under the
corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any
previous year relevant to the assessment year commencing before the 1st day of April, 1988;
and
(b) the amount of depreciation that would have been allowable to the assessee for any
assessment year commencing on or after the 1st day of April, 1988, as if the asset was the
only asset in the relevant block of assets; or
(ii) the actual price for which the asset is re-acquired by him,
whichever is less.
Where before the date of acquisition by the assessee (hereinafter referred to as the first mentioned person), the
assessee (hereinafter referred to as the first mentioned person), the assets were at any time used by any other
person (hereinafter referred to as the second mentioned person) for the purposes of his business or profession
and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person
and such person acquires on lease, hire or otherwise assets from the first mentioned person, the, notwithstanding
anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned
person, shall be the same as the written down value of the said assets at the time of transfer thereof by the second
mentioned person.
Where a building previously the property of the assessee is brought into use for the purpose of the business or
profession the actual cost to the assessee shall be the actual cost of the building to the assessee, as reduced by an
amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the
building been used for the aforesaid purposes since the date of its acquisition by the assessee.

When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary
company to its holding company, then, if the conditions of clause (iv) or, as the case may be, of clause (v) of
section 47 are satisfied, the actual cost of the transferred capital asset to the transferee -company shall be taken
to be the same as it would have been if the transferor-company had continued to hold the capital asset for the
purposes of its business.
Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the
amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred
capital asset to the amalgamated company shall be taken to be the same as it would have been if the
amalgamating company had continued to hold the capital asset for the purposes of its own business.
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 . Provided that such actual cost shall not exceed the written
down value of such capital asset in the hands of the demerged company.
For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in
connection with the acquisition of an assets, so much of such amount as is relatable to any period after such
asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost
of such assets.
For the removal of doubts, it is hereby declared that where an asset is or has been acquired on or after the 1st
day of March, 1994, by an assessee, the actual cost of asset shall be reduced by the amount of duty of excise or
the additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975), in respect of which a
claim of credit has been made and allowed under the Central Excise Rules, 1944.
Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central
Government or a State Government or any authority established under any law or by any other person, in the
form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is
relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the
asset to the assessee :

Where an asset which was acquired outside India by an assessee, being a non-resident, is brought by him to
India and used for the purposes of his business or profession, the actual cost of the asset to the assessee shall be
the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the
rate in force that would have been allowable had the asset been used in India for the said purposes since the date
of its acquisition by the assessee.
This Explanation provides that in case an asset, which was acquired outside India by an assessee, being a non-
resident, is brought by him to India and used for the purposes of his business or profession, the actual cost of
the asset to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of
depreciation calculated at the rate in force that would have been allowable had the asset been used in India for
the said purposes since the date of its acquisition by the assessee.
Where any capital asset is acquired by the assessee under a scheme for corporatisation of a recognised stock
exchange in India, approved by the Securities and Exchange Board of India, the actual cost of the asset shall be
deemed to be the amount which would have been regarded as actual cost had there been no such corporatisation.
The actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under
section 35AD, shall be treated as ‘nil’,
(a) in the case of such assessee; and
(b) in any other case if the capital asset is acquired or received,
(i) by way of gift or will or an irrevocable trust;
(ii) on any distribution on liquidation of the company; and
(iii) by such mode of transfer as is referred to in clauses (i), (iv), (v), (vi), (vib), (xiii),
(xiiib) and (xiv) of section 47;

Special provisions consequential to changes in rate of exchange of currency.

43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any
asset in any previous year from a country outside India for the purposes of his business or profession and, in
consequence of a change in the rate of exchange during any previous year after the acquisition of such asset,
there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to
the liability existing at the time of acquisition of the asset) at the time of making payment—
(a) towards the whole or a part of the cost of the asset; or
(b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or
indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest,
if any,
the amount by which the liability as aforesaid is so increased or reduced during such previous year and which
is taken into account at the time of making the payment, irrespective of the method of accounting adopted by
the assessee, shall be added to, or, as the case may be, deducted from—
(i) the actual cost of the asset as defined in clause (1) of section 43; or
(ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35;
or
(iii) the amount of expenditure of a capital nature referred to in section 35A; or
(iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36;
or
(v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the
purposes of section 48,
and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the
amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as
aforesaid:
Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has
been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account
of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be,
deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the
payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual
cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken
into account at the time of making payment.

Explanation 1.—In this section, unless the context otherwise requires,—

(a) "rate of exchange" means the rate of exchange determined or recognised by the Central Government for
the conversion of Indian currency into foreign currency or foreign currency into Indian currency;
(b) "foreign currency" and "Indian currency" have the meanings respectively assigned to them in section 2
of the Foreign Exchange Management Act, 1999 (42 of 1999).
Explanation 2.—Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly
or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes
of this section.
Explanation 3.—Where the assessee has entered into a contract with an authorised dealer as defined in section
2 of the Foreign Exchange Management Act, 1999 (42 of 1999), for providing him with a specified sum in a
foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable
him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from,
the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of
acquisition of the capital asset under this section shall, in respect of so much of the sum specified in the contract
as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange
specified therein.
43AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in
foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall
be computed in accordance with the income computation and disclosure standards notified under sub-
section (2) of section 145.
(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign
exchange rates shall be in respect of all foreign currency transactions, including those relating to—
(i) monetary items and non-monetary items;
(ii) translation of financial statements of foreign operations;
(iii) forward exchange contracts;
(iv) foreign currency translation reserves.

43C. (1) Where an asset [not being an asset referred to in sub-section (2) of section 45 which becomes the
property of an amalgamated company under a scheme of amalgamation, is sold after the 29th day of February,
1988, by the amalgamated company as stock-in-trade of the business carried on by it, the cost of acquisition
of the said asset to the amalgamated company in computing the profits and gains from the sale of such
asset shall be the cost of acquisition of the said asset to the amalgamating company, as increased by
the cost, if any, of any improvement made thereto, and the expenditure, if any, incurred, wholly and exclusively
in connection with such transfer by the amalgamating company.
(2) Where an asset [not being an asset referred to in sub-section (2) of section 45] which becomes the property
of the assessee on the total or partial partition of a Hindu undivided family or under a gift or will or an irrevocable
trust, is sold after the 29th day of February, 1988, by the assessee as stock-in-trade of the business carried on by
him, the cost of acquisition of the said asset to the assessee in computing the profits and gains from the sale of
such asset shall be the cost of acquisition of the said asset to the transferor or the donor, as the case may be, as
increased by the cost, if any, of any improvement made thereto, and the expenditure, if any, incurred, wholly
and exclusively in connection with such transfer (by way of effecting the partition, acceptance of the gift,
obtaining probate in respect of the will or the creation of the trust), including the payment of gift-tax, if any,
incurred by the transferor or the donor, as the case may be.

(1) Where a part of any premises is used as dwelling house by the assessee -
(a) The deduction under section 30, in the case of rent, shall be such amount as the Assessing Officer
may determine having regard to the proportionate annual value of the part used for the purpose
of the business or profession, and in the case of any sum paid for repairs, such sum as is
proportionate to the part of the premises used for the purpose of the business or profession;
(b) The deduction under section 30 shall be such sum as the Assessing Officer may determine having
regard to the part so used.
(2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the
business or profession, the deductions under section 30, 31 32 shall be restricted to a fair proportionate
part thereof which the Assessing Officer may determine, having regard to the user of such building,
machinery, plant or furniture for the purposes of the business or profession.

Special provision for computing deductions in the case of business reorganization of co-operative banks.
44DB. (1) The deduction under section 32, section 35D, section 35DD or section 35DDA shall, in a case
where business reorganisation of a co-operative bank has taken place during the financial year, be
allowed in accordance with the provisions of this section.
(2) The amount of deduction allowable to the predecessor co-operative bank under section 32, section
35D, section 35DD or section 35DDA shall be determined in accordance with the formula—
B
A×
C
where A = the amount of deduction allowable to the predecessor co-operative bank if the business
reorganisation had not taken place;
B = the number of days comprised in the period beginning with the 1st day of the financial year and ending
on the day immediately preceding the date of business reorganisation; and
C = the total number of days in the financial year in which the business reorganisation has taken place.
(3) The amount of deduction allowable to the successor co-operative bank under section 32, section 35D, section
35DD or section 35DDA shall be determined in accordance with the formula—
B
A×
C
where A = the amount of deduction allowable to the predecessor co-operative bank if the business
reorganisation had not taken place;
B = the number of days comprised in the period beginning with the date of business reorganisation and
ending on the last day of the financial year; and
C = the total number of days in the financial year in which the business reorganisation has taken place.
(4) The provisions of section 35D, section 35DD or section 35DDA shall, in a case where an undertaking of the
predecessor co-operative bank entitled to the deduction under the said section is transferred before the expiry of
the period specified therein to a successor co-operative bank on account of business reorganisation, apply to the
successor co-operative bank in the financial years subsequent to the year of business reorganisation as they
would have applied to the predecessor co-operative bank, as if the business reorganisation had not taken place.

(5) For the purposes of this section,—

(a) "amalgamated co-operative bank" means—
(i) a co-operative bank with which one or more amalgamating co-operative banks merge; or
(ii) a co-operative bank formed as a result of merger of two or more amalgamating co-operative
banks;
(b) "amalgamating co-operative bank" means—
(i) a co-operative bank which merges with another co-operative bank; or
(ii) every co-operative bank merging to form a new co-operative bank;
(c) "amalgamation" means the merger of an amalgamating co-operative bank or banks with an amalgamated
co-operative bank, in such manner that—
(i) all the assets and liabilities of the amalgamating co-operative bank or banks immediately before
the merger (other than the assets transferred, by sale or distribution on winding up, to the
amalgamated co-operative bank) become the assets and liabilities of the amalgamated co-
operative bank;
(ii) the members holding seventy-five per cent or more voting rights in the amalgamating co-operative
bank become members of the amalgamated co-operative bank; and
(iii) the shareholders holding seventy-five per cent or more in value of the shares in the amalgamating
co-operative bank (other than the shares held by the amalgamated co-operative bank or its
nominee or its subsidiary, immediately before the merger) become shareholders of the
amalgamated co-operative bank;
(d) "business reorganisation" means the reorganisation of business involving the amalgamation or demerger
of a co-operative bank;
(e) "co-operative bank" shall have the meaning assigned to it in clause (cci) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(f) "demerger" means the transfer by a demerged co-operative bank of one or more of its undertakings to
any resulting co-operative bank, in such manner that—
(i) all the assets and liabilities of the undertaking or undertakings immediately before the transfer
become the assets and liabilities of the resulting co-operative bank;
(ii) the assets and the liabilities are transferred to the resulting co-operative bank at values (other than
change in the value of assets consequent to their revaluation) appearing in its books of account
immediately before the transfer;
(iii) the resulting co-operative bank issues, in consideration of the transfer, its membership to the
members of the demerged co-operative bank on a proportionate basis;
(iv) the shareholders holding seventy-five per cent or more in value of the shares in the demerged co-
operative bank (other than shares already held by the resulting bank or its nominee or its subsidiary
immediately before the transfer), become shareholders of the resulting co-operative bank,
otherwise than as a result of the acquisition of the assets of the demerged co-operative bank or
any undertaking thereof by the resulting co-operative bank;
(v) the transfer of the undertaking is on a going concern basis; and
(vi) the transfer is in accordance with the conditions specified by the Central Government, by
notification in the Official Gazette, having regard to the necessity to ensure that the transfer is for
genuine business purposes;

(g) "demerged co-operative bank" means the co-operative bank whose undertaking is transferred, pursuant
to a demerger, to a resulting bank;
(h) "predecessor co-operative bank" means the amalgamating co-operative bank or the demerged co-
operative bank, as the case may be;
(i) "successor co-operative bank" means the amalgamated co-operative bank or the resulting bank, as the
case may be;
(j) "resulting co-operative bank" means—
(i) one or more co-operative banks to which the undertaking of the demerged co-operative bank is
transferred in a demerger; or
(ii) any co-operative bank formed as a result of demerger.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AC . 1
Problem (Section 33AB Tea Development account) (Business ID 02)

R Ltd. is engaged in the business of growing and manufacturing tea in India. For the previous year its composite
business profits before allowing deduction u/s 33AB are Rs. 60,00,000. On 1-9-AY (before due date of filing of
return) it deposited a sum of Rs. 11,00,000 in the Tea Development Account. Two years back it has incurred a
business loss of Rs. 14,00,000 which has been carried forward. on 25-1-AY, it withdraws Rs. 10 lakh which is
utilised as under:
Rs. 6,00,000 for purchase of non-depreciable asset as per the scheme specified.
Rs. 3,00,000 for purpose other than specified in the scheme.
Rs. 1,00,000 was spent for the purpose of scheme.
a) Compute the business income of R Ltd.
b) What are the tax consequences of money misutilised / not utilised?
c) What will be the consequence if the asset which was purchased for Rs. 6,00,000 is sold for Rs. 8,00,000
after 18 months.
33AB deduction is available in respect of the following incomes

A Growing of Tea Leaves
B Growing and Manufacturing of Tea Leaves
C Growing of Tea Leaves with organic farming only
D None of the above
33AB deduction is available in to following assessee types

A Individual
B Individual and HUF
C Companies and Foreign companies
D None of the above

Problem (Section 33AB Tea Development account) (Business ID 30) (Revision / Home work)
The business profit of T Ltd., a tea growing and manufacturing company, is 120 lacs (before deduction under
section 33AB) for the year. It deposits 50 lacs with NABARD for claiming deduction under section 33AB. It
wants to claim set – off of brought forward business loss of 40 lacs.
Your Options are

A Deduction u/s 33AB will be 48 Lakhs and Total Income will be 28.80 Lakhs
B Deduction u/s 33AB will be 28.8 Lakhs and Total Income will be 48 Lakhs
C Deduction u/s 33AB will be Nil and Total Income will be 28.80 Lakhs
D Deduction u/s 33AB will be 48 Lakhs and Total Income will be Nil

Problem (Section 33AB Tea Development account) (Business ID 54) (Revision / Home work)
X Ltd., is a company engaged in the business of growing, manufacturing and selling Tea. For the accounting
year, its composite business profits, before an adjustment under section 33AB were Rs. 60 lakh. In the year, it
deposited Rs. 25 lakh with NABARD.
The company has a business loss of Rs. 10 lakh brought forward from the previous year.
The company withdrew in February, Rs. 20 lakh from the deposit account to buy a non-depreciable asset for Rs.
18 lakh and could not use the balance before the end of the accounting year. The withdrawal and the purchase
were under a scheme appeared by the Tea Board.
The non-depreciable assets were sold next year for Rs. 29 lakh.
Your Options are

A Net Business Income for the PY will be 7.2
B Net Business Income for the PY will be 5.2
C Net Business Income for the PY will be 7.2
D Net Business Income for the PY will be 34.2

Problem (Section 33AB Tea Development account) (Business ID 29)
Laxmi Tea Limited is engaged in growing and manufacturing tea in Assam and West Bengal. The company’s
profit and loss account for the year shows a net profit of 550 lacs after debiting or crediting the following
amounts:
a. Depreciation 40 lacs.
b. Interest amounting to 2 lacs on term loan from a bank for purchase of machinery for one of its tea
factories.
c. Repairs to factory building amounting to 15 lacs for which a sum of 10 lacs was withdrawn from Tea
Deposit account maintained with National Bank for Agricultural and Rural Development (NABARD)
as per section 33AB of the Income-tax Act, 1961.
d. Profit from sale of green tea leaves plucked in own gardens 20 lacs.
e. 5 lacs on account of stamp duty and registration fees for the issue of bonus shares.
f. 10 lacs, being sales tax dues of earlier years determined during the year on disposal of appeals by the
appellate authority, for which (the company has furnished a bank guarantee to the Commercial Tax
Authority.
g. 5 lacs written of as bad in respect of a trade debt transferred from Saraswati Tea Limited 2 years back
pursuant to a scheme of amalgamation approved by the jurisdictional High Court.
h. 2 lacs contributed to Employees Welfare Trust.
i. Interest on inter-corporate deposit 1 lac and 1.50 lacs for February and March, for which tax deducted at
source was paid to the Central Government in June AY.
Following additional information are furnished by the management:
(I) Depreciation as per Tax Audit Report under section 44AB 55 lacs.
(II) One financial institution converted arrear interest of 10 lacs into a new loan 3 years back, which is
repayable in five annual instalments. The company has paid 2 lacs towards the instalment due for the
year.
(III) A sum of 250 lacs deposited in NABARD on 15th June, AY as per the provision of Section 33AB.
Compute total income of the company stating the reasons of each item. Ignore provision relating to Minimum
Alternate Tax.
Time limit for depositing money with NABARD as per 33AB is

A before the expiry of six months from the end of the previous year
B before the due date of furnishing the return of his income,
C before the expiry of six months from the end of the previous year or before the due date of
furnishing the return of his income, whichever is earlier
D None of above

33AB. (1) Where an assessee carrying on business of growing and manufacturing tea or coffee or rubber
in India has, before the expiry of six months from the end of the previous year or before the due date
of furnishing the return of his income, whichever is earlier,—
(a) deposited with the National Bank any amount or amounts in an account (hereafter in this section referred
to as the special account) maintained by the assessee with that Bank in accordance with, and for the
purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf
by the Tea Board or the Coffee Board or the Rubber Board ; or
(b) deposited any amount in an account (hereafter in this section referred to as the Deposit Account)
opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Tea
Board or the Coffee Board or the Rubber Board, as the case may be (hereafter in this section referred to
as the deposit scheme), with the previous approval of the Central Government,
the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being
allowed before the loss, if any, brought forward from earlier years is set off under section 72) of—
(a) a sum equal to the amount or the aggregate of the amounts so deposited; or
(b) a sum equal to forty per cent of the profits of such business (computed under the head "Profits and
gains of business or profession" before making any deduction under this section),
whichever is less :
Provided that where such assessee is a firm, or any association of persons or any body of individuals, the
deduction under this section shall not be allowed in the computation of the income of any partner, or as the case
may be, any member of such firm, association of persons or body of individuals :
Provided further that where any deduction, in respect of any amount deposited in the special account, or in the
Deposit Account, has been allowed under this sub-section in any previous year, no deduction shall be allowed
in respect of such amount in any other previous year.

(2) The deduction under sub-section (1) shall not be admissible unless the accounts of such business of the
assessee for the previous year relevant to the assessment year for which the deduction is claimed have been
audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee
furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and
verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it
shall be sufficient compliance with the provisions of this sub-section if such assessee gets the accounts of such
business audited under such law and furnishes the report of the audit as required under such other law and a
further report in the form prescribed under this sub-section.
(3) Any amount standing to the credit of the assessee in the special account or the Deposit Account shall not be
allowed to be withdrawn except for the purposes specified in the scheme or, as the case may be, in the deposit
scheme or in the circumstances specified below :—
(a) closure of business ;
(b) death of an assessee ;
(c) partition of a Hindu undivided family ;
(d) dissolution of a firm ;
(e) liquidation of a company.
(4) Notwithstanding anything contained in sub-section (3), where any amount standing to the credit of the
assessee in the special account or in the Deposit Account is released during any previous year by the National
Bank or withdrawn by the assessee from the Deposit Account, and such amount is utilised for the purchase
of—
(a) any machinery or plant to be installed in any office premises or residential accommodation, including any
accommodation in the nature of a guest-house;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or
profession" of any one previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the purposes of business of
construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule,
the whole of such amount so utilised shall be deemed to be the profits and gains of business of
that previous year and shall accordingly be chargeable to income-tax as the income of that
previous year.

(5) Where any amount, standing to the credit of the assessee in the special account or in the Deposit Account, is
withdrawn during any previous year by the assessee in the circumstance specified in clause (a) or clause (d) of
sub-section (3), the whole of such amount shall be deemed to be the profits and gains of business or profession
of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year, as
if the business had not closed or, as the case may be, the firm had not been dissolved.
(6) Where any amount standing to the credit of the assessee in the special account or in the Deposit Account is
utilised by the assessee for the purposes of any expenditure in connection with such business in accordance with the
scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargeable under the
head "Profits and gains of business or profession".
(7) Where any amount, standing to the credit of the assessee in the special account or in the Deposit Account,
which is released during any previous year by the National Bank or which is withdrawn by the assessee from
the Deposit Account for being utilised by the assessee for the purposes of such business in accordance with the
scheme or the deposit scheme is not so utilised, either wholly or in part, within that previous year, the whole
of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be profits and
gains of business and accordingly chargeable to income-tax as the income of that previous year :
Provided that this sub-section shall not apply in a case where such amount is released during any previous year
at the closure of the account in circumstances specified in clauses (b), (c) and (e) of sub-section (3).
(8) Where any asset acquired in accordance with the scheme or the deposit scheme is sold or
otherwise transferred in any previous year by the assessee to any person at any time before the expiry of
eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is
relatable to the deduction allowed under sub-section (1) shall be deemed to be the profits and gains of
business or profession of the previous year in which the asset is sold or otherwise transferred and shall
accordingly be chargeable to income-tax as the income of that previous year :
Provided that nothing in this sub-section shall apply—
(i) where the asset is sold or otherwise transferred by the assessee to Government, a local authority, a
corporation established by or under a Central, State or Provincial Act or a Government company as defined
in section 617 of the Companies Act, 1956 (1 of 1956) ; or
(ii) where the sale or transfer of the asset is made in connection with the succession of a firm by a company in
the business or profession carried on by the firm as a result of which the firm sells or otherwise transfers
to the company any asset and the scheme or the deposit scheme continues to apply to the company in the
manner applicable to the firm.

Explanation.—The provisions of clause (ii) of the proviso shall apply only where—
(i) all the properties of the firm relating to the business or profession immediately before the succession
become the properties of the company ;
(ii) all the liabilities of the firm relating to the business or profession immediately before the succession
become the liabilities of the company ; and
(iii) all the shareholders of the company were partners of the firm immediately before the succession.
(9) The Central Government, if it considers necessary or expedient so to do, may, by notification in the Official
Gazette, direct that the deduction allowable under this section shall not be allowed after such date as may be
specified therein.
Explanation.—In this section,—
(a) "Coffee Board" means the Coffee Board constituted under section 4 of the Coffee Act, 1942 (7 of 1942);
(aa) "National Bank" means the National Bank for Agriculture and Rural Development established under
section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981);
(ab) "Rubber Board" means the Rubber Board constituted under sub-section (1) of section 4 of the Rubber
Act, 1947 (24 of 1947);
(b) "Tea Board" means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953).

7 . (1)In the case of income which is partially agricultural income as defined in section 2 and partially
income chargeable to income-tax under the head "Profits and gains of business", in determining that part which
is chargeable to income-tax the market value of any agricultural produce which has been raised by the assessee
or received by him as rent-in-kind and which has been utilised as a raw material in such business or the
sale receipts of which are included in the accounts of the business shall be deducted, and no further
deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of
rent-in-kind.
(2) For the purposes of sub-rule (1) "market value" shall be deemed to be :—
(a) where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of
any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market,
the value calculated according to the average price at which it has been so sold during the relevant previous
year;
(b) where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of
any process aforesaid, the aggregate of—
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was grown; and
(iii) such amount as the [Assessing Officer] finds, having regard to all the circumstances in each case, to
represent a reasonable profit.

7A.(1) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale
latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark
crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained
from rubber plants grown by the seller in India shall be computed as if it were income derived from business,
and thirty-five per cent of such income shall be deemed to be income liable to tax.
(2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in
replacement of plants that have died or become permanently useless in an area already planted, if such area
has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made
in respect of the amount of any subsidy which, under the provisions of clause (31) of section 10, is not
includible in the total income.
7B. [(1) Income derived from the sale of coffee grown and cured by the seller in India shall be computed
as if it were income derived from business, and twenty-five per cent of such income shall be deemed to
be income liable to tax.
(1A) Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or
without mixing chicory or other flavouring ingredients, shall be computed as if it were income derived from
business, and forty per cent of such income shall be deemed to be income liable to tax.
Explanation : For the purposes of sub-rules (1) and (1A) “curing” shall have the same meaning as assigned to
it in clause (d) of section 3 of the Coffee Act, 1942 (7 of 1942).]
(2) In computing [the incomes referred to in sub-rules (1) and (1A)], an allowance shall be made in respect of
the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an
area already planted, if such area has not previously been abandoned, and for the purpose of determining such
cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause
(31) of section 10, is not includible in the total income.
8. (1) Income derived from the sale of tea grown and manufactured by the seller in India shall be
computed as if it were income derived from business, and forty per cent of such income shall be deemed
to be income liable to tax.
(2) In computing such income an allowance shall be made in respect of the cost of planting bushes in
replacement of bushes that have died or become permanently useless in an area already planted, if such area
has not previously been abandoned [, and for the purpose of determining such cost, no deduction shall be made
in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not
includible in the total income.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AD . 1
Problem (Section 35 Scientific research) (Business ID 03)

R purchased an asset for scientific research for Rs. 15,00,000 in the previous year 2014-15. During the
previous year, the said asset is ceased to be used for scientific research.
The following information is also submitted to you:
Rs.
Profit from business before depreciation 5,00,000
Written down value of block of assets 15% as on 1-4 10,00,000
The scientific research asset if used for business shall be eligible for depreciation @ 15%.
Compute the total income if the scientific research asset is sold for Rs. 25,00,000 assuming:
a) It is sold without using for business;
b) It is sold after using for business.

Business income of R Ltd. before allowing expenditure on scientific research for the year is Rs. 2,50,000. The
company has incurred the following expenditure on scientific research during the previous year.
Rs.
Revenue expenditure on Scientific Research 2,60,000
Capital expenditure on Scientific Research 5,00,000
Including
1) Expenditure on construction of roads to scientific research building – 1,00,000
2) One of building to be used for scientific research is under construction –
2,00,000
Some of furniture is shifted from administrative office to scientific research wing
2,50,000
(WDV-1,60,000)
Compute the deduction available on account of Scientific Research assuming the company does not have any
other income.

A company engaged in manufacturing of pharmaceutical products, commenced its business on April 1. During
the last 3 financial year, it had incurred Rs. 2 lakh annually as expenditure on salaries and purchase of new raw
materials for the purpose of research connected with its business. For the year it Incurred scientific research
revenue expenditure of Rs. 2 lakh and a capital expenditure of Rs. 3.5 lakh on purchase of plant and machinery.
Since the result of the research was unsuccessful, the company sold its plant and machinery on December 31,
for Rs. 8 lakh and closed its research activity.
Scientific Research expense u/s 35 for the PY will be

A 2.5 Lakhs
B 11.5 Lakhs
C 5.5 Lakhs
D 2.0 Lakhs
Capital Gains (ignoring the provisions of 70 to 80) for the year will be
A 4.5 Lakhs
B 8.0 Lakhs
C 10.0 Lakhs
D None of above
Income will be
A GTI will be 8 and Business Loss of 11.5 lakhs will be carried forward
B GTI will be 4.5 and Business Loss of 1 lakhs will be carried forward
C GTI will be Nil and Business Loss of 3.5 lakhs will be carried forward
D None of above

35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed—
(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific
research related to the business.
Explanation.—Where any such expenditure has been laid out or expended before the commencement of
the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of
any salary as defined in Explanation 2 below sub-section (5) of section 40A to an employee engaged in
such scientific research or on the purchase of materials used in such scientific research, the
aggregate of the expenditure so laid out or expended within the three years immediately preceding
the commencement of the business shall, to the extent it is certified by the prescribed authority to
have been laid out or expended on such scientific research, be deemed to have been laid out or expended
in the previous year in which the business is commenced ;
(ii) an amount equal to one and one half times of any sum paid to a research association which has as its
object the undertaking of scientific research or to a university, college or other institution to be
used for scientific research :
Provided that such association, university, college or other institution for the purposes of this clause—
(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such
conditions as may be prescribed; and
(B) such association, university, college or other institution is specified as such, by notification in the
Official Gazette, by the Central Government :
Provided further that where any sum is paid to such association, university, college or other institution
in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the
deduction under this clause shall be equal to the sum so paid;
(iia) any sum paid to a company to be used by it for scientific research:
Provided that such company—
(A) is registered in India,
(B) has as its main object the scientific research and development,
(C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the
prescribed manner, and
(D) fulfils such other conditions as may be prescribed
(iii) any sum paid to a research association which has as its object the undertaking of research in social
science or statistical research or to a university, college or other institution to be used for research in social
science or statistical research :
Provided that such association, university, college or other institution for the purposes of this clause—
(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such
conditions as may be prescribed; and

(B) such association, university, college or other institution is specified as such, by notification in the
Official Gazette, by the Central Government.
Explanation.—The deduction, to which the assessee is entitled in respect of any sum paid to a research
association, university, college or other institution to which clause (ii) or clause (iii) applies, shall not be
denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval
granted to the association, university, college or other institution referred to in clause (ii) or clause (iii)
has been withdrawn;
(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried
on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) :
Provided that the research association, university, college or other institution referred to in clause (ii) or clause
(iii) shall make an application in the prescribed form and manner to the Central Government for the purpose of
grant of approval, or continuance thereof, under clause (ii) or, as the case may be, clause (iii) :
Provided further that the Central Government may, before granting approval under clause (ii) or clause (iii),
call for such documents (including audited annual accounts) or information from the research association,
university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of
the activities of the research association, university, college or other institution and that Government may also
make such inquiries as it may deem necessary in this behalf :
Provided also that any notification issued, by the Central Government under clause (ii) or clause (iii), before
the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President†, shall, at any
one time, have effect for such assessment year or years, not exceeding three assessment years (including an
assessment year or years commencing before the date on which such notification is issued) as may be specified
in the notification:
Provided also that where an application under the first proviso is made on or after the date on which the
Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under clause (ii)
or clause (iii) shall be issued or an order rejecting the application shall be passed within the period of twelve
months from the end of the month in which such application was received by the Central Government.

(2) For the purposes of clause (iv) of sub-section (1),—

(i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital
expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the
expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous
years ;
(ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such
capital expenditure incurred in any previous year shall be deducted for that previous year :
Provided that no deduction shall be admissible under this clause in respect of any expenditure
incurred on the acquisition of any land, whether the land is acquired as such or as part of any property,
after the 29th day of February, 1984.
Explanation 1.—Where any capital expenditure has been incurred before the commencement of
the business, the aggregate of the expenditure so incurred within the three years immediately
preceding the commencement of the business shall be deemed to have been incurred in the previous
year in which the business is commenced.
Explanation 2.—For the purposes of this clause,—
(a) "land" includes any interest in land ; and
(b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which
the instrument of transfer of such land to him has been registered under the Registration Act, 1908
(16 of 1908), or where he has taken or retained the possession of such land or any part thereof in
part performance of a contract of the nature referred to in section 53A of the Transfer of Property
Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part
;
(ii) notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital
nature incurred before the 1st day of April, 1967, ceases to be used in a previous year for scientific research
related to the business and the value of the asset at the time of the cessation, together with the aggregate
of deductions already allowed under clause (i) falls short of the said expenditure, then—
(a) there shall be allowed a deduction for that previous year of an amount equal to such deficiency, and
(b) no deduction shall be allowed under that clause for that previous year or for any subsequent previous
year ;
(iii) if the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of
cessation, the sale price shall be taken to be the value of the asset at the time of the cessation ; and if the
asset is sold, without having been used for other purposes, in a previous year subsequent to the year of
cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation,
an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale
took place ;
(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented
wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for
the same or any other previous year in respect of that asset ;
(v) where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific
research related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section
32.
(2A) Where, before the 1st day of March, 1984, the assessee pays any sum (being any sum paid with a specific
direction that the sum shall not be used for the acquisition of any land or building or construction of any building)
to a scientific research association or university or college or other institution referred to in clause (ii) of sub-
section (1) or to a public sector company to be used for scientific research undertaken under a programme
approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of
India, then,—
(a) there shall be allowed a deduction of a sum equal to one and one-third times the sum so paid ; and
(b) no deduction in respect of such sum shall be allowed under clause (ii) of sub-section (1) for the same or
any other assessment year.
Explanation.—For the purposes of this sub-section, "public sector company" shall have the same meaning as in
clause (b) of the Explanation below sub-section (2B) of section 32A.

(2AA) Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of
Technology or a specified person with a specific direction that the said sum shall be used for scientific research
undertaken under a programme approved in this behalf by the prescribed authority, then—
(a) there shall be allowed a deduction of a sum equal to one and one-half times the sum so paid ; and
(b) no deduction in respect of such sum shall be allowed under any other provision of this Act :
Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of
carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief
Commissioner or Principal Director General or Director General in such form as may be prescribed
Provided further that where any sum is paid to such National Laboratory or university or Indian Institute of
Technology or specified person in a previous year relevant to the assessment year beginning on or after the 1st day
of April, 2021, the deduction under this sub-section shall be equal to the sum so paid.
Explanation 1.—The deduction, to which the assessee is entitled in respect of any sum paid to a National
Laboratory, University, Indian Institute of Technology or a specified person for the approved programme
referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such
sum by the assessee, the approval granted to,—
(a) such Laboratory, or specified person has been withdrawn; or
(b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or
specified person, has been withdrawn.
(a) "National Laboratory" means a scientific laboratory functioning at the national level under the aegis of the
Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific
and Industrial Research, the Defence Research and Development Organisation, the Department of
Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is
approved as a National Laboratory by the prescribed authority in such manner as may be prescribed ;
(b) "University" shall have the same meaning as in Explanation to clause (ix) of section 47 ;
(c) "Indian Institute of Technology" shall have the same meaning as that of "Institute" in clause (g) of section
3 of the Institutes of Technology Act, 1961 (59 of 1961);
(d) "specified person" means such person as is approved by the prescribed authority.

(2AB)
(1) Where a company engaged in the business of bio-technology or in any business of manufacture or
production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule
incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land
or building) on in-house research and development facility as approved by the prescribed authority then, there
shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred:
Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land
or building) on in-house research and development facility is incurred in a previous year relevant to the assessment
year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure
so incurred.
Explanation.—For the purposes of this clause, "expenditure on scientific research", in relation to drugs and
pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any
regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the
Patents Act, 1970 (39 of 1970).
(2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other
provision of this Act.
(3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the
prescribed authority for co-operation in such research and development facility and fulfils such conditions
with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be
prescribed.
(4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal
Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and
within such time as may be prescribed.
(5)
(6) No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section
(1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008.

(2B)(a) Where, before the 1st day of March, 1984, an assessee has incurred any expenditure (not being in the
nature of capital expenditure incurred on the acquisition of any land or building or construction of any building)
on scientific research undertaken under a programme approved in this behalf by the prescribed authority having
regard to the social, economic and industrial needs of India, he shall, subject to the provisions of this sub-section,
be allowed a deduction of a sum equal to one and one-fourth times the amount of the expenditure certified by
the prescribed authority to have been so incurred during the previous year.
(b) Where a deduction has been allowed under clause (a) for any previous year in respect of any expenditure,
no deduction in respect of such expenditure shall be allowed under clause (i) of sub-section (1) or clause (ia) of
sub-section (2) for the same or any other previous year.
(c) Where a deduction is allowed for any previous year under this sub-section in respect of expenditure
represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under clause (ii)
of sub-section (1) of section 32 for the same or any subsequent previous year.
(d) Any deduction made under this sub-section in respect of any expenditure on scientific research in excess of
the expenditure actually incurred shall be deemed to have been wrongly made for the purposes of this Act if the
assessee fails to furnish within one year of the period allowed by the prescribed authority for completion of the
programme, a certificate of its completion obtained from that authority, and the provisions of sub-section (5B)
of section 155 shall apply accordingly.

(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or
constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to—
(a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-
section (1), and its decision shall be final;
(b) the prescribed authority66, when such question relates to any activity other than the activity specified in
clause (a), whose decision shall be final.
(4) The provisions of sub-section (2) of section 32 shall apply in relation to deductions allowable
under clause (iv) of sub-section (1) as they apply in relation to deductions allowable in respect
of depreciation.
(5) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the
amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on
scientific research,—
(i) the amalgamating company shall not be allowed the deduction under clause (ii) or clause (iii) of sub-section
(2); and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would
have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.

(i) “SCIENTIFIC RESEARCH” means any activities for the extension of knowledge in the fields of
natural or applied science including agriculture, animal husbandry or livestock;
(ii) References to expenditure incurred on scientific research include all expenditure incurred for the
prosecution, or the provision of facilities for the prosecution, of scientific research, but do not
include any expenditure incurred in the acquisition of rights in, or arising out of, scientific
research;
(iii) References to scientific research related to a business or class of business include -
(a) Any scientific research which may lead to or facilitate an extension of that business or, as
the case may be, all businesses of that class;
(b) Any scientific research of a medical nature which has a special relation to the welfare of
workers employed in that business or, as the case may be, all businesses of that class;
Where an asset representing expenditure of a capital nature on scientific research is sold, without having
been used for other purposes, and the proceeds of the sale together with the total amount of the deductions
made, the amount of the deduction exceed the amount of the capital expenditure the excess , or the
amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of
the business or profession of the previous year in which the sale took place.
Explanation.--Where the moneys payable in respect of any asset referred to in this sub-section become due in
a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as
if the business is in existence in that previous year.

Expenditure on eligible projects or schemes.

35AC. (1) Where an assessee incurs any expenditure by way of payment of any sum to a public sector company
or a local authority or to an association or institution approved by the National Committee for carrying out any
eligible project or scheme, the assessee shall, subject to the provisions of this section, be allowed a deduction of
the amount of such expenditure incurred during the previous year :
Provided that a company may, for claiming the deduction under this sub-section, incur expenditure either by
way of payment of any sum as aforesaid or directly on the eligible project or scheme.
(2) The deduction under sub-section (1) shall not be allowed unless the assessee furnishes along with his return
of income a certificate—
(a) where the payment is to a public sector company or a local authority or an association or institution referred
to in sub-section (1), from such public sector company or local authority or, as the case may be, association
or institution;
(b) in any other case, from an accountant, as defined in the Explanation below sub-section (2) of section 288,
in such form, manner and containing such particulars (including particulars relating to the progress in the work
relating to the eligible project or scheme during the previous year) as may be prescribed.
Explanation.—The deduction, to which the assessee is entitled in respect of any sum paid to a public sector
company or a local authority or to an association or institution for carrying out the eligible project or scheme
referred to in this section applies, shall not be denied merely on the ground that subsequent to the payment of
such sum by the assessee,—
(a) the approval granted to such association or institution has been withdrawn; or
(b) the notification notifying the eligible project or scheme carried out by the public sector company or local
authority or association or institution has been withdrawn.
(3) Where a deduction under this section is claimed and allowed for any assessment year in respect of any
expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under
any other provision of this Act for the same or any other assessment year.
(4) Where an association or institution is approved by the National Committee under sub-section (1), and
subsequently—
(i) that Committee is satisfied that the project or the scheme is not being carried on in accordance with all or
any of the conditions subject to which approval was granted; or
(ii) such association or institution, to which approval has been granted, has not furnished to the National
Committee, after the end of each financial year, a report in such form and setting forth such particulars
and within such time as may be prescribed73,
the National Committee may, at any time, after giving a reasonable opportunity of showing cause against the
proposed withdrawal to the concerned association or institution, withdraw the approval:
Provided that a copy of the order withdrawing the approval shall be forwarded by the National Committee to
the Assessing Officer having jurisdiction over the concerned association or institution.

(5) Where any project or scheme has been notified as an eligible project or scheme under clause (b) of
the Explanation, and subsequently—
(i) the National Committee is satisfied that the project or the scheme is not being carried on in accordance with
all or any of the conditions subject to which such project or scheme was notified; or
(ii) a report in respect of such eligible project or scheme has not been furnished after the end of each financial
year, in such form and setting forth such particulars and within such time as may be prescribed74,
such notification may be withdrawn in the same manner in which it was issued:
Provided that a reasonable opportunity of showing cause against the proposed withdrawal shall be given by the
National Committee to the concerned association, institution, public sector company or local authority, as the
case may be:
Provided further that a copy of the notification by which the notification of the eligible project or scheme is
withdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association,
institution, public sector company or local authority, as the case may be, carrying on such eligible project or
scheme.
(6) Notwithstanding anything contained in any other provision of this Act, where—
(i) the approval of the National Committee, granted to an association or institution, is withdrawn under sub-
section (4) or the notification in respect of eligible project or scheme is withdrawn in the case of a public
sector company or local authority or an association or institution under sub-section (5); or
(ii) a company has claimed deduction under the proviso to sub-section (1) in respect of any expenditure
incurred directly on the eligible project or scheme and the approval for such project or scheme is
withdrawn by the National Committee under sub-section (5),
the total amount of the payment received by the public sector company or the local authority or the association
or the institution, as the case may be, in respect of which such company or authority or association or institution
has furnished a certificate referred to in clause (a) of sub-section (2) or the deduction claimed by a company
under the proviso to sub-section (1) shall be deemed to be the income of such company or authority or
association or institution, as the case may be, for the previous year in which such approval or notification is
withdrawn and tax shall be charged on such income at the maximum marginal rate in force for that year.
(7) No deduction under this section shall be allowed in respect of any assessment year commencing on or
after the 1st day of April, 2018.
Explanation.—For the purposes of this section,—
(a) "National Committee" means the Committee constituted by the Central Government, from amongst
persons of eminence in public life, in accordance with the rules made under this Act;
(b) "eligible project or scheme" means such project or scheme for promoting the social and economic welfare
of, or the uplift of, the public as the Central Government may, by notification in the Official Gazette,
specify in this behalf on the recommendations of the National Committee.

Expenditure by way of payment to associations and institutions for carrying out rural development
programmes.
35CCA. (1) Where an assessee incurs any expenditure by way of payment of any sum—
(a) to an association or institution, which has as its object the undertaking of any programme of rural
development, to be used for carrying out any programme of rural development approved by the prescribed
authority; or
(b) to an association or institution, which has as its object the training of persons for implementing programmes
of rural development; or
(c) to a rural development fund set up and notified by the Central Government in this behalf; or
(d) to the National Urban Poverty Eradication Fund set up and notified by the Central Government in this
behalf,
the assessee shall, subject to the provisions of sub-section (2), be allowed a deduction of the amount of such
expenditure incurred during the previous year.
(2) The deduction under clause (a) of sub-section (1) shall not be allowed in respect of expenditure by way of
payment of any sum to any association or institution referred to in the said clause unless the assessee furnishes
a certificate from such association or institution to the effect that—
(a) the programme of rural development had been approved by the prescribed authority before the 1st day of
March, 1983; and
(b) where such payment is made after the 28th day of February, 1983, such programme involves work by way
of construction of any building or other structure (whether for use as a dispensary, school, training or
welfare centre, workshop or for any other purpose) or the laying of any road or the construction or boring
of a well or tube-well or the installation of any plant or machinery, and such work has commenced before
the 1st day of March, 1983.

(2A) The deduction under clause (b) of sub-section (1) shall not be allowed in respect of expenditure by way of
payment of any sum to any association or institution unless the assessee furnishes a certificate from such
association or institution to the effect that—
(a) the prescribed authority had approved the association or institution before the 1st day of March, 1983; and
(b) the training of persons for implementing any programme of rural development had been started by the
association or institution before the 1st day of March, 1983.
Explanation.—The deduction, to which the assessee is entitled in respect of any sum paid to an association or
institution for carrying out the programme of rural development referred to in sub-section (1), shall not be denied
merely on the ground that subsequent to the payment of such sum by the assessee, the approval granted to such
programme of rural development, or as the case may be, to the association or institution has been withdrawn.
(2B) No certificate of the nature referred to in sub-section (2) or sub-section (2A) shall be issued by any
association or institution unless such association or institution has obtained from the prescribed authority
authorisation in writing to issue certificates of such nature.
Explanation.—For the purposes of this section, "programme of rural development" shall have the meaning
assigned to it in the Explanation to sub-section (1) of section 35CC.
expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure
under section 35C or section 35CC or section 80G or any other provision of this Act for the same or any other
assessment year.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AE . 1
Problem (Section 35D Amortisation of Expense) (Business ID 09)

a) Compute the deduction allowable under section 35D on the basis of the following information submitted to
you.
Preliminary expenses incurred 2,40,000
Cost of project 40,00,000
b) What will be your answer if the above preliminary expense have been incurred by R Ltd. & the capital
employed is Rs. 46,00,000.
Problem (Section 35E Amortisation of Expense) (Business ID MCQ-082)
Company X Indian company in India, is engaged in any operations relating to prospecting for, or extraction or
production of, any mineral during the pre-commencement period of the three years immediately preceding
previous year has incurred 4 Lakhs expense wholly and exclusively on operations relating to prospecting for
any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule.it
has started the commercial production during the previous year.
Your Options are

A The expense will be amortised 1/10 for period of 10 years.
B The expense will be amortised 1/5 for period of 5 years.
C The expense will be amortised 1/20 for period of 20 years.
D The expense will be amortised 1/30 for period of 30 years.
Your Options are

A If the above expense remains unabsorbed it shall be carried forward for 10 Years
B If the above expense remains unabsorbed it shall be carried forward for 8 Years
C If the above expense remains unabsorbed it shall be carried forward for 4 Years
D If the above expense remains unabsorbed it shall be carried forward for Any Number of
Years

Your Options are

A IF the above expense is carried forward then it shall be set off against only Business Income
B IF the above expense is carried forward then it shall be set off against Business Income and
House Property Income
C IF the above expense is carried forward then it shall be set off against any income under any
other head like depreciation
D None of above

Amortisation of certain preliminary expenses.

35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident
in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),—
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his undertaking or in
connection with his setting up a new unit,
the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an
amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the
previous year in which the business commences or, as the case may be, the previous year in which the extension
of the undertaking is completed or the new unit commences production or operation :
Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-
section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth
of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such
expenditure for each of the five successive previous years" had been substituted.
(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the
following clauses, namely :—
(a) expenditure in connection with—
(i) preparation of feasibility report;
(ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee :
Provided that the work in connection with the preparation of the feasibility report or the project report or
the conducting of market survey or of any other survey or the engineering services referred to in this clause
is carried out by the assessee himself or by a concern which is for the time being approved in this behalf
by the Board;
(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating
to the setting up or conduct of the business of the assessee;
(c) where the assessee is a company, also expenditure—
(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of
1956)94;
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company,
being underwriting commission, brokerage and charges for drafting, typing, printing and
advertisement of the prospectus;
(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any
other provision of this Act) as may be prescribed.

(3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated
at two and one-half per cent—
(a) of the cost of the project, or
(b) where the assessee is an Indian company, at the option of the company, of the capital employed in the
business of the company,
the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1) :
Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st
day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-half per
cent", the words "five per cent" had been substituted.
Explanation.—In this sub-section—
(a) "cost of the project" means—
(i) in a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being land,
buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books of the assessee
as on the last day of the previous year in which the business of the assessee commences;
(ii) in a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land,
buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books of the assessee
as on the last day of the previous year in which the extension of the undertaking is completed or,
as the case may be, the new unit commences production or operation, in so far as such fixed assets
have been acquired or developed in connection with the extension of the undertaking or the setting
up of the new unit of the assessee;
(b) "capital employed in the business of the company" means—
(i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital,
debentures and long-term borrowings as on the last day of the previous year in which the business
of the company commences;
(ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital,
debentures and long-term borrowings as on the last day of the previous year in which the extension
of the undertaking is completed or, as the case may be, the new unit commences production or
operation, in so far as such capital, debentures and long-term borrowings have been issued or
obtained in connection with the extension of the undertaking or the setting up of the new unit of
the company;
(c) "long-term borrowings" means—
(i) any moneys borrowed by the company from Government or the Industrial Finance Corporation of
India or the Industrial Credit and Investment Corporation of India or any other financial institution
which is eligible for deduction under clause (viii) of sub-section (1) ofsection 36 or any banking
institution (not being a financial institution referred to above), or
(ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside
India of capital plant and machinery, where the terms under which such moneys are borrowed or
the debt is incurred provide for the repayment thereof during a period of not less than seven years.
(4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be
admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the
expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in

the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income
for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed
form95 duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
(5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company
in a scheme of amalgamation,—
(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the
previous year in which the amalgamation takes place; and
have applied to the amalgamating company if the amalgamation had not taken place.
(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of
demerger,—
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous
year in which the demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would have
applied to the demerged company, if the demerger had not taken place.
expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not
qualify for deduction under any other provision of this Act for the same or any other assessment year.

Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999,
wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be
allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive
previous years beginning with the previous year in which the amalgamation or demerger takes place.
No deduction shall be allowed in respect of the expenditure mentioned here under any other provision of this
Act.
The whole expenditure incurred by the assessee in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, each part payment being entitled
to deduction in five equal annual instalments beginning from the year in which such part payment is made
to the employee.
Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee
in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement,
one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that
previous year, and the balance shall be deducted in equal instalments for each of the four immediately
succeeding previous years.

Deduction for expenditure on prospecting, etc., for certain minerals.

35E. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident
in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral
and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in
accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous
years a deduction of an amount equal to one-tenth of the amount of such expenditure.
(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that
sub-section at any time during the year of commercial production and any one or more of the four years
immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any
mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or
on the development of a mine or other natural deposit of any such mineral or group of associated minerals :
Provided that there shall be excluded from such expenditure any portion thereof which is met directly or
indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by
the assessee in respect of any property or rights brought into existence as a result of the expenditure.
(3) Any expenditure—
(i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-
section (2) or of any rights in or over such site;
(ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or
over such deposits; or
(iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way
of depreciation is admissible under section 32,
shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section
(2).
(4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be—
(a) an amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being
hereafter in this sub-section referred to as the instalment); or
(b) such amount as is sufficient to reduce to nil the income (as computed before making the deduction under
this section) of that previous year arising from the commercial exploitation [whether or not such
commercial exploitation is as a result of the operations or development referred to in sub-section (2)] of
any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated
minerals as aforesaid in respect of which the expenditure was incurred,
whichever amount is less :
Provided that the amount of the instalment relating to any relevant previous year, to the
extent to which it remains unallowed, shall be carried forward and added to the instalment
relating to the previous year next following and deemed to be part of that instalment, and so
on, for succeeding previous years, so, however, that no part of any instalment shall be carried
forward beyond the tenth previous year as reckoned from the year of commercial production.


(a) "operation relating to prospecting" means any operation undertaken for the purposes of exploring, locating
or proving deposits of any mineral, and includes any such operation which proves to be infructuous or
abortive;
(b) "year of commercial production" means the previous year in which as a result of any operation relating to
prospecting, commercial production of any mineral or any one or more of the minerals in a group of
associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule, commences;
(c) "relevant previous years" means the ten previous years beginning with the year of commercial production.
(6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be
admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the
expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in
the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income
for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed
form96 duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
in a scheme of amalgamation—
(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the
previous year in which the amalgamation takes place; and
have applied to the amalgamating company if the amalgamation had not taken place.
(7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
in a scheme of demerger,—
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous
year in which the demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have
applied to the demerged company, if the demerger had not taken place.
expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not
qualify for deduction under any other provision of this Act for the same or any other assessment year.
“Key to success is only writing

practice.”
CA Kalpesh Sanghavi

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AF . 1
Problem (Section 35AD Specified business) (Business ID 08) (Revision / Home work)
R ltd. constructed a building and started operating a hotel of 3 star category w.e.f. 1-4. The company incurred
the following expenditure in this connection.
1. Capital expenditure (including cost of land Rs. 50 lakhs) incurred during pre-
Rs. 1,10,00,000
commencement period which were capitalized in the books of accounts.
2. Capital expenditure incurred during previous year (it includes Rs. 20 lakhs
Rs. 1,40,00,000
paid for Goodwill)
Your Options are

A Deduction u/s 35AD will be 1,80,00,000
B Deduction u/s 35AD will be 1,20,00,000
C Deduction u/s 35AD will be 60,00,000
D Deduction u/s 35AD will be 2,50,00,000

Problem (Section 35AD Specified business) (Business ID 01)

On April 1, X Ltd. commences the operation of a warehousing facility in Andhra Pradesh for storage of
agricultural produce. The following information is available from the records of company –
expenses are capitalized of preceding year

Purchase of land for warehouse 50,00,000
Construction cost of warehouse 8,00,000
Purchase of know-how for warehouse 10,00,000
Salary to staff 78,000
Expenses incurred during previous year

Construction cost of warehouse 60,00,000
Purchase of old plant and machinery (from domestic market) 2,00,000
Purchase of old plant and machinery (from Germany) 4,00,000
Purchase of new plant and machinery 9,00,000
Purchase of goodwill 3,50,000
Profit and loss account for the year
Depreciation of building 3,40,000 Amount collected 78,00,000
Depreciation of machinery 3,50,000 (from persons using warehouse)
Cost of know-how
10,00,000
(amount written off)
Other operating expenses 7,51,000
Donation to a political party 10,000
Net profit 53,49,000
78,00,000 78,00,000
Out of other operating expenses, a payment of Rs. 40,000 is made in cash. Other operating expenses are
deductible under section 37. Find out the taxable income of X Ltd. on the assumption that X Ltd. has the
following income from other sources – income from the business of commission agency: Rs. 20,15,000
(computed under the provisions of the income – tax Act) and dividend from a foreign company in Australia :
Rs. 50,000. (TDS in Australia Rs. 10,000).

35AD expense eligibility criteria, Your Options are

A any expenditure of capital nature and revenue nature shall not include any expenditure in
respect of which the payment or aggregate of payments made to a person in a day, otherwise
than by an cross cheque drawn on a bank or an account payee bank draft or use of electronic
clearing system through a bank account, exceeds ten thousand rupees or any expenditure
incurred on the acquisition of any land or goodwill or financial instrument.
B any expenditure shall not include any expenditure in respect of which the payment or
aggregate of payments made to a person in a day, otherwise than by an exceeds ten thousand
rupees or any expenditure incurred on the acquisition of any land or goodwill or financial
instrument.
C any expenditure of capital nature shall not include any expenditure in respect of which the
payment or aggregate of payments made to a person in a day, otherwise than by an account
payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account, exceeds ten thousand rupees or any expenditure incurred on
the acquisition of any land or goodwill or financial instrument.
D None of above
Second hand imported plant and machinery whether it is eligible for benefit of 35AD, Your
Options are
A Yes
B No
C Yes only if it is imported from Specified countries
D None of the above
Second hand domestic plant and machinery whether it is eligible for benefit of 35AD, Your
Options are
A Yes
B No
C Yes only if does not exceed twenty per cent of the total value of the machinery or plant used
in such business
D None of the above

Problem 7 (Section 35AD Specified business) (Business ID 56)

X Ltd. commences its operation of the business of laying and operating a cross country natural gas pipeline
network for distribution on July 1,. The company incurs a capital expenditure of Rs. 300 lakh (including cost of
land Rs. 45 lakh and cost of financial instrument Rs. 5 lakh) during the period 2 years before June 30,. The
company did not claim deduction for such expenditure in the earlier assessment years. The entire expenditure is
capitalised on July 1,. Further, during the previous year, the company incurs capital expenditure of Rs. 200 lakh
exclusively for the said business.
1. Compute the amount of deduction allowable under section 35AD assuming that the company has
fulfilled all the conditions specified in section 35AD.
2. If the company has loss from such business 2 years back, how the same is to be set off and carried
forward?
Problem (Section 35AD Specified business) (Business ID MCQ-84) (Revision / Home work)
Assets used for the purpose of 35AD business was fully allowed as deduction 2 years back Rs. 20 Lakhs. These
assets have been sold for 22 Lakhs during the previous year.
Your Options are

A 2 Lakhs will be Capital Gains and 20 Lakhs will be Business Income.
B 22 Lakhs will be Capital Gains
C 22 Lakhs will be Business Income
D None of the above

35AD. (1) An assessee shall be allowed a deduction in respect of the whole of any expenditure of capital
nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during
the previous year in which such expenditure is incurred by him :
Provided that the expenditure incurred, wholly and exclusively, for the purposes of any specified business, shall
be allowed as deduction during the previous year in which he commences operations of his specified
business, if—
(a) the expenditure is incurred prior to the commencement of its operations; and
(b) the amount is capitalised in the books of account of the assessee on the date of commencement of its
operations.
(2) This section applies to the specified business which fulfils all the following conditions, namely :—
(i) it is not set up by splitting up, or the reconstruction, of a business already in existence;
(ii) it is not set up by the transfer to the specified business of machinery or plant previously used
for any purpose;
(iii) where the business is of the nature referred to in sub-clause (iii) of clause (c) of sub-section (8), such
business,—
(a) is owned by a company formed and registered in India under the Companies Act, 1956 (1 of 1956)
or by a consortium of such companies or by an authority or a board or a corporation established or
constituted under any Central or State Act;
(b) has been approved by the Petroleum and Natural Gas Regulatory Board established under sub-
section (1) of section 3 of the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006)
and notified by the Central Government in the Official Gazette in this behalf;
(c) has made not less than such proportion of its total pipeline capacity as specified by regulations made
by the Petroleum and Natural Gas Regulatory Board established under sub-section (1) of section 3
of the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006) available for use on
common carrier basis by any person other than the assessee or an associated person; and
(d) fulfils any other condition as may be prescribed;
(iv) where the business is of the nature referred to in sub-clause (xiv) of clause (c) of sub-section (8), such
business,—
(A) is owned by a company registered in India or by a consortium of such companies or by an authority
or a board or corporation or any other body established or constituted under any Central or State
Act;
(B) entity referred to in sub-clause (A) has entered into an agreement with the Central Government or
a State Government or a local authority or any other statutory body for developing or operating
and maintaining or developing, operating and maintaining, a new infrastructure facility.]

(3) Where a deduction under this section is claimed and allowed in respect of the specified business for any
assessment year, no deduction shall be allowed under the provisions of section 10AA and Chapter VI-A
under the heading "C.—Deductions in respect of certain incomes" in relation to such specified business for the
same or any other assessment year.
(4) No deduction in respect of the expenditure referred to in sub-section (1) shall be allowed to the
assessee under any other section in any previous year or under this section in any other previous year.
(5) The provisions of this section shall apply to the specified business referred to in sub-section (2) if it
commences its operations,—
(a) on or after the 1st day of April, 2007, where the specified business is in the nature of laying and operating
a cross-country natural gas pipeline network for distribution, including storage facilities being an integral
part of such network;
(aa) on or after the 1st day of April, 2010, where the specified business is in the nature of building and operating
a new hotel of two-star or above category as classified by the Central Government;
(ab) on or after the 1st day of April, 2010, where the specified business is in the nature of building and operating
a new hospital with at least one hundred beds for patients;
(ac) on or after the 1st day of April, 2010, where the specified business is in the nature of developing and
building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central
Government or a State Government, as the case may be, and which is notified by the Board in this behalf
in accordance with the guidelines as may be prescribed;
(ad) on or after the 1st day of April, 2011, where the specified business is in the nature of developing and
building a housing project under a scheme for affordable housing framed by the Central Government or a
State Government, as the case may be, and notified by the Board in this behalf in accordance with the
guidelines as may be prescribed;
(ae) on or after the 1st day of April, 2011, in a new plant or in a newly installed capacity in an existing plant
for production of fertilizer;
(af) on or after the 1st day of April, 2012, where the specified business is in the nature of setting up and operating
an inland container depot or a container freight station notified or approved under the Customs Act, 1962
(52 of 1962);
(ag) on or after the 1st day of April, 2012, where the specified business is in the nature of bee-keeping and
production of honey and beeswax;
(ah) on or after the 1st day of April, 2012, where the specified business is in the nature of setting up and
operating a warehousing facility for storage of sugar;
(ai) on or after the 1st day of April, 2014, where the specified business is in the nature of laying and operating
a slurry pipeline for the transportation of iron ore;
(aj) on or after the 1st day of April, 2014, where the specified business is in the nature of setting up and operating
a semi-conductor wafer fabrication manufacturing unit, and which is notified by the Board in accordance
with such guidelines as may be prescribed79; 80[***]
(ak) on or after the 1st day of April, 2017, where the specified business is in the nature of developing or operating
and maintaining or developing, operating and maintaining, any infrastructure facility; and]

(b) on or after the 1st day of April, 2009, in all other cases not falling under any of the above clauses.
(6) The assessee carrying on the business of the nature referred to in clause (a) of sub-section (5) shall be
allowed, in addition to deduction under sub-section (1), a further deduction in the previous year relevant to the
assessment year beginning on the 1st day of April, 2010, of an amount in respect of expenditure of capital nature
incurred during any earlier previous year, if—
(a) the business referred to in clause (a) of sub-section (5) has commenced its operation at any time during the
period beginning on or after the 1st day of April, 2007 and ending on the 31st day of March, 2009; and
(b) no deduction for such amount has been allowed or is allowable to the assessee in any earlier previous year.
(6A) Where the assessee builds a hotel of two-star or above category as classified by the Central Government
and subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the
assessee shall be deemed to be carrying on the specified business referred to in sub-clause (iv) of clause (c) of
sub-section (8).
(7) The provisions contained in sub-section (6) of section 80A and the provisions of sub-sections (7) and (10)
of section 80-IA shall, so far as may be, apply to this section in respect of goods or services or assets held for
the purposes of the specified business.
(7A) Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for
the specified business, for a period of eight years beginning with the previous year in which such asset
is acquired or constructed.
(7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a
purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way
of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one
or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions
of section 32, as if no deduction under this section was allowed, shall be deemed to be the income of the assessee
chargeable under the head "Profits and gains of business or profession" of the previous year in which the asset
is so used.
(7C) Nothing contained in sub-section (7B) shall apply to a company which has become a sick industrial
company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985
(1 of 1986), during the period specified in sub-section (7A).


(a) an "associated person", in relation to the assessee, means a person,—
(i) who participates, directly or indirectly, or through one or more intermediaries in the management or
control or capital of the assessee;
(ii) who holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting
power in the capital of the assessee;
(iii) who appoints more than half of the Board of directors or members of the governing board, or one
or more executive directors or executive members of the governing board of the assessee; or
(iv) who guarantees not less than ten per cent of the total borrowings of the assessee;
(b) "cold chain facility" means a chain of facilities for storage or transportation of agricultural and forest
produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture
and apiculture and processed food items under scientifically controlled conditions including refrigeration
and other facilities necessary for the preservation of such produce;
(ba) "infrastructure facility" means—
(i) a road including toll road, a bridge or a rail system;
(ii) a highway project including housing or other activities being an integral part of the highway
project;
(iii) a water supply project, water treatment system, irrigation project, sanitation and sewerage system
or solid waste management system;
(iv) a port, airport, inland waterway, inland port or navigational channel in the sea;]
(c) "specified business" means any one or more of the following business, namely :—
(i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of agricultural produce;
(iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network;
(iv) building and operating, anywhere in India, a hotel of two-star or above category as classified by the
Central Government;
(v) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;
(vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation
framed by the Central Government or a State Government, as the case may be, and notified by the
Board in this behalf in accordance with the guidelines as may be prescribed;
(vii) developing and building a housing project under a scheme for affordable housing framed by the
Central Government or a State Government, as the case may be, and notified by the Board in this
behalf in accordance with the guidelines as may be prescribed83;
(viii) production of fertilizer in India;
(ix) setting up and operating an inland container depot or a container freight station notified or approved
under the Customs Act, 1962 (52 of 1962);
(x) bee-keeping and production of honey and beeswax;
(xi) setting up and operating a warehousing facility for storage of sugar;
(xii) laying and operating a slurry pipeline for the transportation of iron ore;

(xiii) setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the
Board in accordance with such guidelines as may be prescribed84;
85
[(xiv) developing or maintaining and operating or developing, maintaining and operating a new
infrastructure facility;]
(d) any machinery or plant which was used outside India by any person other than the assessee shall
not be regarded as machinery or plant previously used for any purpose, if—
(i) such machinery or plant was not, at any time prior to the date of the installation by the
assessee, used in India;
(ii) such machinery or plant is imported into India from any country outside India; and
(iii) 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 installation of the machinery or plant by the
assessee;
(e) where in the case of a specified business, any machinery or plant or any part thereof previously
used for any purpose is transferred to the specified business and the total value of the machinery or plant
or part so transferred does not exceed twenty per cent of the total value of the machinery or
plant used in such business, then, for the purposes of clause (ii) of sub-section (2), the condition specified
therein shall be deemed to have been complied with;
(f) any expenditure of capital nature shall not include any expenditure in respect of which the payment or
aggregate of payments made to a person in a day, otherwise than by an account payee cheque
drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank
account, exceeds ten thousand rupees or any expenditure incurred on the acquisition of any land or
goodwill or financial instrument.

.
73A. (1) Any loss, computed in respect of any specified business referred to in section 35AD shall not be
set off except against profits and gains, if any, of any other specified business.
(2) Where for any assessment year any loss computed in respect of the specified business referred to in sub-
section (1) has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole
loss where the assessee has no income from any other specified business, shall, subject to the other provisions
of this Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable
for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried
forward to the following assessment year and so on.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AG . 1
Problem (Section 35ABB Telecom Rights) (Business ID 05)

R Ltd. obtained a licence to operate telecommunication services from Department of Telecommunication on 5-
6-2010 for a period of 11 years i.e. till 4-6-2021 for a sum of Rs. 13,20,000. Calculate the amount of deduction
available to the company under section 35ABB for the various previous year assuming:-
a) The payment of the entire licence fee is made on the date of acquisition of the licence;
b) Rs. 4,00,000 was paid on the date of acquisition, Rs. 2,50,000 was paid on 15-10-2010 and balance Rs.
6,60,000 will be paid in two equal instalments of Rs. 3,30,000 each during previous year 2011-12 and
2012-13. On 01-06-2013 part of the rights have been transferred for 65,000 which were acquired for
3,30,000.
c) What if in above question (b) instead of part of the rights being transferred for 65,000 the whole of rights
have been transferred for 1,60,000
Problem (Section 35ABB Telecom Rights) (Business ID 06) (Revision / Home work)
How would you treat the following:
Licence acquired for Rs. 24 lakhs on 1-4-2017 for 12 years
WDV as on 1-4-2019 Rs. 20 lakh
Part of licence sold for Rs. 12 lakh on 16-6-2019
Your Options are

A Deduction u/s 35ABB for the PY 19-20 will be 1,80,000
B Deduction u/s 35ABB for the PY 19-20 will be 80,000
C Deduction u/s 35ABB for the PY 19-20 will be 800,000
D None of above

Problem (Section 35ABB Telecom Rights) (Business ID 07)

A licence for operating telecommunication service was acquired on 1-4-2010 by R Ltd. for 18,00,000. The
licence was to remain in force for 12 years and payment of entire 18,00,000 was made in the previous year 2010-
11. The assessee sold the entire licence on 17-12-2012 for:
a) Rs. 12,00,000
b) Rs. 17,80,000
c) Rs. 20,00,000
How will the above transaction of sale be treated under Income Tax ?
Where the whole Telecom Rights Acquired for 12,00,000 used for the business purpose have
been transferred after it being operated for 4 years, for sum of 21,00,000. There is no other
income in that year.
Your Options are
A There will be some Business Income and Capital Gains in the year of transfer
B There will be some business income only in the year of transfer
C There will be some Capital Gains in the year of transfer
D None of above
Where the part Telecom Rights Acquired for 12,00,000 used for the business purpose have
been transferred after it being operated for 4 years, for sum of 1,00,000. There is no other
income in that year.
Your Options are
A There will be some deduction u/s 35ABB in the year of transfer
B There will be No deduction u/s 35ABB in the year of transfer
C There will be some deduction u/s 35ABB in the year of transfer and there will be some capital
gains in the year of transfer
D None of above

Problem (Section 35ABB Telecom Rights) (Business ID 55) (Revision / Home work)
X Ltd. to provide telecom services in Mumbai, obtained a license on April 11, 2012 for a period of 10 years
ending on march 31, 2022 against a fee of Rs. 27 lakh to be paid in 3 installments of Rs. 10 lakh, 9 lakh and 8
lakh by April 2012, April 2013 and April 2014 respectively. Explain how the payment made for license fee shall
be dealt and work out the amount if any, deductible in this respect out of income chargeable to tax for assessment
year 2015-16 and subsequent years.
Your Options are

A 35ABB deduction for AY 15-16 is 3,00,000
B 35ABB deduction for AY 15-16 is 4,00,000
C 35ABB deduction for AY 15-16 is 2,00,000
D 35ABB deduction for AY 15-16 is 5,00,000
It shall be assumed that AY 15-16 law is same as for the previous year.

35ABB. (1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring
any right to operate telecommunication services either before the commencement of the business to
operate telecommunication services or thereafter at any time during any previous year and for which
payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions
of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate
fraction of the amount of such expenditure.
(i)"relevant previous years" means,—
(A) in a case where the licence fee is actually paid before the commencement of the business to
operate telecommunication services, the previous years beginning with the previous year
in which such business commenced;
(B) in any other case, the previous years beginning with the previous year in which the licence
fee is actually paid,
and the subsequent previous year or years during which the licence, for which the fee is paid,
shall be in force;
(ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of
which is the total number of the relevant previous years;
(iii) "payment has actually been made" means the actual payment of expenditure irrespective of the
previous year in which the liability for the expenditure was incurred according to the method of
accounting regularly employed by the assessee.
(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums)
are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure
remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous
year in which the licence is transferred.
(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they
consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much
of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the
amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains
of the business in the previous year in which the licence has been transferred.
Explanation.—Where the licence is transferred in a previous year in which the business is no longer in existence,
the provisions of this sub-section shall apply as if the business is in existence in that previous year.
(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they
consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no
deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which
the licence is transferred or in respect of any subsequent previous year or years.
(5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the
deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be
arrived at by—
(a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure
remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the
beginning of the previous year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to
the amalgamated company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and
have applied to the amalgamating company if the latter had not transferred the licence.
(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the
resulting company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have
applied to the demerged company if the latter had not transferred the licence.
(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any
expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the
same previous year or any subsequent previous year.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AH . 1
Problem (Section 36 Other Deductions) (Business ID 10)

For the year, the business income of R ltd. before allowing expenditure on family planning is Rs. 2,00,000. The
company had incurred the following expenditure on family planning amongst its employees during the year:
(i) Revenue expenses on family planning Rs. 1,10,000
(ii) Capital expenditure on family planning Rs. 6,00,000
Compute the deduction available for expenditure on family planning to the company assuming the company
has income from other sources amounting to Rs. 20,000.
Your Options are

A 10,000 will be carried forward u/s 32(2)
B 10,000 will be carried forward u/s 72
C 30,000 will be carried forward u/s 32(2)
D 30,000 will be carried forward u/s 72
Problem (Section 36 Other Deductions) (Business ID MCQ-83) (Revision / Home work)
Sales made few years back for 200 Lakhs was already recorded in books of accounts. The debtor was considered
bad and the deduction was allowed on account of bad debts Rs. 60 Lakhs 2 years back. During the previous year
the full settlement was done with debtor and 100 Lakhs Bad debts was recovered.
Your Options are

A During the PY section 36(2) will be applicable and 100 Lakhs will be allowed as deduction.
B During the PY section 36(2) will be applicable and 60 Lakhs will be allowed as deduction.
C During the PY section 41 will be applicable and 60 will be deemed income
D During the PY section 36(2) will be applicable and 40 will be allowed as deduction.

Mr. Sahani in the Business of Owing and Maintenance of horse races has acquired horse for 10,00,000 during
the previous year.
Your Options are

A 10,00,000 will be allowed as deduction u/s 36(vi)
B 10,00,000 will be allowed as deduction u/s 37
C 2,50,000 depreciation will be allowed u/s 32
D None of above
Your Options are

A 10,00,000 will be allowed as deduction u/s 36(vi) in year of death of horse
B 10,00,000 will be allowed as deduction u/s 36(vi) in year when horse attains age of 20 years
C 10,00,000 will be allowed as deduction u/s 36(vi) in year of death of horse or when he
becomes permanently useless whichever is earlier
D None of above
Company Hotels Ltd profit as per profit and loss account is 360,000 after crediting sale price of dead bodies of
animals Rs. 10,000 used for the entertainment of guest. The animals were acquired for 160,000 7 years back.
Your Options are

A Total Income of the Company will be 200,000
B Total Income of the Company will be 210,000
C Total Income of the Company will be 190,000
D None of above
Your Options are

A Deduction u/s 36(1)(vi) will be 150,000 and Total income will be 210,000
B Deduction u/s 36(1)(vi) will be 160,000 and Total income will be 200,000
C Deduction u/s 36(1)(vi) will be 150,000 and Total income will be 200,000
D Deduction u/s 36(1)(vi) will be 160,000 and Total income will be 210,000

Company X has constructed nursing home for the promotion of family planning among its employees at cost of
Rs. 10,00,000 which is capitalised in books of accounts. Construction cost was paid in cash to the extent of
100,000. Profit as per p/l is 30,000.
Your Options are

A Deduction u/s 36(1)(ix) will be 1,80,000
B Deduction u/s 36(1)(ix) will be 2,00,000
C Deduction u/s 37 will be 9,00,000
D None of above
Your Options are

A Business loss will be carried forward 170,000
B Business loss will be carried forward 150,000
C Business loss will be carried forward 210,000
D None of above
Which of the following expense is not allowable as deduction u/s 36
Your Options are

A Security Transaction Tax and Commodity Transaction Tax
B Bad Debts
C Insurance of Cattles
D Scientific Research Expense
Infrastructure capital company has issued Zero Coupon Bonds on 01-06-19 with maturity date 01-06-39. Face
value of bonds is 100 cr and it is issued at 50 cr.
Your Options are

A 50 Cr discount will be amortised over 21 years equally i.e. 2.38 cr every year
B 50 Cr discount will be amortised over 20 years equally i.e. 2.5 cr every year
C 50 Cr discount will be amortised pro rate for every year
D None of the above

Mr. X was carrying on business of Textile products. He suffered loss 20 years back 2 Lakhs and thus he dis-
continued business in the year of loss. However during the previous year bad debts of the same business is
recovered Rs. 10,000.
Your Options are

A Total Income of the PY will be 10,000
B Total Income of the PY will be 10,000 and will be taxable at special rates of taxes
C Total Income of the PY will be Nil
D Total Income of the PY will be 10,000 but it will be Income under head IFOS
Company X an Indian company has spend 2,50,000 on CSR responsibility.
Your Options are

A Allowed as deduction u/s 37
B Allowed as deduction u/s 36
C Allowed as deduction u/s 28
D Not allowed as deduction
Insurance on life of cattle will be allowed as deduction.
Your Options are

A U/s 36
B U/s 37
C U/s 37 rw 28
For Mr. X On 1-4-PY working capital bank loan 10 lakhs and Interest on Bank Loan 1 Lakh is outstanding.
Fresh Loan has been taken to re-pay 11 Lakhs and old loan is repaid with new loan.
Your Options are

A Interest of 1 Lakhs will be allowed as deduction u/s 36 read with 43B
B Interest of 1 Lakhs will be allowed as deduction u/s 37 read with 43B
C Interest of 1 Lakhs will be allowed as deduction u/s 28 read with 43B

Mr. Y is in the business of poultry farming.

Opening number of chickens in stock – 10,000
Closing number of chickens in stock – 8,000
During the year Number of chicken died (could not be sold) – 1,000
Price per chicken considered reasonable is 100 Rs.
Your Options are

A Deduction u/s 36(1)(vi), 1000 * 100 = 100,000
B Deduction u/s 37, 1000 * 100 = 100,000
C Deduction u/s 37, 3000 * 100 = 300,000
D None of above

The amount of any premium paid in respect of insurance against risk of damage or destruction of
stocks or stores used for the purposes of the business or profession.
Sec.36(1)(ia) - The amount of any premium paid by a federal milk co-operative society to effect or to
keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a
primary society engaged in supplying milk raised by its members to such federal milk co-operative society;
Sec.36(1)(ib) - The amount of any premium paid by cheque by the assessee as an employer to effect or
to keep in force an insurance on the health of his employees under a scheme framed in this behalf by the
General Insurance Corporation of India formed under section 9 of the General Insurance Business
(Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government;
Now, said section shall be amended to provide that the said premium can be paid by other mode also except
cash.
The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession
:
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an
asset (whether capitalised in the books of account or not); for any period beginning from the date on
which the capital was borrowed for acquisition of the asset till the date on which such asset was first
put to use, shall not be allowed as deduction.
Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit
Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within
the meaning of this clause;
It provide for deduction for the discount on a zero coupon bond on pro rata basis to be calculated in the
manner as may be prescribed. Deduction is pro rata amount of discount on a zero coupon bond having regard to
the period of life of such bond calculated in the manner as may be prescribed.
“discount” means the difference between the amount received or receivable by the infrastructure capital
company or infrastructure capital fund or public sector company or scheduled bank issuing the bond and the
amount payable by such company or fund or public sector company on maturity or redemption of such bond.
“period of life of the bond” means the period commencing from the date of issue of the bond and ending on the
date of the maturity or redemption of such bond.
“infrastructure capital company” and “infrastructure capital fund” shall have the same meanings respectively
assigned to them in 10(23G).

Any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund
or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of
recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such
conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual
contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income
chargeable under the head “Salaries” or to the contributions or to the number of members of the fund.
deduction to an assessee-employer, in respect of contribution made towards a pension scheme referred to

in section 80CCD, to the extent of 10 per cent of salary of the employee in the previous year. ‘Salary’ shall have
the same meaning as in section 80CCD.
Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund
created by him for the exclusive benefit of his employees under an irrevocable trust.
Any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause
(24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant
fund or funds on or before the due date.
In respect of animals which have been used for the purposes of the business or profession otherwise
than as stock-in-trade and have died or become permanently useless for such purposes, the
difference between the actual cost to the assessee of the animals and the amount, if any, realised in
respect of the carcasses or animals).

subject to the provisions of sub-section 36(2), the amount of any bad debt or part thereof which is written
off as irrecoverable in the accounts of the assessee for the previous year:
Provided that in the case of an assessee to which clause (viia) applies, the amount of the
deduction relating to any such debt or part thereof shall be limited to the amount by which
such debt or part thereof exceeds the credit balance in the provision for bad and doubtful
debts account made under that clause:
Provided further that where the amount of such debt or part thereof has been taken into account in computing
the income of the assessee of the previous year in which the amount of such debt or part thereof becomes
irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards
notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or
part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable
and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for
the purposes of this clause.
Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off
as irrecoverable in the accounts of the assessee shall not include any provision for bad and
doubtful debts made in the accounts of the assessee;
Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to
clause (vii)of this sub-section and clause (v)of sub-section (2), the account referred to therein shall be only
one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall
relate to all types of advances, including advances made by rural branches;
1) No such deduction shall be allowed unless such debt or part thereof has been taken into account in
computing the income of the assessee of the previous year in which the amount of such debt or part thereof
is written off or of an earlier previous year, or represents money lent in the ordinary course of
the business of banking or money-lending which is carried on by the assessee;
2) If the amount ultimately recovered on any such debt or part of debt is less than the difference
between the debt or part and the amount so deducted, the deficiency shall be deductible in the
previous year in which the ultimate recovery is made.

any expenditure bona fide incurred by a company for the purpose of promoting family planning
amongst its employees :
Provided that where such expenditure or any part thereof is of a capital nature, one-fifth of such
expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof shall
be deducted in equal instalments for each of the four immediately succeeding previous years :
Provided further that the provisions of sub-section (2) of section 32 and of sub-section (2)
of section 72 shall apply in relation to deductions allowable under this clause as they apply in
relation to deductions allowable in respect of depreciation :
Provided further that the provisions of clauses (ii), (iii), (iv) and (v) of sub-section (2) and sub-section (5)
of section 35, of sub-section (3) of section 41 and of Explanation 1 to clause (1) of section
43 shall, so far as may be, apply in relation to an asset representing expenditure of a capital nature for
the purposes of promoting family planning as they apply in relation to an asset representing expenditure of a
capital nature on scientific research;
Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate,
by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and
purposes authorised by the Act under which such corporation or body corporate was constituted or established.
It allows deduction in respect of banking cash transaction tax paid by the assessee during the year on the taxable
banking transactions entered into by him.
This provides deduction of any sum paid by a public financial institution by way of contribution to such
credit guarantee fund trust for small industries as the Central Government may, by notification in the Official
Gazette, specify in this behalf.

An amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities
transactions entered into in the course of his business during the previous year, if the income arising from such
taxable securities transactions is included in the income computed under the head “Profits and gains of business
or profession”. “securities transaction tax” and “taxable securities transaction” shall have the meanings
respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004).
An amount equal to the commodities transaction tax paid by the assessee in respect of the taxable
commodities transactions entered into in the course of his business during the previous year, if the income
arising from such taxable commodities transactions is included in the income computed under the head "Profits
and gains of business or profession".
Explanation.—For the purposes of this clause, the expressions "commodities transaction tax" and "taxable
commodities transaction" shall have the meanings respectively assigned to them under Chapter VII of the
Finance Act, 2013;
(xvii) the amount of expenditure incurred by a co-operative society engaged in the business of
manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price
fixed or approved by the Government;
(xviii) marked to market loss or other expected loss as computed in accordance with the income
computation and disclosure standards notified under sub-section (2) of section 145

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AI . 1

XY Ltd., a public financial institution, is eligible for claiming deduction under section 36(1)(viia). Its business
income (before claiming this deduction) for the previous year is Rs. 160 lakh. Provision for bad and doubtful
debts account has an opening balance of Rs. 1 lakh. XY Ltd. wants to write off Rs. 14 lakh during year on
account of bad debts. Compute the amount of deduction under section 36(1)(vii) / (viia). What are the formalities
the taxpayer is required to complete ?

X Ltd. is a financial corporation for the purpose of section 36(1)(viii). Income of the taxpayer for the previous
year from different sources is as follows-
In lakh
a. From providing long-term finance for industrial/agricultural development 1120
b. Business income from other sources 105
Compute the amount of deduction under section 36(1)(viii) for the assessment year taking into consideration
the following data
1. Paid-up capital and general reserve on March 31,: Rs. 610 lakh.
2. Opening Balance standing to the credit of special reserve account: Rs. 1,050, lakh (and the same was
allowed as deduction in the earlier years).
3. Amount transferred to special reserve account is Rs. 220 lakh.
Will your answer be different if, X Ltd. withdraws the following amount from the special reserve account
a. Rs. 55 lakh on May 10, AY; and
b. Rs. 20 lakh on June 10, AY
Institution that are eligible for 36(1)(viii)

Your Options are
A a banking company; and Gold finance companies
B a co-operative bank other than a primary agricultural credit society or a primary co-
operative agricultural and rural development bank and And Life insurance corporation of
India
C a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956) and
a financial corporation which is a public sector company;
D None of above

Eligible business for 36(1)(viii)

Your Options are
A Long term and short term finance for
industrial or agricultural development;
development of infrastructure facility in India; or
development of waterways in India;
B Long term finance for
development of housing in India;
C finance for period exceeding 10 years only for
development of water bodies in India;
D None of above
Problem (Section 36 Other Deductions) (Business ID 31) (Revision / Home work)

Atul Housing Finance Co. Ltd., engaged in the business of providing long – term finance for construction or
purchases of houses in India for residential purposes, provides you the following particulars from its accounts
for the year and seeks your opinion as to availability of deduction under section 36(1)(viii) and the amount
thereof :
Profits from the business computed as per Part D of Chapter IV of the Income – tax Act, 1961, but before
claiming deduction under section 36(1)(viii) is 560 lacs.
Paid – up share capital - 500 lacs
General Reserve - 100 lacs
Opening Balance in reserve created u/s 36(1)(viii) - 1,100 lacs
Your Options are

A Deduction u/s 36(1)(viii) will be 112
B Deduction u/s 36(1)(viii) will be 460
C Deduction u/s 36(1)(viii) will be 560
D None of the above

Problem (ID 62) (Section 36 Other Deductions)

The profit and loss account of East West Bank Ltd. operating in India contains, inter alia, the following
particulars:
Crores
Profit before taxation 100
Depreciation as per books 25
Depreciation admissible as per income-tax rule 40
Corporation tax disputed by the bank and not paid 10
Bad debts written off 45
Provision for non-performing assets as per prudential norms of Reserve Bank of India 250
Provision for standard assets as per 2 per cent of such advance as per the above norms 5
Net depreciation on investments under “held for trading” and “available for sale” categories
calculated on lower of cost price or market price basis as per guidelines of Reserve Bank of
India 30
Other information:
a. Two years back provision for doubtful debts allowed in assessment amounted to Rs. 35 crore only.
b. The assessment for preceding year resulted in a loss and unabsorbed depreciation amounting to Rs. 30
crore and Rs. 40 crore respectively and the bank was not allowed deduction on account of provision for
doubtful debts.
c. Unrealized interest income not recognized in the accounts in respect of non-performing assets as per
assets classification norms of RBI amounts to Rs. 65 crore.
d. The aggregate average rural advances calculated as per section 36(1)(viia) read with rule 6ABA amounts
to Rs. 30 crores.
From the above information compute total income of the bank.

36(1)(viia) in respect of any provision for bad and doubtful debts made by—
(a) a scheduled bank not being a bank incorporated by or under the laws of a country
outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural
credit society or a primary co-operative agricultural and rural development bank], an amount not
exceeding eight and one-half per cent of the total income (computed before making any
deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the
aggregate average advances made by the rural branches of such bank computed in the
prescribed manner :
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its
option, be allowed in any of the relevant assessment years, deduction in respect of any provision
made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss
assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding
five per cent of the amount of such assets shown in the books of account of the bank on
the last day of the previous year:
Provided further that for the relevant assessment years commencing on or after the 1st day of
April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall
have effect as if for the words "five per cent", the words "ten per cent" had been substituted :
Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at
its option, be allowed a further deduction in excess of the limits specified in the foregoing
provisions, for an amount not exceeding the income derived from redemption of securities in
accordance with a scheme framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless such income has
been disclosed in the return of income under the head "Profits and gains of business or profession."
Explanation.—For the purposes of this sub-clause, "relevant assessment years" means the five
consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before
the 1st day of April, 2005;
(b) a bank, being a bank incorporated by or under the laws of a country outside India , an
amount not exceeding five per cent of the total income (computed before making any deduction
under this clause and Chapter VI-A);
(c) a public financial institution or a State financial corporation or a State industrial investment
corporation, an amount not exceeding five per cent of the total income (computed before making
any deduction under this clause and Chapter VI-A) :

Provided that a public financial institution or a State financial corporation or a State industrial
investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the
two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending
before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets
classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the
guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such
assets shown in the books of account of such institution or corporation, as the case may be, on the
last day of the previous year;
(d) a non-banking financial company, an amount not exceeding five per cent of the total income
(computed before making any deduction under this clause and Chapter VI-A).

(i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;
(ia) "rural branch" means a branch of a scheduled bank or a non-scheduled bank situated in a place
which has a population of not more than ten thousand according to the last preceding census of
which the relevant figures have been published before the first day of the previous year;
(ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955
(23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959
(38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any
other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934
(2 of 1934);
(iii) "public financial institution" shall have the meaning assigned to it in section 4A5 of the Companies
Act, 1956 (1 of 1956);
(iv) "State financial corporation" means a financial corporation established under section 3 or section
3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of
1951);
(v) "State industrial investment corporation" means a Government company within the meaning of
section 6176 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-
term finance for industrial projects and eligible for deduction under clause (viii) of this sub-section;
(vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural
and rural development bank" shall have the meanings respectively assigned to them in
the Explanation to sub-section (4) of section 80P;
(vii) "non-banking financial company" shall have the meaning assigned to it in clause (f) of section 45-
I of the Reserve Bank of India Act, 1934 (2 of 1934);]

36(1)(viii) in respect of any special reserve created and maintained by a specified entity, an amount not
exceeding twenty per cent of the profits derived from eligible business computed under the head
"Profits and gains of business or profession" (before making any deduction under this clause) carried to
such reserve account:
Provided that where the aggregate of the amounts carried to such reserve account from time
to time exceeds twice the amount of the paid up share capital and of the general reserves of
the specified entity, no allowance under this clause shall be made in respect of such excess.
Explanation.—In this clause,—

(a) "specified entity" means,—
(i) a financial corporation specified in section 4A8 of the Companies Act, 1956 (1 of 1956);
(ii) a financial corporation which is a public sector company;
(iii) a banking company;
(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative
agricultural and rural development bank;
(v) a housing finance company; and
(vi) any other financial corporation including a public company;
(b) "eligible business" means,—
(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause
(iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;
(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of
providing long-term finance for the construction or purchase of houses in India for residential
purposes; and
(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of
providing long-term finance for development of infrastructure facility in India;
(c) "banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949)
applies and includes any bank or banking institution referred to in section 51 of that Act;
(d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and
rural development bank" shall have the meanings respectively assigned to them in
the Explanation to sub-section (4) of section 80P;
(e) "housing finance company" means a public company formed or registered in India with the main
object of carrying on the business of providing long-term finance for construction or purchase of
houses in India for residential purposes;

(f) "public company" shall have the meaning assigned to it in section 39 of the Companies Act, 1956 (1
of 1956);
(g) "infrastructure facility" means—
(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section
80-IA, or any other public facility of a similar nature as may be notified by the Board in this
behalf in the Official Gazette and which fulfils the conditions as may be prescribed10;
(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-
section (4) of section 80-IA; and
(iii) an undertaking referred to in sub-section (10) of section 80-IB;
(h) "long-term finance" means any loan or advance where the terms under which moneys are loaned or
advanced provide for repayment along with interest thereof during a period of not less than five
years;

43D. Notwithstanding anything to the contrary contained in any other provision of this Act,—
(a) in the case of a public financial institution or a scheduled bank or a co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural development
bank or] a State financial corporation or a State industrial investment corporation, the income by way
of interest in relation to such categories of bad or doubtful debts as may be prescribed having
regard to the guidelines issued by the Reserve Bank of India in relation to such debts;
(b) in the case of a public company, the income by way of interest in relation to such categories of
bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National
Housing Bank in relation to such debts,
shall be chargeable to tax in the previous year in which it is credited by the public financial institution
or the scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-
operative agricultural and rural development bank or the State financial corporation or the State industrial
investment corporation or the public company to its profit and loss account for that year or, as the case may be,
in which it is actually received by that institution or bank or corporation or company, whichever is
earlier.

(a) "National Housing Bank" means the National Housing Bank established under section 3 of the National
Housing Bank Act, 1987 (53 of 1987);
(b) "public company" means a company,—
(i) which is a public company within the meaning of section 3 of the Companies Act, 1956 (1 of
1956);
(ii) whose main object is carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes; and
(iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989
given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987);
(c) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act,
1956 (1 of 1956);
(d) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia)
(e) "State financial corporation" means a financial corporation established under section 3 or section 3A or
an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(f) "State industrial investment corporation" means a Government company within the meaning of section
617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance
for industrial projects;
60
[(g) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and
rural development bank" shall have the meanings respectively assigned to them in the Explanation to
sub-section (4) of section 80P.]

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AJ . 1
Problem (Presumptive Incomes) (Business ID 23)

M/s ABC is a partnership firm engaged in the business of Civil Construction and it follows cash system of
accounting i.e. all the expenses are debited to the profit and loss a/c on the basis of the actual. The firm during
the P.Y. carried on the business of Civil Construction and actually received Rs. 55,00,000 and further as on 31st
March it had prepared invoice aggregating to Rs. 10,00,000 and were remaining outstanding. M/s ABC
submitted the return of income declaring total income of Rs. 5,50,000 calculated @ 10% on Rs. 55,00,000. The
Assessing Officer has disputed the computation and has taken a view that the provisions of section 44AD are
not applicable M/s. ABC seeks the necessary advice.
Problem (Presumptive Incomes) (Business ID 24)

M/s ABC was engaged in the business of Civil Construction during the year and gross receipts during the said
previous year amounted to Rs. 20,00,000. The assessee made the computation of total income as under:
Rs.
Profit as per section 44AD @ 8.5% 1,70,000
Add:
Sales tax remaining unpaid under section 43B 20,000
1,90,000
In the next year
The assessee firm during derived Rs. 30,00,000 from the business of Civil Construction and the profit as per the
P& L a/c was Rs. 2,00,000. The assessee made the income computation as under:
Rs.
Profit as per section 44AD @ 8.5% 2,40,000
Less:
Deduction under section 43B on actual payment 15,000
2,45,000
The Assessing officer has disputed the computation thus M/s. ABC seeks the advice for the computation of
income of both the years.

Problem (Presumptive Incomes) (Business ID 24A)

OPTIMA Ltd. is engaged in the business of plying goods carriages. On 1st April, the company owns 10 trucks
(6 out of which are ―heavy goods vehicles‖). On May 2, one of the heavy goods vehicles is sold by OPTIMA
Ltd. To purchase a light goods vehicle on May 6, which is put to use only from June 15,. Find out the total
income of OPTIMA Ltd. For the year taking into consideration the following data gathered from its books:
Freight collected 8,90,000

Less: Operational expenses (6,40,000)
Depreciation as per Section 32 (1,90,000)
Other office expenses (15,000)
Net profit 45,000
Other non-business income 70,000

Question (ID 60) (computation of business income)

Mr. X is engaged in the business of civil construction. The profit and loss account for the year is as under:
Rs. Rs.
Opening stock building and Receipts through banking channel
materials 40,000 from the business of civil
construction contracts (10 lakhs was
received in by crossed cheque) 37,60,000
Salary to workers and employees 4,10,000 Rent of godown 80,000
Purchase of building materials 24,00,000 Surplus from insurance
compensation received for loss of
plant and machinery by fire 2,00,000
Interest on loan 3,20,000 Interest on company deposits 25,000
Office administration expenses 2,60,000 Dividend from companies 50,000
Travelling expenses 1,40,000 Closing stock of building materials 25,000
Municipal taxes on godown 12,000
Insurance premium for godown 8,000
Employees remuneration 2,53,000
Depreciation on plant and
machinery 65000
Provision for tax 1,43,000
Net profit 89,000
41,40,000 41,40,000
The following additional information is also available:
i. Municipal tax of godown includes Rs. 3,000 not paid
ii. The book value of plant and machinery, which was insured against fire, was Rs. 4,20,000. The
opening written down value of plant and machinery block under section 43(6) was 1,85,000.
iii. The entire building materials were purchased from a firm in which his brother is a partner. The fair
market value of the materials purchased is Rs. 20,00,000.
iv. Interest on loan includes Rs. 15,000 being interest on loan taken for investment in shares of various
companies.
v. Office administration expenses includes Rs. 90,000 paid as a donation to a charitable organisation
recognized under section 80G.
vi. The prescribed rate of depreciation under the Income-tax Rules for plant and machinery is 15 per
cent.
vii. He has decided to follow the presumptive tax provision in respect of its business income.
Compute the total income.

Question (ID MCQ-81) (Revision / Home work)
You are required to answer the following MCQ
Mr. X a chartered accountant having gross receipt of 160,000 during the previous year. During preceding three
years the gross receipts are 180,000, 1,90,000 and 75000 respectively.
Your Options are

A During the PY he is not required to maintain books of accounts
B During the PY books of accounts are required to be maintained and also audited.
C Both of A and B above
D None of above
Mr. X a business man (commission agency business) having gross receipt of 12,60,000 during the previous
year. During preceding three years the gross receipts are 11,00,000, 32,90,000 and 8,75,000 respectively.
Your Options are

B During the PY books of accounts are required to be maintained.
C During the PY books of accounts are required to be maintained and also audited.
D None of above
Mr. X a business man (commission agency business) having gross receipt of 52,60,000 during the previous
year. During preceding three years the gross receipts are 11,00,000, 12,90,000 and 8,75,000 respectively.
Your Options are

D None of above
Mr. X a business man (Trader of cosmetic goods) having gross receipt of 55,00,000 during the previous year.
During preceding three years the gross receipts are 11,00,000, 12,90,000 and 8,75,000 respectively. During the
previous year he has disclosed Rs. 200,000 as income.
Your Options are

D None of above

Company X (business of manufacturing Auto Component) having gross receipt of 1,55,00,000 during the
previous year.
Your Options are

A Audit u/s 44AB is not required
B Audit u/s 44AB is required
C Audit u/s 44AB at the option of the assessee can be carried out
D None of above
Company X (non-resident, engaged in the business of operation of aircraft) having gross receipt of
1,55,00,000 from Indian operations during the previous year.
Your Options are

D None of above
Company X (being a non-resident, engaged in the business of providing services or facilities in connection with,
or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production
of, mineral oils) having gross receipt of 1,55,00,000 from Indian operations during the previous year. It has
declared the profits 15,50,000.
Your Options are

D None of above
Mr. X a chartered accountant having gross receipt of 160,000 during the previous year. During preceding three
years the gross receipts are 180,000, 1,90,000 and 175000 respectively. Declares income for the previous year
at 80,000.
Your Options are

A During the PY he is required to maintain books of accounts
B During the PY books of accounts are required to be maintained and also audited.
C Books of accounts are not required to be maintained.
D None of above

Mr. X a Chartered accountant can be required to maintain the books of account, where he is covered by the
scheme of 44ADA and declares profit as per the scheme.
Your Options are

A True, as per rule 6F where in all the 3 preceding years gross receipts are more then 1.5 lakhs
B False, 44ADA scheme gives the liberty to not maintain books of accounts
C False, 44ADA scheme does not give the benefit of maintenance of books of accounts
D None of above

44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or any other profession as is notified
by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may
enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
(2) Every person carrying on business or profession not being a profession referred to in sub-section (1) shall,—
(i) if his income from business or profession exceeds one lakh twenty thousand rupees or his
total sales, turnover or gross receipts, as the case may be, in business or profession exceed or
exceeds ten lakh rupees in any one of the three years immediately preceding the previous year;
or
(ii) where the business or profession is newly set up in any previous year, if his income from business or
profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross
receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during
such previous year; or
(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee
under section 44AE or section 44BB or section 44BBB, as the case may be, and the assessee has
claimed his income to be lower than the profits or gains so deemed to be the profits and gains
of his business, as the case may be, during such previous year; or
(iv) where the provisions of sub-section (4) of section 44AD are applicable in his case and his income
exceeds the maximum amount which is not chargeable to income-tax in any previous year,
keep and maintain such books of account and other documents as may enable the Assessing Officer to
compute his total income in accordance with the provisions of this Act:
Provided that in the case of a person being an individual or a Hindu undivided family, the
provisions of clause (i) and clause (ii) shall have effect, as if for the words "one lakh twenty
thousand rupees", the words "two lakh fifty thousand rupees" had been substituted :
Provided further that in the case of a person being an individual or a Hindu undivided family,
the provisions of clause (i) and clause (ii) shall have effect, as if for the words "ten lakh rupees",
the words "twenty-five lakh rupees" had been substituted.
(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons,
prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be
kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form
and the manner in which and the place at which they shall be kept and maintained.
(4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for
which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section
(2) shall be retained.

Rule - 6F. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession
of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall
keep and maintain the books of account and other documents specified in sub-rule (2) :
Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person
if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of
the three years immediately preceding the previous year, or, where the profession has been newly set up
in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said
amount.
(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—
(i)a cash book;
(ii)a journal, if the accounts are maintained according to the mercantile system of accounting;
(iii)a ledger;
[(iv) carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such
bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise
serially numbered receipts issued by him:
Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;]
(v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the
person or, where such bills and receipts are not issued and the expenditure incurred does not exceed
fifty rupees, payment vouchers prepared and signed by the person:
[Provided that the requirements as to the preparation and signing of payment vouchers shall not apply
in a case where the cash book maintained by the person contains adequate particulars in respect of the
expenditure incurred by him.]
Explanation : In this rule,—
(a) “authorised representative” means a person who represents any other person, on payment of any fee
or remuneration before any Tribunal or authority constituted or appointed by or under any law for the
time being in force, but does not include an employee of the person so represented or a person carrying
on legal profession or a person carrying on the profession of accountancy;
(b) “cash book” means a record of all cash receipts and payments, kept and maintained from day-to-day
and giving the cash balance in hand at the end of each day or at the end of a specified period not
exceeding a [month];
(c) “film artist” means any person engaged in his professional capacity in the production of a
cinematograph film whether produced by him or by any other person, as—
(i) an actor;
(ii) a cameraman;
(iii) a director, including an assistant director;
(iv) a music director, including an assistant music director;
(v) an art director, including an assistant art director;
(vi) a dance director, including an assistant dance director;
(vii) an editor;

(viii) a singer;
(ix) a lyricist;
(x) a story writer;
(xi) a screen-play writer;
(xii) a dialogue writer; and
(xiii) a dress designer.
(3) A person carrying on medical profession shall, in addition to the books of account and other documents
specified in sub-rule (2), keep and maintain the following, namely :—
(i) a daily case register in Form No. 3C;
(ii) an inventory [under broad heads,] as on the first and the last day of the previous year, of the stock of
drugs, medicines and other consumable accessories used for the purpose of his profession.
(4) The books of account and other documents specified in sub-rule (2) and sub-rule (3) [other than those
relating to a previous year which has come to an end] shall be kept and maintained by the person at the place
where he is carrying on the profession or, where the profession is carried on in more places than one, at the
principal place of his profession:
Provided that where the person keeps and maintains separate books of account in respect of each place where
the profession is carried on, such books of account and other documents may be kept and maintained at the
respective places at which the profession is carried on.
(5) The books of account and other documents specified in sub-rule (2) and sub-rule (3) shall be kept and
maintained for a period of [six] years from the end of the relevant assessment year:
[***]
Provided [***] that where the assessment in relation to any assessment year has been reopened under section
147 of the Act within the period specified in section 149 of the Act, all the books of account and other
documents which were kept and maintained at the time of reopening of the assessment shall continue to be so
kept and maintained till the assessment so reopened has been completed.]
[(6) Notwithstanding anything contained in sub-rules (1) to (3), it shall not be necessary for any person carrying
on any of the professions specified in sub-rule (1) to keep and maintain the books of account and other
documents specified in sub-rule (2) or sub-rule (3) in relation to any previous year commencing before the
[first day of March, 1983].]

44AB. Every person,—

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business
exceed or exceeds one crore rupees in any previous year; or
(b) carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any
previous year; or
(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and
gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be,
and he has claimed his income to be lower than the profits or gains so deemed to be the profits
and gains of his business, as the case may be, in any previous year; or
(d) carrying on the profession shall, if the profits and gains from the profession are deemed to be the
profits and gains of such person under section 44ADA and he has claimed such income to be lower
than the profits and gains so deemed to be the profits and gains of his profession and his income
exceeds the maximum amount which is not chargeable to income-tax in any previous year; or
(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable
in his case and his income exceeds the maximum amount which is not chargeable to income-tax
in any previous year,
get his accounts of such previous year audited by an accountant before the specified date and
furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant
and setting forth such particulars as may be prescribed :
Provided that this section shall not apply to the person, who declares profits and gains for the previous year in
accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as
the case may be, in business does not exceed two crore rupees in such previous year:
Provided further that this section shall not apply to the person, who derives income of the nature
referred to in section 44B or section 44BBA, on and from the 1st day of April, 1985 or, as the case
may be, the date on which the relevant section came into force, whichever is later :
Provided also that in a case where such person is required by or under any other law to get his accounts audited,
it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such
business or profession audited under such law before the specified date and furnishes by that date the report of
the audit as required under such other law and a further report by an accountant in the form prescribed under
this section.
(i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288;
(ii) "specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment
year, means the due date for furnishing the return of income under sub-section (1) of section 139.

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible
assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross
receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher
than the aforesaid sum claimed to have been earned by the eligible assessee, 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" :
Provided that this sub-section shall have effect as if for the words "eight per cent", the words "six per cent" had
been substituted, in respect of the amount of total turnover or gross receipts which is received by an account
payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during
the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1),
be deemed to have been already given full effect to and no further deduction under those sections shall be
allowed.
(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the
eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each
of the relevant assessment years.
(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions
of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding
such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the
benefit of the provisions of this section for five assessment years subsequent to the assessment year
relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-
section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom
the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is
not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents
as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as
required under section 44AB.
(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply
to—
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.


(a) "eligible assessee" means,—
(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a
limited liability partnership firm as defined under clause (n) of sub-section (1) of section
2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or
deduction under any provisions of Chapter VIA under the heading "C. - Deductions
in respect of certain incomes" in the relevant assessment year;
(b) "eligible business" means,—
(i) any business except the business of plying, hiring or leasing goods carriages referred to in section
44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two
crore rupees.

44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a
resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose
total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the
total gross receipts of the assessee in the previous year on account of such profession or, as the case may be,
a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the
profits and gains of such profession chargeable to tax under the head "Profits and gains of business or
profession".
allowed.
(3) The written down value of any asset used for the purposes of profession shall be deemed to have been
calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that
his profits and gains from the profession are lower than the profits and gains specified in sub-section (1)
and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be
required to keep and maintain such books of account and other documents as required under sub-section (1)
of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

44AE. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee,
who owns not more than ten goods carriages at any time during the previous year and who is engaged
in the business of plying, hiring or leasing such goods carriages, the income of such business chargeable to tax
under the head "Profits and gains of business or profession" shall be deemed to be the aggregate of the profits
and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the
provisions of sub-section (2).
(2) For the purpose of sub-section (1), the profits and gains from each goods carriage shall be an amount equal
to seven thousand five hundred rupees for every month or part of a month during which the goods carriage is
owned by the assessee in the previous year or an amount claimed to have been actually earned from the vehicle,
whichever is higher.
Following sub-section (2) shall be substituted for the existing sub-section (2) of section 44AE by the
Finance Act, 2018, w.e.f. 1-4-2019 :
(2) For the purposes of sub-section (1), the profits and gains from each goods carriage,—
(i) being a heavy goods vehicle, shall be an amount equal to one thousand rupees per ton of gross
vehicle weight or unladen weight, as the case may be, for every month or part of a month during
which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed
to have been actually earned from such vehicle, whichever is higher;
(ii) other than heavy goods vehicle, shall be an amount equal to seven thousand five hundred rupees
for every month or part of a month during which the goods carriage is owned by the assessee in the
previous year or an amount claimed to have been actually earned from such goods carriage,
whichever is higher.
allowed :
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be
deducted from the income computed under sub-section (1) subject to the conditions and limits
specified in clause (b) of section 40.
(4) The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall
be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction
in respect of the depreciation for each of the relevant assessment years.
(5) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred
to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the
case may be, the income from the said business shall be excluded.
(6) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and
produces evidence to prove that the profits and gains from the aforesaid business during the previous year
relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are
lower than the profits and gains specified in sub-sections (1) and (2), and thereupon the Assessing Officer shall
proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the
assessee on the basis of assessment made under sub-section (3) of section 143.

(7) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim
lower profits and gains than the profits and gains specified in sub-sections (1) and (2), if he keeps and maintains
such books of account and other documents as required under sub-section (2) of section 44AA and gets his
accounts audited and furnishes a report of such audit as required under section 44AB.
(a) the expression "goods carriage" shall have the meaning assigned to it in section 2 of the Motor Vehicles
Act, 1988 (59 of 1988);
Following clauses (a) and (aa) shall be substituted for the existing clause (a) of Explanation to
section 44AE by the Finance Act, 2018, w.e.f. 1-4-2019 :
(a) the expressions "goods carriage", "gross vehicle weight" and "unladen weight" shall
have the respective meanings assigned to them in section 2 of the Motor Vehicles Act,
1988 (59 of 1988);
(aa) the expression "heavy goods vehicle" means any goods carriage, the gross vehicle weight
of which exceeds 12000 kilograms;
(b) an assessee, who is in possession of a goods carriage, whether taken on hire purchase or on instalments
and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of
such goods carriage.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-AK . 1
Question 1 (ID 71) (computation of business income) (Revision / Home work)

The net profit for the year of India biotech Ltd. Engaged in the business of bio – technology works out at Rs. 45
lacs after debit / credit of the following items :
i) Profit of Rs. 2,50,000 from a hedging contract entered into for meeting out the loss in foreign
currency payments towards an imported machinery of Rs. 80 lacs installed on 1.2.
ii) Incidental charges of Rs. 20 lacs paid to a financial institution for taking short – term loan of Rs.
25 crores repayable in 18 months.
iii) Commission of Rs. 25,000 paid to a recovery agent for getting realization of an old outstanding.
iv) Registration fees of Rs. 20,000 and listing fees of Rs. 30,000 paid to the Registrar of Companies
and the Stock Exchange respectively on the issue of bonus shares.
v) Amount of Rs. 1,00,000 towards carry forward losses for Asst. Year 2013-14 of X Ltd., which
got merged with the company during the financial year 2017-2018.
vi) Interest received from banks of Rs. 90,000 net of TDS of Rs. 10,000.
vii) Amount of Rs. 1,50,000 incurred towards reconditioning of generator.
viii) Employees share to the EPF for the month of March, of Rs. 40,000. The amount was deposited
with the PF Commissioner on 22-04-AY.
Compute the total income of the company and given brief reasons for the treatment given to each of the items.

The net profit of ABC Ltd. for the year amounted to 7,22,000 after debiting/crediting following items:
I. Payment of interest on money borrowed from bank for purchase of land and building 222,000.
II. Commission 1,00,000 paid in the month of February and 1,25,000 paid in March,. Tax deducted at source
from the payments was deposited to the Government on 20.09.AY.
III. Travelling expenses of 90,000 on a foreign tour of a director for negotiating collaboration with a foreign
manufacturer for initiation of new line of business.
IV. Securities Transaction tax paid 10,000. Income from trading in shares already credited to profit and loss
account 3,82,000.
V. As part of the restructuring of its debt, the company has converted arrears of interest of 3,00,000 on term
loan into a new term loan with a revised repayment schedule. The company has paid 50,000 towards
such funded interest during the year. Entire 3,00,000 has been debited to profit and loss account.
However, out of this, a further sum of 50,000 was paid before the due date of filing of return.
VI. 5,00,000, being contribution to S Ltd. (wholly owned subsidiary company) for construction to a school
for the benefit of its employees.
VII. Provision for gratuity based on actuarial valuation 6,00,000. Actual gratuity paid 1,50,000 was debited
to provision for gratuity account.
Other information:
1) Provision for bonus for the 2 year back paid on 15.11.PY 98,000. It is inclusive of payment by bearer
cheque of 34,000.
2) The company has purchased a commercial vehicle of 8,00,000 for the purpose of business on
21.03.PY and calculated depreciation@ 15% for the full year. Depreciation debited to the profit and
loss account is calculated on all other assets as per the rates prescribed in the Income-tax Act 1961.
3) The company collected 3,00,000 from its customers towards sales tax in the year 2007-08 and
remitted it to the State Government in due time. On the levy being challenged in the High Court, the
Court held the levy as illegal and the State Government refunded the amount to the company in
February PY. The company refunded 2,00,000 to the customers and the remaining amount of
1,00,000 was shown under the head current Iiabilities.
Compute the income chargeable to tax and work out the amount of tax payable on such income, ignoring the
provisions of section 115 JB.

ILT Limited is engaged in manufacturing pipes and tubes. The profit and loss account of the company for the
year shows a net profit of 405 lacs. The following information and particulars are furnished to you. You are
required to compute total income of the company indicating reasons for treatment of each item.
I. A group free air ticket was provided by a supplier for reaching a certain volume of purchase. The
same is encashed by the company 10 lacs in April.
II. A regular supplier of raw material agreed for settlement of 8 lacs instead of 10 lacs for poor
quality of material supplied during the previous year which was not given effect in the running
account of the supplier.
III. Andhra Bank sanctioned and disbursed a term loan 4 years back for a sum of 50 lacs. Interest of
8 lacs was in arrear. The bank has converted the arrear interest into a new loan repayable in ten
equal installments. During the year, the company has paid two installments and the amount so
paid has been reduced from Funded Interest in the Balance Sheet.
IV. The company remitted 5 lacs as interest to a company incorporated in USA on a loan taken two
years ago. Tax deducted under section 195 from such interest has been deposited by the company
on 15th July, AY. The said interest was debited to profit and loss account.
V. Liquidated damage of 3 lacs received from KS Limited for delay in supply of plant and machinery
has been shown under the head “Other Income” in Profit & Loss Account.
VI. Sandeep, a sales executive stationed at HO at Delhi, was on official tour in Bangalore from 31st
May, to 18th June, and 28th September, to 15th October, for the business development. The
company has paid Sandeep’s salary in cash, from its local office at Bangalore for the month of
May, (payable on 1st June) and September (payable on 1st October), amounting to 25,000 and
27,000 respectively (net of TDS and other deduction), as Sandeep has no bank account at
Bangalore. These were included in the amount of “salary” debited to Profit and Loss Account.
VII. The company has taken up initiative to restructure its debt and paid 20,000 to a finance company,
M/s ABC Ltd., towards are payment premium. As per the scheme, 50,000 loan was waived
against its loan and B Limited directly credited it to its reserve account, considering loan waiver
amount as capital receipt.
VIII. The company has contributed 50,000 to an electoral trust and the same stands included under
the head “General Expenses”.

The Net Profit of “Simran Ltd.” for the year is 50 lacs after debit of the following :
(i) Amount of 1,50,000 contributed to Employees Welfare Trust.

(ii) Amount of 15,00,000 paid towards college fee and hostel expenses for the MBA course of a close
relative of a director.
(iii) Amount of 3,00,000 incurred on installation of a traffic signal, so as to facilitate its employees coming
to office to overcome traffic jam and save office time.
(iv) Amount of 5,00,000 on the gift articles distributed to various dealers under sales incentive scheme.
(v) Expenses of 5,00,000 incurred on the travelling of the wife of Managing Director, who accompanied
him on a tour to U.K. on the invitation of Trade and Commerce Chamber, London.
(vi) Amount of 3,00,000 paid consequent upon change in currency rate due to exchange fluctuation in excess
of the amount due to the suppliers of machinery.
Following further information are also provided by the company :
a. Both the employees and employers contribution towards PF amounting to 2 lacs each for the month of
March, were deposited in 1.7.AY.
b. Provision for audit fees of 5 lacs made in the books of last year was paid to the auditors in September,
after deducting tax under section 194J and the tax so deducted was remitted by 7.10.
c. A contract who carried out repairing work in the office was paid in cash on 25.9. by two vouchers No.
175 of 17,000 and No. 180 of 8,000.
d. TDS, out of payment of interest of 1 lac in February, and of 2 lacs in March, was remitted to the
Government in July AY.
Compute the income chargeable to tax.

Question 1 (ID 74) (computation of business income)

The trading and profit and loss account of X (P.) Ltd. having business of agricultural produce, consumer items
and other products for the year is as under:
Trading Account
Opening stock 3,75,000 Sales 1,55,50,000
Purchases 1,25,75,000 Closing stock 4,50,000
Freight and cartage 1,26,000
Gross profit 29,24,000
1,60,00,000 1,60,00,000
Profit & Loss Account

Bonus to staff 47,500 Gross profit 29,24,000
Rent of premises 53,500 Income-tax refund 20,000
Advertisement 5,000 Warehousing charges 15,00,000
Bad Debts 75,000
Interest on Loans 1,63,500
Depreciation 75,500
GST demand paid 1,08,350
Misc. expenses 5,25,650
44,44,000 44,44,000
On scrutiny of records the following further information and details were extracted/gathered-
1. There was a survey under section 133A on the business premises on March 31, in which it was revealed
that the value of opening stock was Rs. 8,75,000 and sales of Rs. 75,000 made on March 31, was not
recorded in the books. The value of closing stock after considering these facts and on the basis of
inventory prepared in the department, worked out at Rs. 12,50,000, which was accepted to be correct
and not disputed.
2. Income-tax refund includes a sum of Rs. 4,570 of interest allowed thereon.
3. Bonus to staff includes a sum of Rs. 7,500 paid in the month of December, which was provided in the
books 2 years back.
4. Rent of premises includes an amount of Rs. 5,500 incurred on repairs. The assessee was under no
obligation to incur such expenses as per rent agreement.
5. Advertisement expenses include an amount of Rs. 2,500 paid for advertisement published in the souvenir
issued by a political party.
6. Miscellaneous expenses include:

a. Rs. 15,000 paid towards penalty for non-fulfillment of delivery conditions of a contract of sale for
the reason beyond control.
b. Rs. 1,00,000 spent on a notified scheme meant for the uplift of residents of Mid Himalayan Region,
c. Rs. 1,00,000 paid to the wife of a director, who is working as junior lawyer for taking an opinion on
a disputed matter. The senior advocate of Supreme Court had charged only Rs. 25,000 for the same
opinion.
d. Rs. 1,00,000 paid to an Electoral Trust.
7. GST demand paid includes an amount of Rs. 5,300 charged as penalty for delayed filing of returns and
Rs. 12,750 towards interest for delays in deposit of tax.
8. The company had made an investment of Rs. 25 lakh on the construction of a warehouse in rural area
for the purpose of storage of agricultural produce. This was made available for use from September 15,
and the income from this activity is credited in the profit and loss account under the head of warehousing
charges.
9. Depreciation under the Income-tax Act works out Rs. 65,000.
10. Interest on loans includes an amount of Rs. 20,000 on which tax at source was not deducted.
Compute the income chargeable to tax of X (P.) Ltd.

Support your answer with working notes.

The profit and loss account for the year of Jolly Ltd., a company engaged in different types of business activities,
continuously incurring losses, disclosed a net loss of Rs. 1,50,000 arrived at after debiting / crediting the
following :
a. Profit of Rs.3,13,000 from a hedging contract entered into for meeting out the loss in foreign
currency payments towards an imported machinery of Rs.60 lacs installed and put to use on
1-1-2010.
b. Amount in U.K. Pounds 1,660 equivalent to Rs. 1,11,200 paid to a travel agent, resident of
U.K. as commission for the booking of international tourists to India in one of the hotels of
the company, on which the tax at source was neither deducted nor paid.
c. Amount of Rs. 25,000 debited in commission account represents payments payment to a party
as secret commission duly approved by the board.
d. Amount of Rs. 4,23,000 recovered from the C & F agents towards the excess freight charges
collected upto financial year 2008-09 by them from the customers of the company which was
neither remitted to the company nor refunded back to customers.
e. Amount of Rs.5,00,000 of unpaid interest for the year 2008-2009 waived by SBI after
considering the financial health of the company.
f. Interest on the amount of advance of Rs.3,00,000 given to the subsidiary company at 10%
p.a. was not charged on the ground that the financial position of the subsidiary was not
satisfactory.
g. Rs. 50,000 representing the value of furniture found missing on physical verification and
debited to General Expenses.
h. Amount of salary of Rs.1,50,000 paid to the Managing Director for which the approval of the
Central Government was received.
i. Amount of Rs.3,30,000 received from the holding company in reimbursement of loss
sustained in a particular transaction.
j. Expenses of Rs.26,00,000 incurred on the dismantling of building and machinery and
transportation to the new site for refitting because of shifting of the location of one of its unit.
k. Provision of Rs.75,000 of interest on the unpaid purchase price of an asset.
Compute income under the head “Profits and gains of business of profession” of Jolly Ltd. for the year indicating
brief reasons for treatment given to each of the items.

XYZ Private Limited is engaged in manufacturing and selling ceramic tiles. The net profit of the company as
per its Profit & Loss Account for the year is 150 lakh after debiting or crediting the following items:
I. One- time license fee of 20 lakh paid to a foreign company for obtaining franchise on 1st June,
II. 29,000 paid to A & Co., a goods transport operator in cash on 31st January, for distribution of the
company’s products to its warehouse.
III. Rent of 6 lakh received from letting out a part of its office premises, Municipal tax in respect of the
said part of the building amounting to 15,000 remains unpaid.
IV. 2 lakh, being contribution to a University approved and notified under section 35(1)(ii).
V. 3 lakh, being loss due to destruction of a machinery caused by a fire due to short circuit. The
Insurance Company did not admit the claim of the company.
VI. 4 lakh and 1 lakh being amounts waived by a bank out of principal and arrear interest respectively
in an one time settlement. The loan was obtained for meeting working capital requirement four years
back.
VII. 3 lakh, being amount payable to a contractor (who does not have Permanent Account Number) for
repair work at the company’s factory. Tax of 6,000 was deducted and paid in time.
VIII. Dividend of 0.10 lakh from P. Limited on 1000 equity shares of 10 each purchased at 100 per
share on 10th October,. The rate of dividend declared is 100%, the record date being 1st December,.
The shares were sold on 1st March, at 80 per share. Loss of 0.20 lakh has been debited to Profit &
Loss Account. Dividend is not credit to profit and loss account.
IX. Depreciation on tangible assets 1 lakh.
Additional Information:
a) Depreciation on tangible fixed assets as per Income –tax Rules 1.75 lakh.
b) The company has obtained a loan of 2 lakh from ABC Private Limited in which it holds 16%
voting rights. The accumulated profits of ABC Private Limited on the date of receipt of loan
was 0.50 lakh.
Compute total income of XYZ Private Limited indicating reasons for treatment of each item. Ignore the
provisions relating to minimum alternate tax.
1 Your Options are, w.r.t. (IV) in the question

A Assessee will be eligible for 150 % deduction i.e. 300,000
B Assessee will be eligible for 100 % deduction i.e. 200,000
C No deduction will be allowed since it is not in relation to business of the assessee
D None of the above

2 Your Options are, where assessee makes any contribution to institution approved u/s
35(1)(iii)
A Assessee will be eligible for 150 % deduction
B Assessee will be eligible for 100 % deduction
C No deduction will be allowed since it is not in relation to business of the assessee
D None of the above
3 Rate of TDS when PAN number is not provided by contractor

A 30 %
B 20 %
C 22 %
D 2%
4 Where a shareholder of private limited company holding 26 % in the company receives 10

lakhs as loan from the company, what will be amount on which dividend tax will have to be
paid by the company. Accumulated reserve of the company are 2 lakhs.
A 2 lakhs
B 10 lakhs
C 2.6 lakhs
D None of above
5 In 4 above
A Dividend taxable in the hands of shareholder will be Nil
B Dividend taxable in the hands of shareholder will be 8 lakhs
C Dividend taxable in the hands of shareholder will be 10 lakhs
D Dividend taxable in the hands of shareholder will be 18 lakhs
6 In relation to VII above, if the payment to contractor was made outside India then the amount
of dis-allowance would be
A 90,000 will be dis-allowed u/s 40(a)
B 300,000 will be dis-allowed u/s 40(a)
C 210,000 will be dis-allowed u/s 40(b)
D 300,000 will be dis-allowed u/s 40(b)

X Ltd. is engaged in the business of manufacturing, plastic bottle. Its profit and loss account shows a net profit
of Rs. 60 lakh for the year, after debiting/crediting the following items –
1. Rs 5 lakh, being expenses incurred on the travelling of the wife of managing director, who accompanied
him on tour to Beijing on invitation of Trade and Commerce Chamber, China.
2. Rs. 10,000 and Rs. 15,000 paid in cash on October 15, by two separate vouchers to a contractor who
carried out certain repair work in the office premises.
3. One time license fee of Rs. 10 lakh paid to a foreign company for obtaining a franchise on July 1,.
4. Rs. 5 lakh paid to S Ltd. towards feasibility study conducted for examining proposals for technological
advancement relating to existing business, where the project was abandoned without creating a new
asset.
5. Dividend of Rs. 3,50,000 received from a foreign company, in which X Ltd. holds 28 per cent nominal
value of equity share capital of the company. Rs. 25,000 spent on earning this income.
6. Depreciation on tangible fixed assets Rs. 1,50,000.
7. Rs. 5,00,000 and Rs. 1,50,000, being amounts waived by a bank out of principal and arrear interest,
respectively in one time settlement. The loan was obtained for meeting working capital requirements
two years back.
8. Provision for gratuity based on actuarial valuation is Rs. 5,00,000. Actual gratuity paid Rs. 1,50,000 was
debited to provision for gratuity account.
9. The opening and closing stock of the year were Rs, 18,00,000 and 18,72,000 respectively and were
undervalued 10 per cent on cost.
Additional information –
- Provision for audit fee of Rs. 3,00,000 was made in the books of the last year , without deducting tax at
source. Such fee was paid to the auditors in September, after deducting tax under section 194J and the
tax so deducted was deposited on October 7 after the due date of filing of return of income.
- During the year, the company purchased 5,000 shares of RK Private Ltd. at Rs. 20 per share. The fair
market value of such shares on the date of transaction was Rs. 40 per share.
- Depreciation on tangible fixed assets as per Income-tax rules : Rs. 1.75 lakh.
- A debt of Rs. 8 lakh was claimed as bad debt in the previous year 2013-14. But the assessing Officer
allowed only Rs. 4 lakh as bad debt in the previous year. Rs 3 lakh was recovered ultimately in respect
of the debt during year. The effect of recovery of bad debt was not given in the books of account.
Compute the total income, giving the reasons for treatment of each item. Ignore MAT provisions.

X Ltd., engaged in the business of manufacturing, shows a net profit of Rs. 5 crore for the previous year after
debiting / crediting the following items –
1. On EPABX and mobile phones (exclusively used for the business purpose) purchased during the year,
on which depreciation amounting to Rs. 18 lakhs was claimed at higher rate of 60 per cent treating them
at par with computer.
2. Rs. 50 lakh paid to N Ltd., towards feasibility studies conducted for examining proposals for
technological advancement relating to the existing business, where the project was abandoned without
creating a new asset.
3. Rs. 35 lakh paid on higher studies of the director’s son abroad, with a stipulation that he would be
appointed as a trainee in the company under “apprentice training scheme” where there was no evidence
of existence of such scheme.
4. Payment of Rs. 29 lakh of purchase of software from a non-resident, meant for subsequent resale in the
Indian market (no tax deducted at source) was ultimately sold at a profit during year.
5. Dividend of Rs. 10 lakh received from a foreign company in which company holds 28 per cent in nominal
value of the equity share capital of the company Rs. 0.25 lakh expended on earning this income.
6. A machine is used since past 7 financial years having WDV amounting to Rs. 1.50 lakh on April 1,. The
depreciation on the block 15 at per cent has been provided and charged to profit and loss account for the
year. The entire block is used for the purpose of business.
7. Rs. 45 lakh were paid on June 3, to a National Laboratory with a stipulation that the said contribution
shall be used for the purpose of an approved scientific research programme only.
8. Secret commission of Rs. 13 Lakh was paid and debited under commission account.
9. Purchased a brand new bus and donated to a school where the employees’ children were studying and
debited the same to the Workmen and Staff Welfare Account.
Additional Information –
10. A debt of Rs. 10 lakh was claimed as bad debt in the previous year 2013-14. However, the Assessing
Officer allowed only a sum of Rs. 5 lakh as bad debts. In the previous, a sum of Rs. 4 lakh is recovered
ultimately in respect of the debt.
Compute the total income of X Ltd. and work out the amount of tax payable on such income, indicating reasons
for treatment of each item.

The profit and loss account for the year of X Ltd. (A company engaged in different type of business activities
and continuously incurring losses) disclosed a net loss of Rs. 1,50,000 arrived at after debiting /crediting the
following –
1. Profit of Rs. 3,13,000 from a hedging contract entered into for meeting out the loss in foreign currency
payments towards an imported machinery of Rs. 60 lakh installed and put to use on January 1,.
2. Amount in UK Pounds 1,660 equivalent to Rs. 1,11,200 paid to a travel agent resident of UK as
commission for the booking of international tourists to India in one of the hotels of the company , on
which the tax at source was neither deducted not paid.
3. Amount of Rs. 25,000 debited in commission account represents payment to a party as secret
commission duly approved by the board.
4. Amount of Rs. 4,23,000 recovered from the C&F agents towards the excess freight charges collected up
to financial year 2013-14 by them from the customers of the company which was neither remitted to the
company nor refunded back to customers.
5. Amount of Rs. 5,00,000 of unpaid interest for the year 2013-14 waived by SBI after considering the
financial health of the company.
6. Interest on the amount of advance of Rs. 3,00,000 given to the subsidiary company at 1- per cent per
annum was not charged on the ground that the financial position of the subsidiary was not satisfactory.
7. Rs. 50,000 representing the value of furniture found missing on physical verification and debited to
general expenses.
8. Amount of salary of Rs. 1,50,000 paid to the managing director of which the approval of the Central
Government was received on April 18, AY.
9. Amount of Rs. 3,30,000 received from the holding company in reimbursement of loss sustained in a
particular transaction.
10. Expenses of 26,00,000 incurred on the dismantling of building and machinery and transportation to the
new site for refitting because of shifting of the location of one of its units.
11. Provision of Rs. 75,000 of interest on the unpaid purchase price of an asset which was put to use in
August.
Compute the income under the head “Profits and gains of business and profession” of X Ltd.
Indicate brief reasons for treatment given to each of the items.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-BA . 1
Question (ID 101)

(a) M/s. Gomati P Ltd., a closely held company, is in the business of growing rubber. The profit & loss
account for the year of the company shows a net profit Rs. 37.65 crores after debiting depreciation of
Rs. 30 crores.
The company has provided the following additional information :
(1) The company has deposited Rs. 30 crores in special account with NABARD on 29-04-AY.
(2) The company has brought forward losses of Rs. 6 crores pertaining to 2 years back. Mr. A who
continuously held 60% of shares carrying voting power since incorporation of the company, had sold
his entire holding to Mr. B on 01-08-PY.
(3) The company had an accumulated balance of Rs. 200 crores in the special account with NABARD
as on 01-04-PY. It has withdrawn Rs. 40 crores and utilized the same for the following purposes:
Purchase of a new sprinkling machine for use in its operation Rs. 10 crores.
Purchase of office appliances for corporate office at Chennai Rs. 10 crores.
Purchase of computers and accessories Rs. 5 crores.
Construction of a godown at a cost of Rs. 1 crore near the rubber estate to store raw rubber.
Repairs to machinery Rs. 35 lakhs.
(4) On 31-03-PY, the company has sold sprinkling machinery which was purchased on 10-05-PY for
Rs. 10 crores. The purchase of the said machinery was in accordance with the scheme of deposit.
(5) Depreciation allowable as per Tax Audit Report is Rs. 28 crores.
Compute Taxable and Exempt income of M/s. Gomati (P) Ltd. (8 marks)
Question (ID 102) (Revision / Home work)
The Gross Total Income of Mr. Bharadwaj who is a resident of Varanasi for the year is Rs. 15 lakhs.
Further
(1) He has contributed Rs.2 lakh towards Clean Ganga Fund set up by the Central Government.
(2) He has incurred medical Expenditure of Rs. 50,000 towards surgery for his grandmother who is
85 years of age. (No Premium is paid to keep in force an insurance on her health)
(3) He has donated Rs 2 lakhs in cheque and Rs. 50,000 in cash to a political party during its annual
conference of which he is a member.
(4) Repayment of housing loan instalment Rs. 1 lakh during the financial year to his employer XYZ
Private Limited.
Discuss the allowable deduction to Mr. Bharadwaj from the above information. (6 marks)

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-BA . 2
Question (ID 103)

Dr. Juhi reports to you that her gross receipt from her medical profession for the year is Rs. 49,20,000. Her net
income as per income and expenditure account is Rs. 26,40,000 before adjustment of depreciation of Rs.
2,10,000. She did not pay any amount by way of advance tax during the financial year. She has two residential
house properties, of which one is self-occupied for residence and another is let out for the monthly rent of Rs.
10,000 during the financial year.
During the course of the assessment assessing officer has noticed following transactions from bank statement
of Dr. Juhi and asked for the explanation from her.
1. One cash deposits have been made in her bank account to the tune of 200,000 on 13 th July, which Dr
Juhi has explained that it out of profession but unable to bring on record the name and address of the
person from whom it is received.
2. She has gone for a personal trip to Canada and spend 60,000 for trip of 12 days with her Son. She is not
able to produce the necessary documents to support the expense details like hotel bills abroad etc. Officer
is of the view that fair expense should have been 3,60,000.
Advise Dr. Juhi with reference to section 44ADA on filing of return with optimal tax liability besides compliance
cost. Assume that she approached you in April of the assessment year, and you have given your advice then. (7
marks)

Surat Limited, engaged in the business of textiles also effected the sales and purchase of shares of other
companies. It suffered loss from such transactions:
(1) Whether such company can set off its losses from share trading from the profit of textile business?
(2) If principal business of such company is sale and purchase of shares of other company, then,
what would be your answer? (4 marks)

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-CA . 1
Question 1 (section 68,69 deemed incomes) (Revision / Home work) (ID 01)
Shares were floated by the company X and subscriptions were invited from the public through advertisement in
the newspapers and the whole paraphernalia of subscription for shares was undergone in accordance with law.
Out of 37 subscribers to shares 14 persons though served with notice did not respond. The assessing officer
came to the conclusion that deposits of 14 subscriber is from undisclosed source and thus intended to make
addition under section 68. Further assessee pleaded that to prove his case and to verify the matter officer must
co-operate with him and issue the summons under section 131 requiring the depositor to appear before him and
prove the case.
Your Options are

A Officer May or May not Issue summons at his own discretion.
B Officer is Not Justified in Not Issuing Summons of 131
C Officer is partly correct in not issuing summons of 131
D Officer is fully justified.
Your Options are

A Income additions with respect to 14 persons, is fully justified
B Income additions with respect to 14 persons, is not justified
C Income additions with respect to 14 persons, needs further inquiry to be carried out.
D Income additions with respect to 14 persons, is not justified since subscription is in correct
compliance of corporate and SEBI laws.

The assessee is in the business of leasing, financing, hire purchase, dealing in shares and other financial
activities. it acquired 1,00,000 equity shares of Rs. 10 each at par from the promoters’ quota out of total capital
consisting of 10,00,000 shares of ITC Agro-Tech Ltd. The said shares were sold at Rs. 18.90 per share, resulting
in a profit of Rs. 8,90,000. The Assessing Officer took the view that the assessee had suppressed income and
took the sale price at the rate of Rs. 54 per share and made an addition to income.
Your Options are

A Additions made by the officer is Justified, on the premise that it was bad tax management.
B Additions made by the officer is Justified, on the premise that there was tax evasion.
C Additions made by the officer is Justified, on the premise that assessee in the past had many
such instance of additions made in scrutiny.
D Additions made by the officer is not Justified.
Mr. X carried on the business of supply of bamboo had taken loans amounting to Rs. 4,35,000 and Rs. 5 lakhs
during the previous year. The amounts were paid by cheques by the creditors to the assessee. The creditors
received the said amount by way of loans from their sub-creditors by means of cheques. The Assessing Officer
declined to treat the loan amount as genuine. The Assessing Officer added the two amounts.
Your Options are

A Officer is Justified in making the additions, on the premise that assessee has failed prove the
identity of sub-creditors
B Officer is Justified in making the additions, on the premise that assessee is duty bound to
prove the identity of sub creditor and has failed to prove so.
C Officer is Justified in making the additions, since he is not satisfied with the genuineness of
identity of sub creditors.
D Officer is not Justified in making the additions.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the
assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in
the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the
income of the assessee of that previous year :
Provided that where the assessee is a company (not being a company in which the public are
substantially interested), and the sum so credited consists of share application money, share capital,
share premium or any such amount by whatever name called, any explanation offered by such assessee-
company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company
also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be
satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum
referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause
(23FB)of section 10.
69. Where in the financial year immediately preceding the assessment year the assessee has made investments
which are not recorded in the books of account, if any, maintained by him for any source of income, and
the assessee offers no explanation about the nature and source of the investments or the explanation offered by
him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to
be the income of the assessee of such financial year.
69A. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or
other valuable article and such money, bullion, jewellery or valuable article is not recorded in the
books of account, if any, maintained by him for any source of income, and the assessee offers no explanation
about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the
explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value
of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such
financial year.

69B. Where in any financial year the assessee has made investments or is found to be the owner of any
bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on
making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount
recorded in this behalf in the books of account maintained by the assessee for any source of income, and the
assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion
of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for
such financial year.
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation
about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the
opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the
case may be, may be deemed to be the income of the assessee for such financial year :
Provided that, notwithstanding anything contained in any other provision of this Act, such
unexplained expenditure which is deemed to be the income of the assessee shall not be
allowed as a deduction under any head of income.
69D. Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person
otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be
deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in
which the amount was borrowed or repaid, as the case may be :
Provided that, if in any case any amount borrowed on a hundi has been deemed under the
provisions of this section to be the income of any person, such person shall not be liable to be
assessed again in respect of such amount under the provisions of this section on repayment of
such amount.
Explanation.—For the purposes of this section, the amount repaid shall include the amount of interest paid on
the amount borrowed.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-CB . 1
Question: 01 (ID 01) (Revision / Home work)

Under a decree of court, X has to make an annual payment of Rs. 60,000 for maintenance of his wife and three
sons. The annual payment is not charged on any of his property. X claims that Rs. 60,000 is deductible while
computing his taxable income, since it is diversion of income by overriding charge. Is he legally justified ?
Your Options are

A Annual payment is not deductible.
B Annual payment is deductible, since is under the decree of court.
C Annual payment is deductible, since it for the maintenance of his wife and sons
D Annual payment is deductible, because his wife and sons are going to stay in the property for
which payment of 60000 is paid.

X is appointed as managing director of a company on commission of 5 per cent of total sales made by the
company. If in any year the net profits of company are not sufficient to declare 8 per cent dividend, X is bound
to give up such portion of commission. The agreement also provides that the commission is payable after March
31 and after account are passed by the general meeting of shareholders. On March 13, the board of directors of
the company passes a resolution to the effect that X, the managing director, has agreed to charge a lower rate of
commission for the accounting year.
Your Options are

A Difference between Original contract and actual commission, not taxable in hands of
managing director.
B Difference between Original contract and actual commission, taxable in hands of managing
director.
C Difference between Original contract and actual commission, taxable in hands of managing
director since it is tax evasion.
D Difference between Original contract and actual commission, taxable in hands of managing
director since the commission is payable after 31st March.


X, a leading advocate (following cash method of accounting), who has been originally reluctant, agrees to defend
certain accused persons in a criminal suit, on the conditions that he will be provided with Rs. 85,000 for a public
charitable trust which he will create. X creates a public charitable trust on receipt of Rs. 85,000. Discuss whether
the sum of Rs. 85,000 will form part of assessee’s taxable income.
Your Options are

A 85,000 income accrues to Advocate but it is not taxable since he did not receive it.
B 85,000 income accrues to Advocate and thus Taxable.
C 85,000 income is not taxable to Advocate since he is following cash method of accounting.
D 85,000 income is not taxable to Advocate since accrual concept is not relevant in cash method
of accounting.
Question 04 (ID 04) (Revision / Home work)

X is a dealer in garments and maintains his books of account on the basis of mercantile system. X withdraws
some garments for his personal use by crediting goods accounts by the cost price of the goods. The Assessing
Officer, wants to include the difference between the market price and cost price of the goods withdrawn in the
income of X.
Your Options are

A Difference between market price and cost price of goods withdrawn, is not taxable.
B Difference between market price and cost price of goods withdrawn, is taxable business
income.
C Difference between market price and cost price of goods withdrawn, is not relevant at all.
D Difference between market price and cost price of goods withdrawn, is not covered by
business income chapter, thus taxable as IFOS.


The members of the X co-operative society are teachers. The assessee society is getting text-books from the
Government at concessional rates and selling them to any person who wants to purchase as also to its members
at a discount.
Your Options are

A Profit on sale of text books is not taxable since assessee is a co-operative society.
B Profit on sale of text books is not taxable since text books are for education and it is building
our nation.
C Profit on sale of text books is not taxable since it is promoting the common interest of its
members.
D None of above

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-CC . 1
Question: 01 (ID 01) (Revision / Home work) (concept of mutuality)

XY Club Ltd., a social and sports club. A resolution is passed at a general meeting of the club for charging a
surcharge, apart from regular admission fee, the proceeds of which are to go for local charities. Every entrant is
issued two tickets – one, an admission ticket, for admission to the enclosure of the club and the other, a separate
ticket in respect of surcharge for local charities.
Your Options are

A Surcharge on Ticket is income, however it will be allowed as deduction also.
B Surcharge on Ticket is income, since it is collected as part of regular admission fees.
C Surcharge on Ticket is not income, since it diversion of income by overriding title.
D Surcharge on Ticket is not income, because the correct resolution for the same has been
passed as per the corporate law.

XYZ Ltd., a public limited company, runs a club for its members. Its objects are to promote social intercourse
among the members of the club, their families and friends, provide them will a club house and accommodation..
During the accounting year ending March 31, the assessee provided temporary accommodation to the members
in its Madras property and realised a rent of Rs. 34,000.
Your Options are

A Rent income of 34,000 is taxable as house property income.
B Rent income of 34,000 is special services to members and thus not being mutual and thus
taxable as IFOS income.
C Rent income of 34,000 is extension of mutuality concept and thus not taxable.
D None of above


XYZ, a co-operative society, registered under the Bombay Co-operative Societies Act, 1925, owns certain land.
After the land is fully developed by laying roads and making provisions for civil amenities, the society allots
plots of land to its members on lease basis and collects certain amounts an execution of lease deed. The society
further permits, in appropriate cases, disposition or devolution of the lease of any plot, including any building
thereon, from an existing member to another prospective member, but the transferor is to pay the society half of
the premium amount, if any, received by him from the purchaser.
For the assessment year, the assessee files a return showing certain amounts received on allotment of plots by
lease to members and also those being half share of abovementioned premium amount, and contends that it is a
mutual association and hence its income cannot be taxed. The revenue, on the other hand, insists that since the
impugned amounts, received by the society from its members, remain with the society and can be disposed of
as it likes, the assessee-society cannot be treated as a mutual association. Decide.
Your Options are i.r.t Lease transaction

A The society is doing mutual activity and thus income out of lease is not taxable.
B Income out of lease will be taxed as IFOS since it is not lease of property.
C Income out of lease will be taxable since it is organised activity.
D B and C both above is true
Your Options are, i.r.t. premium transaction

A Half of the amount of premium received by society upon disposition is not taxable since it is
received from existing member.
B Half of the amount of premium received by society upon disposition will be taxable if it is
received from prospecting member.
C Issue is controversial.
D All of the above

Question: 04 (ID 04) (concept of mutuality)

A is an association governed by the provisions of Section 44A. The subscription receipts was Rs.60,000. The
expenditure in the normal course of its activities was Rs.85,000. Its other income taxable under the Income Tax
Act works out to Rs. 75,000. On these facts you are consulted as to:
1. How A's taxable income will be determined?
2. In case the association did not have the other income taxable, will there be any difference in the
computation of its income?
Your Options are i.r.t. 1

A Taxable income will be 25000 (85000 - 60000)
B Taxable income will be 60000
C Taxable income will be 75000
D Taxable income will be 50000
Your Options are i.r.t. 2

A Taxable income will be Nil
B Taxable income will be Nil (loss of 25,000 will be carried forward)
C Taxable income will be 60000
D Taxable income will be 30000

The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing society, formed with
the objective of maintaining the property owned by it, to effect repairs and maintenance of the common property
of the members, and to confer to the members, the usual rights and privileges. For the year, the assessee has
received Rs.3 lacs as transfer fees from the transferor members and like amount from the transferees, who at the
time of transfer, were not member of the society. Discuss the exigibility to tax the aforesaid receipts in the hands
of the assessee.
Your Options are

A Rs. 3 Lakhs is taxable
B Rs. 6 Lakhs is taxable
C Issue is controversial and nothing will be taxable
D Rs. 3 Lakhs is taxable which is received from non member.

44A. (1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a
previous year by any trade, professional or similar association (other than an association or institution
referred to in clause (23A) of section 10) from its members, whether by way of subscription or otherwise (not
being remuneration received for rendering any specific services to such members) falls short of the expenditure
incurred by such association during that previous year (not being expenditure deductible in computing the
income under any other provision of this Act and not being in the nature of capital expenditure) solely for the
purposes of protection or advancement of the common interests of its members, the amount so fallen short
(hereinafter referred to as deficiency) shall, subject to the provisions of this section , be allowed as a
deduction in computing the income of the association assessable for the relevant assessment year under the
head "Profits and gains of business or profession" and if there is no income assessable under that head or the
deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be,
shall be allowed as a deduction in computing the income of the association assessable for the relevant
assessment year under any other head.
(2) In computing the income of the association for the relevant assessment year under sub-section (1), effect
shall first be given to any other provision of this Act under which any allowance or loss in respect of any earlier
assessment year is carried forward and set off against the income for the relevant assessment year.
(3) The amount of deficiency to be allowed as a deduction under this section shall in no case exceed
one-half of the total income of the association as computed before making any allowance under this
section.
(4) This section applies only to that trade, professional or similar association the income of which or any part
thereof is not distributed to its members except as grants to any association or institution affiliated to it.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-CD . 1
Question 1 (Tonnage Tax) (ID 02)

Tarun Shipping Co. Ltd., having its registered office in Mumbai, plies two ocean-going vessels which it owns.
The registered tonnage of the two vessels are 47,549 tonnes and 800 kgs and 25,759 tonnes and 400 kgs
respectively. In the accounting year the first vessel was operated for 360 days and the second for 200 days.
The accounts of the company reveal the following results :

Profit from core shipping activity 60.50 Lacs
Profit from incidental activity 15,000
Compute the tax payable by the company, taking note of the provisions of the law relating to taxation of income
of shipping companies. Also indicate the specified conditions for the procedure.

CHAPTER XII-G
SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING COMPANIES
A.—Meaning of certain expressions
Definitions.
115V. In this Chapter, unless the context otherwise requires,—
(a) "bareboat charter" means hiring of a ship for a stipulated period on terms which give the charterer
possession and control of the ship, including the right to appoint the master and crew;
(b) "bareboat charter-cum-demise" means a bareboat charter where the ownership of the ship is intended to
be transferred after a specified period to the company to whom it has been chartered;
(c) "Director-General of Shipping" means the Director-General of Shipping appointed by the Central
Government under sub-section (1) of section 7 of the Merchant Shipping Act, 1958 (44 of 1958);
(d) "factory ship" includes a vessel providing processing services in respect of processing of the fishing
produce;
(e) "fishing vessel" shall have the meaning assigned to it in clause (12) of section 3 of the Merchant
Shipping Act, 1958 (44 of 1958);
(f) "pleasure craft" means a ship of a kind whose primary use is for the purposes of sport or recreation;
(g) "qualifying company" means a company referred to in section 115VC;
(h) "qualifying ship" means a ship referred to in section 115VD;
(i) "seagoing ship" means a ship if it is certified as such by the competent authority of any country;
(j) "tonnage income" means the income of a tonnage tax company computed in accordance with the
provisions of this Chapter;
(k) "tonnage tax activities" means the activities referred to in sub-sections (2) and (5) of section 115V-I;
(l) "tonnage tax company" means a qualifying company in relation to which tonnage tax option is in force;
(m) "tonnage tax scheme" means a scheme for computation of profits and gains of business of operating
qualifying ships under the provisions of this Chapter.

Computation of profits and gains from the business of operating qualifying ships.
115VA. Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company,
the income from the business of operating qualifying ships, may, at its option, be computed in accordance
with the provisions of this Chapter and such income 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".
Operating ships.
115VB. For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any
ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in
by it in an arrangement such as slot charter, space charter or joint charter :
Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on
bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.
Qualifying company.
115VC. For the purposes of this Chapter, a company is a qualifying company if—
(a) it is an Indian company;
(b) the place of effective management of the company is in India;
(c) it owns at least one qualifying ship; and
(d) the main object of the company is to carry on the business of operating ships.
Explanation.—For the purposes of this section, "place of effective management of the company" means—
(A) the place where the board of directors of the company or its executive directors, as the case may be,
make their decisions; or
(B) in a case where the board of directors routinely approve the commercial and strategic decisions made
by the executive directors or officers of the company, the place where such executive directors or
officers of the company perform their functions.

Qualifying ship.
115VD. For the purposes of this Chapter, a ship is a qualifying ship if—
(a) it is a sea going ship or vessel of fifteen net tonnage or more;
(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship registered outside
India in respect of which a licence has been issued by the Director-General of Shipping under section
406 or section 407 of the Merchant Shipping Act, 1958 (44 of 1958); and
(c) a valid certificate in respect of such ship indicating its net tonnage is in force,
but does not include—
(i) a sea going 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;
(ii) fishing vessels;
(iii) factory ships;
(iv) pleasure crafts;
(v) harbour and river ferries;
(vi) offshore installations;
(vii) [***]
(viii) a qualifying ship which is used as a fishing vessel for a period of more than thirty days during a previous
year.

Manner of computation of income under tonnage tax scheme.

115VE. (1) A tonnage tax company engaged in the business of operating qualifying ships shall compute
the profits from such business under the tonnage tax scheme.
(2) The business of operating qualifying ships giving rise to income referred to in sub-section (1) of section
115V-I shall be considered as a separate business (hereafter in this Chapter referred to as the tonnage
tax business) distinct from all other activities or business carried on by the company.
(3) The profits referred to in sub-section (1) shall be computed separately from the profits and gains
from any other business.
(4) The tonnage tax scheme shall apply only if an option to that effect is made in accordance with the
provisions of section 115VP.
(5) Where a company engaged in the business of operating qualifying ships is not covered under the tonnage
tax scheme or, has not made an option to that effect, as the case may be, the profits and gains of such company
from such business shall be computed in accordance with the other provisions of this Act.
Tonnage income.
115VF. Subject to the other provisions of this Chapter, the tonnage income shall be computed in accordance
with section 115VG and the income so computed shall be deemed to be the profits chargeable under the head
"Profits and gains of business or profession" and the relevant shipping income referred to in sub-section (1)
of section 115V-I shall not be chargeable to tax.

Computation of tonnage income.

115VG. (1) The tonnage income of a tonnage tax company for a previous year shall be the aggregate of the
tonnage income of each qualifying ship computed in accordance with the provisions of sub-sections (2) and (3).
(2) For the purposes of sub-section (1), the tonnage income of each qualifying ship shall be the daily
tonnage income of each such ship multiplied by—
(a) the number of days in the previous year; or
(b) the number of days in part of the previous year in case the ship is operated by the company as a
qualifying ship for only part of the previous year, as the case may be.
(3) For the purposes of sub-section (2), the daily tonnage income of a qualifying ship having tonnage referred
to in column (1) of the Table below shall be the amount specified in the corresponding entry in column (2) of
the Table:
TABLE
Qualifying ship having net tonnage Amount of daily tonnage income
(1) (2)
up to 1,000 Rs. 70 for each 100 tons
exceeding 1,000 but not more than 10,000 Rs. 700 plus Rs. 53 for each 100 tons exceeding 1,000 tons
exceeding 10,000 but not more than Rs. 5,470 plus Rs. 42 for each 100 tons exceeding 10,000 tons
25,000
exceeding 25,000 Rs. 11,770 plus Rs. 29 for each 100 tons exceeding 25,000
tons.
(4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in the
certificate referred to in section 115VX and includes the deemed tonnage computed in the prescribed manner.
Explanation.—For the purposes of this sub-section, "deemed tonnage" shall be the tonnage in respect of an
arrangement of purchase of slots, slot charter and an arrangement of sharing of break-bulk vessel.
(5) The tonnage shall be rounded off to the nearest multiple of hundred tons and for this purpose any
tonnage consisting of kilograms shall be ignored and thereafter if such tonnage is not a multiple of
hundred, then, if the last figure in that amount is fifty tons or more, the tonnage shall be increased to the
next higher tonnage which is a multiple of hundred and if the last figure is less than fifty tons, the tonnage
shall be reduced to the next lower tonnage which is a multiple of hundred; and the tonnage so rounded
off shall be the tonnage of the ship for the purposes of this section.
(6) Notwithstanding anything contained in any other provision of this Act, no deduction or set off shall be
allowed in computing the tonnage income under this Chapter.

Calculation in case of joint operation, etc.

115VH. (1) Where a qualifying ship is operated by two or more companies by way of joint interest
in the ship or by way of an agreement for the use of the ship and their respective shares are definite and
ascertainable, the tonnage income of each such company shall be an amount equal to a share of income
proportionate to its share of that interest.
(2) Subject to the provisions of sub-section (1), where two or more companies are operators of a qualifying ship,
the tonnage income of each company shall be computed as if each had been the only operator.

Relevant shipping income.

115VI. (1) For the purposes of this Chapter, the relevant shipping income of a tonnage tax company
means—
(i) its profits from core activities referred to in sub-section (2);
(ii) its profits from incidental activities referred to in sub-section (5):
Provided that where the aggregate of all such incomes specified in clause (ii) exceeds one-fourth per cent
of the turnover from core activities referred to in sub-section (2), such excess shall not form part of the
relevant shipping income for the purposes of this Chapter and shall be taxable under the other provisions of this
Act.
(2) The core activities of a tonnage tax company shall be—
(i) its activities from operating qualifying ships; and
(ii) other ship-related activities mentioned as under :—
(A) shipping contracts in respect of—
(i) earning from pooling arrangements;
(ii) contracts of affreightment.
(a) "pooling arrangement" means an agreement between two or more persons for providing
services through a pool or operating one or more ships and sharing earnings or operating
profits on the basis of mutually agreed terms;
(b) "contract of affreightment" means a service contract under which a tonnage tax company
agrees to transport a specified quantity of specified products at a specified rate, between
designated loading and discharging ports over a specified period;
(B) specific shipping trades, being—
(i) on-board or on-shore activities of passenger ships comprising of fares and food and beverages
consumed on board;
(ii) slot charters, space charters, joint charters, feeder services, container box leasing of container
shipping.
(3) The Central Government, if it considers necessary or expedient so to do, may, by notification in the Official
Gazette, exclude any activity referred to in clause (ii) of sub-section (2) or prescribe the limit up to which such
activities shall be included in the core activities for the purposes of this section.
(4) Every notification issued under this Chapter shall be laid, as soon as may be after it is issued, before each
House of Parliament, while it is in session for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry of the session immediately following the
session or the successive sessions aforesaid, both Houses agree in making any modification in the notification,
or both Houses agree that the notification should not be issued, the notification shall thereafter have effect only
in such modified form or be of no effect, as the case may be; so, however, that any such modification or
annulment shall be without prejudice to the validity of anything previously done under that notification.
(5) The incidental activities shall be the activities which are incidental to the core activities and which may be
prescribed for the purpose.
(6) Where a tonnage tax company operates any ship, which is not a qualifying ship, the income attributable to
operating such non-qualifying ship shall be computed in accordance with the other provisions of this Act.

(7) Where any goods or services held for the purposes of tonnage tax business are transferred to any other
business carried on by a tonnage tax company, or where any goods or services held for the purposes of any other
business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case,
the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not
correspond to the market value of such goods or services as on the date of the transfer, then, the relevant shipping
income under this section shall be computed as if the transfer, in either case, had been made at the market value
of such goods or services as on that date:
Provided that where, in the opinion of the Assessing Officer, the computation of the relevant shipping income
in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such
income on such reasonable basis as he may deem fit.
Explanation.—For the purposes of this sub-section, "market value", in relation to any goods or services, means
the price that such goods or services would ordinarily fetch on sale in the open market.
(8) Where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax
company 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 tonnage tax company more than the ordinary profits which
might be expected to arise in the tonnage tax business, the Assessing Officer shall, in computing the relevant
shipping income of the tonnage tax company for the purposes of this Chapter, take the amount of income as
may reasonably be deemed to have been derived therefrom.
Explanation.—For the purposes of this Chapter, in case the relevant shipping income of a tonnage tax company
is a loss, then, such loss shall be ignored for the purposes of computing tonnage income.
Treatment of common costs.

115VJ. (1) Where a tonnage tax company also carries on any business or activity other than the tonnage tax
business, common costs attributable to the tonnage tax business shall be determined on a reasonable basis.
(2) Where any asset, other than a qualifying ship, is not exclusively used for the tonnage tax business by the
tonnage tax company, depreciation on such asset shall be allocated between its tonnage tax business and other
business on a fair proportion to be determined by the Assessing Officer, having regard to the use of such asset
for the purpose of the tonnage tax business and for the other business.

C.A. Kalpesh Sanghavi Business and Profession Income - P a g e | F6-CE . 1
Problem (Section 28, adventure in nature of trade) (Business ID 13) (Revision / Home work)
Mr. Kalpesh Sanghavi a CA by Profession, purchased certain agricultural lands over period of 5 years with the
intention of resale it. The lands were compulsory acquired immediately thereafter by the State Government. The
assessee’s received compensation/enhanced compensation towards the acquisition of the lands. Resulted in
profit of 500,000.
Your Options are

A 500,000 will be long term capital gains
B 500,000 will be Business Income
C 500,000 will be IFOS
D 500,000 will either Business income or it can be IFOS
Problem (Section 28, pre-commencement incomes) (Business ID 14) (Revision / Home work)
The assessee company incorporated in October, 2010. Loans were obtained by it for purchase of capital
equipment and for setting up the business of the company, which was manufacturing cement. The company had
paid interest on all of its borrowings. Besides the loan, the company had also received application money for
the issue of share certificates and the application money so received was deposited with the bank as short-term
deposit besides part of the borrowings. On such deposit, the company earned interest of Rs. 2,10,000. On the
other hand, the amount of interest paid by the company on its borrowings was Rs. 14,10,000.
Your Options are

A 2,10,000 will be IFOS
14,10,000 will be Business Expense u/s 36
B 2,10,000 will be IFOS
14,10,000 will be added to cost of capital equipment
C 12,00,000 will be added to cost of capital equipment
D 12,00,000 will be Business Expense u/s 36

Problem (Section 28, pre-commencement incomes) (Business ID 15) (Revision / Home work)
The assessee was incorporated as a company on May 20, and commenced business on June 23. In November,
the estate was purchased by the assessee with effect from April 1, one of the terms of the sale deed being that
all income and profits from April 1, would belong to the assessee, and the assessee should pay all tax, etc., from
that date. The trading results of the assessee's accounting year, showed a total loss of Rs. 1,00,000. Loss for the
period April 1 to May 20 is 15,000. The Income-tax Officer held that the assessee was not entitled to claim the
whole of this loss (which should be treated as business loss) but only a portion to the period from which it
commenced business, i.e., from June 23, to year end which is 65,000 loss.
Your Options are (on the assumption that company ratifies the contract)
A Allowable Business loss to Company will be 65,000
B Allowable Business loss to Company will be 85,000
C Allowable Business loss to Company will be 100,000
D None of the above
Your Options are (on the assumption that company does not ratifies the contract)
A Allowable Business loss to Company will be 65,000
B Allowable Business loss to Company will be 85,000
C Allowable Business loss to Company will be 100,000
D None of the above
Problem (Section 28, scope of head of income) (Business ID 22) (Revision / Home work)
Mr. kalpesh sanghavi, which was doing business with of buying and developing landed properties and promoting
and developing markets, godown construction is done on land with specific requirement of food corporation of
India. You are required to answer whether the income realised from the tenants 20 lakhs of the shops and stalls
was liable to be taxed as "business income".
Your Options are

A 20 Lakhs will be Treated as House Property Income
B 20 Lakhs will be Treated as Business Income
C 20 Lakhs will be Treated as IFOS
D None of above

Kalpesh Sanghavi , constructed a building on a certain plot of land, fitted it up with furniture and fixtures and
let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a
monthly rent of Rs. 6,000 for the building and other amenities in hotel like gym and swimming pool and a hire
of Rs. 5,000 for the furniture and fixtures and breakfast. You are required to answer whether the income realised
was liable to be taxed as "business income".
Your Options are

A 6000 pm will be House Property Income and
5000 pm will be Business Income
B 6000 pm will be House Property Income and
5000 pm will be IFOS
C 11000 pm will be Business Income
D 11000 pm will be House Property Income
Kalpesh Sanghavi entered into a contract with the Government for executing certain works. A dispute arose
between the assessee and the Government and the dispute was referred to arbitration. The arbitrator awarded a
certain amount by way of compensation for work done 25,000 and also awarded interest of 3000.
Your Options are

A 25000 will be treated as Business Receipt
3000 will be treated as IFOS
B 28000 will be treated as Business Receipt
C 28000 will be treated as Capital Gains with Cost as Nil
D 28000 will not be taxable
The assessee was a company which manufactured locomotives and locomotive boilers. For the purpose of
purchasing capital goods it paid 28,00,000 pounds to an authorised agent. On September 16, there was a
devaluation in the pound sterling and due to market fluctuation the asset could not be purchased. In the process
of converting the balance into rupee currency the assessee gained a surplus of Rs. 37,70,147.
Your Options are

A 37,70,147 will be treated as Business Income
B 37,70,147 will be treated as Capital Gains
C 37,70,147 will not be taxable at all
D None of the above

The assessee an individual derived income from his profession as a photographer. In an all-India photography
contest the assessee won the first prize and received a cash award of Rs. 30,000.
Your Options are

A Cash Reward will be treated as Business Income
B Cash Reward will be treated as IFOS casual Income
C Cash Reward will be treated as similar to Lottery Winning since he won the prize
D None of the above
Problem 9 (Section 28, scope of head of income) (Business ID 73) (Revision / Home work)
Explain in brief, the treatment as to their taxability and or allowability, in the following cases-
1. A Ltd., an investment company receives dividend income of Rs. 1,00,000 on its investment in shares. It
incurs interest expenditure of Rs. 2,00,000 on the borrowed capital utilized in the investment of shares.
2. B Ltd. is a company engaged in the business of financing and investment in shares. It suffers loss in an
amount of Rs. 3,00,000 on account of futures and options, a transaction in the form of derivatives in
which the underlying asset was shares.
3. C Ltd., which does not have any active business carried on by it, incurs capital expenditure on scientific
research amounting to Rs. 5,00,000 that relates to its subsidiary companies.
Your Options are in relation to (1)

A 1,00,000 will be IFOS loss
B 1,00,000 will be IFOS Income
2,00,000 will be business expense
C Gross Total Income will be Nil
D None of the above

A 300,000 Loss will be treated as Normal Business Loss
B 300,000 Loss will be treated as Speculative Business Loss
C 300,000 Loss will be treated as IFOS Loss
D None of the above

A Deduction u/s 35 of Rs. 500000 will not be allowed
B Deduction u/s 35 of Rs. 500000 will not be allowed but allowed u/s 37
C Deduction u/s 35 of Rs. 500000 will be allowed
D None of above

A & Co. Ltd., a property developer and builder, disclosed unsold flats as stock in trade. It let out those office
flats and offered the same as income from house property Rs. 10,00,000.
Your Options are

A 10,00,000 will be treated under the head House Property.
B 10,00,000 will be treated under the head House Property but deduction u/s 24 will not be
allowed.
C 10,00,000 will be treated under the head IFOS.
D 10,00,000 will be treated under the head Business and Profession.
Problem (Section 28, benefit out of business) (Business ID 19) (Revision / Home work)
Mr. Kalpesh Sanghavi a social reformer who established a movement for the up-liftment of the masses which
was joined by great numbers of followers. The followers has offered gifts of Rs. 250,000 in year received by
the assessee on his 80th birthday.
Your Options are

A 250,000 will be Treated as IFOS
B 250,000 will be Treated as Business Income
C 250,000 will be Treated as capital receipts and not taxable at all
D None of the above
Problem (Section 28, Non compete fees) (Business ID 20) (Revision / Home work)
The assessee was engaged in computer software business. In December, entered into a non-competition
agreement with the assessee restraining the assessee from carrying on similar business in India. The agreement
was not confined to any particular assessment year, however agreement is operative for 36 months. 30 lakhs is
received by assessee pursuant to this agreement.
Your Options are

A 30 Lakhs will be business Income.
B 10 Lakhs will be business Income.
C Taxable income will be Nil
D None of the above.

The assessee a dealer in cloth received Rs. 50,000 as cash equivalent of value of an ambassador car as a gift
from a company under a gift scheme formulated in the company’s centenary year for having purchased suiting
worth more than Rs. 8 lakhs from the company.
Your Options are

A 50,000 will be Business income
B 50,000 will be IFOS
C 50,000 will be Capital Gains
D 50,000 can be either business income or IFOS at the option of the assessee
The assessee Mr. A was a film actor as also a film distributor. During the previous year he had entered into an
agreement with producer Mr. P of films and had received remuneration of 25,00,000 for acting in those films
which were duly accounted for by him as also by the producer. The assessee’s child Rama Age 10 years had
received gifts of a Laptop worth 200,000 from Mr. P.
Your Options are

A 200,000 will be clubbed in the hands of Mr. A
B 200,000 will be taxable in the hands of Rama
C 200,000 will be IFOS income of Mr. A
D 200,000 will be Business Income of Mr. A
The company X had let out a portion of its commercial premises in Bombay and Hyderabad to its sister concern
for which the assessee received non-interest bearing security deposit of 30,00,000. Reasonable security deposit
should be 20,00,000 and reasonable rate of interest is 10%. The assessee also received annual rent 6,00,000 for
both the properties from the concern. Officer is of the view that annual rent is suppressed figure.
Your Options are

A 6,00,000 will be House Property Income
1,00,000 will be Business Income
B 7,00,000 will be Business Income
C 7,50,000 will be House Property Income (assuming that Reasonable annual rent is 7,50,000)
D None of above

Problem (Section 28, keymans insurance policy) (Business ID 21) (Revision / Home work)
M/S. XYZ is a firm with X, Y & Z as equal partners, Mr. X is looking after the entire operations of the firm and
Mr. Y & Mr. Z are sleeping partners. The firm proposes to undertake insurance policy for insuring the firm
against the losses due to any unprecedented eventuality to Mr. X under any Keyman Insurance Scheme. The
firm will be required to pay annual premium on such policy.
Your Options are

A Keyman Insurance Premium paid is allowable expenditure
B Keyman Insurance Premium paid is not allowable expenditure
C Keyman Insurance Premium paid is personal expenditure
D None of the above

Ch-ID Q-ID Type of Question Status

F6 – A 29 33AB tea development account V.Imp
F6 – A 01 35AD business V.Imp
F6 – A 07 Telecom rights
F6 – A 12 Special reserve for financial institutions V.Imp
F6 – A 62 Bad debts V.Imp
F6 – A 75 Full computations
F6 – A 57 Full computations
F6 – C 04 Mutual concern computation of 44A

C.A. Kalpesh Sanghavi MAT and Dividend Tax - P a g e | F7-A . 1

Question 01 (ID 01) (corporate taxation)

The profits as per P&L A/c of M/s. PQR Ltd. are Rs. 50 crores. You are requested to compute the tax liability
of the company under section 115-JB after taking into consideration the following information:
(1) Provision for Income Tax : Current Tax Rs. 10 crores and Deferred Tax Rs. 5 crores;
(2) Indirect Tax : Paid Rs. 1.5 crores; Provision Rs. 0.5 crores;
(3) The company had acquired shares of a listed company for Rs. 6 crores on 1st of January three years
back, which it had sold for Rs. 10 crores on 31st of January. The Securities Transaction Tax on purchase
and sale of shares was 0.075 % and 0.1 % respectively. The gains arising from such sale were credited
directly to Investment Reserve A/c.
(4) The following extract of Balance Sheet is furnished (Rs. crores):
Fixed Assets as on 1-4 100
Add: Increase on account of Revaluation 200
Total 300
Less: Depreciation @ 10% 30
Fixed Assets as on 31-3 270
The company has credited Rs. 15 crores out of Revaluation Reserve to the Profit & Loss A/c.


A domestic company, ABC Ltd., has an undertaking newly established for export of computer software in a free
trade zone, the profits of which have been merged in the net profit of the company as per Profit and Loss Account
prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. It furnishes
the following particulars in respect of Assessment and seeks your opinion on the application of section 115JB.
You are also required to compute the total income and tax payable by the company:
lakhs
(1) Net profit as per P & L A/c as per Schedule VI 200
(2) Profit and Loss A/c includes:
(a) Credits: Dividend income 20
Excess realised on sale of land held as Investment 30
Net profit for export of Computer software 100
(b) Debits: Depreciation on straight line method basis 100
Provision for losses of subsidiary company 60
(3) Depreciation allowable as per I.T. Act and Rules 150
(4) Capital Gains as computed under I.T. Ac 40
(5) Losses brought forward as per books of account:
Business loss 50
Unabsorbed depreciation 60
The company has represented to you that the excess realised on sale of land cannot form part of the book profit
for purposes of sec. 115JB. You will have to deal with this issue.

Question 03 (corporate taxation) (ID 07)
The accounts of a public company have been prepared in accordance with provisions of Parts II and III of
Schedule VI to the Companies Act and its Profit and Loss Account laid before the Annual General Meeting for
the previous year shows a net profit of Rs. 15 lakhs. The following information relevant for the purpose of
computing its assessable income has been extracted from a scrutiny of the Profit and Loss Account:
Credits in Profit and Loss Account

(1) Profit from a new industrial undertaking qualifying for deduction under section
80-IA (Net) 17,00,000
(2) Profits from a new industrial undertaking qualifying for deduction under
section 10AA (Gross) 10,00,000
(3) Long-term capital gains 3,00,000
Debits in Profit and Loss Account

(1) Expenditure relating to industrial undertaking qualifying for deduction under
section 10AA 7,00,000
(2) Depreciation brought forward (2 years back) 10,00,000
(3) Business loss brought forward (2 years back) 12,00,000
(4) Current year’s depreciation 10,00,000
(5) Penalty for infraction of law 1,00,000
(6) Provision of GST 3,00,000
(7) Dividend proposed 2,00,000
Depreciation admissible under the Income-tax Act and Rules for the previous year is Rs. 19,50,000. The capital
gain has been invested in specified assets under section 54EC. GST provided in the accounts has been remitted
before the due date. There is no loss or unabsorbed depreciation to be carried forward and adjusted as per
income-tax assessment. You are required to compute the total tax liability of the company.


R Ltd. is a closely held company engaged in manufacture of insecticides and fertilizers. The value of plant and
machinery owned by the company is Rs. 55 lakhs. Its profits and loss account for the year is as under :
Domestic sales 22,23,900
Export sales 5,76,100
Other receipts 2,00,000 30,00,000
Less: Expenses
Depreciation 4,16,000
Salary and wages 1,34,500
Entertainment expenses 10,000
Travelling expenses 36,000
Miscellaneous expenses 5,000
Income-tax 3,50,000
Wealth-tax 8,000
Outstanding customs duty 17,500
Provision for unascertained liabilities 70,000
Proposed dividends 60,000
Loss of subsidiary company 30,000
Consultation fees paid to a tax consultant 21,000
Salary and perquisites of managing director 1,80,000
Indirect Tax of 3 years back 75,500 14,13,500
The assessee claims the following as deductions:
(a) Deduction under section 80-IB (30% of Rs. 15,86,500).
(b) Indirect Tax pertaining to three years back paid during the year Rs. 75,500.
(c) Depreciation under section 32 is Rs. 5,36,000.
The following further particulars are furnished.
For tax purposes For accounting purposes
Brought forward loss of 3 years back 11,80,000 9,10,000
Unabsorbed depreciation Nil 2,45,000

Question 05 (ID 17) (corporate taxation) (Revision / Home work)

Profit and loss account of X Ltd. for the year shows a net profit of Rs. 75 lakh after debiting/crediting the
following items:
1. Depreciation: Rs. 24 lakh (including Rs. 4 lakh on revaluation).
2. Interest to financial institution not paid before due date of filing return of income : Rs. 6 lakh.
3. Provision for doubtful debt: Rs. 1 lakh.
4. Provision for unascertained liabilities: Rs. 2 lakh.
5. Transfer to general reserve: Rs. 5 takh.
6. Net agricultural income: Rs. 16 lakh.
7. Amount withdrawn from reserve created during 3 years back : Rs. 3 lakh (book profit was increased
by the amount transferred to such reserve)
Other information –
Brought forward loss and unabsorbed depredation as per books are Rs. 12 lakh and Rs. 10 Lakh, respectively.
Compute Minimum Alternate tax.

Question 06 (corporate taxation) (ID 11) (Revision / Home work)

The net profit of ABP Ltd. as per Profit & Loss Account for the year is 100 lacs after debiting / crediting the
following items :
a) Provision for income-tax : 15 lacs
b) Provision for deferred tax : 8 lacs
c) Proposed Dividend : 20 lacs
d) Depreciation debited to Profit & Loss Account is 12 lacs. This includes depreciation on revaluation of
assets to the tune of 2 lacs.
e) Profit from unit established in Special Economic Zone : 30 lacs
f) Provision for permanent diminution in value of investments : 2 lacs
g) Brought forward losses and unabsorbed depreciation as per books of the company as follows :
Previous Year Brought forward loss Unabsorbed Depreciation
( in cash) ( in lacs)
B3 2 5
B2 ----- 3
B1 10 2
Compute book profit of the company section 115JB.

Question 07 (corporate taxation) (Revision / Home work) (ID 13)

Hyper Ltd. engaged in diversified activities earned a net profit of 14,25,000 after debit / credit of the following
items to it profit and loss account.
(a) Items debited to Profit and Loss Account
Provision for loss of subsidiary 70,000
Provision for sales tax demand (paid before due date) 75,000
Provision for wealth-tax demand 90,000
Provision for income-tax demand 1,05,000
Expenses on purchase / sale of equity shares 15,000
Depreciation 3,60,000
Interest on deposit credited to buyers on for advance received from them, on 90,000
which TDS was deposited on 31.7.AY
(b) Items credited to Profit and Loss Account
Long term capital gain on sale of equity shares on which securities transaction 3,60,000
tax was paid
Income from units UTI 75,000
The company provides the following additional information:
1) Depreciation includes 1,50,000 on account of revaluation of fixed asset.
2) Depreciation allowable as per income tax Rules is 2,80,000.
3) Brought forward Business Loss/Unabsorbed Depreciation:
F.Y. Amount as per books Amount as per Income-tax
Loss Depreciation Loss Depreciation
B3 2,50,000 3,00,000 2,00,000 2,50,000
B2 Nil 2,70,000 1,00,000 1,80,000
B1 3,50,000 3,15,000 1,20,000 2,10,000
You are required to :
compute the total income of the company for the year giving the reasons for treatment of items and examine the
applicability of section 115JB of the income-tax Act, 1961, and compute book profit and tax credit to be carried
forward.

Question (corporate taxation) (ID 12)

ABC Ltd., engaged in diversified activities, earned a net profit of 42,50,000 after debit / credit of the following
items to its profit and loss account:
(a) Items debited to Profit and Loss Account
Provision for Income-tax 8,64,000
Dividend distribution tax 1,00,000
Provision for deferred tax 70,000
Wealth-tax 1,90,000
Securities Transaction Tax 1,35,000
Transfer to General Reserve 1,50,000
Provision for gratuity based on actuarial valuation 1,20,000
Provision for losses of subsidiary company 1,40,000
Proposed dividend 1,60,000
Preference dividend 1,30,000
Expenditure to earn agricultural income 50,000
Expenditure to earn LTCG 40,000
Expenditure to earn dividend income 20,000
Depreciation (including depreciation of 1,50,000 on revaluation) 3,50,000
(b) Items credited to Profit and Loss Account
Amount credited to P & L A/c from Special Reserve 1,00,000
Amount credited to P & L A/c from Revaluation Reserve 1,80,000
Agricultural income 2,50,000
LTCG 1,60,000
Dividend income 1,20,000
The company provides the following additional information :
Brought forward Business Loss/Unabsorbed Depreciation :
Assessment Year Amount as per books
Loss Depreciation
B3 5,00,000 4,00,000
B2 3,00,000 Nil
B1 1,00,000 2,50,000
You are required to examine the applicability of section 115JB of the Income-tax Act, 1961 and compute book
profit and the tax credit to be carried forward, assuming that the total income computed as per the provisions of
the Income-tax Act, 1961 is 25,00,000.


Netherlands oil Corporation is a Foreign Company engaged in the exploration of Oil and Gas in all countries
including India. In respect of its Indian Business, the company has prepared the Profit and Loss Account in
accordance with Part II and III of Schedule VI to the Companies Act, 1956 and such Profit and Loss Account
for the previous year shows a Net Profit of Rs. 65 lakhs. The Net profit from activities in all other countries
stands at Rs. 550 lakhs. The company informs that while arriving at the Net Profit as indicated above in respect
of Indian business, the following debits / credits have been made in its Profit and loss Account.
Credits to the Profit and Loss Account Rs. In
Lakhs
(i) Net agricultural income in India 16
(ii) Share of Profits from a firm engaged in business in India 15
(iii) Amount withdrawn from Reserve created few years back 3
(book Profit was not increased by the amount transferred to such reserve)
(iv) Profits from an Industrial Undertaking covered and qualified for deduction under 30
section 10B of Income – tax Act, 1961
(v) Profits from an Industrial undertaking covered and qualified under section 80-1C (in 6
the state of Sikkim) of Income – tax Act, 1961
Debits to the Profit and Loss Account Rs.(in

lakhs)
(i) Expenditure relating to 10 B undertaking 12
(ii) Depreciation for current year under Companies Act, 1956 24
(iii) Interest to Financial Institutions not paid up to the date of filing the return 6
(iv) Penalty for infraction of law 1
(v) Proposed Dividend 3
(vi) Provision for taxation 1 (Income-tax) + RBD 1 2
(vii) Transfer to General Reserve 5
(vii) Provision for Unascertained liabilities 2
(ix) Expenditure relating to 80-IC undertaking (in the state of Sikkim) 5
The following additional information is also provided:
Particulars Rs.
(lakhs)
Brought forward Book Loss 12
Depreciation allowable under Income-tax rules 30
Brought forward Business Loss and unabsorbed depreciation as per Income-tax law (Loss 17
Rs. 7 lakhs and Depreciation Rs. 10 lakhs)
The company has brought forward tax credit from 3 years back Rs. 500,000.
You are requested to compute the total tax liability of the company.

Question (corporate taxation) (Revision / Home work) (ID 06)

R Private Ltd., a closely held Indian company, is engaged in the business of manufacture of paints in India. A
profit or loss account for the year is given below: [Rs. (in lakhs)]
Salary and wages 6.50 Sales & closing stock 48.00
Postage and Telegrams 0.40 General Reserve 3.00
Expense on issue of Subsidy from state government 0.55
convertible debentures (life 5 years) 5.55 Loan written off 5.00
Travelling and Conveyance 0.50 (Includes past interest of 1.60
Discount on issue of shares (1/5 of 5) 1.00 out of which dis-allowed 0.50)
Depreciation 5.00
Income-tax 4.00
Wealth-tax 0.10
GST due 1.00
Provisions for future losses 0.60
Proposed dividend 0.80
Loss of subsidiary company 0.50
Audit fee 0.25
Director remuneration 8.00
Deferred tax liability 1.35
Net profit 21.00
Total 56.55 Total 56.55
Additional information
1. The GST due on 31-3-PY was paid on 2-12-AY
2. Custom duty of Rs. 1,20,000 which was due 3 years back was paid during the financial year.
3. Depreciation as per income tax is Rs. 11.43 lakhs. Officer proposes to dis-allow the depreciation
equivalent to state bank’s loan written off.
4. Loan written off includes, the loan of Rs. 2,00,000 from state bank of India which was originally
obtained for acquiring the plant and machinery worth 5,50,000 (depreciation rate @ 15 %,
depreciation claimed for 2 years) and balance loan is from holding company.
5. Company is having bank overdraft facility. For the year it has disclosed the accounting statement
to bank however the closing stock disclosed to bank is higher then in books by Rs. 1,20,000.
6. Closing stock includes Indirect Tax of 1.00 lakh which is goods manufactured but not cleared from
factory.
7. The company wants of set off the following losses/allowances:
For tax For accounting

purposes purposes
Brought forward loss of 2 years back 12,00,000 10,00,000
Unabsorbed depreciation 5 years back 3,00,000 3,00,000
Compute the total income of the assessee and the tax liability.


The net profits of XYZ Ltd. for the year, after debiting / crediting the following items, were 9 Lacs :
a. The company had taken on lease an old building for the purpose of locating its business. Due to old age
of the building, it was demolished and a new building put up, which was used for purposes of XYZ’s
business from September PY, . The cost of the new building 10 Lacs was written off as revenue
expenditure. The lessor permitted the company to have an extension of the lease by another twenty years.
b. 1 Lacs was paid as an annual fee for technical services to a foreign collaborator under an agreement
approved by the Government.
c. The company collected 3 Lacs from its customers by way of GST 3 years back and had remitted it to the
State Government in due time. On the levy being challenged in the High Court, the Court held the
collection as illegal and the State Government refunded the amount to the company.
d. Land development charges of 1.5 Lacs were paid to the State Industrial Development Corporation on
allotment of a commercial plot.
e. A criminal case was filed against a Director of the company, in his official capacity. The company spent
legal expenses of 50,000 defending him in the proceedings. The Director was acquitted of the charges at
the end.
f. The company issued in the year bonus shares to its shareholders and for that purpose fees of 1.5 Lacs
were paid to the Registrar of Companies. These have been written off in the accounts as revenue expense.
g. The company paid Rs. 70,000 as interest on deposits to some of the non-resident buyers on advances
received from them. No tax at source was deducted on the payment.
h. Overdraft interest of Rs 40,000 was paid to the company’s bank to enable the company to pay its income
tax dues.
i. The opening and closing stocks of the year were 90,000 and 1,17,000 respectively and were undervalued
by 10% on cost.
j. Some investments were held by the company (not as stock in trade), which had to be depreciated by 4.8
Lacs due to a directive from the Government.
k. Sale price of land (held as stock in trade) Rs. 10,00,000. Agreement for sale of land is executed on 21st
of March and stamp duty @ 5% is paid by buyer Rs. 60,000.
The balance on 1st April, to the Profit and Loss Account, shown separately in the Balance Sheet, was a debit of
2 Lacs.
The company had the following claims brought forward from the prior years :
Business losses relating to
Assessment year 12 years back 8 Lacs
Long-term losses under the head capital gains-
Unabsorbed depreciation 12.50 Lacs
(Both as per income-tax records and books of accounts of the company)
Calculate the total income of XYZ ltd. [Your answer should clearly indicate the reasons for the treatment of the
individual items given above.] Examine the applicability of section 115JB.

Question (ID 15) (corporate taxation) (Revision / Home work)

XYZ Ltd is engaged in the business of manufacturing fertilizer. Its profit and loss account shows a net profit of
Rs. 500 lakh for the year after debiting and crediting the following items –
1. Depreciation provided in accounts as per straight line basis Rs. 30 lakh.
2. Normal depreciation allowable is Rs. 28 lakh. The company has made addition to machinery during the
year to the extent of Rs. 100 lakh, in June.
3. The company has made cash payments for purchases and expenditure as below –
o On June 4, Rs. 5 lakh (due to strike by bank staff)
o On June 5, Rs. 7 lakh (due to cash demanded by the supplier)
o On September 30, Rs. 10 lakh (half yearly closing for bank: a bank holiday)
o Payment made to transport operator for hiring of lorry as follows: May 7, Rs. 50,000; January 8,
Rs. 75,000; March 2, Rs. 32,000.
4. Rs. 5 Lakh contributed to a University approved and notified under section 35(1)(ii).
5. GST of Rs. 1.45 lakh, pertaining to Last year was paid on December 10,.
6. Rent paid and professional charges to a consultant including service tax was Rs. 5,61,800 and Rs.
2,24,720 respectively. Tax was not deducted on the service tax portion for both the payments.
7. The company has imported 1000 kgs raw materials from a supplier in US at the rate $75 kg on March
29, 2014. The exchange rate was Rs. 59 per dollar when the imports were made. The payment to the
supplier was made on January20, when the exchange rate was Rs. 62 per dollar. The company had not
entered into a forward contract to hedge the risk.
8. The company has also purchased goods of Rs. 55 lakh from ABC Ltd. in which directors have substantial
interest. The market value of the goods is Rs. 54 lakh.
9. The company has incurred legal expenses for the following –
a. Issue of bonus shares Rs. 10 lakh.
b. Alteration of memorandum of association Rs. 2 lakh (in connection with increase of authorized
capital).
10. Donation paid to a political party is Rs. 25 lakh.
Compute he total income and tax payable by the company for the year, Ignore MAT provisions.

Question (ID 16) (corporate taxation) (Revision / Home work)
Profit and loss account of X (Pvt.) Ltd. for the year shows a profit of Rs. 75 lakh after debiting the following
items –
1. Rs. 2 lakh contributed to Employees’ Welfare Trust.
2. Rs. 12 lakh paid towards Course fee and hostel expenses for MBA course of a close relative of a director.
The relative is not in employment with the company.
3. Rs. 3.50 Lakh being expenses incurred on installation of a traffic signal, so as to facilitate its employees
coming to office to overcome traffic jam and save office time.
4. RS. 3 lakh spent of gift items distributed to various dealers under the company’s sales incentive scheme.
5. Rs. 6 Lakh being expenses incurred on the travelling of the wife of MD, who accompanied him on tour
to Singapore on invitation of Trade and Commerce Chamber, Singapore.
6. Rs. 3 lakh being amount paid in March consequent upon change in currency rate due to exchange
fluctuation in excess of the amount due to the supplier of machinery.
7. Rs. 18,000 and Rs. 9,000 paid in cash on October 25, by two separate vouchers to a contractor who
carried out certain repair work in the office premises.
8. Interest of Rs. 2 lakh was paid in March to a company on a loan taken from the company. Tax deducted
at source from such interest was deposited in July of AY.
Additional information –
1. Provision for audit fee of Rs. 6 lakh was made in the books for the last year without deducting tax at
source. Such fee was paid to the auditors in September after deducting tax under section 194J and the
tax so deducted was deposited on October 7,.
2. During the year the company purchased 10,000 shares of VK Private Limited at Rs. 40 per share. The
fair market value of such shares on the date of transaction was Rs. 60 per share.
Compute total income of X (Pvt.) Ltd. for year and tax payable on such, income indicating reasons for treatment
of each item. Ignore the provisions relating to minimum alternate tax.

Question (ID 18) (corporate taxation)

The profit and loss account of Indian Branch of Bank of UK, a bank incorporated in United Kingdom, for the
year shows a net profit of Rs. 60 crore after debiting/crediting the following items –
Particulars Rs. in crore
Depreciation 10
Interest on fixed deposit from which tax was deducted at source under section 194A, but
was deposited before due date of furnishing of return of income. 2
Interest on Government Securities accrued but not due 3
Reversal of interest income recognised in the previous year 2 years back in respect of
term loan which was classified as substandard asset in that year as per the prudential
norms of Reserve Bank of India. The reversal of interest was made on the basis of
inspection report of Reserve Bank of India in September. 0.20
Profit on sale of a vacant land situated in Noida. Uttar Pradesh to a company
incorporated in New Zealand pursuant to an agreement entered into in UK for which
payment was also made in UK 10
Net depreciation on investments under “held for trading” and “available for sale”
categories on lower of cost or market price as per the prudential guidelines of Reserve
Bank of India 12
Bad debts written off in respect of advances classified as “loss assets’. 13
Provision for non-performing assets as per prudential norms of Reserve Bank of India. 120
Indian branch’s share of executive and general administration expenses as per debit note
raised by the Head Office. 4
Other relevant information –

1. Interest on Government Securities accrued but not due for last year Rs. 5 crore, which was credited to
the Profit & Loss Account for the last year
2. Depreciation allowable under Income - tax Rules: Rs. 12 crore.
3. The assessee was allowed deduction of Rs. 10 crore for provision for bad debts under section 36(1)(viia)
till last year and it wrote off bad debts for the first time in PY.
4. Interest on Sub-Standard and doubtful categories of advances not recognised as income as per prudential
norms of Reserve Bank of India : Rs. 15 crore.
5. Land at Noida was acquired by the branch at a cost of Rs. 9 crore (indexed cost 14.58 crore) few years
back.
Compute total income and tax payable by the Indian Branch of Bank of UK ignoring the applicability of the
provision relating to minimum alternate tax. Give explanation for treatment of each item.

Question (ID 21) (corporate taxation)

The net profit of X Ltd. for the year amounts to Rs. 7,22,000 after debiting/crediting following items –
1. Payment of interest on money borrowed from bank for purchase of land and building :Rs. 2,22,000.
2. Commission Rs. 1,00,000 paid in the month of February and Rs. 1,25,000 Paid in the month of March.
Tax deducted at source from the payment was deposited to the Government on September 20 AY.
3. Travelling expenses of Rs. 90,000 on a foreign tour of a director for negotiating collaboration with a
foreign manufacturer for initiation of new line of business.
4. Security transaction tax paid Rs. 10,000. Income from trading in shares already credited to profit and
loss account Rs. 3,82,000.
5. As restructuring of its debt, the company has converted arrears of interest of Rs. 3,00,000 on term loan
into a new term loan with a revised repayment schedule. The company has paid Rs. 50,000 towards such
funded interest during the year. Entire Rs. 3,00,000 is debited to profit and loss account. However, out
of this a further sum of Rs. 50,000 is paid before the due date of submission of return of income.
6. Rs. 5,00,000, being contribution to S Ltd (wholly owned subsidiary company) for construction of a
school for the benefit of its employees.
7. Provision for gratuity based on actuarial valuation is Rs. 6,00,000. Actual payment of gratuity of Rs.
1,50,000 was debited to provision for gratuity account.
8. Payment of 200,000 to an agency for meeting corporate social responsibility obligation under the
company law.
9. Payment of Rs. 150,000 towards insurance policy of its key directors on account of key mans insurance
policy with life insurance corporation of India.
Other information
Provision for bonus for 2 years back paid on December 15, : Rs. 98,000. It is inclusive of payment by bearer
cheque of Rs. 34,000. As it pertains to an earlier year, it is not debited to current year’s P & L a/c.
Company has purchased a commercial vehicle of Rs. 8,00,000 for the purpose of business on March 21, and
calculated depreciation @ 15 per cent for the full year. Depreciation debited to the Profit and Loss account is
calculated on all other assets as per the rates prescribed in the Income-tax Act, considering the useful lives of
the assets.
The company collected Rs. 3,00,000 from its customers towards GST of few years back and remitted it to the
State Government in due time. On the levy being challenged in the High Court, the Court held the levy as illegal
and the State Government refunded the amount to the company in February PY. The company refunded Rs.
2,00,000 to the Customers and the remaining amount of Rs. 1,00,000 was shown under the head “current
liabilities”.
Compute the income chargeable to tax and work out the amount of tax payable on such income, ignoring the
provisions of section 115JB.

Question (ID 22) (corporate taxation) (Home work)

Moon India Ltd. engaged in manufacturing activity furnishes the following details:
Net profit as per Profit and Loss Account 50,00,000.
i. The company took a loan of 12,00,000 in the financial year 2011-12 for the purpose of relocation of its
office premises. The lender waived 8,00,000 in the year and it is credited in the profit and loss account.
ii. Depreciation charged to Profit and Loss Account is 16,00,000. Depreciation as per Income-tax Act, 1961
amounts to 28,00,000 which includes the following:
Depreciation rate meant for computers has been adopted for (i) accessories like printers and
scanners; and (ii) EPABX. The opening written down value of these is given below:
i. Printers and Scanners 50,000
ii. EPABX 2,00,000
Assume that there were no additions during the year.
iii. It incurred 2,50,000 as expenditure for public issue of shares. The public issue could not materialize on
account of non-clearance by SEBI. This amount is charged to Profit & Loss Account.
iv. It incurred expenditure of 2,00,000 towards issue of debentures. This amount has been capitalized in the
books.
v. The company paid 1,00,000 as compounding fee for violations in the pollution control regulations. This
has been charged as revenue expenditure.
vi. The company lost cash of 25,00,000 due to theft when it was withdrawn from bank and taken to
administrative office. It is not insured and hence, fully charged as revenue expenditure.
vii. 5,00,000 was spent during the year towards permitted CSR activities as per 135 of the Companies Act,
2013. This is charged to Profit and Loss Account.
viii. It paid 2,00,000 to share broker for transacting shares listed in stock exchange and 1,00,000 to
commodity broker for commodity transactions at MCX. Both the amounts are debited to Profit and Loss
Account and no tax was deducted at source on these payments.
ix. It paid 50,000 to an electoral trust by cash and 1,00,000 by cheque to a registered political party. Both
these are debited to Profit and Loss Account.
Compute the total income of the company.
Give reasons in brief for treatment of each of the above items. Ignore MAT provisions.


Fun India Limited has a carried forward credit of Rs. 2 lakh under section 115 JAA(3A) of the Income-tax Act
from one year back. In the previous year, the company’s total income and “book profit” under section 115JB
are Rs.5 lakh and Rs. 8 lakh respectively. Compute the tax payable by the company and the amount to be carried
forward under section 115JAA.
Question (corporate taxation) (Revision / Home work) (ID 09)

Kalpesh Sanghavi was a director in a private company floated by, his brother. He resigned from directorship of
the company with effect from 31-3-PY. For the year, tax and interest were found due against the company. As
the departmental authorities could not recover the outstanding dues from the company, proceedings were
initiated against Kalpesh Sanghavi under section 179(1). His salary from his employer, Punjab Roadways was
attached in month of August. Subsequently, the company filed a revision petition for the stay against recovery
proceedings. Can the recovery proceedings against Kalpesh Sanghavi be stayed ?
OR
In respect of the taxes due from a private limited company, which could not be recovered from it, the
Tax Recovery Officer attached the properties of an erstwhile director for recovery thereof. It was
contended by the director that notice under section 156 had not been served on him and, therefore, the
proceedings for recovery were not valid. What is the correct legal position ?
OR
'A' was a director of a Private Company floated by his brother. He resigned on 31st March. Tax and
interest was due from the Company. Proceedings were initiated against ‘A’. His salary was attached.
Company filed a revision petition for stay of recovery against the company. Can recovery against 'A' be
stayed ?

C.A. Kalpesh Sanghavi MAT and Dividend Tax - P a g e | F7-B . 1
Question (ID 01) (Dividend tax)

A Domestic Company’s Total Income was determined at a loss of Rs. 20 Lakhs for the year. It has distributed
the following dividends to its shareholders in respect of the previous year. The Paid-up Capital of the Company
on the date was Rs. 50 Lakhs
(a) Interim Dividend at 10% on 31.10.PY
(b) Bonus Shares in the ratio 1:10 on 30.6.PY
(c) Final Dividend at 10% on 31.8.PY
What are the tax consequences of such distribution in the hands of the Company ?

Suman Ltd is a Company incorporated in India. The Balance Sheet of the Company discloses the following
position -
Liabilities Rs. Assets Rs.
Preference Capital 2,00,000 Fixed Assets 5,00,000
Equity Share Capital Investment in Shares 2,00,000
-Issued for Cash 4,00,000 Market Value (7,00,000)
-Bonus Issued in 1995 - 2,00,000 6,00,000 Other Assets 7,00,000
- General Reserve 2,00,000
- Profit and Loss A/c
-Opening balance 1,40,000
-Profit for year 60,000 2,00,000
- Provision for Taxation 1,30,000
- Current Liabilities 70,000
Total 14,00,000 Total 14,00,000
The Company distributes the entire investment in share in species to its shareholders pro rata. Is ‘X’ a holder of
10% of the Equity Share Capital liable to tax on his receipt ? If so, what is the amount liable to tax ?


Yaman Limited is a company in which 60% shares are held by Piloo Limited. Yaman Limited declared a
dividend amounting to Rs. 35 lacs to its shareholders for the last financial year in its Annual General Meeting
held on 10th May, Dividend distribution tax was paid by Yaman Limited on 15th May,. Piloo Limited declared
on interim dividend amounting to Rs. 50 lacs on l5 October for the PY.
Compute the amount of tax on dividend payable by Piloo Limited.
What would be your answer, if 58% shares of PiIoo Limited ore held by Kafi Limited, an Indian company ?
Does the position change further, if Kafi Limited is a foreign company ?
Question (ID 08) (Dividend tax) (Revision / Home work)

Y Ltd. is company in which 60 per cent shares are held by P Ltd. Y Ltd. declares a dividend of Rs. 35 lakh to
its shareholders for the year in its annual general meeting held on May 10. Dividend
distribution tax is paid by Y Ltd. on May 15. P Ltd. declares an interim dividend amounting to Rs. 50 lakh on
October 15. Compute the amount of tax on dividend payable by P Ltd. What would be your answer, if 58 per
cent shares in P Ltd. are held by K Ltd., an Indian company? Does the position change further, if K Ltd is a
foreign company.

X Ltd is a manufacturing company located in India. Business income of the company for year under section 28
is Rs. 40 lakh. X Ltd holds shares in few companies. Amount of dividend received from these companies and
other related information are given below-
Investee Country of Shareholding of Dividend Weather investee

companies (i.e incorporation of X Ltd in investee received during companies paid
companies in investee companies (in %) the previous year tax on such
which X ltd is a companies dividend under
shareholder) section 115-O
A Ltd. India 51% 40,000 Yes
B Ltd. India 26% 50,000 Yes
C Ltd. Country C 51% 60,000 No
D Ltd. Country C 26% 70,000 No
E Ltd. Country C 25% 80,000 No
On September 1, X Ltd declares a dividend of Rs. 5 lakh for its own shareholders. Find out income-tax and
dividend tax liability of X ltd for the year on the assumption that India has ADT agreement with Country C and
as per agreement dividend income is taxable in India and not in Country C.


X Ltd. gives the following information for the year:
1. Net profit as per Profit and Loss Account for the last 4 financial years Rs. 33,00,000 was included
in General Reserve.
2. On 1.8.PY, the company issues its redeemable bonus shares to its preference shareholder for Rs.
9,09,000.
3. A shareholder holding 10% equity shares of the company borrowed Rs. 3,00,000 from the company
@ 18% p.a. on 31.8.AY.
4. The company declared dividend of Rs. 14,00,000 at its annual general meeting held on 30.9.PY.
But the dividend remained unpaid up to 31.3.PY.
Compute the tax liability of the company under section 115-O (tax on distributed profits).
Question (Dividend tax) (ID 05) (Revision / Home work)

MNO Ltd. is a company in which the public are not substantially interested. K is a shareholder of the company
holding 15% of the equity shares. The accumulated profits of the company as on 31.3. amounted to 10,00,000.
The company lent 1,00,000 to K by an account payee bank draft on 1.10. The loan was not connected with the
business of the company. K repaid the loan to the company by an account payee bank draft on 30.3. Examine
the effect of the borrowal and repayment of the loan by K on the computation of his total income.
Question (Dividend tax) (ID 06) (Revision / Home work)

Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of 20 Lacs. The balance
as at 31.3 in General Resreve was 6 Lacs. The company on 1.7 gave an interest – free loan of 5 Lacs to its
Supervisor having salary of 4,000 p.m., who in turn on 15.8. advanced the said amount of loan so taken from
the company to Shri Parimal. The Assessing Officer had taxed the amount of advance in the hands of Parimal.
Is the action of Assessing Officer correct ?

Question (Dividend tax) (ID 09)

Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing Director and
held nearly 65% of the paid-up share capital of Aarav Ltd. A substantial part of the business of Dhaval is
obtained through Aarav Ltd. For this purpose, Aarav Ltd. passed on the advance received from its customers to
Dhaval to execute the job work entrusted to him. The Assessing Officer held that the advance money received
by Dhaval is in the nature of loan given by Aarav Ltd. to him and accordingly is deemed dividend within the
meaning of provisions of section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer, therefore made
the addition by treating advance money as the deemed dividend income of Dhaval. Examine whether the action
of the Assessing Officer is tenable in law.
Question (Dividend tax) (ID 10)

HLI Private Limited is a company with three shareholders H (40%), L (20%) and I on behalf of his HUF (40%).
I (HUF) is a Hindu Undivided Family whose members are Mr. I, Mrs. I and their two sons, G and J. The company
gave a loan of 9 Lakhs to I (HUF) on 30th April, on which date the accumulated profits of the company was 6
Lakhs. What is the tax consequence of this transaction ?


F07 – A 04 MAT with Foreign Company V.Imp
F07 – A 14 Full Computation V.Imp
F07 – A 18 Foreign Branch of bank and bad debts V.Imp
F07 – A 05 Tax credits
F07 –B 04 Inter corporate dividend and dividend tax V.Imp

F07 –B 07 Foreign subsidiary dividend V.Imp
F07 –B 03 Computation
F07 –B 09 2(22)(e) concept
F07 –B 10 2(22)(e) concept

C.A. Kalpesh Sanghavi MAT and Dividend Tax - P a g e | F7-C . 1
115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an
assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect
of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less
than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total
income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-
tax at the rate of eighteen and one-half per cent.
(2) Every assessee,
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section,
prepare its statement of profit and loss] for the relevant previous year in accordance with the provisions
of Schedule III to the Companies Act, 2013 (18 of 2013)]; or
(b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act,
2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and
loss] for the relevant previous year in accordance with the provisions of the Act governing such company:
Provided that while preparing the annual accounts including statement of profit and loss,—
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including [statement of profit and loss];
(iii) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including [statement of profit
and loss] and laid before the company at its annual general meeting in accordance with the provisions of section
129 of the Companies Act, 2013 (18 of 2013):
Provided further that where the company has adopted or adopts the financial year under the 76d[Companies
Act, 2013 (18 of 2013)], which is different from the previous year under this Act,—
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including 76e[statement of profit and loss];
(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for calculating the
depreciation which have been adopted for preparing such accounts including 76e[statement of profit and loss] for
such financial year or part of such financial year falling within the relevant previous year.

Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of
profit and loss for the relevant previous year prepared under sub-section (2), as increased by—
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves, by whatever name called, other than a reserve specified
under section 33AC; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained
liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed ; or
(f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the
provisions contained in clause (38) thereof) or section 11 or section 12 apply; or
(fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of
an association of persons or body of individuals, on which no income-tax is payable in accordance with
the provisions of section 86; or
(fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a
foreign company, from,—
(A) the capital gains arising on transactions in securities; or
(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in
Chapter XII,
if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions
of this Chapter, is at a rate less than the rate specified in sub-section (1); or
(fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose
vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section
47 or the amount representing notional loss resulting from any change in carrying amount of said units
or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or
78
[(fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent
chargeable to tax under section 115BBF; or]
(g) the amount of depreciation,
(h) the amount of deferred tax and the provision therefor,
(i) the amount or amounts set aside as provision for diminution in the value of any asset,
(j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of
such asset,
(k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into
account the cost of the shares exchanged with units referred to in the said clause or the carrying amount
of the shares at the time of exchange where such shares are carried at a value other than the cost
through 79[statement of profit and loss], as the case may be;

if any amount referred to in clauses (a) to (i) is debited to the 79a[statement of profit and loss] or if any amount
referred to in clause (j) is not credited to the 79a[statement of profit and loss], and as reduced by,—
(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of
April, 1997 otherwise than by way of a debit to the 80[statement of profit and loss]), if any such amount
is credited to the 80[statement of profit and loss]:
Provided that where this section is applicable to an assessee in any previous year, the amount
withdrawn from reserves created or provisions made in a previous year relevant to the assessment year
commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the
book profit of such year has been increased by those reserves or provisions (out of which the said amount
was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as
the case may be; or
(ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained
in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to
the 80[statement of profit and loss]; or
(iia) the amount of depreciation debited to the 80[statement of profit and loss] (excluding the depreciation on
account of revaluation of assets); or
(iib) the amount withdrawn from revaluation reserve and credited to the 80[statement of profit and loss], to
the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to
in clause (iia); or
(iic) the amount of income, being the share of the assessee in the income of an association of persons or body
of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if
any, such amount is credited to the 80[statement of profit and loss]; or
(iid) the amount of income accruing or arising to an assessee, being a foreign company, from,—
(A) the capital gains arising on transactions in securities; or
(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in
Chapter XII,
if such income is credited to the 80[statement of profit and loss] and the income-tax payable thereon in
accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less
than the rate specified in sub-section (1); or
(iie) the amount representing,—
(A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business
trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or
(B) notional gain resulting from any change in carrying amount of said units; or
(C) gain on transfer of units referred to in clause (xvii) of section 47,
if any, credited to the 80a[statement of profit and loss]; or
(iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into
account the cost of the shares exchanged with units referred to in the said clause or the carrying amount
of the shares at the time of exchange where such shares are carried at a value other than the cost
through 81[statement of profit and loss], as the case may be; 82[or]
82
[(iig) the amount of income by way of royalty in respect of patent chargeable to tax under section
115BBF; 83[or]]
84
[(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company
against whom an application for corporate insolvency resolution process has been admitted by the
Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy
Code, 2016 (31 of 2016).
Explanation.—For the purposes of this clause, the expression "Adjudicating Authority" shall have the
meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of
2016) and the loss shall not include depreciation; or]
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of
account 84[in case of a company other than the company referred to in clause (iih)].
(a) the loss shall not include depreciation;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed
depreciation is nil; or
(iv) to (vi) [***]
(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the
assessment year relevant to the previous year in which the said company has become a sick industrial
company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act,
1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such
company becomes equal to or exceeds the accumulated losses.
Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in
clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act,
1985 (1 of 1986); or
85
[(viii) the amount of deferred tax, if any such amount is credited to the 85[statement of profit and loss].
Explanation 2.—For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include—
(i) any tax on distributed profits under section 115-O or on distributed income under section 115R;
(ii) any interest charged under this Act;
(iii) surcharge, if any, as levied by the Central Acts from time to time;
(iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and
(v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to
time.
Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this section, the
assessee, being a company to which the second proviso to sub-section (1) of section 129 of the Companies Act,
2013 (18 of 2013)] is applicable, has, for an assessment year commencing on or before the 1st day of April,
2012, an option to prepare its statement of profit and loss for the relevant previous year either in accordance
with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013)] or in accordance with the
provisions of the Act governing such company.

Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be
applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—
(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred
to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-
section (1) of section 90A and the assessee does not have a permanent establishment in India in
accordance with the provisions of such agreement; or
(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred
to in clause (i) and the assessee is not required to seek registration under any law for the time being in
force relating to companies.]
Explanation 4A.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be
applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its
total income comprises solely of profits and gains from business referred to in section 44B or section
44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those
sections.
91
[Explanation 5].—For the purposes of sub-section (2), the expression "securities" shall have the same meaning
as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
92
[(2A) For a company whose financial statements are drawn up in compliance to the Indian Accounting
Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit
as computed in accordance with Explanation 1 to sub-section (2) shall be further—
(a) increased by all amounts credited to other comprehensive income in the statement of profit and loss
under the head "Items that will not be re-classified to profit or loss";
(b) decreased by all amounts debited to other comprehensive income in the statement of profit and loss
under the head "Items that will not be re-classified to profit or loss";
(c) increased by amounts or aggregate of the amounts debited to the statement of profit and loss on
distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the
Indian Accounting Standards 10;
(d) decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on
distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the
Indian Accounting Standards 10:

Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other
comprehensive income under the head "Items that will not be re-classified to profit or loss" in respect of—
(i) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian
Accounting Standards 38; or
(ii ) gains or losses from investments in equity instruments designated at fair value through other
comprehensive income in accordance with the Indian Accounting Standards 109:
Provided further that the book profit of the previous year in which the asset or investment referred to in the
first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case
may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or
any of the preceding previous years and relatable to such asset or investment.
(2B) In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings
being received by it are recorded at values different from values appearing in the books of account of the
demerged company immediately before the demerger, any change in such value shall be ignored for the purpose
of computation of book profit of the resulting company under this section.
(2C) For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the
following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the
transition amount:
Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses
(B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be
increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said
sub-clauses relatable to such asset or investment:
Provided further that the book profit of the previous year in which the foreign operation referred to in sub-
clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased,
as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to
such foreign operations.
Explanation.—For the purposes of this sub-section, the expression—
(i) "year of convergence" means the previous year within which the convergence date falls;
(ii) "convergence date" means the first day of the first Indian Accounting Standards reporting period as
defined in the Indian Accounting Standards 101;
(iii) "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) amount or 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;

(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.]
(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant
previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2)
of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section
73 or section 74 or sub-section (3) of section 74A.
(4) Every company to which this section applies, shall furnish a report in the prescribed form 93 from an
accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit
has been computed in accordance with the provisions of this section along with the return of income filed under
sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause
(i) of sub-section (1) of section 142.
(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee,
being a company, mentioned in this section.
(5A) The provisions of this section shall not apply to any income accruing or arising to a company from life
insurance business referred to in section 115B.
(6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April,
2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special
Economic Zone, as the case may be:
Provided that the provisions of this sub-section shall cease to have effect in respect of any previous year relevant
to the assessment year commencing on or after the 1st day of April, 2012.
94
[(7) Notwithstanding anything contained in sub-section (1), where the assessee referred to therein, is a unit
located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange, the provisions of sub-section (1) shall have the effect as if for the words "eighteen and one-half per
cent" wherever occurring in that sub-section, the words "nine per cent" had been substituted.
Explanation.—For the purposes of this sub-section,—
(a) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of
section 2 of the Special Economic Zones Act, 2005 (28 of 2005);
(b) "unit" means a unit established in an International Financial Services Centre;
(c) "convertible foreign exchange" means a foreign exchange which is for the time being treated by the
Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange
Management Act, 1999 (42 of 1999) and the rules made thereunder.]

115JAA. (1) Where any amount of tax is paid under sub-section (1) of section 115JA by an assessee being a
company for any assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance
with the provisions of this section.
(1A) Where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a company for
the assessment year commencing on the 1st day of April, 2006 and any subsequent assessment year, then, credit in
respect of tax so paid shall be allowed to him in accordance with the provisions of this section.
(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment
year under sub-section (1) of section 115JA and the amount of tax payable by the assessee on his total income
computed in accordance with the other provisions of this Act:
Provided that no interest shall be payable on the tax credit allowed under sub-section (1).
(2A) The tax credit to be allowed under sub-section (1A) shall be the difference of the tax paid for any assessment
year under sub-section (1) of section 115JB and the amount of tax payable by the assessee on his total income
computed in accordance with the other provisions of this Act:
Provided that no interest shall be payable on the tax credit allowed under sub-section (1A):
Provided further that where the amount of tax credit in respect of any income-tax paid in any
country or specified territory outside India, under section 90 or section 90A or section 91,
allowed against the tax payable under the provisions of sub-section (1) of section
115JB exceeds the amount of such tax credit admissible against the tax payable by the
assessee on its income in accordance with the other provisions of this Act, then, while
computing the amount of credit under this sub-section, such excess amount shall be ignored.
(3) The amount of tax credit determined under sub-section (2) shall be carried forward and set off in accordance
with the provisions of sub-sections (4) and (5) but such carry forward shall not be allowed beyond the fifth
assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-
section (1).
(3A) The amount of tax credit determined under sub-section (2A) shall be carried forward and set off in
accordance with the provisions of sub-sections (4) and (5) but such carry forward shall not be allowed beyond
the 75a[fifteenth] assessment year immediately succeeding the assessment year in which tax credit becomes
allowable under sub-section (1A).]
(4) The tax credit shall be allowed set-off in a year when tax becomes payable on the total income computed in
accordance with the provisions of this Act other than section 115JA or section 115JB, as the case may be.
(5) Set off in respect of brought forward tax credit shall be allowed for any assessment year to the extent of the
difference between the tax on his total income and the tax which would have been payable under the provisions
of sub-section (1) of section 115JA or section 115JB, as the case may be for that assessment year.
(6) Where as a result of an order under sub-section (1) or sub-section (3) of section 143, section 144, section
147, section 154, section 155, sub-section (4) of section 245D, section 250, section 254, section 260, section
262, section 263 or section 264, the amount of tax payable under this Act is reduced or increased, as the case
may be, the amount of tax credit allowed under this section shall also be increased or reduced accordingly.
(7) In case of conversion of a private company or unlisted public company into a limited liability partnership
under the Limited Liability Partnership Act, 2008 (6 of 2009), the provisions of this section shall not apply to
the successor limited liability partnership.

Explanation.—For the purposes of this section, the expressions "private company" and "unlisted public
company" shall have the meanings respectively assigned to them in the Limited Liability Partnership Act, 2008
(6 of 2009).

115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions
of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company
for any assessment year, any amount declared, distributed or paid by such company by way of dividends
(whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated
profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the
rate of fifteen per cent:
Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall
have effect as if for the words "fifteen per cent", the words "thirty per cent" had been substituted.
(1A) The amount referred to in sub-section (1) shall be reduced by,—
(i) the amount of dividend, if any, received by the domestic company during the financial year, if
such dividend is received from its subsidiary and,—
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is
payable under this section on such dividend; or
(b) where such subsidiary is a foreign company, the tax is payable by the domestic company
under section 115BBD on such dividend:
Provided that the same amount of dividend shall not be taken into account for reduction
more than once;
(ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System
Trust referred to in clause (44) of section 10.
Explanation.—For the purposes of this sub-section, a company shall be a sub-sidiary of another company, if
such other company, holds more than half in nominal value of the equity share capital of the company.
(1B) For the purposes of determining the tax on distributed profits payable in accordance with this
section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount
referred to in sub-section (1A) hereafter referred to as net distributed profits, shall be increased to
such amount as would, after reduction of the tax on such increased amount at the rate specified in
sub-section (1), be equal to the net distributed profits:
Provided that this sub-section shall not apply in respect of dividend referred to in sub-clause (e) of
clause (22) of section 2.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in
accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable
by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed
profits to the credit of the Central Government within fourteen days from the date of—
(a) declaration of any dividend; or
(b) distribution of any dividend; or
(c) payment of any dividend,
whichever is earliest.

(4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect
of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the
company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in
respect of the amount which has been charged to tax under sub-section (1) or the tax thereon.
(6) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in
respect of the total income of an undertaking or enterprise engaged in developing or developing and operating
or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount
declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise)
on or after the 1st day of April, 2005 out of its current income either in the hands of the Developer or enterprise
or the person receiving such dividend :
Provided that the provisions of this sub-section shall cease to have effect from the 1st day of June, 2011.
(7) No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed
or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out
of its current income on or after the specified date:
Provided that nothing contained in this sub-section shall apply in respect of any amount declared, distributed or
paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its
accumulated profits and current profits up to the specified date.
(a) "specified domestic company" means a domestic company in which a business trust has become the
holder of whole of the nominal value of equity share capital of the company (excluding the equity share
capital required to be held mandatorily by any other person in accordance with any law for the time
being in force or any directions of Government or any regulatory authority, or equity share capital held
by any Government or Government body);
(b) "specified date" means the date of acquisition by the business trust of such holding as is referred to in
clause (a).]
(8) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect
of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely
in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such
company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current
income, either in the hands of the company or the person receiving such dividend.
(b) "unit" means a unit established in an International Financial Services Centre, on or after the 1st day of
April, 2016;
(c) "convertible foreign exchange" means foreign exchange which is for the time being treated by the
Management Act, 1999 (42 of 1999) and the rules made thereunder.]

115P. Where the principal officer of a domestic company and the company fails to pay the whole or any part of
the tax on distributed profits referred to in sub-section (1) of section 115-O, within the time allowed under sub-
section (3) of that section, he or it shall be liable to pay simple interest at the rate of one per cent for every month
or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on
which such tax was payable and ending with the date on which the tax is actually paid.
115Q. If any principal officer of a domestic company and the company does not pay tax on distributed profits
in accordance with the provisions of section 115-O, then, he or it shall be deemed to be an assessee in default in
respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery
of income-tax shall apply.
Explanation.—4[***]

(22) "dividend" includes—

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such
distribution entails the release by the company to its shareholders of all or any part of the assets
of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit
certificates in any form, whether with or without interest, and any distribution to its preference
shareholders of shares by way of bonus, to the extent to which the company possesses
accumulated profits, whether capitalised or not ;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which
the distribution is attributable to the accumulated profits of the company immediately before its
liquidation, whether capitalised or not ;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to
which the company possesses accumulated profits which arose after the end of the previous year
ending next before the 1st day of April, 1933, whether such accumulated profits have been
capitalised or not ;
(e) any payment by a company, not being a company in which the public are substantially
interested, of any sum (whether as representing a part of the assets of the company or otherwise)
made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a
person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend
whether with or without a right to participate in profits) holding not less than ten per cent of
the voting power, or to any concern in which such shareholder is a member or a partner and in
which he has a substantial interest (hereafter in this clause referred to as the said concern) or any
payment by any such company on behalf, or for the individual benefit, of any such shareholder,
to the extent to which the company in either case possesses accumulated profits;

but "dividend" does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share
issued for full cash consideration, where the holder of the share is not entitled in the event of
liquidation to participate in the surplus assets ;
(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) insofar as such distribution
is attributable to the capitalised profits of the company representing bonus shares allotted to its
equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965;
(ii) any advance or loan made to a shareholder or the said concern by a company in the
ordinary course of its business, where the lending of money is a substantial part of the
business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or
any part of any sum previously paid by it and treated as a dividend within the meaning
of sub-clause (e), to the extent to which it is so set off;
(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance
with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of
the demerged company (whether or not there is a reduction of capital in the demerged company).
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not
include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and
before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include
all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and
in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not,
where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government
or a corporation owned or controlled by the Government under any law for the time being in force,
include any profits of the company prior to three successive previous years immediately preceding the
previous year in which such acquisition took place.
5
[Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether
capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether
capitalised or not, of the amalgamating company on the date of amalgamation.]
Explanation 3.—For the purposes of this clause,—
(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of
individuals or a company ;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he
is, at any time during the previous year, beneficially entitled to not less than twenty per cent of
the income of such concern ;

115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-
tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of
distributed income by the company on buy-back of shares (not being shares listed on a recognised
stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional
income-tax at the rate of twenty per cent on the distributed income.
(i) "buy-back" means purchase by a company of its own shares in accordance with the provisions of 5[any
law for the time being in force relating to companies];
(ii) "distributed income" means the consideration paid by the company on buy-back of shares as
reduced by the amount, which was received by the company for issue of such shares ,
determined in the manner as may be prescribed
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in
accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be
payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of
the Central Government within fourteen days from the date of payment of any consideration to the shareholder
on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of
the said income and no further credit therefor shall be claimed by the company or by any other person in respect
of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in
respect of the income which has been charged to tax under sub-section (1) or the tax thereon.
115QB. Where the principal officer of the domestic company and the company fails to pay the whole or any
part of the tax on the distributed income referred to in sub-section (1) of section 115QA, within the time allowed
under sub-section (3) of that section, he or it shall be liable to pay simple interest at the rate of one per cent for
every month or part thereof on the amount of such tax for the period beginning on the date immediately after
the last date on which such tax was payable and ending with the date on which the tax is actually paid.
115QC. If any principal officer of a domestic company and the company does not pay tax on distributed income
in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an assessee in default
in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and
recovery of income-tax shall apply.

115R. (1) Notwithstanding anything contained in any other provisions of this Act and section 32 of the Unit
Trust of India Act, 1963 (52 of 1963), any amount of income distributed on or before the 31st day of March,
2002 by the Unit Trust of India to its unit holders shall be chargeable to tax and the Unit Trust of India shall be
liable to pay additional income-tax on such distributed income at the rate of ten per cent :
Provided that nothing contained in this sub-section shall apply in respect of any income distributed to a unit
holder of open-ended equity oriented funds in respect of any distribution made from such fund for a period of
three years commencing from the 1st day of April, 1999.
(2) Notwithstanding anything contained in any other provision of this Act, any amount of income distributed by
the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company
or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the rate of—
(i) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family
by a money market mutual fund or a liquid fund;
(ii) thirty per cent on income distributed to any other person by a money market mutual fund or a liquid
fund;
(iii) ten per cent on income distributed to any person by an equity oriented fund;
(iv) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided
family by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund;
and
(v) thirty per cent on income distributed to any other person by a fund other than a money market mutual
fund or a liquid fund or an equity oriented fund:
Provided that where any income is distributed by a mutual fund under an infrastructure debt fund scheme to a
non-resident (not being a company) or a foreign company, the mutual fund shall be liable to pay additional
income-tax at the rate of five per cent on income so distributed:
Provided further that nothing contained in this sub-section shall apply in respect of any income distributed,—
(a) by the Administrator of the specified undertaking, to the unit holders; or
(b) 9[***]
(i) "administrator" and "specified company" shall have the meanings respectively assigned to them in
the Explanation to clause (35) of section 10;
(ii) "infrastructure debt fund scheme" shall have the same meaning as assigned to it in clause (1) of
regulation 49L of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made
under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
(2A) For the purposes of determining the additional income-tax payable in accordance with sub-section (2), the
amount of distributed income referred therein shall be increased to such amount as would, after reduction of the
additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount
of income distributed by the Mutual Fund.
(3) The person responsible for making payment of the income distributed by the Unit Trust of India or a Mutual
Fund and the Unit Trust of India or the Mutual Fund, as the case may be, shall be liable to pay tax to the credit
of the Central Government within fourteen days from the date of distribution or payment of such income,
whichever is earlier.
(3A) [***]

(4) No deduction under any other provision of this Act shall be allowed to the Unit Trust of India or to a Mutual
Fund in respect of the income which has been charged to tax under sub-section (1) or sub-section (2).
115S. Where the person responsible for making payment of the income distributed by the specified company
as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002 (58 of 2002) or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, fails to
pay the whole or any part of the tax referred to in sub-section (1) or sub-section (2) of section 115R, within the
time allowed under sub-section (3) of that section, he or it shall be liable to pay simple interest at the rate of one
per cent every month or part thereof on the amount of such tax for the period beginning on the date immediately
after the last date on which such tax was payable and ending with the date on which the tax is actually paid.
115T. If any person responsible for making payment of the income distributed by the specified company as
referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002
(58 of 2002) or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, does not pay
tax, as is referred to in sub-section (1) or sub-section (2) of section 115R, then, he or it shall be deemed to be an
assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the
collection and recovery of income-tax shall apply.
Explanation.— For the purposes of this Chapter,—
(a) "Mutual Fund" means a Mutual Fund specified under clause (23D) of section 10;
10
[(b) "equity oriented fund" means a fund referred to in clause (a) of the Explanation to section 112A and the
Unit Scheme, 1964 made by the Unit Trust of India;]
(c) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963
(52 of 1963);
(d) "money market mutual fund" means a money market mutual fund as defined in sub-clause (p) of clause
(2) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996;
(e) "liquid fund" means a scheme or plan of a mutual fund which is classified by the Securities and Exchange
Board of India as a liquid fund in accordance with the guidelines issued by it in this behalf under the
Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder.

115TA. (1) Notwithstanding anything contained in any other provisions of the Act, any amount of income
distributed by the securitisation trust to its investors shall be chargeable to tax and such securitisation
trust shall be liable to pay additional income-tax on such distributed income at the rate of—
(i) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided
family;
(ii) thirty per cent on income distributed to any other person:
Provided that nothing contained in this sub-section shall apply in respect of any income distributed by the
securitisation trust to any person in whose case income, irrespective of its nature and source, is not chargeable to
tax under the Act.
(2) The person responsible for making payment of the income distributed by the securitisation trust shall be
liable to pay tax to the credit of the Central Government within fourteen days from the date of distribution or
payment of such income, whichever is earlier.
(3) [***]
(4) No deduction under any other provisions of this Act shall be allowed to the securitisation trust in respect of
the income which has been charged to tax under sub-section (1).
11
[(5) Nothing contained in this section shall apply in respect of any income distributed by a securitisation trust
to its investors on or after the 1st day of June, 2016.]
115TB. Where the person responsible for making payment of the income distributed by the securitisation trust
and the securitisation trust fails to pay the whole or any part of the tax referred to in sub-section (1) of section
115TA, within the time allowed under sub-section (2) of that section, he or it shall be liable to pay simple interest
at the rate of one per cent every month or part thereof on the amount of such tax for the period beginning on the
date immediately after the last date on which such tax was payable and ending with the date on which the tax is
actually paid.
115TC. If any person responsible for making payment of the income distributed by the securitisation trust and
the securitisation trust does not pay tax, as referred to in sub-section (1) of section 115TA, then, he or it shall be
deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions
of this Act for the collection and recovery of income-tax shall apply.

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-A . 1
Question (ID 026 006) (firm fundamental computation)

Section 40(b) a firm comprising of four Partners A,B,C and D carrying on business in partnership, sharing profits
and losses equally shows a profit of Rs.1,00,000 in its books after deduction of the following amounts for the
year
a. Remuneration to partner A, who is not actively engaged in business 48,000
b. Remuneration to partner B and C actively engaged in business
Partner B 60,000
Partner C 72,000
c. Interest on partner D on loan of Rs. 2,25,000 36,000
The deed of partnership provides for the payment of above remuneration and interest to partners. You are
required to work out the taxable income of the firm as well as partners.
Question (ID 14) (Revision / Home work) (firm fundamental computation)

Work out the taxable income for of a partnership firm engaged in retail trade from the following particulars:
1. Net profit of 3,65,000 arrived at after debit of interest on capital of partners of 1,80,000 and salaries to
working partners of 4,80,000.
2. Total capital of the partners on which interest paid is debited in the profit and loss account was
10,00,000.
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Question (ID 01) (firm fundamental computation)

A partnership firm, consisting of three partners A, Band C was engaged in the business of Civil Construction
and received the following amounts by way of contract receipts:
Contract work for supply of labour 30,00,000
Value of materials supplies by Government 8,00,000
Total value of contract 38,00,000
Each partner of the firm was entitled to draw Rs. 2,500 per month by way of salary as authorized by the terms
of the partnership deed. Interest of Rs. 1,00,000 was also paid to partner C on the capital of Rs. 5,00,000
contributed by him. The profit as per books of accounts, before deduction of salary to partners and interest to
C amounted to Rs. 2,50,000. Compute the total income of the firm, applying the provisions of section 44AD.
exhaustively
selectively
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Question (ID 026 001) (full computation of firm)
X,Y and Z are equal partners in a firm carrying on some business. Compute the total income of the firm. The
profit and the loss account of the firm is as follows. With the return of income computation of income with
account statements have been enclosed.
Selling and administrative expenses 87,000 Gross profit 3,00,000
(Rs. 30,000 paid in cash)
Baddebts 5,000 Miscellaneous receipts 10,000
Depreciation on assets 10,000
Interest to parties 3,000
Interest to partners @ 20 %
Y 20,000
Remuneration to partners
X 70,000
Y 70,000 1,40,000
Net profit 45,000
TOTAL 3,10,000 TOTAL 3,10,000
Following additional information is available
a) Depreciation includes Rs. 2,000 for the assets purchased on hire purchases basis.
b) Bad debts include Rs. 1050 as amount written off which was given as advance to supplier.
c) Bad debts include Rs. 300 as provision for bad debts as general practice of the firm.
d) Bad debts include Rs. 200 debt which represents receivable from Mr. A, this was taken over at time of
purchase of business some 12 years back. However during previous year no police complaint has been
filed or no suit has been initiated for the recovery of said amount from Mr. A.
e) Selling and administrative expense include fees paid to CA for preparation of return and audit Rs. 1,000.
f) During the year some loans of Rs. 6,000 were advances to b & co. in which there are common partners.
There is no interest charges from b & co. prevailing interest rate is 10 % per annum.
g) In the past assets of the firm was revalued and there was corresponding increase in capital of the partner.
The revaluation had doubled the capital of partners as appearing in previous balance sheet.
h) In the balance sheet of the firm loan from Mr. B Rs. 275 is being carried forward since last 15 years.
i) Miscellaneous receipts include sum of Rs. 245 as refund of Indirect Tax. However this refund is under
protest.
j) Miscellaneous receipts include sum of Rs. 260 (include interest of past Rs. 10) which is loan written off.
The loan was granted by b & co for the purpose of business needs.
k) Assessing officer observed introduction of capital from partner Mr. X Rs. 4,500 in his capital account.
This was in cash. However corresponding entry in personal books of Mr. X is not observed. Since the
account does not tally officer proposes to add it to the income of the firm.
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You are required to compute the total income of the firm in the following situations.
1. The firm failed to comply with the provisions of section 184.
2. Suppose Mr. Z died on 1-12-PY.
3. Suppose Mr. Z retired on 1-12-PY.
4. Firm in the course of the assessment did not comply with notice of scrutiny and officer has resorted to
best judgement assessment.
5. Suppose Z was minor and was admitted to benefits of partnership had attained majority on 1-6-PY.
6. Suppose during the year Mr. A and B was admitted and Y and Z retired.
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Question (ID 16) (full computation of firm)
HSP, a partnership firm engaged in a business of running a heritage hotel approved by the competent authority
provides the following information relating to the year:
1. Net profit as per P & L account of Rs. 200 lakh was arrived at after charge the following:
a. Depreciation on hotel building having opening W.D.V on April 1, of Rs. 500 lakh was charged by
treating the same as plant and machinery.
b. Expensed of Rs. 1,00,000 incurred for the purpose of promoting family planning among its
employees.
c. Payment of Rs. 50,000 for an advertisement published in the souvenir released on August 15 by
Bhartiya Janta Party.
d. Compensation of Rs. 1,00,000 paid to the suppliers of automatic kitchen appliances because of
termination of contract after receipt of 50% of appliances.
e. Wines and liquor imported last year for Rs. 20,00,000 and were available in the stock on April 1, for
Rs. 5 lakh were confiscated by the Government authority and therefore were written off.
f. Expenses of Rs. 20 lakh incurred on replacement of carpets in the foyer, lounge and bar.
2. Out of amount credited to the reserve created under section 80HHD(1), an amount of Rs. 15 lakh could
not be utilized for the purposes as per section 80HHD(4) till March 31, and time limit of reserve is
expired.
3. Amount of Rs. 4 lakh equal to U.K. £5000 was remitted and paid to a travel agent resident of U.K. as
commission for the booking of international tourists in the hotel. Tax at source was not deducted out of
such payment.
4. Amount of Rs. 40,000 each was paid in cash to the suppliers of vegetables, milk products and eggs on
February 11, because of suspension of banking operations due to strike of bank employees.
5. Amount of Rs. 5 lakh was written off in the financial year 2012-13 as irrecoverable from a travel agent;
an amount of Rs. 2 lakh out of it was recovered on March 13, and credited to a reserve account.
Compute the income chargeable to tax and give reasons in brief for treatment given to each of the items.
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XYZ and Co., is a partnership firm consisting of three partners X, Y and Z. it is engaged in the business of
manufacturing and selling toys. Turnover of the business for the year ending March 31, amounts to Rs. 55 lakh.
The following additional income is available –
1. Bad debts written off in the books are Rs. 75,000.

2. Interest at 12 per cent is provided to partner Z on his capital of Rs, 6 lakh as authorized by the partnership
deed.
3. The firm had business loss of Rs. 50,000 and unabsorbed depreciation of Rs. 1,50,000 carried forward
from 2 years back. The firm did not pay tax under presumptive tax system in last year.
4. The firm opts for presumptive taxation under section 44AD for the first time.
Compute the income of the firm chargeable under the head, “profits and gains of business or profession”.
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Question (ID 18) (full computation of firm) (Revision / Home work)

X (28years), Y (30years) and Z (32years) are three partners of a firm [profit sharing ratio being 1 : 3 : 5]. The
following information is available from the record of the company for the year.
1. Net profit as per profit and loss account is Rs.32,000.
2. Credit side of the profit and loss account includes -
a. Interest recovered from X on drawing : Rs. 5,000
b. Gift from Mrs. D : Rs. 75,000
c. Interest on income-tax refund : Rs. 16,000
d. Income tax refund : Rs. 80,000
e. Long-term capital gain : Rs. 2,10,000 (computed as per section 45)
f. Rent of property at Delhi : Rs. 72,000
g. Interest on fixed deposit kept for business purposes : Rs. 40,000 (tax deducted out of it : Rs.
4,000) ;
h. Interest on fixed deposit (not being kept for business purposes) : Rs. 60,000 (tax deducted out of
it : Rs. 6,000).
3. Debit side of the profit and loss includes -
a. Salary and commission to partners- X : Rs.6,00,000; Y : Rs.8,40,000, Z : Rs.90,000 (Z is not
working partner);
b. Interest on capital to partners @ 24 per cent –X :Rs.40,000,Y : Rs. 20,000,Z : Rs. 2,00,000;
c. Salary to employees include Rs. 40,000 being an outstanding liability of bonus which is paid on
December 10, AY and employer’s contribution towards unrecognised provident fund : Rs.
30,000;
d. Outstanding sales tax : Rs.10,000 (which is paid on may 10,2015);
e. depreciation on Delhi house which is let out : Rs.20,600;
f. depreciation on other assets : Rs.4,10,000 (as per section 32 amount deductible is Rs.3,90,000);
g. advance income-tax : Rs,70,000;
h. expenditure on income tax appeals :Rs.20,000;
i. outstanding interest on term loan taken from SBI :Rs. 60,000 paid on December 20, AY);
j. outstanding interest on term loan taken from IDBI : Rs.65,000(paid on May 20, AY);
k. municipal tax of house at Delhi :Rs.2,000 (paid on April 6, AY);
l. repairs to compound wall collapsed due to heavy rains : Rs.25,000;
m. donation to PM’s Drought Relief Fund : Rs. 10,000;
n. office expenses : Rs.50,640.
Whatsapp 9969100000
The firm wants to set-off the following unadjusted losses brought forward from earlier years
Capital loss of 3 years back 40,000
Loss from house property of 15 years back 10,000
Unadjusted depreciation 5,000
Business loss of 4 years back 60,000
Partners
X Y Z
Rs. Rs. Rs.
Interest on government securities 15,000 20,000 10,000
Business income 1,90,000 1,35,000 2,65,000
Contribution to LIC’s pension funds 6,000 5,000 10,000
PPF contribution and LIC payment 1,75,000 1,30,000 1,30,000
Compute the net income and tax liability of the firm and its partners on the assumption that the firm satisfies all
condition of section 184 and 40(b).
Whatsapp 9969100000
Question (ID 19) (full computation of firm) (Revision / Home work)

XY & co. is a partnership firm. It has two partners X (34 years) and Y (36 years) (1:2). The firm is engaged in
the business of manufacture of chemicals and repairs of dams and supply of labour for civil construction. The
profit and loss account of the firm for the year is as follows :
Rs. Rs.
Opening stock of raw material 21,700 Receipts from the business 38,70,700
Depreciation 2,39,430 Rent of a godown 48,000
Salary to employees 1,30,000 Interest from
Purchase of raw material 24,10,210 government securities 2,60,000
Interest on loan taken to invest Closing stock of raw material 1,31,600
in Government securities 13,800
Interest on loan taken for business 74,400
purposes
Travelling, entertainment and 57,800
Advertisement expenses
Other expenses 2,68,000
Municipal tax and insurance 7,200
(Rs. 6,000 + Rs.1,200) of godown
Salary to partners as per partnership deed
X 1,80,000
Y 1,44,000
Interest to partners as per partnership
deed @ 24 per cent
X 12,000
Y 57,000
Net profit 6,94,760
43,10,300 43,10,300
Whatsapp 9969100000
Other information :
1. Out of other expenses debited to P & L a/c Rs. 12,700 is not deductible under section 37(1).
2. Out of travelling, advertisement and entertainment expenses, Rs. 17,500 is not deductible under section
37 (1).
3. On April 1, the firm owns the following depreciable assets:
a. Block-1 -Plant A, B and C, depreciated value : Rs.3,70,000, rate of depreciation : 15%.
b. Block-2 -Plants D and E, depreciated value : Rs. 1,98,000, rate of depreciation : 40%.
c. On January 1, the firm sells Plant D for Rs. 9,10,000 and purchases plant F (rate of depreciation
15%) for Rs. 4,86,000.
4. The firm gives a donation of Rs. 1,70,000 to a notified charitable institute which is included in other
expenses.
5. The firm wants to set-off the following losses brought forward from earlier years.
2 years back 1 Year Back
Business loss 20,000 -
Capital loss 2,000 1,000
Income of partners X and Y is as follow
X Y
Bank fixed deposit interest 2,28,000 2,70,000
PPF contribution 1,10,000 1,20,000
Find out the net income and tax liability of the firm and partners for the year. The firm satisfies all conditions
of sections 184 and 40(b).
Whatsapp 9969100000
C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-B . 1

Vyay Agencies, a partnership firm constituted by three partners with equal shares was dissolved on 1.04.2011
after a search. The liability to tax finally decided against the firm outstanding to be paid was 15 Lacs. Out of
three partners, one was declared insolvent on 18-03-2012 by the Court. The Assessing Officer, for recovering
the demand, attached the Bank Accounts of other two partners and could recover an amount of 6 Lacs from the
Account of one such partner. You are asked by the partners of dissolved firm :
(i) About the liability of each of them to pay outstanding demand.
(ii) Whether the action of Assessing Officer to attach the Bank Account of partners against demand of dissolved
firm is justified ?

Partners of assessee-firm Kalpesh Sanghavi & co created another separate distinct firm Bhavesh Sanghavi &
co, under separate partnership deed to carry on other business. Assessing Officer, however, included Bhavesh
Sanghavi & co profit in income of Kalpesh Sanghavi & co. assessing officer applying certain principles
enunciated by courts, held that two firms were not in reality one firm but two different legal entities for purpose
of assessment. CIT does not agree with the officer. You are required to give your opinion on the same.

Assessee firm Kalpesh Sanghavi & co’s business was taken over by a private limited company. Transfer deed
stipulated that an outstanding disputed claim against certain completed piece of work was not transferred.
Subsequently, firm was dissolved under deed wherein it was stated that disputed claim was to be treated as
actionable claim realisable by all partners as tenants-in-common. Assessing Officer invoking section 176(3A)
brought to tax under section 28(iv) amount realised after dissolution of firm in respect of aforesaid claim.
Partners are of the view, while holding that section 176(3A) was not attracted nor section 28(iv) or section 60
was attracted. You are required to offer your comments on correct tax treatment of the said actionable claim.
Kalpesh Classes (Mumbai)

Question (ID Firms - 51) (Revision / Home work)

Answer the following case. Your answer should cover (1) Issues involved; (2) Provisions applicable; (3)
Analysis; and (4) Conclusion:
Bose & Co. is a partnership firm consisting of 4 partners with equal shares. The partnership firm is engaged in
execution of civil construction contracts with State Government authorities. The partnership firm deposited
Rs.50 lakhs in State Bank of India (SBI) for the purpose of obtaining guarantee as and when the tenders were
applied by the firm. It also kept Rs. 10 lakhs in fixed deposit with Canara Bank, being the surplus funds of the
firm. The firm credited interest on bank deposits of Rs. 4,00,000 from SBI and Rs. 80,000 from Canara Bank in
Profit and loss account and computed working partners’ salary based on the resultant book profit. The Assessing
Officer wants to tax interest incomes as income under the head ‘other sources’ and accordingly reduced the
amount allowable by way of working partners’ salary. Is the action of the Assessing Officer tenable in law?

Question (ID Firms - 52)

Ram, Rahim & Robert are equal partners of SSK & Co., which was formed w.e.f. 01.06.PY. The firm is an
authorized dealer of watches manufactured by a reputed company. It reported Net Profit as per profit and loss
account of Rs. 2,50,000 after debit / credit of the following items :
(1) Depreciation on generator and computers Rs. 1,10,000.
(2) Working partners’ salary Rs. 30,000 per month for each partner.
All the partners are working partners and the salary paid is authorized by the deed of partnership.
(3) Interest on capital to partners @ 18% per annum. The total interest on capital of the firm debited to
profit and loss account being Rs. 3,60,000.
(4) Donation to registered political parties Rs.80,000 by cash and Rs. 70,000 by electronic transfer.
(5) Monthly rent paid to partner Ram for use of his premises as godown Rs. 30,000 and it is occupied
from 01.10.PY.The market rent for the premises is ascertained at Rs. 15,000 per month. No tax was
deducted at source on the rent paid.
(6) Sponsorship fee for local Cricket tournament Rs. 4,00,000.
(7) The firm incurred Rs. 5 lakhs by way of expenditure towards the cost of gold coins awarded to
customers on the first day of their showroom inauguration. The cost of each gold coin was less than
Rs. 10,000 and one coin was given for each of the buyers on that day selected through lucky dip. No
tax was deducted at source on such gold coins given to the customers.
Additional information :
(1) Depreciation on tangible assets allowable u/s 32 Rs. 2,37,500.
(2) One registered trademark was acquired on 10.07 for Rs. 3,00,000. The firm used the trademark w.e.f.
01.12 since there was some dispute in title of the previous owner and was cleared through court decree
only in November.
(3) The total turnover for the firm for the year was Rs. 80 lakhs. Amount realized by cash Rs. 20 lakhs
and the balance of sale proceeds were received through credit card / RTGS / NEFT.
(4) During the course of the assessment assessing officer has noticed the following transactions and has
asked for the explanation for the same.
a. Cash deposit of 300,000 in bank passbook on 16th July and assessee has replied stating that it
is business receipts but not able to produce the details of name and address of the person from
whom it is received.
b. One of the partner has travelled abroad to New Zealand for business purpose and firm has
borne the expense for the same but firm is not able to produce full details of tour expense and
officer is of the view that there is under reporting of expense to the extent of 200,000
c. Firm has made investment in books however firm is stated that due to slump in diamond
market they got a lot of loose diamonds at dirt cheap price of 18,00,000 however fair value is
22,00,000 but at the same time firm is not able to produce the detailed vouchers and bills
supporting the said purchase.
Officer is of the view that above explanation provided by firm is not satisfactory.

You are required to compute the total income of the firm applying regular provisions and presumptive provisions
contained in section 44AD of the Income-tax Act,1961 (Act). Advise the procedural requirement on opting any
of the provisions for the purpose of the Act. You are also required to advice suitable by notes to assessing officer
in relation to income adjustment in passing order. (10 marks).

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-C . 1

X, Y and HUF of Z (represented by Z) are partners with equal shares in profits and losses of a firm, ABC, which
is engaged in the production of TV serials and tele-films. Two years back, one partner A retired, but his dues
have been settled in the previous year.
The earlier partnership deed did not authorize payment of remuneration or interest to partners. The partnership
deed was revised by the partners on June 1, to authorize payment of remuneration of Rs. 1 lakh per month to
each working partner and simple interest at 15 percent per annum to X and Y on their capital. X, Y and Z are
actively associated with the affairs of the firm. The profit and loss account of the firm for the year ending March
31, shows a net profit of Rs. 10 lakh after debiting/crediting the following:
1. Interest amounting to Rs. 15 lakh paid to X and Y on the balances standing to their capital accounts from
April 1, to March 31,
2. Remuneration to the partners including partner in representative capacity Rs. 30 lakh.
3. Interest amounting to Rs. 2 lakh paid to Z on loan provided by him in his individual capacity at the rate
of 16 percent per annum.
4. Royalty of Rs. 5 lakh paid to partner X, who is a professional scriptwriter, for use of his scripts as per
an agreement between the firm and X.
5. Two separate payments of Rs. 18,000 and Rs. 15,000 made in cash on February 7, to P, a hair dresser
against his bill for services rendered in January, and two payments of Rs. 19,000 and Rs. 10,000 made
in cash on February 7, and February 8, respectively to Q, assistant cameraman against her bill for services
provided in January.
6. Amount of Rs. 5 lakh provided in the books on March 31, as liability for remuneration to S, a film artist
and a non-resident. Tax deducted at source under section 195 from the amount so credited was paid on
June 3 AY.
7. Amount of Rs. 6 lakh provided as gratuity for the year on the basis of actuarial valuation. Gratuity paid
to retired employees in Rs. 1.50 lakh.
8. Interest of Rs. 1.20 lakh received on income tax refund under section 244(1A) in respect of two years
back.
9. Mrs. X, Mrs. Y and Mrs. Z are looking after some administrative work of the firm, they are paid 8,000
annually each. They do not possess any professional or technical qualification but in the course of the
assessment assessing officer considers the payment as reasonable.
The firm has also provided the following additional information:
The amount due to A, the former partner was Rs. 15 lakh. The dues were settled on September 30, by transferring
a plot of land purchased two years back having a book value of Rs. 10 lakh. The difference of Rs. 5 lakh was
credited to the partners’ capital accounts in their profit sharing ratio. The fair market value of the plot on the
date of transfer was Rs. 16 lakh.
Compute total income of the firm stating the reasons for treatment of each item.

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-C . 2

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-D . 1
Question (ID 11) (firm fundamental computation)

M/s. Harilal Industries, a partnership firm, submits the following profit and loss account for computation of its
business income Profit and loss account for the year ending is given below.
Additional information:
(i) Salaries include 1,50,000 paid to working partner A (administrative head and making business
policies for the firm) and 1,00,000 to working partner B (Looking after day to day routine matter and
execution of transactions. Includes Rs. 20,000 paid to him for extra work done by him during diwali
season.). (authorized by the partnership deed)
(ii) Interest paid includes 54,000, being interest paid on loan given by partner B at the rate 18% simple
interest.
(iii) Out of provident fund contribution debited to profit and loss account, 10,000 is outstanding beyond
the due date of filing of return balance is paid before due date of filing of return of income but after
the date of dissolution of firm.
(iv) The firm purchased goods by issuing account payee drafts except in the case of one bill for 80,000
for which payment has been made by cash. This has been debited to trading account as part of
purchases.
Expenses Income
Salaries 4,23,000 gross profit 7,47,300
Rent 32,000 Dividend from UTI 8,000
Printing & Stationery 5,600
Telephone 3,700
Conveyance 21,000
Travelling 14,000
interest 72,000
Depreciation 27,000
Legal fees 15,000
Auditor fees 18,000
PF contribution 24,000
Net profit 1,00,000
Total 7,55,300 Total 7,55,300
The firm was dissolved and business is discontinued on 21st of march of PY, above income and expense is thus
prepared up to date of dissolution of business. However one debtor Mr. D who was written off 3 years back has
made the payment of Rs. 12,600 on 28th March, but since the firm was already dissolved it made payments to
one of the partner Mr. Harilal. You are also required to explain how the assessment of the firm will be made.

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-D . 2
M/s HIG, a firm, consisting of three partners namely H , I and G, carried on the business of purchase and sale
of television sets in wholesale and manufacture and sale of pens under a deed of partnership executed on 1-4-
2004. H, I and G were partners in their individual capacity. The deed of partnership provided for payment of
salary amounting to Rs 2,00,000 each to H and G who were the working partners. A new deed of partnership
was executed on 1-10-PY which, apart from providing for payment of simple interest @ 12% p.a on the balance
standing to the credit of the capital accounts of partners from 1-4-PY. The firm was dissolved on 31-3-PY and
the capital asset of the firm were distributed among the partners on 20-4-AY. The net profit of the firm for the
year after payments of salary to the working partners and debit /credit of the following items to the profit and
loss account was 1,50,000.
(i) Interest amounting to Rs 1,00,000 paid to the partners on the balances standing to the credit of
their capital accounts from 1-4-PY to 31-3-PY
(ii) Interest amounting to Rs 50,000 paid to the partners on the balance standing to the credit of their
accounts from 1-4-PY to 31-3-PY
(iii) Interest amounting to Rs 20,000 paid to the Hindu undivided family of partner H @18% p.a.
(iv) Payment of Rs 25,000 towards purchase of television sets made by crossed cheque on 1-11-PY.
(v) Rs. 30,000 being the value of gold jewelry received as gift from a manufacturer for achieving
sales target.
(vi) Depreciation amounting to Rs 15,000 on motor car bought and used exclusively for business
purpose, but not registered in the name of the firm.
(vii) Depreciation under section 32(1) (ii) amounting to Rs 37,500 of new machinery bought and
installed for manufacture of pens on 1-11-PY at a cost of Rs 5,00,000. There was no increase in
the installed capacity as a result of the installation of the new machinery.
(viii) Interest amounting to Rs 25,000 received from bank on fixed deposits made out of surplus funds.
The firm furnishes the following information relating to it:
(a) Closing stock –in-trade was valued at Rs 60,000 as per the method of lower of cost or market
rate consistently followed by it. The market value of the closing stock-in-trade was Rs 65,000.
(b) Brought forward business loss of 3 years back Rs 50,000.
(c) The fair market value of the capital assets as on 31-3-PY was Rs 20,00,000 and the cost of their
acquisition was Rs 15,00,000.
Compute the total income of M/s HIG. You are required to furnish explanations for treatment of the various
items given above.

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-E . 1
MNO Corporation LLP, is carrying on two businesses viz. Textile manufacture and Operation of cold chain
facility. It gives you the following information for the year:
Net profit as per Profit & Loss Account:
From Textile Manufacture - 10,25,000
From Operation of cold chain facility - 20,50,000
The following items are debited to Profit & Loss Account:

1. Interest on capital payable to partners @ 15% on total capital of 100 lakhs.
2. Working partner salary 36 lakhs (i.e., 1 lakh each per month for 3 partners).
3. Depreciation on textile factory building 5 lakhs.
4. Depreciation on Plant & Machineries of textile business 35 lakhs.
5. Keyman insurance policy premium paid 1,55,000.
Other Information:
Eligible depreciation under section 32 for the year are
i. On Plant & Machineries of textile business 27 lakhs.
ii. On factory building relating to textile business 4 Iakhs.
The assessee set up and operating a cold chain facility last year. It incurred capital expenditure and income
towards construction of cold chain facility of last year:
1. Cost of land 30 lakhs.
2. Cost of construction of building and machineries installed, 75 lakhs.
3. Income from Textile manufacture 12 lakhs.
4. Income from cold chain facility 60 lakhs (before deduction under section 35AD)
5. The firm originally had 4 equal partners and one partner retired on 31-3.
The partnership agreement authorizes payment of salary and interest on capital which are debited to Profit &
Loss Account.
You are requested to compute the total income of the firm.
Note: Ignore Alternate Minimum Tax (AMT) under section 115 JC.

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-F . 1
Patel & Co., is a partnership firm consisting of three partners, Mr. Patel, Mr. Malhotra and Mr. Anand, sharing
profit and losses in ratio of 3:2:3. The firm was doing business in manufacture of electrical appliances. The
Profit loss account of the firm was under:

Purchases 7,50,000 Sales (excluding GST collected 16,70,000
salary to staff 3,00,000 Rs. 30,000 under deferrals scheme
Interest to Partners: of Gujarat government.)
- Patel 30,000 Miscellaneous business receipts 4,000
- Malhotra 2,20,000 Interest on drawings 16,000
- Anand 70,000 3,20,000 (recovered from Mr. Patel)
Depreciation 1,80,000 Long-term capital gains 4,90,000
Remuneration to partners Debenture Interest 40,000
- Patel 1,02,000
- Malhotra 60,000
- Anand 72,000 2,34,000
Miscellaneous expenses 1,80,000
Net profit
- Patel 96,000
- Malhotra 64,000
- Anand 96,000 2,56,000
22,20,000 22,20,000
The following further details are furnished:
(1) The firm has completed all the formalities to be considered as a partnership assessed as such.
(2) The firm satisfies all the conditions of Sec. 80-IA but is not found to be eligible for deduction.
(3) The partnership deed was amended on 1st April, providing remuneration and interest to partners as under:
Remuneration Interest on capital
Mr . Patel (Working partner) Rs. 8,500 p.m. 20% simple interest
Mr. Malhotra (Sleeping partner) Rs. 5,000 p.m. 24% simple interest
Mr. Anand (Working partner) Rs. 6,000 p.m. 20% simple interest

(4) Depreciation eligible under the Income-tax Act works to Rs. 96,000.
(5) Under Miscellaneous expense Rs. 82,000 are inadmissible expenses, out of which Rs. 60,000 were
donations given to an approved charitable trust.
(6) Two years back, the firm was assessed on a business loss of Rs. 40,000 and long term capital loss of Rs.
10,000.
(7) Partnership deed contains clause for the allowance of partners remuneration and interest as per the
provisions of income tax act.
(8) The firm has borrowed monies on account of loan and it is outstanding at year end of Rs. 3,00,000 from
Mr. M (Money Lender)
a) Compute the total income of the firm and the tax payable by it.
b) You are also required to answer if there was carried forward depreciation of Rs. 2,88,000.
c) Explain the tax obligations associated with outstanding loan.


F08 – A 07 Full computation V.Imp
F08 – B 52 Firm and Presumptive Income
F08 – C 08 HUF is partner in firm V.Imp
F08 – E 20 Firm with 35AD activities

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-G . 1
2(23) (i) "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and
shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008
(6 of 2009);
(ii) "partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and
shall include,—
(a) any person who, being a minor, has been admitted to the benefits of partnership; and
(b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008
(6 of 2009);
(iii) "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932),
and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008
(6 of 2009);
40(b) in the case of any firm assessable as such,—

(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter
referred to as "remuneration") to any partner who is not a working partner; or
(ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner,
which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership
deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner,
which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed,
but which relates to any period (falling prior to the date of such partnership deed) for which such
payment was not authorised by, or is not in accordance with, any earlier partnership deed, so,
however, that the period of authorisation for such payment by any earlier partnership deed does not
cover any period prior to the date of such earlier partnership deed; or
(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms
of the partnership deed and relates to any period falling after the date of such partnership deed in
so far as such amount exceeds the amount calculated at the rate of twelve per cent simple
interest per annum; or

C.A. Kalpesh Sanghavi Partnership Firms - P a g e | F8-G . 2
(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and
is in accordance with, the terms of the partnership deed and relates to any period falling after the
date of such partnership deed in so far as the amount of such payment to all the partners during the
previous year exceeds the aggregate amount computed as hereunder :—
(a) on the first Rs. 3,00,000 of the Rs. 1,50,000 or at the rate of 90 per
book-profit or in case of a cent of the book-profit, whichever is
loss more;
(b) on the balance of the book- at the rate of 60 per cent :
profit
Provided that in relation to any payment under this clause to the partner during the previous year relevant
to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may,
at any time during the said previous year, provide for such payment.
Explanation 1.—Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such
partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so
represented", respectively),—
(i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be
taken into account for the purposes of this clause;
(ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm
to the person so represented shall be taken into account for the purposes of this clause.
Explanation 2.—Where an individual is a partner in a firm otherwise than as partner in a representative capacity,
interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such
interest is received by him on behalf, or for the benefit, of any other person.
Explanation 3.—For the purposes of this clause, "book-profit" means the net profit, as shown in the
profit and loss account for the relevant previous year, computed in the manner laid down in Chapter
IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners
of the firm if such amount has been deducted while computing the net profit.
Explanation 4.—For the purposes of this clause, "working partner" means an individual who is actively
engaged in conducting the affairs of the business or profession of the firm of which he is a partner;

C.A. Kalpesh Sanghavi Association of Persons - P a g e | F9-A . 1
Question (ID 01)
X, Y, and Z are three members of B & Co. (an AOP). Profit and loss account of the firm for the year ending is
as follows:
Cost of goods sold 1,34,000 Sales 4,00,000

Interest to the members : Short term capital gain 2,10,000
X 9,000 Interest on drawings
Y 27,000 X 2,000
Z 35,000 Y 1,000
Salary to members Z 3,000
Y 65,000
Z 70,000
Other expenses 60,000
Net profit 2,16,000
Total 6,16,000 Total 6,16,000
Other information:
1. The AOP gives a donation of Rs.46,000 to a public charitable trust (not debited to P & L Account) which is
eligible for section 80G deduction.
2. Out of other expenses, Rs.26,000 is not deductible by virtue of section 43B.
Find out the tax liability of the AOP and members under the following situations:
Situation 1-
The profit sharing ratio of X, Y and Z is 2 : 3 : 5. Other incomes of members are given below:
Investment sections 80C
Amount Nature of income PPF contribution
and 80U
X 130,000 Bank interest Rs. 6,000 mediclaim 14,000
Y 206,000 Interest on Government ------ 16,000
securities
Z 25,000 Interest on company deposit Rs.3,000 mediclaim 28,000

Situation 2 –
The profit sharing ratio of X, Y and Z is 3 : 2: 5. Other incomes of members are given below:
Amount of income Donation Paid PPF deposit
X 1,30,000 6,000 2,000
Y 1,06,000 26,000 36,000
Z 4,25,000 15,000 6,000
Situation 3 –
One of the members X is a closely – held foreign company and the profit- sharing ratio of X. Ltd. Y and Z
is 5 : 3 : 2. Other income of the members is as follows:
X. Ltd. (foreign company) Nil
Y 32,000
Z 40,000
Situation 4 –
From the available information, it is not possible to find out the profit-sharing ratio.
Other income of members is:
Amount Nature of income
X 40,000 Bank interest
Y 60,000 Rent (taxable)
Z 8,65,000 Interest on company deposit
Z 15,000 Being 60% share from D & Co.
(An AOP which has not paid tax because its taxable income is lower than the
basic amount not chargeable to tax.)
Situation 5 –
It is not possible to determine the profit-sharing ratio of members. One of the members, X is closely held foreign
company. Other income of members is as follows:
X Ltd. 1,17,000
Y 3,60,000
Z 9,30,000

Question (ID 05)
Two individuals A & B and one foreign company X Ltd. who are sharing profits and losses in the ratio of 2:2:1
are members of an AOP. The total income of AOP has been determined at Rs. 2,00,000. The separate income
of members of AOP was s under.
A 90,000
B 1,10,000
X Ltd. (a foreign company) Nil
1. Compute the tax leviable on the income of AOP.

2. What will be your answer if instead of X Ltd., C (an individual) had been the member of AOP

Question (ID 03)
Prakash, a member in two AOPs, namely, “AOP & Co.” and “Prakash & Akash”, provides the following details
of his income:
(a) “AOP & Co”, assessed at normal rates of tax, had credited in his account, amount of Rs. 2,96,000 as
salary and Rs. 20,000 as share of profit and 96,000 as interest.
(b) A house property located at Jaipur was purchased on 1.7.2001 with the borrowed capital in “Prakash
& Akash” jointly shared equally and occupied by both of them for self residential purposes. Total
interest paid for the year on the borrowed capital was Rs. 1,00,000.
Compute the income and the tax liability thereon and support your answer with brief reasons and the provisions
of the Act.

Question (ID 06)

The profit and loss account of the AOP viz. M/s R and S, sharing profit and losses in the ratio of 2:1 for the
previous year is as follows:
Cost of goods sold 42,45,000 Sales 51,00,000
Remuneration of member R 1,80,000 Dividends 25,000
Remuneration of member S 1,20,000 Long-term capital gain 4,40,000
Remuneration to employees 2,70,000
Interest to R 48,000
Interest to S 36,000
Other expenses 1,60,000
(Includes Retrenchment
Compensation Rs. 25,000
paid to employees (in violation of their
terms of employment) for
Shutting down one of line of
Manufacturing process during the year.)
GST outstanding 30,000
Net Profit 4,76,000
55,65,000 55,65,000
Additional information is given below:
(1) Other expenses include the following:

(i) Entertainment expenses Rs. 40,000
(ii) Watches costing of Rs. 2,500 each given to 12 dealers who exceed the sales target fixed under
sales promotion scheme.
(iii) Employer’s contribution to provident fund included in other expenses, amounting to Rs. 6,000 was
paid by cheque on 15-11-AY.
(2) Rs. 30,000 paid as advance in cash to Mr. Sunder who is supplier of raw material. Mr. Sunder has
supplied the material on 21st June of AY and has raised invoice Rs. 68,000 on that date. Balance
Payment is made to him in cash on 12th December of AY however in the next year material could
not be used in production process and it was shown as closing stock of next year.
(3) Outstanding GST was paid on 3-9-PY
(4) Other incomes of R and S 9,64,000 and 1,56,000
You are required to compute.
(i) Total income of the AOP (ii) Tax liability of the AOP (iii) Tax liability of the members.

2(29C) "maximum marginal rate" means the rate of income-tax (including surcharge on income-tax, if any)
applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case
may be, body of individuals as specified in the Finance Act of the relevant year
40(ba) in the case of an association of persons or body of individuals [other than a company or a co-operative
society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law
corresponding to that Act in force in any part of India], any payment of interest, salary, bonus, commission
or remuneration, by whatever name called, made by such association or body to a member of such
association or body.
Explanation 1.—Where interest is paid by an association or body to any member thereof who has also paid
interest to the association or body, the amount of interest to be disallowed under this clause shall be
limited to the amount by which the payment of interest by the association or body to the member
exceeds the payment of interest by the member to the association or body.
Explanation 2.—Where an individual is a member of an association or body on behalf, or for the benefit,
of any other person (such member and the other person being hereinafter referred to as "member in a
representative capacity" and "person so represented", respectively),—
(i) interest paid by the association or body to such individual or by such individual to the association
or body otherwise than as member in a representative capacity, shall not be taken into account
for the purposes of this clause;
(ii) interest paid by the association or body to such individual or by such individual to the association or
body as member in a representative capacity and interest paid by the association or body to the
person so represented or by the person so represented to the association or body, shall be taken
into account for the purposes of this clause.
Explanation 3.—Where an individual is a member of an association or body otherwise than as
member in a representative capacity, interest paid by the association or body to such individual
shall not be taken into account for the purposes of this clause, if such interest is received by him
on behalf, or for the benefit, of any other person.

167B. (1) Where the individual shares of the members of an association of persons or body of individuals
(other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860
(21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of
the income of such association or body are indeterminate or unknown, tax shall be charged on the total
income of the association or body at the maximum marginal rate :
Provided that, where the total income of any member of such association or body is chargeable
to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total
income of the association or body at such higher rate.
(2) Where, in the case of an association of persons or body of individuals as aforesaid not being a case falling
under sub-section (1),—
(i) the total income of any member thereof for the previous year (excluding his share from such
association or body) exceeds the maximum amount which is not chargeable to tax in the case of
that member under the Finance Act of the relevant year, tax shall be charged on the total income of
the association or body at the maximum marginal rate;
(ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are
higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total
income of the association or body which is or are relatable to the share or shares of such member or
members at such higher rate or rates, as the case may be, and the balance of the total income of
the association or body shall be taxed at the maximum marginal rate.
Explanation.—For the purposes of this section, the individual shares of the members of an association of persons
or body of individuals in the whole or any part of the income of such association or body shall be deemed to be
indeterminate or unknown if such shares (in relation to the whole or any part of such income) are
indeterminate or unknown on the date of formation of such association or body or at any time
thereafter.

C.A. Kalpesh Sanghavi Association of Persons - P a g e | F9-B . 1
This will be updated duly.

C.A. Kalpesh Sanghavi Association of Persons - P a g e | F9-C . 1
Question (ID 01) (AMT)

X & Co. is a partnership firm. The firm is eligible for deduction under section 35AD of Rs. 14.00,000 (because
of this deduction the firm cannot claim depreciation under section 32 of Rs. 80,000). Business income of the
firm before deduction under section 35AD and before depreciation of Rs. 80,000 is Rs. 15,00,000. Deduction
available under section 80-IB is Rs. 50,000. Income from other sources is Rs. 1,00,000. The firm has given a
donation of Rs. 90,000 to a political party. Find out the tax liability of the firm.
Question (ID 02) (AMT)

X (31 years) is a resident individual. For the previous year, his business income is Rs. 50,50,000. He does not
have any other income. He is eligible for deduction of Rs. 1,50,000 under section 80C, Rs. 15,000 under section
80D, Rs. 80,000 under section 80G and Rs. 45,00,000 under section 80-IB. find out the tax liability of X

C.A. Kalpesh Sanghavi Association of Persons - P a g e | F9-C . 2
115JC. (1) Notwithstanding anything contained in this Act, where the regular income-tax payable for a previous
year by a person, other than a company, is less than the alternate minimum tax payable for such previous
year, the adjusted total income shall be deemed to be the total income of that person for such previous year and
he shall be liable to pay income-tax on such total income at the rate of eighteen and one-half per cent.
(2) Adjusted total income referred to in sub-section (1) shall be the total income before giving effect to this
Chapter as increased by—
(i) deductions claimed, if any, under any section (other than section 80P) included in Chapter VI-A under
the heading "C.—Deductions in respect of certain incomes";
(ii) deduction claimed, if any, under section 10AA; and
(iii) deduction claimed, if any, under section 35AD as reduced by the amount of depreciation allowable in
accordance with the provisions of section 32 as if no deduction under section 35AD was allowed in
respect of the assets on which the deduction under that section is claimed.
(3) Every person to whom this section applies shall obtain a report, in such form as may be prescribed,
from an accountant, certifying that the adjusted total income and the alternate minimum tax have been computed
in accordance with the provisions of this Chapter and furnish such report on or before the due date of furnishing
of return of income under sub-section (1) of section 139.
Following sub-section (4) shall be inserted after sub-section (3) of section 115JC by the Finance Act, 2018,
w.e.f. 1-4-2019 :
(4) Notwithstanding anything contained in sub-section (1), where the person referred to therein, is a unit
located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange, the provisions of sub-section (1) shall have effect as if for the words "eighteen and one-half per
cent", the words "nine per cent" had been substituted.

C.A. Kalpesh Sanghavi Unit in IFSC - P a g e | F9-D . 1
Question (ID 01) (IFSC)
Company Zora Ltd is a unit in “International Financial Services Centre” which has been approved by the Central
Government under of section 18 of Special Economic Zone act on 15 may of PY. It is deriving income solely
in convertible foreign exchange. During the year it has derived net income of US $ 10,10,500. Out of the current
year income it has distributed profits (dividend) of US $ 7,00,000 to its shareholders in the month of October.
One of the shareholder Mr. X is holding 40 % share in company Zora Ltd. You are required to discuss the tax
treatment in the hand of Company and its shareholders. Conversion rate of 1 US $ to be taken as 70 INR. (4
mark type for Nov 2018 CA Final Exam)

80LA. (1) Where the gross total income of an assessee,—

(i) being a scheduled bank, or, any bank incorporated by or under the laws of a country outside India; and
having an Offshore Banking Unit in a Special Economic Zone; or
(ii) being a Unit of an International Financial Services Centre,
includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the
provisions of this section, a deduction from such income, of an amount equal to—
(a) one hundred per cent of such income for five consecutive assessment years beginning with the
assessment year relevant to the previous year in which the permission, under clause (a) of sub-section
(1) of section 23 of the Banking Regulation Act, 1949 (10 of 1949) or permission or registration under
the Securities and Exchange Board of India Act, 1992 (15 of 1992) or any other relevant law was
obtained, and thereafter;
(b) fifty per cent of such income for five consecutive assessment years.
(2) The income referred to in sub-section (1) shall be the income—
(a) from an Offshore Banking Unit in a Special Economic Zone; or
(b) from the business referred to in sub-section (1) of section 6 of the Banking Regulation Act, 1949 (10 of
1949) with an undertaking located in a Special Economic Zone or any other undertaking which
develops, develops and operates or develops, operates and maintains a Special Economic Zone; or
(c) from any Unit of the International Financial Services Centre from its business for which it has been
approved for setting up in such a Centre in a Special Economic Zone.
(3) No deduction under this section shall be allowed unless the assessee furnishes along with the return of
income,—
(i) the report, in the form specified by the Central Board of Direct Taxes under clause (i) of sub-section
(2)2 of section 80LA, as it stood immediately before its substitution by this section, of an accountant as
defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been
correctly claimed in accordance with the provisions of this section3; and
(ii) a copy of the permission obtained under clause (a) of sub-section (1) of section 23 of the Banking
Regulation Act, 1949 (10 of 1949).
section 2 of the Special Economic Zones Act, 2005;
(b) "scheduled bank" shall have the same meaning as assigned to it in clause (e) of section 2 of the Reserve
Bank of India Act, 1934 (2 of 1934);
(c) "Special Economic Zone" shall have the same meaning as assigned to it in clause (za) of section 2 of
the Special Economic Zones Act, 2005;
(d) "Unit" shall have the same meaning as assigned to it in clause (zc) of section 2 of the Special Economic
Zones Act, 2005.


F09 – A 03 Computation of Member V.Imp
F09 – A 06 Full computation with tax liability V.Imp
F09 – C 01 AMT
F09 – D 01 IFSC

C.A. Kalpesh Sanghavi Private and Public Trust - P a g e | F10-A . 1
Question 1 (ID 051) (Private Trust) (Revision / Home work)

Assessee trust was a 20% beneficiary of the main trust & its only source of income was 5% share in the income
of main trust. Trust claims that its share should be taxed at normal rate as none of the beneficiaries was a
beneficiary in any other trust & none of them had income exceeding maximum limit not liable to tax. But A.O.'s
view is that assessee was a chain trust created for avoiding tax, so income should be charged at maximum
marginal rate (MMR). What is your opinion ?
Your Options are

A 164 (1) applies and thus tax rate of MMR will be applicable
B 164 (1) Prov 1 Applies Thus tax rate of AOP will be applicable
C 164 is not applicable
D 164A is applicable

The settler of the trust amended certain clauses to rectify certain mistakes in order to make the trust wholly for
charitable & religious purposes. Can the trust acquire such status and claim the exemption u/s. 11?
Your Options are

A Exemption of 11 is not available
B Exemption of 11 is available
C Private trust can not be converted to public trust.
D None of above


A trust deed named granddaughter of the author of the trust as the beneficiary on attaining majority. During the
P.Y., she had not attained majority. The payment of income to the beneficiary was left to the absolute discretion
of the trustees. The trustees claim that beneficiary is only one who is known. Hence, income of the trust should
not be charged at MMR. Do you agree with this view?
Your Options are

A Share of beneficiary is not determined but section 161 will be applicable.
B Since beneficiary is only one share of member is determined and thus section 161 is
applicable.
C Since beneficiary is only one but she is minor, her rights in trust will accrue only when she
attains majority in future years. Thus 164 will be applicable.
D 2 out of 3 Either of the above (A or B or C) are acceptable.

An assessee was a trustee of a trust created by Will. She was a wife of the executor (T). She was the sole trustee
of the trust as well as beneficiary. She had a life interest in the trust and after her death the children were to
become beneficiaries in the shares determined in the deed and immovable property used by her as residence
which was sold and new house was purchased. She claimed u/s.54. A.O. disallowed it. Do you think it is proper?
Your Options are

A 54 exemption is available
B 54 exemption is not available to trust
C This trust is not a genuine trust.
D 54 exemption is available to Individual, HUF and Trust, thus allowed to trust.

Character of discretionary trust is changed by a resolution passed by trustees to give income to only one
beneficiary out of the many.
Your Options are

A Section 164 will apply and thus rates of taxes to trust will be MMR
B Since resolution is passed to give benefit to one, section 161 will apply.
C Section 164 will apply and thus rates of taxes to trust will not be MMR
D “discretionary trust” will always be covered by 164 and rates of tax will be MMR.


There is a private specific trust in which the shares of the beneficiaries are certain. Mr. L and Mr. M are the
trustees. The beneficiaries are all minors and there are several items of assets as envisaged by section 2(ea) of
wealth tax act as stood in 2009. Mr. B, the father of the minor children also has taxable net wealth. What is the
best possible manner in which the Assessing Officer should complete the income tax assessment of the trust, so
as to maximize the tax revenue?
Your Options are

A Wealth tax has been abolished.
B Since beneficiary are individuals trust should be treated as like individual.
C Assessing officer take the view that share is not determined thus MMR should be applicable
on property income.
D All of the above

Question 7 (ID 053) (Private Trust)

A trust was created with a sole beneficiary, it was provided in the deed that all the assets of the trust were to be
regarded as one single fund. Can it be said that vesting of income in the beneficiary is not a precondition to
claim that sec.164 should not apply. The trustees had the discretion of the time at which to extend the benefit to
the beneficiary. Do you think section 164 is applicable?
Question 8 (ID 032 001) (Private Trust)

Welfare trust is a private discretionary trust, which derived income from the following sources.
Income from House Property 25,000

Interest from Indian Companies 175,000
Other Incomes / Business Income (Net) 150,000
Capital gains - Long term 30,000
What will be the tax liability of the trust ?
Question 9 (ID 032 021) (Private Trust)

XY trust derives a total income of Rs. 6,40,000. Out of Rs 6,40,000, Rs. 1,40,800 is meant for public charitable
purposes and the balance Rs. 4,99,200 is for the benefits of X (29 years) and Y (31 years) whose individual
shares are not known. The trust has actually applied Rs. 40,000 toward public charitable purposes during the
previous year. Determine the tax liability of the trust for the assessment year under the following situations:
a) X and Y neither beneficiaries under any other trust nor their taxable income exceeds Rs. 1,00,000.
b) X is member of another trust (no income is derived for the trust), though taxable income of X and Y
does not exceed Rs. 1,00,000.
c) Taxable income of X and / or Y is Rs. 8,00,010 though they are not beneficiaries under any other trust

Refer the Bare act for Section 160 to 166 in chapter ID F52 (representative assessee)

C.A. Kalpesh Sanghavi Private and Public Trust - P a g e | F10-B . 1
Question 1 (ID 039) (Charitable Trust) (Revision / Home work)

The assessee, a Charitable Trust received donations exceeds Rs.8 lacs through the executor of a will. The
executor gave a letter stating that the donation was made towards the corpus of the trust. In the will, executor
was given the direction to donate the said sum but was not mentioned that it was donated towards the corpus.
Assessing officer was of the opinion that the executor cannot assume for himself any role other than the one
envisaged in the will. Hence, the A.O. held the donations to be general donations. Do you agree?

The Assessee Company was incorporated and registered under Companies Act as a guarantee Company and the
status was accepted by the revenue. It was not a company u/s.25 of Companies Act. Can it automatically make
the Assessee and AOP? The main object was of public utility and not of earning profit. So, subsidiary objects
to be regarded as mere power for achieving the means.

A Charitable Trust applied for registration u/s 12A Commissioner made a number of suggestions for amendment
of by-laws because he considered that if those clauses remain in the deed, trust will not be able to claim
exemption u/s. 11. The trust wants to file a writ petition on the argument that the Commissioner is exceeding
his powers. Do you find any merits in his claim ?
Question 4 (ID 031) (Trust with business income) (Revision / Home work)
A trust had main objects of educational, medical & relief to poor. It was authorized to establish, maintain & run
such institutions to carry out the objectives, for the benefit of general public. One clause of the trust deed
empowered the trustees to invest funds & carry on business. The trustees cached out the business of purchasing
& selling cotton yam. The trust claims exemption for this income contending it to be income from property held
for charitable purpose. A.O. denied it. Do you agree?
Primary purpose of a company was provided specialized information in respect of circulation of newspapers &
periodicals through the process of independent audit. Can it be said that it is engaged in activity of general public
utility? Can it claim exemption u/s. 11? A.O. disallows the exemption for income from subscription, application
fees & entrance fees. Is it correct?
Above Questions are included in MCQ pattern
Exclusive Place for CA Final Taxation

The Assessee, a charitable trust, received certain amount from an industry to be spent for agricultural
development and specially for organizing Kisan rally. According to A.O., the income is not for charitable
purpose and it should be considered as taxable. According to assessing Officer (A.O.) the receipt from the donor
was not towards the corpus. Do you agree?
Question 7 (ID 034) (Violations) (Revision / Home work)

Assessee trust purchased a refrigerator & kept it at the residence of managing trustee before moving it into
orphanage. Can it be said that trust property was used for the benefit of prohibited person u/s. 13(3) &
accordingly can the exemption be denied? Assessee says, the words "Land, building & other property" refer to
only immovable property. So refrigerator is not covered by it. What are your views?

Object of the assessee trust was to provide general & vocational education. Its funds were invested in 2 firms
where does relatives of trustees were not only partners but also had a substantial interest. Can the trust claim
exemption U/s. 11?

The assessee society registered u/s 12 gave money to an institution for utilisation whose objects were similar as
per the bye-laws, were similar to those of this society. Assessing officer held that the amount of investment or
deposit was in infrigement of Sec. 13(1)(d) r.w. Sec. 11 (5). He denied the exemption u/s. 11. Is it justified?

Author of the Trust is Mr. X His son has substantial interest in ABC Ltd. That company has donated shares to
this trust The Assessing officer wants to deny exemption u/s 11 by invoking the provisions of sec 13(2). Do you
agree ?

A trust was set up with the objects which included inter-alia to impact knowledge and education primarily in
Gujarati Language, established and maintain institutions, reading rooms etc. and also promote social, moral and
religious standards of the members. AO denied the exemption u/s 11 by invoking the provisions of sec 13(i)(b)
of the ground that Trust was established mainly for Gujarati speaking persons. Is it justified ?
Above Questions are included in MCQ pattern

Question (ID 032 020) (Charitable Trust)
Varinder Charitable Trust, a charitable Trust registered u/s 12A of the Income Tax Act, 1961 has sold the plot
acquired two years back. The purchase price was Rs. 2,00,000. The sale consideration was Rs. 3,60,000. A sum
of Rs. 10,000 was incurred in connection with the sale. The Trust acquired English mortgage [worth Rs.
3,10,000] of an Immovable property utilizing the sale proceeds. Is the Trust entitled to exemption u/s 11(1A)?

Question (ID 032 011)

A public charitable trust registered under section 12A, for the previous year derived gross income of Rs.16 lakh
, which consist of the following :
Income from properties held by trust

Including
Dividend Income of 20,000 from domestic company,
Interest income 8,500 which is exempt u/s 10(15)
Payment of income tax of 7,000
House Property Income of Rs. 30,000 (Fair Rent 32,000) 5,00,000
Income from business

In order to help the earthquake victims in Bangalore trust has organised horse races in
race course in Mumbai, income is net of organising expense and collection of entry fees in
to the horse race. 4,00,000
Voluntary contributions from public 7,00,000
The trust applied a sum of Rs.11.60 lakh towards charitable purposes during the year, which includes repayment
of loan taken for construction of orphan home Rs.3.60 lakh.
Determine the taxable income of the trust.

Question (ID 62) (Charitable Trust)

XYZ is a public charitable trust created under a trust deed for providing relief to physically challenged persons
and registered under section 12A. The following are the particulars of receipts of the trust during the year:
Particulars Rs. in lakh
Income from properties held by the trust (net) (Received 12 and accrued 3) 15
Income (net) from business (incidental to main objects) 14
Voluntary contributions from public (including the corpus donation of Rs. 7 lakh) 18
The trust applied Rs 18 lakh towards various activities and programmes undertaken for the benefit of physically
challenged persons during the year. The trust has also paid Rs. 8 lakh towards repayment of a loan taken two
years back for the purpose of construction of its centre for training the handicapped persons in various handicraft
works and sports.
Determine the tax liability, if any, of the trust and also state how the trust can mitigate such liability.

An institution having its main object as advancement of general public utility received 30 lakhs in aggregate
during year from an activity in the nature of trade. The total receipts of the institution, including donations, was
140 lakhs. It applied 85% of its total receipts from such activity during the same year for its main object i.e.
advancement of general public utility
1) What would be the tax consequence of such receipt and application thereof by the institution?
2) Would your answer be different if the institutions total receipts had been 150 lakhs (instead of 140 lakhs) in
aggregate
3) What would be your answer if the main object of the institution is ‘relief of the poor’ and the institution
receives 30 Iakhs from a trading activity, when its total receipts are 140 lakhs and applies 85% of the said
receipts for its main object’
A charitable trust derives its income from the business of providing mineral water to various companies situated
in Software Technology Perk in Hyderabad. A sum of 30 lacs has been derived as net income from such business
activity, which has been applied for the object of general public utility. The total receipts of the trust during the
year was 140 lacs. Examine the taxability of application of the income, if the income so derived relates to the
year. Would your answer be different if the trust runs a school in a backward district end applies the profits from
the business for such school’s activity?


“Charities Unlimited” a charitable trust is running a hospital and medical institution has made its services
available to trustees of the trust. The value of medical service and hospital service made available to trustees of
trust is Rs. 30,000. Other details of the income and expense of the trust is given below.
Gross collection from the counter of the hospital 300,000
Voluntary donations received
(Rs. 100,000 is with specific direction to form part of the corpus) 450,000
Expenditure incurred for maintaining hospital 250,000
Actual expenditure incurred for making its services available to trustees of trust a specified
person u/s 13 20,000
Amount applied toward the charitable objects 200,000
Amount invested in Units of Unit trust of India 250,000
You are required to compute the total income of the trust.

X Public Charitable Trusts runs a hospital, which is derived income of Rs.250 lakh, from its operational
activities. Expenses incurred to earn such income are Rs.55 lakh. Depreciation on various assets used in the
hospital is Rs.15 lakh. Out of the income of Rs.250 lakh. the amount accrued but non received during the year
is Rs.20 lakh. The institution earmarked and set apart Rs.30 lakh to give as advance for a building intended to
be taken on lease for expansion of the hospital, but the amount was paid on April 7, of assessment year, as the
lease agreement could not be signed during the previous year. The trust has got an ERP package developed and
installed by an IT company during the year. The total cost to the trust on account of the ERP package was Rs.85
lakh. Advice the trust on its total income, if the trust has incurred Rs.12 lakh for purchase of a number of desktop
and laptop computers for use in the hospital.


AB Memorial Trust which runs hospitals is registered under section 12A. Following particulars relevant for the
previous year are furnished to compute tax liability of the trust.
1. Income from running of hospitals: Rs. 14.25 lakh.
2. Donation received (including anonymous donation Rs. 3 lakh): Rs. 5.75 lakh.
3. Amount applied for the purposes of hospital: Rs. 13 lakh.
4. The trust had accumulated Rs. 15 lakh under section 11(2) in the financial year 6 years back for a
period of five years for extension of one of its hospitals. The trust has spent Rs. 13.50 lakh for the
said purpose till 01.04.PY.
Compute the taxable income of the trust and tax payable by AB Memorial Trust.


Jyoti Education Centre, a charitable institution registered under section 12AA of the Income –tax Act runs
school for primary and secondary education. The following particulars are furnished to you by the institution:
PARTICULARS ( in Lakh)
(i) Gross Receipts from students towards admission Fees, tuition fees, development 152.75
fees, laboratory fees, etc.
(ii) Dividend received on units of mutual funds specified in section 10(23D). 16
(iii) Donation received (including anonymous donation 2.50 lakh). 10.50
(iv) Grant from State Government. 7.25
(v) Amount applied for purpose of schools. 90.60
(vi) Purchase of computer and laboratory equipments. 21.40
(vii) Included in (v) above, a sum of 3.50 lakh, being the amount applied for the benefit
of the founder of the Institution.
(viii) The institution had accumulated 20 lakh under section 11(2) in the 3 years back for
a period of two years for acquiring and developing a plot of land for construction
of a new school. Land was purchased for 15 lakh and development was made at a
cost of 2 lakh.
(ix) Excess of expenditure over income of 2 years back. 35
Compute total income of the institution and tax payable.

A public charitable trust registered under section 12AA runs a hospital and also a medical college. It furnishes
you the following information for the year:
i) Gross receipt 425 lakhs.

ii) Income from business - incidental to main objects 2 lakhs.
iii) Voluntary contributions received from public 32 Iakhs. It include corpus donation of 3 Iakhs and
anonymous donation of 5 lakhs. (Voluntary contributions are included in Gross receipt given in (i)
above.)
iv) Hospital operational expenses incurred 107 lakhs. This does not include capital expenditures and
depreciation. 2 lakhs was paid in cash on 1st July as advance salary to a Doctor working in hospital
who was in urgent need for money for his personal purposes.
v) Income from Medical College (solely for education purpose) 10 lakhs. Gross receipts of college for
the year 90 Iakhs.
vi) Gross receipt given in (i) above includes a sum of 55 lakhs which has accrued but not received.
However, a sum of 18 lakhs was received only on 31st day of March.
vii) The trust set apart 80 Iakhs for acquiring a building to expand its hospital. But the amount was paid
in May of next year when sale deed was registered in its name.
viii) In June, the trust purchased and installed new computer software for 28 lakhs. The rate of
depreciation is 60% as per Income-tax Act, 1961.
ix) The trust incurred 35 lakhs towards purchase of laptops, computers and printers for the hospital.
x) It repaid loan of 15 Iakhs taken earlier for construction of hospital building.
Compute the total income of the trust in order to avail maximum benefits within the four corners of law.


Mathi Charitable Trust registered under section 12AA, following cash system of accounting, furnishes you the
following Information:
1. Gross receipts from hospital by name “Full Cure” 400 lakhs.

2. Gross receipts from college by name “India Arts College” 180 lakhs (offering recognized degree
courses).
3. Corpus donations by way of cheque 30 lakhs and by way of cash 5 lakhs.
4. Anonymous donations by cash 10 lakhs.
5. Administrative expenses for hospital 220 lakhs and for college 100 lakhs. The administrative expense
includes rent of premises used for India Arts College on which tax is deducted in the month of June but
the payment was made in the month of December.
6. Fees not realized from patients and from students of the college as on March 6.5 lakhs.
7. Depreciation on assets of the trust The entire cost of assets 300 lakhs claimed as application in the earlier
years
8. Acquired a building for 120 lakhs on 1st June for expansion of hospital (cost of land included therein 100
lakhs). Stamp duty value of the land and building on the date of registration of sale deed 140 lakhs.
9. The trust gave donation of 25 lakhs to Gandhiji Free Trust having Objects Of charitable nature registered
under section 12AA but not similar to the objects of the donor trust.
You are required to compute the total income of the trust and its income-tax liability in such a manner that it
can avail the optimal benefit within the four comers of the Income- Tax Act, 1961.
Note: The trust does not want to seek accumulation of income by virtue of section 11(2) of the Act.

C.A. Kalpesh Sanghavi Private and Public Trust - P a g e | F10-C . 1
Question (ID 101) (Charitable Trust) (Home Work)

Holy Mission Charitable Trust filed an application in Form 10G along with copies of trust deed and registration
certificate, for grant of approval under section 80G(5), with the approving authority. In order to verify the stated
objects of education, social activities etc. and the facts in the application, the trust was asked to produce the
relevant books of account, vouchers, donation book and minutes in original.
After considering the same, the Commissioner reject the application for approval under section 80G(5) on the
ground that the trust had failed to apply 85% of its income.
Whether the order of Commissioner is justified in law? (4 marks)
Question (ID 102) (Charitable Trust) (Home Work)
Govind Charitable Trust registered under section 12AA is engaged in imparting Yoga to the public. Its aggregate
annual receipt was Rs. 60 lakhs and it spent only Rs. 40 lakhs by way of remuneration to yoga teachers and by
way of administration expenses. The trust applied for approval under section 80G to the Commissioner of
Income-tax. The application was rejected on the ground that it had not spent 85% of its income for charitable
purposes. Decide the validity of the rival contentions.


The assessee, a Charitable Trust received donations exceeds Rs.8 lacs through the executor of a will. The
executor gave a letter stating that the donation was made towards the corpus of the trust. In the will, executor
was given the direction to donate the said sum but was not mentioned that it was donated towards the corpus.
Assessing officer was of the opinion that the executor cannot assume for himself any role other than the one
envisaged in the will. Hence, the A.O. held the donations to be general donations. Do you agree?
Your Options are

A It is corpus donation
B It is non corpus donations
C It is not a donation, instead it is revenue receipt taxable in hands of trust.
D It is not a donation, instead it is capital receipt taxable in hands of trust.

The Assessee Company was incorporated and registered under Companies Act as a guarantee Company and the
status was accepted by the revenue. It was not a company u/s.25 of Companies Act. Can it automatically make
the Assessee and AOP? The main object was of public utility and not of earning profit. So, subsidiary objects
to be regarded as mere power for achieving the means.
Your Options are

A Main objects are relevant
B Main objects are not wholly relevant
C Section 11 exemption can be given if it is a registered body under income tax act
D None of above

A Charitable Trust applied for registration u/s 12A Commissioner made a number of suggestions for amendment
of by-laws because he considered that if those clauses remain in the deed, trust will not be able to claim
exemption u/s. 11. The trust wants to file a writ petition on the argument that the Commissioner is exceeding
his powers. Do you find any merits in his claim ?
Your Options are

A Commissioner is indeed exceeding his powers
B Commissioner action is justified and within the corners of law
C The trust is not correctly advised to file writ
D None of the above

A trust had main objects of educational, medical & relief to poor. It was authorized to establish, maintain & run
such institutions to carry out the objectives, for the benefit of general public. One clause of the trust deed
empowered the trustees to invest funds & carry on business. The trustees cached out the business of purchasing
& selling cotton yam. The trust claims exemption for this income contending it to be income from property held
for charitable purpose. A.O. denied it. Do you agree?
Your Options are

A The trust can carry out systematic business, thus income from selling cotton yarn will be
covered by section 11.
B The trust can carry out only incidental business, business income from cotton yarn will be
covered by section 11.
C Purchase and sale of cotton yarn will be fully taxable income as per section 28.
D AO is justified in denial of section 11 because it is cotton yarn and not polyester yarn.
Primary purpose of a company was provided specialized information in respect of circulation of newspapers &
periodicals through the process of independent audit. Can it be said that it is engaged in activity of general public
utility? Can it claim exemption u/s. 11? A.O. disallows the exemption for income from subscription, application
fees & entrance fees. Is it correct?
Your Options are

A Income from subscription, application fees & entrance fees can not be regarded as Charitable
donations.
B Income from subscription, application fees & entrance fees can be regarded as charitable
donations.
C It is general public utility since news papers are read by many persons in the country.
D Exemption u/s 11 can be claimed by the company.

The Assessee, a Registered charitable trust, received certain amount from an industry to be spent for agricultural
development and specially for organizing Kisan rally. According to A.O., the income is not for charitable
purpose and it should be considered as taxable. According to assessing Officer (A.O.) the receipt from the donor
was not towards the corpus. Do you agree?
Your Options are

A Amount received from Industry is Corpus Donation
B Amount received from Industry is Non Corpus Donation
C Amount received from Industry is Corpus / Non corpus Donation can be assumed by the AO
either ways to the advantage of the revenue.
D Can’t say in question whether it is corpus or non-corpus donation, since enough data is not
given.

Assessee registered trust purchased a refrigerator & kept it at the residence of managing trustee before moving
it into orphanage. Can it be said that trust property was used for the benefit of prohibited person u/s. 13(3) &
accordingly can the exemption be denied? Assessee says, the words "Land, building & other property" refer to
only immovable property. So refrigerator is not covered by it. What are your views?
Your Options are

A Use of Refrigerator by Managing Trustee is benefit to related party.
B Use of Refrigerator by Managing Trustee is not benefit to related party.
C Use of Refrigerator by Managing Trustee is allowed by law.
D Any two of the above points are acceptable

Object of the assessee trust was to provide general & vocational education. Its funds were invested in 2 firms
where does relatives of trustees were not only partners but also had a substantial interest. Can the trust claim
exemption U/s. 11?
Your Options are

A Investment in firm is covered by section 13
B Investment in firm is covered by section 11
C Investment in firm is covered by section 12
D Any two of the above points are not acceptable


The assessee society A registered u/s 12 gave money to an institution X for utilisation whose objects were similar
as per the bye-laws, were similar to those of this society. Assessing officer held that the amount of investment
or deposit was in infringement of Sec. 13(1)(d) r.w. Sec. 11 (5). He denied the exemption u/s. 11. Is it justified?
Your Options are

A Giving of money to institution X is investment of funds in hand of Society A
B Giving of money to institution X is application of funds in hand of Society A
C Giving of money to institution X is expense in hand of Society A
D None of above

Author of the Trust is Mr. X His son has substantial interest in ABC Ltd. That company has donated shares to
this trust The Assessing officer wants to deny exemption u/s 11 by invoking the provisions of sec 13(2). Do you
agree ?
Your Options are

A Donation received by trust in form of shares is allowed
B Donation received by trust in form of shares is allowed but within the given time trust should
sale / transfer it and invest as per 11(5)
C Donation received by trust in form of shares is allowed however it is at the liberty to trust to
treat it as either corpus or non corpus donations.
D Donation received by trust in form of shares is allowed and it will be treated always as non
corpus donation although it will be accounted as asset in the balance sheet of trust.

A trust was set up with the objects which included inter-alia to impact knowledge and education primarily in
Gujarati Language, established and maintain institutions, reading rooms etc. and also promote social, moral and
religious standards of the members. AO denied the exemption u/s 11 by invoking the provisions of sec 13(i)(b)
of the ground that Trust was established mainly for Gujarati speaking persons. Is it justified ?
Your Options are

A Trust for person speaking Gujarati is for Specific caste and thus covered by 13
B Trust for person speaking Gujarati is not for Specific caste and thus not covered by 13
C Trust for person speaking Gujarati is for Specific caste because persons living in Gujarat can
only speak Gujarati and thus covered by 13
D None of the above


F10 – A 32-001 Tax liability of Private Trust V.Imp
F10 – A 32-021 Mix or Private and Public Objects V.Imp
F10 –B 32-020 Capital Gains for Trust

F10 –B 22 11(2) adjustment V.Imp
F10 –B 61 Full Computation
F10 –B 63 Full Computation V.Imp
F10 –B 67 Full Computation V.Imp

C.A. Kalpesh Sanghavi Private and Public Trust - P a g e | F10-D . 1
Section 2
(15) "charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of
environment (including watersheds, forests and wildlife) and preservation of monuments or places or
objects of artistic or historic interest, and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable
purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or
any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or
any other consideration, irrespective of the nature of use or application, or retention, of the income from
such activity, unless—
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other
object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed
twenty per cent of the total receipts, of the trust or institution undertaking such activity or
activities, of that previous year;

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total
income of the previous year of the person in receipt of the income—
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent
to which such income is applied to such purposes in India; and, where any such income is accumulated
or set apart for application to such purposes in India, to the extent to which the income so accumulated
or set apart is not in excess of fifteen per cent of the income from such property;
(b) income derived from property held under trust in part only for such purposes, the trust having been
created before the commencement of this Act, to the extent to which such income is applied to such
purposes in India; and, where any such income is finally set apart for application to such purposes in
India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income
from such property;
(c) income derived from property held under trust—
(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote
international welfare in which India is interested, to the extent to which such income is applied to
such purposes outside India, and
(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to
which such income is applied to such purposes outside India:
Provided that the Board, by general or special order, has directed in either case that it shall not be
included in the total income of the person in receipt of such income;
(d) income in the form of voluntary contributions made with a specific direction that they shall form part
of the corpus of the trust or institution.
96
[Explanation 1].—For the purposes of clauses (a) and (b),—
(1) in computing the fifteen per cent of the income which may be accumulated or set apart, any such
voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;
(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of
eighty-five per cent of the income derived during that year from property held under trust, or, as the
case may be, held under trust in part, by any amount—
(i) for the reason that the whole or any part of the income has not been received during that year, or
(ii) for any other reason,
then—
(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India
during the previous year in which the income is received or during the previous year immediately
following as does not exceed the said amount, and
(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India
during the previous year immediately following the previous year in which the income was
derived as does not exceed the said amount,
may, at the option of the person in receipt of the income (such option to be exercised before the expiry
of the time allowed under sub-section (1) of section 139 for furnishing the return of income, in such
form and manner as may be prescribed97) be deemed to be income applied to such purposes during the
previous year in which the income was derived; and the income so deemed to have been applied shall
not be taken into account in calculating the amount of income applied to such purposes, in the case

referred to in sub-clause (i), during the previous year in which the income is received or during the
previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii),
during the previous year immediately following the previous year in which the income was derived.
98
[Explanation 2.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) read
with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a
specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as
application of income for charitable or religious purposes.]
Following Explanation 3 shall be inserted after Explanation 2 to sub-section (1) of section 11 by the
Finance Act, 2018, w.e.f. 1-4-2019 :
Explanation 3.—For the purposes of determining the amount of application under clause (a) or clause (b), the
provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A,
shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and
gains of business or profession".
(1A) For the purposes of sub-section (1),—
(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is
transferred and the whole or any part of the net consideration is utilised for acquiring another capital
asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied
to charitable or religious purposes to the extent specified hereunder, namely:—
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole
of such capital gain;
(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much
of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the
cost of the transferred asset;
(b) where a capital asset, being property held under trust in part only for such purposes, is transferred and
the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held,
then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been
applied to charitable or religious purposes to the extent specified hereunder, namely:—
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole
of the appropriate fraction of such capital gain;
(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount,
if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds
the appropriate fraction of the cost of the transferred asset.
Explanation.—In this sub-section,—
(i) "appropriate fraction" means the fraction which represents the extent to which the income derived from
the capital asset transferred was immediately before such transfer applicable to charitable or religious
purposes;
(ii) "cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the
purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of
any improvement thereto within the meaning assigned to that expression in*sub-clause (b) of †clause
(1) of section 55;
(iii) "net consideration" means the full value of the consideration received or accruing as a result of the
transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection
with such transfer.

(1B) Where any income in respect of which an option is exercised under clause (2) of the Explanation to sub-
section (1) is not applied to charitable or religious purposes in India during the period referred to in sub-clause
(a) or, as the case may be, sub-clause (b), of the said clause, then, such income shall be deemed to be the income
of the person in receipt thereof—
(a) in the case referred to in sub-clause (i) of the said clause, of the previous year immediately following
the previous year in which the income was received; or
(b) in the case referred to in sub-clause (ii) of the said clause, of the previous year immediately following
the previous year in which the income was derived.
(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with
the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or
religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part,
for application to such purposes in India, such income so accumulated or set apart shall not be included in the
total income of the previous year of the person in receipt of the income, provided the following conditions are
complied with, namely:—
(a) such person furnishes a statement in the prescribed form and in the prescribed99 manner to the Assessing
Officer, stating the purpose for which the income is being accumulated or set apart and the period for
which the income is to be accumulated or set apart, which shall in no case exceed five years;
(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-
section (5);
(c) the statement referred to in clause (a) is furnished on or before the due date specified under sub-section
(1) of section 139 for furnishing the return of income for the previous year:
Provided that in computing the period of five years referred to in clause (a), the period during which the income
could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of
any court, shall be excluded.
Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section
(1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any
trust or institution registered under section 12AA or to any fund or institution or trust or any university or other
educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v)
or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income
for charitable or religious purposes, either during the period of accumulation or thereafter.
(3) Any income referred to in sub-section (2) which—
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be
accumulated or set apart for application thereto, or
(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in
clause (a) of that sub-section or in the year immediately following the expiry thereof,
(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution
or trust or any university or other educational institution or any hospital or other medical institution
referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C)
of section 10,
shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so
accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be,
of the previous year immediately following the expiry of the period aforesaid.

(3A) Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of
the person in receipt of the income, any income invested or deposited in accordance with the provisions of clause
(b) of sub-section (2) cannot be applied for the purpose for which it was accumulated or set apart, the Assessing
Officer may, on an application made to him in this behalf, allow such person to apply such income for such
other charitable or religious purpose in India as is specified in the application by such person and as is in
conformity with the objects of the trust; and thereupon the provisions of sub-section (3) shall apply as if the
purpose specified by such person in the application under this sub-section were a purpose specified in the notice
given to the Assessing Officer under clause (a) of sub-section (2):
Provided that the Assessing Officer shall not allow application of such income by way of payment or credit
made for the purposes referred to in clause (d) of sub-section (3) of section 11:
Provided further that in case the trust or institution, which has invested or deposited its income in accordance
with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of
such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or
institution was dissolved.
(4) For the purposes of this section "property held under trust" includes a business undertaking so held, and
where a claim is made that the income of any such undertaking shall not be included in the total income of the
persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking
in accordance with the provisions of this Act relating to assessment; and where any income so determined is in
excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to
purposes other than charitable or religious purposes.
(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any
income of a trust or an institution, being profits and gains of business, unless the business is incidental to the
attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are
maintained by such trust or institution in respect of such business.
(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall
be the following, namely :—
(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings
Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central
Government under the Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the
business of banking (including a co-operative land mortgage bank or a co-operative land development
bank).
Explanation.—In this clause, "scheduled bank" means the State Bank of India constituted under the
State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of
the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under
section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980),
or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934
(2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of
1963);
(v) investment in any security for money created and issued by the Central Government or a State
Government;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal
whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government
or by a State Government;
(vii) investment or deposit in any public sector company:
Provided that where an investment or deposit in any public sector company has been made and such
public sector company ceases to be a public sector company,—
(A) such investment made in the shares of such company shall be deemed to be an investment made
under this clause for a period of three years from the date on which such public sector company
ceases to be a public sector company;
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this
clause for the period up to the date on which such investment or deposit becomes repayable by
such company;
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing
long-term finance for industrial development in India and which is eligible for deduction under clause
(viii) of sub-section (1) of section 36;
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes and which is eligible for deduction under clause
(viii) of sub-section (1) of section 36;
(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance for urban infrastructure
in India.
(a) "long-term finance" means any loan or advance where the terms under which moneys are loaned
or advanced provide for repayment along with interest thereof during a period of not less than five
years;
(b) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956
(1 of 1956);
(c) "urban infrastructure" means a project for providing potable water supply, sanitation and
sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;
(x) investment in immovable property.
Explanation.—"Immovable property" does not include any machinery or plant (other than machinery
or plant installed in a building for the convenient occupation of the building) even though attached to,
or permanently fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development
Bank of India Act, 1964 (18 of 1964);
(xii) any other form or mode of investment or deposit as may be prescribed.1
(6) In this section where any income is required to be applied or accumulated or set apart for application, then,
for such purposes the income shall be determined without any deduction or allowance by way of depreciation
or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under
this section in the same or any other previous year.
(7) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) of section
12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the
Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, then, nothing
contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income
derived from the property held under trust from the total income of the person in receipt thereof for that previous
year.

12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or
by an institution established wholly for such purposes (not being contributions made with a specific direction
that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed
to be income derived from property held under trust wholly for charitable or religious purposes and the
provisions of that section and section 13 shall apply accordingly.
(2) The value of any services, being medical or educational services, made available by any charitable or
religious trust running a hospital or medical institution or an educational institution, to any person referred to in
clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed
to be income of such trust or institution derived from property held under trust wholly for charitable or religious
purposes during the previous year in which such services are so provided and shall be chargeable to income-tax
notwithstanding the provisions of sub-section (1) of section 11.
Explanation.—For the purposes of this sub-section, the expression "value" shall be the value of any benefit or
facility granted or provided free of cost or at concessional rate to any person referred to in clause (a) or clause
(b) or clause (c) or clause (cc) or clause (d) of sub-section (3) ofsection 13.
(3) Notwithstanding anything contained in section 11, any amount of donation received by the trust or institution
in terms of clause (d) of sub-section (2) of section 80G in respect of which accounts of income and expenditure
have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the
manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims
of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not
transferred to the Prime Minister's National Relief Fund on or before the 31st day of March, 2004 shall be
deemed to be the income of the previous year and shall accordingly be charged to tax.

12A. (1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or
institution unless the following conditions are fulfilled, namely:—
(a) the person in receipt of the income has made an application for registration of the trust or institution in
the prescribed form2 and in the prescribed manner to the Principal Commissioner or Commissioner
before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation
of the trust or the establishment of the institution, whichever is later and such trust or institution is
registered under section 12AA :
Provided that where an application for registration of the trust or institution is made after the expiry of
the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such
trust or institution,—
(i) from the date of the creation of the trust or the establishment of the institution if the Principal
Commissioner or Commissioner is, for reasons to be recorded in writing, satisfied that the person
in receipt of the income was prevented from making the application before the expiry of the period
aforesaid for sufficient reasons;
(ii) from the 1st day of the financial year in which the application is made, if the Principal
Commissioner or Commissioner is not so satisfied:
Provided further that the provisions of this clause shall not apply in relation to any application made
on or after the 1st day of June, 2007;
(aa) the person in receipt of the income has made an application for registration of the trust or institution on
or after the 1st day of June, 2007 in the prescribed form3 and manner to the Principal Commissioner or
Commissioner and such trust or institution is registered under section 12AA;
4
[(ab) the person in receipt of the income has made an application for registration of the trust or institution,
in a case where a trust or an institution has been granted registration under section 12AA or has
obtained registration at any time under section 12A [as it stood before its amendment by the Finance
(No. 2) Act, 1996 (33 of 1996)], and, subsequently, it has adopted or undertaken modifications of the
objects which do not conform to the conditions of registration, in the prescribed form and manner5,
within a period of thirty days from the date of said adoption or modification, to the Principal
Commissioner or Commissioner and such trust or institution is registered under section 12AA;]
(b) where the total income of the trust or institution as computed under this Act without giving effect to the
provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to
income-tax in any previous year, the accounts of the trust or institution for that year have been audited
by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in
receipt of the income furnishes along with the return of income for the relevant assessment year the
report of such audit in the prescribed form6 duly signed and verified by such accountant and setting
forth such particulars as may be prescribed;
7
[(ba) the person in receipt of the income has furnished the return of income for the previous year in
accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that
section.]
(c) [***]
(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections
11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately
following the financial year in which such application is made:

Provided that where registration has been granted to the trust or institution under section 12AA, then, the
provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of
any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending
before the Assessing Officer as on the date of such registration and the objects and activities of such trust or
institution remain the same for such preceding assessment year:
Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust
or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such
trust or institution for the said assessment year:
Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or
institution which was refused registration or the registration granted to it was cancelled at any time under section
12AA.

12AA. (1) The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust
or institution made under clause (a) or clause (aa) 8[or clause (ab)] of sub-section (1) of section 12A, shall—
(a) call for such documents or information from the trust or institution as he thinks necessary in order to
satisfy himself about the genuineness of activities of the trust or institution and may also make such
inquiries as he may deem necessary in this behalf; and
(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities,
he—
(i) shall pass an order in writing registering the trust or institution;
(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,
and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable
opportunity of being heard.
(1A) All applications, pending before the Principal Chief Commissioner or Chief Commissioner on which no
order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred
on that day to the Principal Commissioner or Commissioner and the Principal Commissioner or Commissioner
may proceed with such applications under that sub-section from the stage at which they were on that day.
(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the
expiry of six months from the end of the month in which the application was received under clause (a) or clause
(aa) 9[or clause (ab)] of sub-section (1) of section 12A.
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained
registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996
(33 of 1996) and subsequently the Principal Commissioner or Commissioner is satisfied that the activities of
such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust
or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or
institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a
reasonable opportunity of being heard.
(4) Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted
registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it
stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that
the activities of the trust or the institution are being carried out in a manner that the provisions of sections
11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to
operation of sub-section (1) ofsection 13, then, the Principal Commissioner or the Commissioner may by an
order in writing cancel the registration of such trust or institution:
Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that
there was a reasonable cause for the activities to be carried out in the said manner.

13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the
previous year of the person in receipt thereof—
(a) any part of the income from the property held under a trust for private religious purposes which does
not enure for the benefit of the public;
(b) 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;
(bb) [***]
(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any
income thereof—
(i) if such trust or institution has been created or established after the commencement of this Act and
under the terms of the trust or the rules governing the institution, any part of such income enures,
or
(ii) 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 person referred to in sub-section (3) :
Provided that in the case of a trust or institution created or established before the commencement of
this Act, the provisions of sub-clause (ii) shall not apply 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
person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory
term of the trust or a mandatory rule governing the institution :
Provided further that in the case of a trust for religious purposes or a religious institution (whenever
created or established) or a trust for charitable purposes or a charitable institution created or established
before the commencement of this Act, the provisions of sub-clause (ii) shall not apply 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 person referred to in sub-section (3) in so far as such use or application
relates to any period before the 1st day of June, 1970;
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any
income thereof, if for any period during the previous year—
(i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983
otherwise than in any one or more of the forms or modes specified in sub-section (5) of section
11; or
(ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983
otherwise than in any one or more of the forms or modes specified in sub-section (5) of section
11 continue to remain so invested or deposited after the 30th day of November, 1983; or
(iii) any shares in a company, other than—
(A) shares in a public sector company ;
(B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5)
of section 11,
are held by the trust or institution after the 30th day of November, 1983:
Provided that nothing in this clause shall apply in relation to—
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or
institution as on the 1st day of June, 1973;
(ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus
shares allotted to the trust or institution;
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by
the trust or institution before the 1st day of March, 1983;
(iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section
(5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of
the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from
the end of the previous year in which such asset is acquired or the 31st day of March, 1993,
whichever is later;
(iii) any funds representing the profits and gains of business, being profits and gains of any previous
year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent
assessment year.
Explanation.—Where the trust or institution has any other income in addition to profits and gains of business,
the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate
books of account in respect of such business.
Explanation.—For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income
or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for
the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period
before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7
[other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972.
(2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the
income or the property of the trust or institution or any part of such income or property shall, for the purposes
of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section
(3),—
(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person
referred to in sub-section (3) for any period during the previous year without either adequate security
or adequate interest or both;
(b) if any land, building or other property of the trust or institution is, or continues to be, made available
for the use of any person referred to in sub-section (3), for any period during the previous year without
charging adequate rent or other compensation;
(c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person
referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that
person to such trust or institution and the amount so paid is in excess of what may be reasonably paid
for such services;
(d) if the services of the trust or institution are made available to any person referred to in sub-section (3)
during the previous year without adequate remuneration or other compensation;
(e) if any share, security or other property is purchased by or on behalf of the trust or institution from any
person referred to in sub-section (3) during the previous year for consideration which is more than
adequate;
(f) if any share, security or other property is sold by or on behalf of the trust or institution to any person
referred to in sub-section (3) during the previous year for consideration which is less than adequate;

(g) if any income or property of the trust or institution is diverted during the previous year in favour of any
person referred to in sub-section (3):
Provided that this clause shall not apply where the income, or the value of the property or, as the case
may be, the aggregate of the income and the value of the property, so diverted does not exceed one
thousand rupees;
(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the
previous year (not being a period before the 1st day of January, 1971), in any concern in which any
person referred to in sub-section (3) has a substantial interest.
(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :—
(a) the author of the trust or the founder of the institution;
(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person
whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;
(c) where such author, founder or person is a Hindu undivided family, a member of the family;
(cc) any trustee of the trust or manager (by whatever name called) of the institution;
(d) any relative of any such author, founder, person, member, trustee or manager as aforesaid;
(e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial
interest.
(4) Notwithstanding anything contained in clause (c) of sub-section (1) but without prejudice to the provisions
contained in clause (d) of that sub-section, in a case where the aggregate of the funds of the trust or institution
invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed
five per cent of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in
relation to any income other than the income arising to the trust or the institution from such investment, by
reason only that the funds of the trust or the institution have been invested in a concern in which such person
has a substantial interest.
(5) Notwithstanding anything contained in clause (d) of sub-section (1), where any assets (being debentures
issued by, or on behalf of, any company or corporation) are acquired by the trust or institution after the 28th day
of February, 1983 but before the 25th day of July, 1991, the exemption under section 11 or section 12 shall not
be denied in relation to any income other than the income arising to the trust or the institution from such assets,
by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not
continue to remain so invested in such assets after the 31st day of March, 1992.
(6) Notwithstanding anything contained in sub-section (1) or sub-section (2), but without prejudice to the
provisions contained in sub-section (2) of section 12, in the case of a charitable or religious trust running an
educational institution or a medical institution or a hospital, the exemption under section 11 or section 12 shall
not be denied in relation to any income, other than the income referred to in sub-section (2) of section 12, by
reason only that such trust has provided educational or medical facilities to persons referred to in clause (a) or
clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3).
(7) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the
previous year of the person in receipt thereof, any anonymous donation referred to in section 115BBC on which
tax is payable in accordance with the provisions of that section.
(8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income
of the previous year of the person in receipt thereof if the provisions of the first proviso* to clause (15) of section
2 become applicable in the case of such person in the said previous year.

(9) Nothing contained in sub-section (2) of section 11 shall operate so as to exclude any income from the total
income of the previous year of a person in receipt thereof, if—
(i) the statement referred to in clause (a) of the said sub-section in respect of such income is not furnished
on or before the due date specified under sub-section (1) of section 139 for furnishing the return of
income for the previous year; or
(ii) the return of income for the previous year is not furnished by such person on or before the due date
specified under sub-section (1) of section 139 for furnishing the return of income for the said previous
year.
Explanation 1.—For the purposes of sections 11, 12, 12A and this section, "trust" includes any other legal
obligation and for the purposes of this section "relative", in relation to an individual, means—
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) any lineal ascendant or descendant of the individual;
(v) any lineal ascendant or descendant of the spouse of the individual;
(vi) spouse of a person referred to in sub-clause (ii), sub-clause (iii), sub-clause (iv) or sub-clause (v);
(vii) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.
Explanation 2.—A trust or institution created or established for the benefit of Scheduled Castes, backward
classes, Scheduled Tribes or women and children shall not be deemed to be a trust or institution created or
established for the benefit of a religious community or caste within the meaning of clause (b) of sub-section (1).
Explanation 3.—For the purposes of this section, a person shall be deemed to have a substantial interest in a
concern,—
(i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits) carrying not less than twenty
per cent of the voting power are, at any time during the previous year, owned beneficially by such person
or partly by such person and partly by one or more of the other persons referred to in sub-section (3);
(ii) in the case of any other concern, if such person is entitled, or such person and one or more of the other
persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year,
to not less than twenty per cent of the profits of such concern.

115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any
university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or
other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-
clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or
institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax
payable shall be the aggregate of—
(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous
donations received in excess of the higher of the following, namely:—
(A) five per cent of the total donations received by the assessee; or
(B) one lakh rupees, and
(ii) the amount of income-tax with which the assessee would have been chargeable had his total income
been reduced by the aggregate of anonymous donations received in excess of the amount referred to in
sub-clause (A) or sub-clause (B) of clause (i), as the case may be.
(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by—
(a) any trust or institution created or established wholly for religious purposes;
(b) any trust or institution created or established wholly for religious and charitable purposes other than any
anonymous donation made with a specific direction that such donation is for any university or other
educational institution or any hospital or other medical institution run by such trust or institution.
(3) For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-
clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record
of the identity indicating the name and address of the person making such contribution and such other particulars
as may be prescribed.

C.A. Kalpesh Sanghavi Political Parties and Electoral Trust - P a g e | F11 . 1
Question 1
The books of account maintained by a National Political Party registered with Election Commissioner for the
year disclose the following receipts:
Rs.
Rent of property let out to a departmental store at Chennai 6,00,000
Interest on deposits other than Banks 5,00,000
Contributions from 100 persons (who have secreted their names) of Rs. 21,000 each 21,00,000
Contribution @ Rs. 11 each from 1,00,000 members in cash 11,00,000
Net profit of Cafeteria run in the premises at Delhi 3,00,000
Compute the total income of the political party, with reasons for inclusion or otherwise.
Question 2
Electoral Trust invests the donations received by it in say Bank FDR, then the interest from such investment is
exempt under section 13B and shall not be taxable, is the view of trust. You are required to offer your comments
for the same.
Donations received by Electoral Trust 10,00,00,000
Interest earned by Electoral Trust 40,00,000
You are required to answer the tax consequence if the trust distributes 9,50,00,000 or 9,00,00,000 to political
parties.

Special provision relating to incomes of political parties.

13A. Any income of a political party which is chargeable under the head "Income from house property" or
"Income from other sources" or "Capital gains" or any income by way of voluntary contributions
received by a political party from any person shall not be included in the total income of the previous year
of such political party :
Provided that—
(a) such political party keeps and maintains such books of account and other documents as would
enable the Assessing Officer to properly deduce its income therefrom;
(b) in respect of each such voluntary contribution 10[other than contribution by way of electoral
bond] in excess of twenty thousand rupees, such political party keeps and maintains a record of
such contribution and the name and address of the person who has made such contribution; 11[***]
(c) the accounts of such political party are audited by an accountant as defined in
the Explanation below sub-section (2) of section 288 12[; and]
(d) no donation exceeding two thousand rupees is received by such political party otherwise than
by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic
clearing system through a bank account or through electoral bond.
Explanation.—For the purposes of this proviso, "electoral bond" means a bond referred to in the Explanation to
sub-section (3) of section 31 of the Reserve Bank of India Act, 1934 (2 of 1934):]
Provided further that if the treasurer of such political party or any other person authorised by that political
party in this behalf fails to submit a report under sub-section (3) of section 29C of the Representation of the
People Act, 1951 (43 of 1951) for a financial year, no exemption under this section shall be available for that
political party for such financial year:
14
[Provided also that such political party furnishes a return of income for the previous year in accordance with
the provisions of sub-section (4B) of section 139 on or before the due date under that section.]
15
[Explanation.—For the purposes of this section, "political party" means a political party registered under
section 29A of the Representation of the People Act, 1951 (43 of 1951).]

Special provisions relating to voluntary contributions received by electoral trust.

13B. Any voluntary contributions received by an electoral trust shall not be included in the total
income of the previous year of such electoral trust, if—
(a) such electoral trust distributes to any political party, registered under section 29A of the
Representation of the People Act, 1951 (43 of 1951), during the said previous year, ninety-five per
cent of the aggregate donations received by it during the said previous year along with the
surplus, if any, brought forward from any earlier previous year; and
(b) such electoral trust functions in accordance with the rules made by the Central Government.

C.A. Kalpesh Sanghavi Co Operative Society - P a g e | F12-A . 1
Question 1 (co-operative society) (ID 01)

XYZ Consumer Co-operative Society furnishes the following particular of its income in respect of year. You
are required to work out the taxable income of the Co-operative Society:
Rs. Rs.
Income from business 2,50,000
Interest on deposits with bank 10,000
Dividend on investments:
-Investments in share of other Co-operative societies 4,000
-Other investments 4,000 8,000
Income from letting of godowns for storage of commodities 20,000
Give reason for your answer.
Question 2 (Revision / Home work) (co-operative society) (ID 02)
Calcutta Suburban Co-operative Society is engaged in processing agricultural produce of its members without
the aid of power, and its marketing, furnish the following particulars:
(i) Income from processing of agricultural produce Rs. 17,000
(ii) Income from marketing agricultural produce Rs. 3,000
(iii) Dividends from another co-operative society Rs. 55,000
(iv) Income from letting of godowns Rs. 10,000;
(v) Income from agency business Rs. 85,000.
Determine its total income for the year.
Question 3 (co-operative society) (ID 03)
The total income of a co-operative society (not being a consumers co-operative society) for financial year
under various heads is as under:
Rs.
Banking business 10,000
Income from cottage industry (product manufactured involves 4 process and last process is
subcontracted to persons who are not the members of society.) 15,000
Marketing of agricultural produce grown by members (some of the lorrys have been owned
by society and they are used for marketing of agricultural produce, however when there was
slackness in work the lorries were rented out, such income of Rs. 2,300 is included under this
head.) 15,000
Income from purchase and sale of agricultural Implements to members 12,000
Profit and gains of business 75,000
Interest and dividend from other co-operative society 12,000
Collective disposal of labour 11,000
Income from house property 50,000
Compute taxable income of the co-operative society.


PQR Co-operative Bank, a co-operative society, having its area of operation confined to Gubbi Takuk and the
principal object of which is to provide for long term credit for agricultural and rural development activities, has
received the following amounts during the year:
(i) Interest amounting to Rs. 1,00,000 from its members on loans advanced to them.
(ii) Interest amounting to Rs. 1,50,000 on deposits with other co-operative societies.
(iii) Rent amounting to Rs. 2,00,000 from letting out its godowns for storage of commodities.
PQR Co-operative Bank seeks your advise in the matter of taxability of the above amounts and the eligibility
for deduction, if any, in respect thereof.

Samode Food Processing co-operative Society engaged in processing without the aid of power of the agricultural
produce of its members, in carrying out activities of marketing of agricultural produce, in agency business and
others, furnishes the following particulars of its income for the year.
Rs.
Income from processing of the produce of members 50,000
Income from marketing activities 30,000
Income from letting of building used as godowns 96,000
Dividend from another Co-operative Society 45,000
Collective disposal of Labour of its members 25,000
Income from agency business 75,000
Interest on deposits from another Cooperative Society 15,000
Compute the income chargeable to tax.
Question 6 (co-operative society) (Revision / Home work) (ID 06)

The assessee, a co-operative society, which was engaged in the activity of collecting milk from primary milk
societies, processing the milk and supplying the milk and other products to the State level federal co-operative
society claimed deduction under section 80P(2)(b) on the ground that it had to be considered as a primary
society engaged in supply of milk. The Assessing Officer held that the assessee society was a federal society
collecting milk from various primary societies and supplying it to the State level apex society after processing
the milk and thus the deduction is not available. You are required to answer whether the society will be eligible
for the deduction under section 80 P for income of Rs. 625,000.

Deduction in respect of income of co-operative societies.

80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any
income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the
provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely :—
(a) in the case of a co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of agricultural produce grown by its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for the purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or
marketing of fish or the purchase of materials and equipment in connection therewith for the
purpose of supplying them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such
activities :
Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the
rules and bye-laws of the society restrict the voting rights to the following classes of its members,
namely:—
(1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied
activities;
(2) the co-operative credit societies which provide financial assistance to the society;
(3) the State Government;
(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits
or vegetables raised or grown by its members to—
(i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds,
fruits, or vegetables, as the case may be; or
(ii) the Government or a local authority; or
(iii) a Government company5 as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a
corporation established by or under a Central, State or Provincial Act (being a company or
corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the
public),
the whole of the amount of profits and gains of such business;

(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or
clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much
of its profits and gains attributable to such activities as does not exceed,—
(i) where such co-operative society is a consumers' co-operative society, one hundred
thousand rupees; and
(ii) in any other case, fifty thousand rupees.
Explanation.—In this clause, "consumers' co-operative society" means a society for the benefit of the
consumers;
(d) in respect of any income by way of interest or dividends derived by the co-operative society
from its investments with any other co-operative society, the whole of such income;
(e) in respect of any income derived by the co-operative society from the letting of godowns or
warehouses for storage, processing or facilitating the marketing of commodities, the whole of such
income;
(f) in the case of a co-operative society, not being a housing society or an urban consumers' society
or a society carrying on transport business or a society engaged in the performance of any manufacturing
operations with the aid of power, where the gross total income does not exceed twenty
thousand rupees, the amount of any income by way of interest on securities or any income from house
property chargeable under section 22.
Explanation.—For the purposes of this section, an "urban consumers' co-operative society" means a society for
the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee,
notified area committee, town area or cantonment.
(3) In a case where the assessee is entitled also to the deduction under section 80HH or section
80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA or section 80J,
the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b)
or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those
clauses included in the gross total income as reduced by the deductions under section 80HH, section
80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section
80JJ.
(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and rural development bank.
(a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively
assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b) "primary co-operative agricultural and rural development bank" means a society having its area of
operation confined to a taluk and the principal object of which is to provide for long-term credit for
agricultural and rural development activities.

C.A. Kalpesh Sanghavi Co Operative Society - P a g e | F12-B . 1
Question (Producer Company) (ID 21)
Company P a producer company as per 581A of the companies act, having turn over of 46 crore has the following
incomes. You are required to compute the tax liability of the company.
(a) the marketing of agricultural produce grown by the members; - 10 Lakhs

(b) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the
purpose of supplying them to the customers in Gujarat who are not the member of company; - 23 Lakhs
(c) the processing of the agricultural produce of the members; - 17 Lakhs
(d) Interest on Bank deposits – 4 lakhs
Ignore the provision of MAT.

C.A. Kalpesh Sanghavi Co Operative Society - P a g e | F12-B . 1
80PA. (1) Where the gross total income of an assessee, being a Producer Company having a total turnover
of less than one hundred crore rupees in any previous year, includes any profits and gains derived from
eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in
computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the
profits and gains attributable to such business for the previous year relevant to an assessment year commencing
on or after the 1st day of April, 2019, but before the 1st day of April, 2025 .
(2) In a case where the assessee is entitled also to deduction under any other provision of this Chapter, the
deduction under this section shall be allowed with reference to the income, if any, as referred to
in this section included in the gross total income as reduced by the deductions under such other
provision of this Chapter.
(i) "eligible business" means—
(a) the marketing of agricultural produce grown by the members; or
(b) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for the purpose of supplying them to the members; or
(c) the processing of the agricultural produce of the members;
(ii) "member" shall have the meaning assigned to it in clause (d) of section 581A of the Companies Act,
1956 (1 of 1956);
(iii) "Producer Company" shall have the meaning assigned to it in clause (l) of section 581A of the
Companies Act, 1956 (1 of 1956).

C.A. Kalpesh Sanghavi HUF - P a g e | F13 . 1
Refer Part BF of capital gains for discussion of HUF extra questions.
Question are solved at respective places and see few questions under the heading of HUF and family
settlement commission of capital gains.

171. (1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to
continue to be a Hindu undivided family, except where and in so far as a finding of partition has
been given under this section in respect of the Hindu undivided family.
(2) Where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf
of any member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place
among the members of such family, the Assessing Officer shall make an inquiry thereinto after giving
notice of the inquiry to all the members of the family.
(3) On the completion of the inquiry, the Assessing Officer shall record a finding as to whether there has
been a total or partial partition of the joint family property, and, if there has been such a partition, the date on
which it has taken place.
(4) Where a finding of total or partial partition has been recorded by the Assessing Officer under this section,
and the partition took place during the previous year,—
(a) the total income of the joint family in respect of the period up to the date of partition shall be assessed
as if no partition had taken place; and
(b) each member or group of members shall, in addition to any tax for which he or it may be separately
liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable
for the tax on the income so assessed.
(5) Where a finding of total or partial partition has been recorded by the Assessing Officer under this
section, and the partition took place after the expiry of the previous year, the total income of the previous year
of the joint family shall be assessed as if no partition had taken place; and the provisions of clause (b) of
sub-section (4) shall, so far as may be, apply to the case.
(6) Notwithstanding anything contained in this section, if the Assessing Officer finds after completion of the
assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial,
the Assessing Officer shall proceed to recover the tax from every person who was a member of the family
before the partition, and every such person shall be jointly and severally liable for the tax on the
income so assessed.
(7) For the purposes of this section, the several liability of any member or group of members thereunder shall
be computed according to the portion of the joint family property allotted to him or it at the partition, whether
total or partial.
(8) The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any
penalty, interest, fine or other sum in respect of any period up to date of the partition, whether total or partial,
of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such
period.

(9) Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition
has taken place after the 31st day of December, 1978, among the members of a Hindu undivided family
hitherto assessed as undivided,—
(a) no claim that such partial partition has taken place shall be inquired into under sub-section (2)
and no finding shall be recorded under sub-section (3) that such partial partition had taken place and
any finding recorded under sub-section (3) to that effect whether before or after the 18th day of June,
1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void;
(b) such family shall continue to be liable to be assessed under this Act as if no such partial
partition had taken place;
(c) each member or group of members of such family immediately before such partial partition
and the family shall be jointly and severally liable for any tax, penalty, interest, fine or
other sum payable under this Act by the family in respect of any period, whether before or after such
partial partition;
(d) the several liability of any member or group of members aforesaid shall be computed
according to the portion of the joint family property allotted to him or it at such partial partition,
and the provisions of this Act shall apply accordingly.
(a) "partition" means—
(i) where the property admits of a physical division, a physical division of the property, but a
physical division of the income without a physical division of the property producing the income
shall not be deemed to be a partition; or
(ii) where the property does not admit of a physical division, then such division as the property
admits of, but a mere severance of status shall not be deemed to be a partition;
(b) "partial partition" means a partition which is partial as regards the persons constituting the
Hindu undivided family, or the properties belonging to the Hindu undivided family, or both.

C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AA . 1
Question 1 (capital gains fundamentals) (Revision / Home work) (CG ID 31)

The Partnership firm of M/s. ABCD sold the asset acquired by one of its partners A which he had given to firm
as capital contribution at book value of 300,000 on 30-06-2012. At the time of distribution of the asset of the
erstwhile firm which was reconstituted thereafter it claimed that the sum paid by A to the retiring partners in
past Mr. M (Rs. 35,000) and N (Rs. 55,000) at time of his admission should be treated as a part of cost of
acquisition in addition to the cost that had been originally incurred by the erstwhile firm for acquiring the said
asset, please discuss whether the claim for deduction is acceptable?
Your Options are
A Cost of asset to Firm will be 335,000
B Cost of asset to Firm will be 355,000
C Cost of asset to Firm will be 300,000
D Cost of asset to Firm will be 390,000

R. Ltd had a liability of Rs. 238.14 crores payable from 1-5-2004 to 1-4-2015 to the sales tax departments of
Governments of Maharashtra and Gujarat in respect of Sales Tax deferral scheme. R Ltd. has assigned the said
Liability to another Company on Payment of Rs. 55.76 Crores in financial year. Whether surplus i.e. difference
of Rs. 182.38 Crores can be directly credited to capital reserve or it must be credited to profit and Loss a/c?
Discuss Liability of Capital gain tax ?
Your Options are
A 182.38 cr will be capital gains
B 182.38 cr will be Business Income
C 182.38 cr will be IFOS
D 182.38 cr will not be taxable at all
Website - https://ca-lectures.online/

Mr. X has entered into derivative transactions and has incurred loss of Rs. 5,00,000. He claims this loss as a
short term capital loss and asks for set off against short term capital gain on sale of share Rs. 200,000. A.O.
rejects the claim as according to him the loss is speculation loss. Discuss.
Your Options are
A Speculative Business Loss carried forward will be 500,000
B Business Loss carried forward will be 300,000
C Business Loss carried forward will be 500,000
D Speculative Business Loss carried forward will be 300,000

Mr. X an investor has invested a sum of Rs. 5,00,000 in shares of M/s Y. The said company went into liquidation
and since the liabilities were much more than the assets, noting was distributed to the shareholders. Mr. X wants
to claim the loss. Is his contention correct ?
Your Options are
A 500,000 will be Capital Loss
B 500,000 will be Business Loss
C Gross Total Income will be 500,000
D None of the above
Question 5 (capital gains fundamentals) (CG ID 35)

Mr. Albert a full time practicing C.A aged 55 years. He disclosed the following for the computation of his
income :-
Rs.
1. Income from profession 2,00,000
2. Short term capital gain on sale of shares 10,00,000
3. Sale of Silver Utensils (inherited from his grand father.) 3,50,000
4. Long term capital gain on equity shares as 10,00,000 on which STT is paid. 10,00,000
5. Income from other sources (profit on sale of spontaneous growth of plant on
3,00,000
agricultural land referred to in 7 to 9 below)
6. Profit on sale of loose diamonds (inherited from his mother) 800,000
7. Profit on sale agricultural land near Mumbai pune highway (situated at 3 km
from Mumbai and having population of 3 lakhs) (Possession of land is handed 12,00,000
st
over however sale deed is not registered as on 31 of March.)
8. Profit on sale agricultural land near Mumbai Nashik highway (situated at 7 km
850,000
from Mumbai and having population of 3 lakhs)
9. Profit on sale agricultural land near Mumbai Ahmedabad highway (situated at
12,25,000
9 km from Mumbai and having population of 23 lakhs)
MCQ1 In relation to (3) above

Your Options are
A Taxable as Capital Gains
B Taxable as IFOS
C Taxable as Business Income
D Not Taxable

Your Options are
A Loose Diamonds are not jewellery, however taxable as capital gains
B Loose Diamonds are not jewellery, thus not taxable as capital gains
C Loose Diamonds are not jewellery, however taxable as business income
D Loose Diamonds are jewellery, however taxable as capital gains

Your Options are
A It is Rural Agricultural Land and not taxable to capital gains
B It is Rural Agricultural Land and taxable to capital gains
C It is Not Rural Agricultural Land and not taxable to capital gains
D It is Not Rural Agricultural Land and taxable to capital gains

Your Options are

Your Options are

Your Options are
A It is a transfer by means of sale
B It is a transfer by means of 53A of Transfer of property act
C It is a deemed transfer
D It is transfer by taking advance monies.

Your Options are
A It is not an agricultural income
B It is an agricultural income
C It is Business income
D It is not a taxable income
Question 6 (capital gains fundamentals) (CG ID 71) (Revision / Home work)

X owns 1,000 partly paid shares in a company. These shares have been fortified by the company for non-
payment of call money. X wants to claim Rs.8.000 (i.e., amount paid at the time of application and allotment)
as short-term capital loss. Is the claim of X tenable?
Your Options are
A 8000 is capital loss, as extinguishment of rights
B 8000 is capital loss, as sale of shares back to company
C 8000 is capital loss, as exchange of shares
D 8000 is not assessable at all

X purchased in 1984-85, 42,000 (non-listed) shares of a company at the rate of Rs. 100 per share with a view to
acquiring controlling interest of the company. In 2014-15, he sells the entire lot of 42,000 shares at the market
value of Rs. 45 per share. On account of this sale, X wants to claim capital loss of Rs, 3.25 cr in the assessment
year. The Assessing Officer finds that X had purchased the shares in 1984-85 at the rate of Rs. 100 per share
when the market value of the shares was Rs. 76 per share. According to the Assessing officer, the extra price of
Rs. 24 per share was paid by X to acquire the controlling rights of the company. The Assessing Officer, therefore,
determines the amount of loss at Rs. 2.42 cr excluding the extra price of Rs. 24 per share. Is the Assessing
Officer legally correct?
Your Options are

A 3.25 cr is capital loss
B 3.25 cr is Business loss
C 2.42 cr is capital loss
D 2.42 cr is Business loss

A car in personal use for about 6 years is sold at a profit of about Rs. 58,000. Will the gain be taxable?
Your Options are
A Capital Gains will be 58,000
B Capital Gains will be Nil
C Capital Gains will be Not applicable
D IFOS will be 58,000

Mr. X had a leasehold property since 5th May, 2008. The leasehold rights were converted into freehold on 20th
May PY by paying 10 lakhs. The said property was sold on 10th January PY for 35 lakhs. The assessee claimed
the capital gain as long-term capital gain. The Assessing Officer contended the same as short-term as the
property was acquired by converting the leasehold right into freehold right only on 20 May, 2014. Is Mr. X
justified in his claim?
Your Options are
A Capital gains will be Long term
B Capital gains will be Short term
C Capital gains will be Long term but no indexation on 10 lakhs
D Capital gains will be Long term subject to indexation on 10 lakhs
Question 1 (CG ID 36)

A flat was booked on 1-4-2014, by paying Rs. 50,000, Rs. 4,00,000 were paid in instalments during financial
year 2015-16. Rs. 1,00,000 was paid on taking possession on 30-6-17. Flat was sold on 1-3-18 for Rs. 7,00,000.
1. whether the Capital Gain is Long Term or Short Term ?
2. Would it make any difference if the flat is sold on 31-5-2017 before taking possession ?
3. How COA will be indexed ?
Question 2 (CG ID 02)

R owns a plot of land acquired on 1-6-1994 for a consideration of Rs. 2 lakhs. He enters into an agreement to
sell the property on 15-3-PY for a consideration of Rs. 5 lakhs. In part performance of the contract, he handed
over the possession of land on 21-3-PY on which date he received the full consideration. As on 31-3-PY, the
sale was not registered. Discuss the liability to capital gain. Computation need not be made.
2(14) "capital asset" means—

(a) property of any kind held by an assessee, whether or not connected with his business or
profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities
in accordance with the regulations made under the Securities and Exchange Board of India Act,
1992 (15 of 1992),
but does not include—
(i) any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or
raw materials held for the purposes of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and
furniture) held for personal use by the assessee or any member of his family dependent
on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Explanation 1.—For the purposes of this sub-clause, "jewellery" includes—
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious or
semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil
or other article or worked or sewn into any wearing apparel.
Explanation 2.—For the purposes of this clause—
(a) the expression "Foreign Institutional Investor" shall have the meaning assigned to it in clause
(a) of the Explanation to section 115AD;
(b) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of
the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(iii) agricultural land in India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality (whether known
as a municipality, municipal corporation, notified area committee, town area committee,
town committee, or by any other name) or a cantonment board and which has a population
of not less than ten thousand; or
(b) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than
ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than
one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten
lakh.
Explanation.—For the purposes of this sub-clause, "population" means the population according
to the last preceding census of which the relevant figures have been published before the first day
of the previous year;
(iv) 6 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds,
1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued
under the Gold Monetisation Scheme, 2015 notified by the Central Government.
Explanation.—For the removal of doubts, it is hereby clarified that "property" includes and shall be
deemed to have always included any rights in or in relation to an Indian company, including rights of
management or control or any other rights whatsoever;
2(42A) "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six
months immediately preceding the date of its transfer :
Provided that in the case of a security (other than a unit) listed in a recognized stock exchange
in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963
(52 of 1963) or a unit of an equity oriented fund or a zero coupon bond, the provisions of this clause
shall have effect as if for the words "thirty-six months", the words "twelve months" had been
substituted:
Provided further that in case of a share of a company (not being a share listed in a recognised stock
exchange) or a unit of a Mutual Fund specified under clause (23D) of section 10, which is transferred
during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014, the
provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve
months" had been substituted:
[Provided also that in the case of a share of a company (not being a share listed in a
recognised stock exchange in India), 3[or an immovable property, being land or
building or both,] the provisions of this clause shall have effect as if for the words "thirty-six
months", the words "twenty-four months" had been substituted.
Explanation 1.—(i) In determining the period for which any capital asset is held by the
assessee—
(a) in the case of a share held in a company in liquidation, there shall be excluded the period
subsequent to the date on which the company goes into liquidation ;
(b) in the case of a capital asset which becomes the property of the assessee in the circumstances
mentioned in sub-section (1) of section 49, there shall be included the period for which the asset
was held by the previous owner referred to in the said section ;
Following sub-clause (ba) shall be inserted after sub-clause (b) of clause (i) of Explanation
1 to clause (42A) of section 2 by the Finance Act, 2018, w.e.f. 1-4-2019 :
(ba) in the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned
from the date of its conversion or treatment;
(c) in the case of a capital asset being a share or shares in an Indian company, which becomes the
property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there
shall be included the period for which the share or shares in the amalgamating company were held
by the assessee ;
(d) in the case of a capital asset, being a share or any other security (hereafter in this clause referred
to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such
financial asset or subscribed to by the person in whose favour the assessee has renounced his right
to subscribe to such financial asset, the period shall be reckoned from the date of allotment of
such financial asset ;
(e) in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced
in favour of any other person, the period shall be reckoned from the date of the offer of such right
by the company or institution, as the case may be, making such offer ;
(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis
of holding of any other financial asset, the period shall be reckoned from the date of the allotment
of such financial asset ;
(g) in the case of a capital asset, being a share or shares in an Indian company, which becomes the
property of the assessee in consi-deration of a demerger, there shall be included the period for
which the share or shares held in the demerged company were held by the assessee ;
(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in
India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock
exchange in India as referred to in clause (xiii) of section 47, there shall be included the period
for which the person was a member of the recognised stock exchange in India immediately prior
to such demutualisation or corporatisation;
(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to
demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause
(xiii) of section 47, there shall be included the period for which the person was a member of the
recognised stock exchange in India immediately prior to such demutualisation or corporatisation;
(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer free of cost or at concessional rate to his
employees (including former employee or employees), the period shall be reckoned from the date
of allotment or transfer of such specified security or sweat equity shares;
(hc) in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer of share
or shares as referred to in clause (xvii) of section 47, there shall be included the period for which
the share or shares were held by the assessee;
(hd) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in
consideration of a transfer referred to in clause (xviii) of section 47, there shall be included the
period for which the unit or units in the consolidating scheme of the mutual fund were held by the
assessee;
(he) in the case of a capital asset, being share or shares of a company, which is acquired by the non-
resident assessee on redemption of Global Depository Receipts referred to in clause (b) of sub-
section (1) of section 115AC held by such assessee, the period shall be reckoned from the date on
which a request for such redemption was made;
4
[(hf) in the case of a capital asset, being equity shares in a company, which becomes the property of
the assessee in consideration of a transfer referred to in clause (xb) of section 47, there shall be
included the period for which the preference shares were held by the assessee;]
5
[(hg) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in
consideration of a transfer referred to in clause (xix) of section 47, there shall be included the
period for which the unit or units in the consolidating plan of a mutual fund scheme were held by
the assessee;]
(ii) In respect of capital assets other than those mentioned in clause (i), the period for which any capital
asset is held by the assessee shall be determined subject to any rules which the Board may make in this
behalf.
Explanation 2.—For the purposes of this clause, the expression "security" shall have the meaning
assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
Explanation 3.—For the purposes of this clause, the expressions "specified security" and "sweat equity
shares" shall have the meanings respectively assigned to them in the Explanation to clause (d) of sub-
section (1) of section 115WB.
Explanation 4.—For the purposes of this clause, the expression "equity oriented fund" shall have the
meaning assigned to it in 6[the Explanation to clause (38) of section 10];
(42B) "short-term capital gain" means capital gain arising from the transfer of a short-term capital asset ;
(42C) "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.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it
in Explanation 1 to clause (19AA).
Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of
an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar
taxes or fees shall not be regarded as assignment of values to individual assets or liabilities ;
2(47) "transfer", in relation to a capital asset, includes,—

(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as,
stock-in-trade of a business carried on by him, such conversion or treatment ; or
(iva) the maturity or redemption of a zero coupon bond; or
(v) any transaction involving the allowing of the possession of any immovable property to be
taken or retained in part performance of a contract of the nature referred to in section 53A
of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-
operative society, company or other association of persons or by way of any agreement or any
arrangement or in any other manner whatsoever) which has the effect of transferring, or
enabling the enjoyment of, any immovable property.
Explanation 1.—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same
meaning as in clause (d) of section 269UA.
Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be
deemed to have always included disposing of or parting with an asset or any interest therein, or creating
any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally,
voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or
otherwise, notwithstanding that such transfer of rights has been characterised as being effected or
dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated
outside India;
Capital gains.
45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall,
save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to
income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in
which the transfer took place.
Mode of computation.
48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full
value of the consideration received or accruing as a result of the transfer of the capital asset the following
amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a
capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost
of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value
of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign
currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed
in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of
computation of capital gains shall be applicable in respect of capital gains accruing or arising from every
reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :
Provided further that where long-term capital gain arises from the transfer of a long-term
capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of,
an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the
words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and
"indexed cost of any improvement" had respectively been substituted:
Provided also that nothing contained in the first and second provisos shall apply to the capital
gains arising from the transfer of a long-term capital asset being an equity share in a company
or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A:
Provided also that nothing contained in the second proviso shall apply to the long-term capital gain
arising from the transfer of a long-term capital asset, being a bond or debenture other than—
(a) capital indexed bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme,
2015:
Provided also that in case of an assessee being a non-resident, any gains arising on account of
appreciation of rupee against a foreign currency at the time of redemption of rupee denominated
bond of an Indian company 69[held] by him, shall be ignored for the purposes of computation of full value of
consideration under this section:
Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii)
of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such
transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer
for the purposes of this section :
Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital
gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance
(No. 2) Act, 2004.
(i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in
section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);
(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into
Indian currency shall be at the rate of exchange prescribed in this behalf;
(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation
Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st
day of April, 70[2001], whichever is later;
(iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation
Index for the year in which the improvement to the asset took place;
(v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may,
having regard to seventy-five per cent of average rise in the Consumer Price Index (urban) for the
immediately preceding previous year to such previous year, by notification in the Official Gazette,
specify, in this behalf.
Cost with reference to certain modes of acquisition.

49. (1) Where the capital asset became the property of the assessee—
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) under a gift or will;
(iii) (a) by succession, inheritance or devolution, or
(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of
persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or
clause (viaa) or clause (viab) or clause (vib) 71[or clause (vic)] or clause (vica) or clause (vicb) or clause
(vicc) or clause (xiii) or clause (xiiib) or clause (xiv) of section 47;
(iv) such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section
64 at any time after the 31st day of December, 1969,
the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the
property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous
owner or the assessee, as the case may be.
Explanation.—In this sub-section the expression "previous owner of the property" in relation to any capital
asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of
acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section.
(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company
became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the
cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the
amalgamating company.
(2A) Where the capital asset, being a share or debenture of a company, became the property of the assessee in
consideration of a transfer referred to in clause (x) or clause (xa) of section 47, the cost of acquisition of the
asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock, bond or deposit
certificate in relation to which such asset is acquired by the assessee.
(2AA) Where the capital gain arises from the transfer of specified security or sweat equity shares referred to in
sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair
market value which has been taken into account for the purposes of the said sub-clause.
(2AAA) Where the capital asset, being rights of a partner referred to in section 42 of the Limited Liability
Partnership Act, 2008 (6 of 2009), became the property of the assessee on conversion as referred to in clause
(xiiib) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of
the share or shares in the company immediately before its conversion.
(2AB) Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of
acquisition of such security or shares shall be the fair market value which has been taken into account while
computing the value of fringe benefits under clause (ba) of sub-section (1) of section 115WC.
(2ABB) Where the capital asset, being share or shares of a company, is acquired by a non-resident assessee on
redemption of Global Depository Receipts referred to in clause (b) of sub-section (1) of section 115AC held by
such assessee, the cost of acquisition of the share or shares shall be the price of such share or shares prevailing
on any recognised stock exchange on the date on which a request for such redemption was made.
Explanation.—For the purposes of this sub-section, "recognised stock exchange" shall have the meaning
assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43.
(2AC) Where the capital asset, being a unit of a business trust, became the property of the assessee in
consideration of a transfer as referred to in clause (xvii) of section 47, the cost of acquisition of the asset shall
be deemed to be the cost of acquisition to him of the share referred to in the said clause.
(2AD) Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, became the
property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, the cost of
acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating
scheme of the mutual fund.
72
[(2AE) Where the capital asset, being equity share of a company, became the property of the assessee in
consideration of a transfer referred to in clause (xb) of section 47, the cost of acquisition of the asset shall be
deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the
assessee.]
73
[(2AF) Where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, became
the property of the assessee in consideration of a transfer referred to in clause (xix) of section 47, the cost of
acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating
plan of the scheme of the mutual fund.]
(2B) [***]
(2C) The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost
of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value
of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such
demerger.
(2D) The cost of acquisition of the original shares held by the shareholder in the demerged company shall be
deemed to have been reduced by the amount as so arrived at under sub-section (2C).
(2E) The provisions of sub-section (2), sub-section (2C) and sub-section (2D) shall, as far as may be, also apply
in relation to business reorganisation of a co-operative bank as referred to in section 44DB.
Explanation.—For the purposes of this section, "net worth" shall mean the aggregate of the paid up share capital
and general reserves as appearing in the books of account of the demerged company immediately before the
demerger.
(3) Notwithstanding anything contained in sub-section (1), where the capital gain arising from the transfer of a
capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 is deemed to be income
chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of
acquisition of such asset to the transferee-company shall be the cost for which such asset was acquired by it.
(4) Where the capital gain arises from the transfer of a property, the value of which has been subject to income-
tax under clause (vii) or clause (viia) 73[or clause (x)] of sub-section (2) of section 56, the cost of acquisition of
such property shall be deemed to be the value which has been taken into account for the purposes of the said
clause (vii) or clause (viia) 73[or clause (x)].
(5) Where the capital gain arises from the transfer of an asset declared under the Income Declaration Scheme,
2016, and the tax, surcharge and penalty have been paid in accordance with the provisions of the Scheme on the
fair market value of the asset as on the date of commencement of the Scheme, the cost of acquisition of the asset
shall be deemed to be the fair market value of the asset which has been taken into account for the purposes of
the said Scheme.
74
[(6) Where the capital gain arises from the transfer of a specified capital asset referred to in clause (c) of
the Explanation to clause (37A) of section 10, which has been transferred after the expiry of two years from the
end of the financial year in which the possession of such asset was handed over to the assessee, the cost of
acquisition of such specified capital asset shall be deemed to be its stamp duty value as on the last day of the
second financial year after the end of the financial year in which the possession of the said specified capital
asset was handed over to the assessee.
Explanation.—For the purposes of this sub-section, "stamp duty value" means the value adopted or assessed or
assessable by any authority of the State Government for the purpose of payment of stamp duty in respect of an
immovable property.
(7) Where the capital gain arises from the transfer of a capital asset, being share in the project, in the form of
land or building or both, referred to in sub-section (5A) of section 45, not being the capital asset referred to in
the proviso to the said sub-section, the cost of acquisition of such asset, shall be the amount which is deemed as
full value of consideration in that sub-section.]
75
[(8) Where the capital gain arises from the transfer of an asset, being the asset held by a trust or an institution
in respect of which accreted income has been computed and the tax has been paid thereon in accordance with
the provisions of Chapter XII-EB, the cost of acquisition of such asset shall be deemed to be the fair market
value of the asset which has been taken into account for computation of accreted income as on the specified date
referred to in sub-section (2) of section 115TD.]
Following sub-section (9) shall be inserted after sub-section (8) of section 49 by the Finance Act, 2018,
w.e.f. 1-4-2019 :
(9) Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the
cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account
for the purposes of the said clause.
Meaning of "adjusted", "cost of improvement" and "cost of acquisition".

55. (1) For the purposes of sections 48 and 49,—
(a) [***]
(b) "cost of any improvement",—
(1) in relation to a capital asset being goodwill of a business or a right to manufacture, produce
or process any article or thing or right to carry on any business or profession shall be taken to
be nil ; and
(2) in relation to any other capital asset,—
(i) where the capital asset became the property of the previous owner or the assessee before the
1st day of April, 2001, means all expenditure of a capital nature incurred in
making any additions or alterations to the capital asset on or after the said date
by the previous owner or the assessee, and
(ii) in any other case, means all expenditure of a capital nature incurred in making any
additions or alterations to the capital asset by the assessee after it became his
property, and, where the capital asset became the property of the assessee by any of the
modes specified in sub-section (1) of section 49, by the previous owner,
but does not include any expenditure which is deductible in computing the income chargeable
under the head "Interest on securities", "Income from house property", "Profits and gains of
business or profession", or "Income from other sources", and the expression "improvement" shall
be construed accordingly.
(2) For the purposes of sections 48 and 49, "cost of acquisition",—
(a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name
associated with a business or a right to manufacture, produce or process any article or thing or
right to carry on any business or profession, tenancy rights, stage carriage permits or loom hours,—
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means
the amount of the purchase price; and
(ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section
49], shall be taken to be nil ;
(aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning
of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this
clause referred to as the financial asset), the assessee—
(A) becomes entitled to subscribe to any additional financial asset ; or
(B) is allotted any additional financial asset without any payment,
then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),—
(i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any
additional financial asset, means the amount actually paid for acquiring the original financial asset
;
(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when
such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case
of such assessee ;
(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said
entitlement, means the amount actually paid by him for acquiring such asset ;
(iiia) in relation to the financial asset allotted to the assessee without any payment and on the
basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ;
and
(iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to
such asset has been renounced, means the aggregate of the amount of the purchase price paid by
him to the person renouncing such right and the amount paid by him to the company or institution,
as the case may be, for acquiring such financial asset ;
(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock
exchange in India under a scheme for demutualisation or corporatisation approved by the
Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of
the exchange:
Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock
exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of
demutualisation or corporatisation, shall be deemed to be nil;
(ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-term capital asset,
being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust
referred to in section 112A, acquired before the 1st day of February, 2018 shall be higher of—
(i) the cost of acquisition of such asset; and
(ii) lower of—
(A) the fair market value of such asset; and
(B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
(a) "fair market value" means,—
(i) in a case where the capital asset is listed on any recognised stock exchange as on the 31st day
of January, 2018, the highest price of the capital asset quoted on such exchange on the said
date:
Provided that where there is no trading in such asset on such exchange on the 31st day of
January, 2018, the highest price of such asset on such exchange on a date
immediately preceding the 31st day of January, 2018 when such asset was traded
on such exchange shall be the fair market value;
(ii) in a case where the capital asset is a unit which is not listed on a recognised stock
exchange as on the 31st day of January, 2018, the net asset value of such unit as on
the said date;
(iii) in a case where the capital asset is an equity share in a company which is—
(A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but
listed on such exchange on the date of transfer;
(B) listed on a recognised stock exchange on the date of transfer and which became
the property of the assessee in consideration of share which is not listed on such
exchange as on the 31st day of January, 2018 by way of transaction not regarded as
transfer undersection 47,
an amount which bears to the cost of acquisition the same proportion as Cost Inflation
Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the
asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is
later;
(b) "Cost Inflation Index" shall have the meaning assigned to it in clause (v) of
the Explanation to section 48;
(c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to
clause (5) of section 43;]
(b) in relation to any other capital asset,—
(i) where the capital asset became the property of the assessee before the 1st day of April, 2001,
means the cost of acquisition of the asset to the assessee or the fair market value of the asset on
the 1st day of April, 81[2001], at the option of the assessee ;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-
section (1) of section 49, and the capital asset became the property of the previous owner
before the 1st day of April, 81[2001], means the cost of the capital asset to the previous owner or
the fair market value of the asset on the 1st day of April, 81[2001], at the option of the assessee
;
(iii) where the capital asset became the property of the assessee on the distribution of the capital
assets of a company on its liquidation and the assessee has been assessed to income-tax under
the head "Capital gains" in respect of that asset under section 46, means the fair market value
of the asset on the date of distribution ;
(iv) [***]
(v) where the capital asset, being a share or a stock of a company, became the property of the
assessee on—
(a) the consolidation and division of all or any of the share capital of the company into shares of
larger amount than its existing shares,
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller amount, or
(e) the conversion of one kind of shares of the company into another kind,
means the cost of acquisition of the asset calculated with reference to the cost of acquisition
of the shares or stock from which such asset is derived.
(3) Where the cost for which the previous owner acquired the property cannot be ascertained,
the cost of acquisition to the previous owner means the fair market value on the date on which the capital
asset became the property of the previous owner.
79. Sub. for "1981" by the Finance Act, 2017 (w.e.f. 1-4-2018).
80. Ins. by the Finance Act, 2018 (w.e.f. 1-4-2018).
81. Sub. for "1981" by the Finance Act, 2017 (w.e.f. 1-4-2018).
Reference to Valuation Officer.

55A. With a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter,
the Assessing Officer may refer the valuation of capital asset to a Valuation Officer—
(a) in a case where the value of the asset as claimed by the assessee is in accordance with the
estimate made by a registered valuer, if the Assessing Officer is of opinion that the value so claimed is
at variance with its fair market value;
(b) in any other case, if the Assessing Officer is of opinion—
(i) that the fair market value of the asset exceeds the value of the asset as claimed by the
assessee by more than such percentage of the value of the asset as so claimed or by more
than such amount as may be prescribed in this behalf ; or
(ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to
do,
and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A,
clauses (ha) and (i) of sub-section (1) and sub-sections (3A) and (4) of section 23, sub-section (5) of section 24,
section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall with the necessary
modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing
Officer under sub-section (1) of section 16A of that Act.
Explanation.—In this section, "Valuation Officer" has the same meaning, as in clause (r) of section 2 of the
Wealth-tax Act, 1957 (27 of 1957).
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AB . 1
Question 1 (specific computations, Insurance monies) (Revision / Home work) (CG ID 03)
A manufacturing company was transporting two of its machines from unit ‘A’ to unit ‘B’ (which is at a distance
of 100 miles) on 1-9-PY by a truck. On account of a civil disturbance, both the machines were damaged. The
insurance company paid Rs. 5 lakhs for the damaged machineries. On these facts, for submitting the return of
income for the previous year, your advice is sought as to:
(i) Whether the damage of machines result in any transfer ?
(ii) How the amount received from the insurance company are to be treated for taxability ?
(iii) Would there be any impact on the written down value of the block of plant and machinery ?
Discuss these points in your answer and give your valuable opinion.
Question 2 (specific computations, Insurance monies) (CG ID 48)

Rohit Ltd installed a new plant for Rs. 20,00,000 on Dec. 30, 2008. They received a grant from the central
Government exclusively for busying the new plant amounting to Rs. 5,00,000. In September 2010 the new plant
was destroyed by fire. The company realized Rs. 10,00,000 from the insurance company and Rs. 2,50,000 from
scrap sale. Calculate the profit / loss for this plant. Depreciation allowed for year ending 31-03-09 is Rs. 1,12,500
and for the year ending 31-03-2010 is Rs. 2,08,125.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AB . 1
(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during
any previous year any money or other assets under an insurance from an insurer on account of damage
to, or destruction of, any capital asset, as a result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a
declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-
tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year
in which such money or other asset was received and for the purposes of section 48, value of any money or
the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of such capital asset.
Explanation.—For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to
it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AC . 1
Question 1 (specific computations, 45(2)) (CG ID 42)

The assessee company purchased a land on 01-01-1972 for Rs. 120,000 (stamp duty value on 01-01-72 Rs.
1350,000) (FMV as on 01-04-2001 – 350,000) the land was acquired for use of industrial purpose. The company
on 02-02-2008 (FMV : 10,10,000) decided to go into real estate business and said land is intended to be used
for real estate business and company has resolved it dated 15-02-2008 (FMV : 11,00,000) that the land will be
used for development of property. The difference has been transferred to general reserve in the accounts and
land is now being shown as under the head current assets in the books. The Land is sold during the PY for
13,50,000. Discuss the tax implications.
Question 2 (specific computations, 45(2)) (Revision / Home work) (CG ID 43)

Assessee bank acquired securities as stock in trade on 02-02-2002 for 200 crore. On 02-03-2005 bank converted
the securities as capital asset and recorded the book entry at 225 crore (FMV 250 crore). During year it is sold
at 300 crores. You are required to discuss tax implications of the same.
Question 3 (specific computations, 45(2)) (CG ID 49)

Mr. Dilip, an individual purchased unlisted shares in Indian companies as investments on 10.5.2005 for Rs. 30
lacs. On June 1, 2008 he started a business a dealer in shares and transferred 50% of such shareholding to the
business. The fair market value of the entire shares as on that date was Rs. 60 lacs. The shares held in business
were sold by Dilip for Rs. 34 lacs in PY. Compute the taxable income of Mr. Dilip under the relevant hands of
income indicating the relevant assessment year.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AC . 1
45(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by
way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a
business carried on by him shall be chargeable to income-tax as his income of the previous year in which
such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair
market value of the asset on the date of such conversion or treatment shall be deemed to be the full
value of the consideration received or accruing as a result of the transfer of the capital asset.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AD . 1
Question 1 (specific computations, DE-mat of shares) (Revision / Home work) (CG ID 06)
R furnishes the following information:
No. of shares Month and year of purchase Shares dematted
month and year
1,000 March 1992 July, 1999
500 March 1995 -
1,000 December 1996 October 1998
He sold 1,500 shares in January out of the dematted shares. He seeks your advice as to the taxability towards
capital gains. Discuss the provisions of law.
Question 2 (specific computations) (CG ID 56)

Mrs. Sanghvi acquired 1000 listed shares in January 1998 at a cost of Rs. 2 lacs. The company allotted one
bonus share for every 2 shares held in March 2008. She sells 1,250 in April of PY for a consideration of Rs. 10
lacs. The demat account has been entered first with bonus shares and thereafter with original shares. The
transaction is subject to securities transaction tax. Determine the capital gains.
FMV as on 1.4.01 is Rs. 60 per share.
FMV as on 31.01.18 is Rs. 1,000 per share.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AD . 1
(2A) Where any person has had at any time during previous year any beneficial interest in any securities,
then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest
in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous
year in which such transfer took place and shall not be regarded as income of the depository who is deemed
to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996,
and for the purposes of—
(i) section 48; and
(ii) proviso to clause (42A) of section 2,
the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-
first-out method.
Explanation.—For the purposes of this sub-section, the expressions "beneficial owner", "depository" and
"security" shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of
section 2 of the Depositories Act, 1996.
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Question 1 (specific computations, partnership firms) (CG ID 44)

Mr. A is admitted as partner in firm M/s ABC. He transfers capital asset on 01-03 to firm as his capital
contribution. Market value of the asset on date of transfer is 50,00,000 however firm has recorded it at book
value of 30,00,000. Capital asset was acquired by Mr. A in 1971 for Rs. 10,00,000.
Question 2 (specific computations, partnership firms) (Revision / Home work) (CG ID 04)
A firm consisting of four partners was dissolved consequent to the death of one of the partners. The remaining
partners reconstituted the firm immediately, without discontinuance of the business, and carried on the business
as before. The inventory of stocks on the date of dissolution was valued at cost, which was lower than the market
value and all other assets were valued at book value, for the purpose of transfer to the reconstituted firm. The
Assessing Officer, while arriving at the total income of the firm as constituted prior to dissolution, valued the
stocks as well as the other assets at market value. You are required to comment on the correctness of the
Assessing Officer’s action.
A firm RGS had an immovable property purchased out of the firm’s funds for Rs. 6,00,000. On 31-3-2001, the
property was divided among the partners equally by making entries in the capital accounts of the partners. The
property was subsequently sold on 1-7-PY for Rs. 9,00,000. The Assessing Officer assessed the resultant capital
gain in the hands of the firm. Discuss the validity of the order of the Assessing Officer.

X and Y form a partnership firm. Soon after formation of the firm X brings on July 10, the following assets as
his capital contribution:
Gold Silver
Fair market value on the date of transfer by X to firm 5,40,000 72,000
Amount recorded in books of account 6,00,000 50,000
Actual cost 30,000 12,000
Year of acquisition 1984-85 PY
Rs. 6,50,000 is credited in the capital account of X in the firm.

Is X chargeable to tax in this case?

X, Y and Z are three partners of a firm. On March 10, the firm is dissolved. The following assets are
distributed to partners:
Residential Listed Government
Car
house securities
(taken by Z)
(taken by X) (taken by Y)
Fair market value on March 10, 22,60,000 50,000 30,000
Agreed value as per dissolution deed 11,70,000 46,000 32,000
Cost of acquisition 40,000 5,000 -
Cost of acquisition as per section 50 (i.e.
- - 8,000
written down value)
Year of acquisition 1949-50 2003-04 2008-09
Fair market value on April 1, 2001 3,00,000 N.A. N.A.
Determine the amount of chargeable capital gains.
X is a partner in a firm, A co., along with three other persons. On December 31, the firm is dissolved and X
takes over the following assets :
Plant and machinery Residential house

(depreciation is Premises (no
claimed by the depreciation is
firm) claimed)
Fair market value of assets on December 31 6,50,000 48,00,000
Agreed value of assets taken over by X as per
dissolution deed 4,60,000 18,50,000
Cost of acquisition (*as per section 50) 3,10,000 90,000
Year of acquisition 1970 1940
Fair market value on April 1, 2001 --- 4,40,000
Discuss whether A Co. is liable for tax on any capital gains.

Will X be able to claim depreciation in respect of plant and machinery on Rs. 6,50,000 ?
45(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other
association of persons or body of individuals (not being a company or a co-operative society) in which he
is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his
income of the previous year in which such transfer takes place and, for the purposes of section 48, the
amount recorded in the books of account of the firm, association or body as the value of the capital
asset shall be deemed to be the full value of the consideration received or accruing as a result of the
transfer of the capital asset.
45(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets
on the dissolution of a firm or other association of persons or body of individuals (not being a company or a
co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of
the previous year in which the said transfer takes place and, for the purposes of section 48, the fair
market value of the asset on the date of such transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer.
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Question 1 (specific computations, compulsory acquisition) (Revision / Home work) (CG ID 07)
R Ltd., a public limited company, engaged in the generation and distribution of power had its business acquired
by the Government in June, 2003. Certain items of plant and machinery used by the company in its business
were taken over by the Government at a price which resulted in the company realizing a surplus of Rs. 26,60,000
over its written down value. The compensation was received by the company in April, which was accepted by
it under protest. The company proceeded to initiate arbitration proceedings under law and was granted an
additional compensation Rs. 16 lakhs. This was decided by the arbitrators in December and received by the
company in March.
The company claims that the assessment of the company to tax should not be made since the business was
completely taken over by the Government in June, 2003 and at the time of final determination of compensation
in March, the company did not exist. Do you agree to the company’s claim ? Discuss with reference to the
assessment year(s) to which the claim to tax, if any, can be related.
Question 2 (specific computations, compulsory acquisition) (Revision / Home work) (CG ID 08)
A plot of land purchased 5 years back by Ram Janki trust was acquired by Government of India for construction
of an over-bridge in Mumbai. The compensation awarded by Revenue Authorities was at Rs. 5,00,000. The trust
preferred an appeal against the order for increase in the compensation awarded to it. The appellate authority
increased the compensation by further Rs. 4 lakhs in August, 2009 but the amount was actually received in
April, 2010. You are required to compute the capital gains, if any, arising to the trust in respect of additional
compensation by it and state the year of its taxability.
Question 3 (specific computations, compulsory acquisition) (CG ID 52)

The Government compulsorily acquired land of Mr. Balaji in June 2009 and paid compensation of Rs. 5,00,000
in April 2010. The land was acquired by Mr. Balaji in May 1998 for Rs. 3,00,000. Mr. Balaji claimed more
compensation and court awarded additional compensation of Rs. 8 lakhs in January 2016 and it was paid in
April 2016. Compute the taxable capital gain from the above transaction indicating the relevant assessment year.
Expenses in connection with compulsory acquisition were Rs. 20,000 and for obtaining enhancement of
compensation was Rs. 40,000.
Question 4 (specific computations, compulsory acquisition) (CG ID 53)

The Central Government acquires a house property owned by X on October 17, 2009. This property was
purchased on April 10, 1976 for Rs. 76,000 (cost of improvement incurred during 2005-06: Rs. 40,000 and fair
market value of the property on April 1, 2001 was Rs. 1,32,000). The Government awards Rs. 5,67,000 as
compensation out of which Rs. 1,00,000 is received on May 4, 2011 and Rs. 4,67,000 is received on April 1,
2012. Expenditure incurred by X for getting compensation fixed: Rs. 2,000. Being aggrieved against the award,
X files an appeal. The Bombay court, as per order dated August 1, 2011, enhanced the compensation from Rs.
5,67,000 to Rs. 8,50,000 (legal expenditure incurred in court’s proceedings : Rs 10,000). X receives the
additional compensation of Rs. 2,83,000 on April 15, PY. Compute the income under the head “Capital gains”.
Does it make any difference if the additional compensation is received by X’s son after the death of X?
45(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of
a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the
consideration for which was determined or approved by the Central Government or the Reserve Bank of India,
and the compensation or the consideration for such transfer is enhanced or further enhanced by any
court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :—
(a) the capital gain computed with reference to the compensation awarded in the first instance or, as
the case may be, the consideration determined or approved in the first instance by the Central
Government or the Reserve Bank of India shall be chargeable as income under the head "Capital gains"
of the previous year in which such compensation or part thereof, or such consideration or
part thereof, was first received; and
(b) the amount by which the compensation or consideration is enhanced or further enhanced by the
court, Tribunal or other authority shall be deemed to be income chargeable under the head
"Capital gains" of the previous year in which such amount is received by the assessee :
Provided that any amount of compensation received in pursuance of an interim order of a court,
Tribunal or other authority shall be deemed to be income chargeable under the head
"Capital gains" of the previous year in which the final order of such court, Tribunal or other
authority is made;
(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is
computed by taking the compensation or consideration referred to in clause (a) or, as the case may be,
enhanced compensation or consideration referred to in clause (b), and subsequently such compensation
or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of
that year shall be recomputed by taking the compensation or consideration as so reduced
by such court, Tribunal or other authority to be the full value of the consideration.
(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement
shall be taken to be nil;
(ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st
day of April, 1988;
(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced
compensation or consideration is received by any other person, the amount referred to in clause (b) shall
be deemed to be the income, chargeable to tax under the head "Capital gains", of such other person.
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C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AG . 1
(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee,
being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or
building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income
of the previous year in which the certificate of completion for the whole or part of the project is
issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date
of issue of the said certificate, of his share, being land or building or both in the project, as increased
by the consideration received in cash, if any, shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the capital asset :
Provided that the provisions of this sub-section shall not apply where the assessee transfers his share
in the project on or before the date of issue of the said certificate of completion, and the capital
gains shall be deemed to be the income of the previous year in which such transfer takes
place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose
of determination of full value of consideration received or accruing as a result of such transfer.
Explanation.—For the purposes of this sub-section, the expression—
(i) "competent authority" means the authority empowered to approve the building plan by or under any law
for the time being in force;
(ii) "specified agreement" means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building or both, in
consideration of a share, being land or building or both in such project, whether with or without
payment of part of the consideration in cash;
(iii) "stamp duty value" means the value adopted or assessed or assessable by any authority of the
Government for the purpose of payment of stamp duty in respect of an immovable property being land
or building or both.]
(6) Notwithstanding anything contained in sub-section (1), the difference between the repurchase price of the
units referred to in sub-section (2) of section 80CCB and the capital value of such units shall be deemed to be
the capital gains arising to the assessee in the previous year in which such repurchase takes place or the plan
referred to in that section is terminated and shall be taxed accordingly.
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Question 1 (Buy Back) (CG ID 84)

On June 6, 1984, X purchases 1,000 shares (face value Rs. 10 per share) in A Ltd. for Rs. 12,000. Under a
scheme of buy-back of its own shares, A Ltd. purchases these shares on October 10 PY, for a consideration of
Rs. 4,60,000. On October 10, PY, A Ltd. has an accumulated profit of Rs. 50,00,000. Find out the income
chargeable to tax. Is there any dividend income under section 2(22) ?
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Capital gains on purchase by company of its own shares or other specified securities.
46A. Where a shareholder or a holder of other specified securities receives any consideration from any
company for purchase of its own shares or other specified securities held by such shareholder or holder
of other specified securities, then, subject to the provisions of section 48, the difference between the cost
of acquisition and the value of consideration received by the shareholder or the holder of other specified
securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of
other specified securities, as the case may be, in the year in which such shares or other specified securities were
purchased by the company.
Explanation.—For the purposes of this section, "specified securities" shall have the meaning assigned to it
in Explanation to section 77A of the Companies Act, 1956 (1 of 1956).
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Question 1 (Taxation of 112, 111A) (CG ID 09)

R acquires 10,000 equity shares of R Ltd., listed in stock exchanges in India and abroad and a constituent of
BSE 500 on 15-3-2013 @ Rs. 2,250 per share. Fair market value of the shares on 31st January 2018 is 1600 per
share. He transfers the shares at Rs. 5,000 per share on 31-12-PY. The brokerage and securities transactions tax
deducted were at 0.5% and 0.1% respectively. Examine the liability of R to income tax. Will your answer be
different, if instead of selling the shares in the market R privately transferred the shares to his son at the same
price ?
Will your answer be different if Fair market value of the shares on 31st January 2018 is 3600 per share or may
be even 6600 per share.
Question 2 (Taxation of 112, 111A) (CG ID 55)

Mr.A acquired 2000 shares listed in National Exchange for Rs. 5 lakhs during 2012-13. Company allotted him
equal value of bonus shares during 2014-15. Second bonus issue was made during March PY when he received
1 bonus share for every 2 shares held by him. The entire shares held in the company have been sold by him on
8th of August PY @ 1,100/- per shares on which securities transaction tax was paid. Determine the taxable
capital gain indicating the nature of capital gain. Fair market value of the shares on 31st January 2018 is 600
Question 3 (settlement of disputes) (CG ID 10)

Discuss the following:
1. R entered into an agreement with G for the purchase of a property of Rs. 10 lakhs and paid Rs. 10,000
as earnest money. On G failing to execute a conveyance in respect of the property, a suit for specific
performance was filed by R. the suit was comprised and R agreed to receive Rs. 50,000 by way of
damages and gave up his right to specific performance. What will be the position of this amount under
the Income-tax Act.
2. An assessee acquired 1,000 shares of R Ltd. at Rs. 100 per share on 1-4-1975. The company issued
bonus shares in the ratio of 1:1 in April 2004 and a further issue in the ratio of 1:2 in April 2008. The
assessee sold in June-PY the bonus shares allotted to him in April 2008 at Rs. 175 per share (FMV as
31/01/2018 is Rs. 100 per share) . The market value of the shares as on 1-4-2001 is Rs. 250 per share.
What is the capital gain assessable in the hands of the assessee?
Question 4 (Previous owner and Indexation) (CG ID 11)

R was allotted 3,000 equity shares of a widely held company on 1-3-2009 of the value of Rs. 10 each. R gifted
2,000 shares to his son G on 30-11-PY on which day the share is quoted at Rs. 50. G disposed of 1,000 shares
at Rs. 80 per share on 15-3-PY. What are the consequences of the transaction in the hands of G ? Discuss.
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Question 5 (Debentures to shares) (CG ID 54)

Mr. X purchases convertible debentures for Rs. 4,88,000 during May 2002. The debentures were converted into
shares in June 2006. These shares were sold for Rs. 10,00,000 in August. The brokerage expenses are Rs. 30,000.
Compute the capital gain taxable of Mr. X.
Question 6 (Debentures to shares) (CG ID 58)

X gets 1,000 partly convertible debentures (face value Rs. 100) of A Ltd. (cost being Rs. 200 per debenture) at
the time of original allotment to him on May 16, 2004. As per terms of allotment A Ltd. converts 60 per cent
portion of each debenture into 2 equity shares of face value of Rs. 10 on July 1, 2012. On September 10, PY, X
transfers 2,000 equity shares in A Ltd. @ Rs. 300 per share and 1,000 (non-convertible portion) debentures @
Rs. 310 per debenture. Find out the amount of capital gains chargeable to tax.
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Question 1 (specific computations, company in liquidation) (CG ID 12)

R Private Ltd. went into liquidation on 1-6-PY. The company was seized and possessed of the following funds
prior to the distribution of assets to the shareholders:
Rs.
Share capital 5,00,000
Reserves prior to 1-6-PY 3,00,000
Excess realization in the course of liquidation 5,00,000
Total 13,00,000
There are 5 shareholders, each of whom received Rs. 2,60,000 from the liquidation in full settlement. You are
required to examine the various issues and advice the shareholders about their liability to income-tax.

R had purchased 5,000 equity shares in M/s. Kamat & Co. Ltd. at the rate of Rs. 2 per share (on 16-4-1985).
M/s. Kamat & Co. Ltd. goes into liquidation on 30-6-PY. The Balance Sheet of the company as on the date of
liquidation stood as under:
Rs. Rs.
50,000 equity shares 12,00,000 10,000 debentures in Patel & Co. 30,00,000
Ltd. (Cost Rs. 10,00,000)
Accumulated profits 30,00,000 Cash in hand 12,00,000
Total 42,00,000 Total 42,00,000
On liquidation tax, the assets are distributed to the shareholders. In the process, R gets 1,000 debentures (market
value Rs. 3,00,000) and 50,000 cash during the year. He transfers the entire debentures on 10-3-PY for Rs.
3,20,000. Indicate the tax consequences of these transactions.
X holds 10 per cent of equity shares of ABC Ltd. (cost of acquisition on April 1, 1969 of 1,500 shares : Rs.
75,000; fair market value on April 1, 2001 : Rs. 80,000). ABC Ltd. goes into liquidation on December 31,.
Balance sheet of ABC Ltd. as on December 31, is given below. Determine the net income of (a) the company,
and (b) X.
Capital and liabilities Rs. Assets and properties Rs.

Share capital 15,00,000 Total assets comprising land and building
(15,000 shares of Rs100) on Which no depreciation is claimed
P & L Account 75,000 (amount Realized on December 20,
General reserve 8,25,000 Rs. 1,41,00,000
Sundry creditors 26,00,000 And cost of liquidation : Rs.45,000) 50,00,000
(acquired On April 1, 1997 : Rs.
43,93,091)
50,00,000 50,00,000
Capital gains on distribution of assets by companies in liquidation.

46. (1) Notwithstanding anything contained in section 45, where the assets of a company are distributed
to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company
for the purposes of section 45.
(2) Where a shareholder on the liquidation of a company receives any money or other assets from the
company, he shall be chargeable to income-tax under the head "Capital gains", in respect of the money so
received or the market value of the other assets on the date of distribution, as reduced by the amount assessed
as dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be
deemed to be the full value of the consideration for the purposes of section 48.
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Question 1 (Not regarded as transfer) (CG ID 16)

An individual was the sole proprietor of a business. His net investment in the business, on 01-4-PY, was Rs.
20 lakhs represented by:
Rs. Rs.
Fixed assets 18,00,000
Current assets 10,00,000
28,00,000
Current liabilities 5,00,000
Loans 3,00,000 8,00,000
20,00,000
Finding himself unable to carry on business by himself and also to attract additional capital, he formed a private
limited company in April-PY with an authorized capital of Rs. 1 crore. At the time of formation of the company,
A and his wife had subscribed to 100 equity shares each-fully paid in cash on 10-6-PY. A transfers his individual
business in entirely, as going concern, to the private limited company for Rs. 40 lakhs for issue of shares in the
following manner:
Preference Shares:
Wholly to Mrs. A and her sister Mrs. G (in joint names) 1,50,000 Shares
Equity Shares:
Mr. A 1,30,000 Shares
Mr. C, major son of A 20,000 Shares
Mr. D, friend of A 30,000 Shares
Mrs. E, a married sister of A 20,000 Shares
Mr. F, husband of Mrs. E 50,000 Shares
The shares of the face value of Rs. 10 each are to be issued fully paid up. No other purchase consideration for
the transfer of the business to the company was due.
Required:
(i) Ascertain whether in A’s hands any tax liability will be due; if so, also indicate the assessment year
relevant for this.
(ii) If, on 10-5-AY, A sold 10,000 equity shares allotted to him, at Rs. 50 per share, to a friend, what will
be the consequences ?
Question 2 (Not regarded as transfer) (Revision / Home work) (CG ID 17)

R held 2,000 shares in G Ltd. This company amalgamated with another company during the previous year.
Under the scheme of amalgamation, R was allotted 1,000 shares in the new company. The market value of shares
so allotted is higher by Rs. 50,000 than the value of holding in G Ltd. The Assessing Officer proposes to treat
the transaction as an exchange and to tax Rs. 50,000 as capital gain. Is he justified ? Discuss.

X Co. Ltd. was amalgamated with Y Co. Ltd. on 30.04.PY. X Co. Ltd. was engaged in real estate and whereas
Y Co. Ltd. was engaged in manufacture of textile articles. Y Co. Ltd. after amalgamation altered its objects
clause of Memorandum of Association, to carry on real estate business. The stock in trade of X Co. Ltd. (being
vacant lands) was taken over at Rs. 110 lakhs by Y Co. Ltd. as against their original cost of Rs. 125 lakhs to X
Co. Ltd. for the purpose of amalgamation. Y Co. Ltd incurred Rs. 25 lakhs towards development of those lands
obtained on amalgamation. It sold the entire land for Rs. 160 lakhs during the year. Determine the tax implication
of the transaction in the hands of Y Co. Ltd.

Mr. X transferred his residential house to Y for 10 lakh on 1st April,. The value of the said house as per Stamp
Valuation Authority was 16 lakh. Mr. Y is a childhood friend of Mr. X. Mr. X gifted a plot of land (purchased
by him on 1st August, 2007) to Mr. Y on 1st July,. The value as per Stamp Valuation Authority is 8 lakh. Mr. Y
sold the land on 1st March, at 14 lakh. Compute total income of Mr. Y.

Balance sheet of partnership firm as on 31st march is as under
Capital and liabilities
Capital account of Mr. A 6,00,000
Capital account of Mr. B 3,00,000
Creditors 1,00,000
Assets
Land (FMV : 13 WDV : 1.2) 2,00,000
Building (FMV : 10 WDV : 0.7) 1,00,000
Machinery (FMV : 12 WDV : 2) 3,00,000
Stock in trade (FMV : 5) 4,00,000
Now the firm is taken over by the company and firm is dissolved. Discuss the tax treatment of the same.

X Ltd. owns the following assets:
Units of UTI (debt-oriented) House property
Cost of acquisition Rs. 1,40,000 Rs. 70,000
Date of acquisition March 10, 2008 March 10, 2008
These capital assets (no depreciation is claimed) are transferred by X Ltd. to its wholly-owned Indian subsidiary
company – S Ltd. on April 1, 2015. On July 7, PY these assets are transferred by S ltd. for a consideration of
Rs. 4,50,000 (i.e., units: Rs. 2,15,700, house property: Rs. 2,34,800). Compute the capital gain chargeable to tax
in the case of S Ltd.
Question 6 (Not regarded as transfer) (CG ID 85) (Revision / Home work)
X is a member of DEL Stock Exchange. He purchased the membership ticket on March 2, 1956 for Rs. 5,000.
The fair market value on April 1, 2001 is Rs. 6,000. The Stock Exchange is converted into a company on
November 1, 2014. Consequently, on November 1, 2014, X is allotted 1,000 shares in DEL Stock Exchange
Ltd. and a ticket to trade in DEL Stock Exchange Ltd. X transfers 1,000 shares in DEL Stock Exchange Ltd. on
December 1, for Rs. 2,00,000 and the right to trade in DEL Stock Exchange Ltd. for Rs. 45,000, find out the
amount of capital gains chargeable to tax.
Question 7 (Not regarded as transfer) (CG ID 86) (Revision / Home work)

X Ltd. owns the following assets :
Goodwill Shares (non-listed) House property
Cost of acquisition Self-generated Rs. 1,38,600 Rs. 96,000
Date of acquisition -* March 10, 2011 March 10, 2012
(*Since the commencement of business on November 1, 1981).
These capital assets (no depreciation is claimed) are transferred by X Ltd. to its wholly-owned Indian subsidiary
company S Ltd. on April 1, 2017. On July 7, these assets are transferred by S Ltd. for consideration of Rs.
10,50,000 (i.e., goodwill : Rs. 6,00,000, shares : Rs. 2,15,700, house property : Rs. 2,34,800). Compute the
capital gain chargeable to tax in the case of S Ltd. for the year.
Transactions not regarded as transfer.

47. Nothing contained in section 45 shall apply to the following transfers :—
(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family;
(ii) [***]
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust :
Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset
being shares, debentures or warrants allotted by a company directly or indirectly to its employees under
any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance
with the guidelines issued by the Central Government in this behalf;
(iv) any transfer of a capital asset by a company to its subsidiary company, if—
(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company,
and
(b) the subsidiary company is an Indian company;
(v) any transfer of a capital asset by a subsidiary company to the holding company, if—
(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company :
Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer of a capital asset
made after the 29th day of February, 1988, as stock-in-trade;
(vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an Indian company;
(via) any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian
company, by the amalgamating foreign company to the amalgamated foreign company, if—
(a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue
to remain shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated;
(viaa) any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned
and brought into force by the Central Government under sub-section (7) of section 45 of the Banking
Regulation Act, 1949 (10 of 1949), of a capital asset by the banking company to the banking institution.
(i) "banking company" shall have the same meaning assigned to it in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949);
(ii) "banking institution" shall have the same meaning assigned to it in sub-section (15) of section 45
of the Banking Regulation Act, 1949 (10 of 1949);
(viab) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred
to in the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly,
its value substantially from the share or shares of an Indian company, held by the amalgamating foreign
company to the amalgamated foreign company, if—
(A) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company; and
(B) such transfer does not attract tax on capital gains in the country in which the amalgamating
company is incorporated;
(vib) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the
resulting company is an Indian company;
(vic) any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the
demerged foreign company to the resulting foreign company, if—
(a) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign
company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign
company is incorporated :
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956) shall not
apply in case of demergers referred to in this clause;
(vica) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the
successor co-operative bank;
(vicb) any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held
by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to
him of any share or shares in the successor co-operative bank.
Explanation.—For the purposes of clauses (vica) and (vicb), the expressions "business reorganisation",
"predecessor co-operative bank" and "successor co-operative bank" shall have the meanings
respectively assigned to them in section 44DB;
(vicc) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in
the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its
value substantially from the share or shares of an Indian company, held by the demerged foreign
company to the resulting foreign company, if—
(a) the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign
company, continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which the demerged foreign
company is incorporated:
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956) shall not
apply in case of demergers referred to in this clause;
(vid) any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders
of the demerged company if the transfer or issue is made in consideration of demerger of the
undertaking;
(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares
held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment to him of any share or shares in the
amalgamated company except where the shareholder itself is the amalgamated company, and
(b) the amalgamated company is an Indian company;
(viia) any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section (1)
of section 115AC, made outside India by a non-resident to another non-resident;
66
[(viiaa) any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian
company issued outside India, by a non-resident to another non-resident;]
Following clause (viiab) shall be inserted after clause (viiaa) of section 47 by the Finance Act, 2018,
w.e.f. 1-4-2019 :
(viiab) any transfer of a capital asset, being—
(a) bond or Global Depository Receipt referred to in sub-section (1) of section 115AC; or
(b) rupee denominated bond of an Indian company; or
(c) derivative,
made by a non-resident on a recognised stock exchange located in any International Financial Services
Centre and where the consideration for such transaction is paid or payable in foreign currency.
(a) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of
(b) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation
1 to clause (5) of section 43;
(c) "derivative" shall have the meaning assigned to it in clause (ac) of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956);
(viib) any transfer of a capital asset, being a Government Security carrying a periodic payment of interest,
made outside India through an intermediary dealing in settlement of securities, by a non-resident to
another non-resident.
Explanation.—For the purposes of this clause, "Government Security" shall have the meaning assigned
to it in clause (b) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(viic) any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond
Scheme, 2015, by way of redemption, by an assessee being an individual;
(viii) any transfer of agricultural land in India effected before the 1st day of March, 1970;
(ix) any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book,
manuscript, drawing, painting, photograph or print, to the Government or a University or the National
Museum, National Art Gallery, National Archives or any such other public museum or institution as
may be notified by the Central Government in the Official Gazette to be of national importance or to be
of renown throughout any State or States.
Explanation.—For the purposes of this clause, "University" means a University established or
incorporated by or under a Central, State or Provincial Act and includes an institution declared under
section 3 of the University Grants Commission Act, 1956 (3 of 1956), to be a University for the purposes
of that Act;
(x) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any
form, of a company into shares or debentures of that company;
(xa) any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section
115AC into shares or debentures of any company;
67
[(xb) any transfer by way of conversion of preference shares of a company into equity shares of that
company;]
(xi) any transfer made on or before the 31st day of December, 1998 by a person (not being a company) of a
capital asset being membership of a recognised stock exchange to a company in exchange of shares
allotted by that company to the transferor.
Explanation.—For the purposes of this clause, the expression "membership of a recognised stock
exchange" means the membership of a stock exchange in India which is recognised under the provisions
of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(xii) any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared
and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986) where such sick industrial company is being managed by its workers' co-operative :
Provided that such transfer is made during the period commencing from the previous year in which the
said company has become a sick industrial company under sub-section (1) of section 17 of that Act and
ending with the previous year during which the entire net worth of such company becomes equal to or
exceeds the accumulated losses.
Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in
clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act,
1985 (1 of 1986);
(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the
firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company
in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result
of which an association of persons or body of individuals is succeeded by such company :
Provided that—
(a) all the assets and liabilities of the firm or of the association of persons or body of individuals
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 accounts stood in the books of the firm on
the date of the 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 way of allotment of shares in the company; and
(d) the aggregate of the shareholding 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 continues to be as such
for a period of five years from the date of the succession;
(e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in
accordance with a scheme for demutualisation or corporatisation which is approved by the
Securities and Exchange Board of India established under section 3 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992);
(xiiia) any transfer of a capital asset being a membership right held by a member of a recognised stock
exchange in India for acquisition of shares and trading or clearing rights acquired by such member in
that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation
which is approved by the Securities and Exchange Board of India established under section 3 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company
(hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of
a share or shares held in the company by a shareholder as a result of conversion of the company into a
limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited
Liability Partnership Act, 2008 (6 of 2009):
Provided that—
(a) all the assets and liabilities of the company immediately before the conversion become the assets
and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of
the limited liability partnership and their capital contribution and profit sharing ratio in the limited
liability partnership are in the same proportion as their shareholding in the company on the date
of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly,
in any form or manner, other than by way of share in profit and capital contribution in the limited
liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability
partnership shall not be less than fifty per cent at any time during the period of five years from the
date of conversion;
(e) the total sales, turnover or gross receipts in the business of the company in any of the three
previous years preceding the previous year in which the conversion takes place does not exceed
sixty lakh rupees; [***]
(ea) the total value of the assets as appearing in the books of account of the company in any of the three
previous years preceding the previous year in which the conversion takes place does not exceed
five crore rupees; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit
standing in the accounts of the company on the date of conversion for a period of three years from
the date of conversion.
Explanation.—For the purposes of this clause, the expressions "private company" and "unlisted public
company" shall have the meanings respectively assigned to them in the Limited Liability Partnership
Act, 2008 (6 of 2009);
(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 or intangible asset to
the company :
Provided that—
(a) all the 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) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total
voting power in the company and his shareholding continues to remain as such for a period of five
years from the date of the 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;
(xv) any transfer in a scheme for lending of any securities under an agreement or arrangement, which the
assessee has entered into with the borrower of such securities and which is subject to the guidelines
issued by the Securities and Exchange Board of India, established under section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992) or the Reserve Bank of India constituted under sub-
section (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934), in this regard;
(xvi) any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by
the Central Government;
(xvii) any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange
of units allotted by that trust to the transferor.
Explanation.—For the purposes of this clause, the expression "special purpose vehicle" shall have the
meaning assigned to it in the Explanation to clause (23FC) of section 10;
(xviii) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating
scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit
or units, in the consolidated scheme of the mutual fund:
Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more
schemes of a fund other than equity oriented fund.
(a) "consolidated scheme" means the scheme with which the consolidating scheme merges or which
is formed as a result of such merger;
(b) "consolidating scheme" means the scheme of a mutual fund which merges under the process of
consolidation of the schemes of mutual fund in accordance with the Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board
of India Act, 1992 (15 of 1992);
(c) "equity oriented fund" shall have the meaning assigned to it in clause (38) of section 10;
(d) "mutual fund" means a mutual fund specified under clause (23D) of section 10;
(xix) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan
of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit
or units, in the consolidated plan of that scheme of the mutual fund.
(a) "consolidating plan" means the plan within a scheme of a mutual fund which merges under the
process of consolidation of the plans within a scheme of mutual fund in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(b) "consolidated plan" means the plan with which the consolidating plan merges or which is formed
as a result of such merger;
(c) "mutual fund" means a mutual fund specified under clause (23D) of section 10.]
Withdrawal of exemption in certain cases.

47A. (1) Where at any time before the expiry of a period of eight years from the date of the transfer of a
capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47,—
(i) such capital asset is converted by the transferee company into, or is treated by it as, stock-
in-trade of its business; or
(ii) the parent company or its nominees or, as the case may be, the holding company ceases or
cease to hold the whole of the share capital of the subsidiary company,
the amount of profits or gains arising from the transfer of such capital asset not charged under section
45 by virtue of the provisions contained in clause (iv) or, as the case may be, clause (v) of section 47 shall,
notwithstanding anything contained in the said clauses, be deemed to be income chargeable under the head
"Capital gains" of the previous year in which such transfer took place.
(2) Where at any time, before the expiry of a period of three years from the date of the transfer of a
capital asset referred to in clause (xi) of section 47, any of the shares allotted to the transferor in exchange
of a membership in a recognised stock exchange are transferred, the amount of profits and gains not charged
under section 45 by virtue of the provisions contained in clause (xi) of section 47 shall, notwithstanding
anything contained in the said clause, be deemed to be the income chargeable under the head
"Capital gains" of the previous year in which such shares are transferred.
(3) Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv)
of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital
asset or intangible asset not charged under section 45 by virtue of conditions laid down in the proviso to clause
(xiii) or the proviso to clause (xiv) of section 47 shall be deemed to be the profits and gains chargeable to
tax of the successor company for the previous year in which the requirements of the proviso to clause (xiii)
or the proviso to clause (xiv), as the case may be, are not complied with.
(4) Where any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied
with, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or share
or shares not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed
to be the profits and gains chargeable to tax of the successor limited liability partnership or the
shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of
the said proviso are not complied with.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AL . 1
Problem 1 (depreciable assets) (CG ID 59)
Details regarding the opening WDV, additions the year and deletions during the year of 5 block of assets are
given below. You are required to compute depreciation or capital gain/ loss for the purpose of income-tax:-
Assets put to use Assets put to

Category of Opening Sold during
Block Rate for less than 180 use for 180
asset WDV the year
days days or more
A. Building 5% 4,00,000 - 1,00,000 -
B. Building 10% 12,50,000 2,50,000 - -
C. Furniture 10% 2,00,000 - 75,000 -
D. Motor car 15% 3,00,000 50,000 - 3,10,000
E. Machinery 15% 4,00,000 - 2,20,000 7,50,000
In respect of Block D above the entire assets in that block is sold during the year and expenses on transfer is Rs.
15,000. In respect of Block E above there are still some assets remaining in that block and expenses incurred
for transfer is Rs. 20,000/-
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AL . 1
Special provision for computation of capital gains in case of depreciable assets.

50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset
forming part of a block of assets in respect of which depreciation has been allowed under this Act or
under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48and 49 shall be subject to the
following modifications :—
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset
together with the full value of such consideration received or accruing as a result of the transfer of any
other capital asset falling within the block of the assets during the previous year, exceeds the
aggregate of the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from the transfer of short-term
capital assets;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block
are transferred during the previous year, the cost of acquisition of the block of assets shall be the written
down value of the block of assets at the beginning of the previous year, as increased by the actual cost
of any asset falling within that block of assets, acquired by the assessee during the previous year and
the income received or accruing as a result of such transfer or transfers shall be deemed to be the
capital gains arising from the transfer of short-term capital assets.
Special provision for cost of acquisition in case of depreciable asset.

50A. Where the capital asset is an asset in respect of which a deduction on account of depreciation under clause
(i) of sub-section (1) of section 32 has been obtained by the assessee in any previous year, the provisions
of sections 48 and 49 shall apply subject to the modification that the written down value, as defined in
clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AM . 1
Question 1 (slump sale) (CG ID 20)

Your client, A Ltd. has two industrial undertakings-one engaged in production of audio music CDs and cassettes
and the other engaged in production of video CDs. As a restructuring drive, the company has decided to sell its
undertaking producing video CDs as a going concern by way of slump sale for Rs. 450 lakhs to new company
called T Ltd., in which it holds 75% equity shares. The balance sheet of A ltd. as on 31-3-PY reads as follows:
(Rs. In lakhs)
Audio Unit Video Unit

Fixed assets 150 225
Debtors 150 112.5
Inventories 75 37.5
Liabilities 42 75
Paid up share capital Rs. 378 lakhs
General Reserve Rs. 222 lakhs
Share premium Rs. 33 lakhs
Revaluation Reserve Rs. 140 lakhs
The company set up the video unit on 1-4-2005. The written down value of the block of assets for tax purposes
as on 31-3-PY is Rs. 200 lakhs of which Rs. 85 lakhs are attributable to video unit.
(i) Determine the capital gains which would arise to A Ltd. from slump sale;
(ii) Suggest modification of the restructuring plan of A Ltd. without changing the amount of
consideration so as to make it more tax efficient.
Question 2 (slump sale) (CG ID 21) (Revision / Home work)

Axel Ltd. has two industrial undertakings. Unit-I is engaged in the production of television sets and Unit-II is
engaged in the production of refrigerators. The company has, as part of its restructuring program, decided to sell
Unit-II as a going concern by way of slump sale for Rs. 260 lacs to a new company called Gamma Ltd., in which
it holds 85% equity shares. The following is the extract of the balance sheet of Axel Ltd. as on 31-3-PY: (Rs. In
lacs)
Unit-1 Unit-II
Fixed Assets 112 158
Debtors 88 67
Inventories 60 23
Liabilities 33 45
Paid-up share capital Rs. 231 lacs
General Reserve Rs. 160 lacs
Share Premium Rs. 39 lacs
Revaluation Reserve Rs. 105 lacs
The company set up Unit-II on 1-4-2006. The written down value of the block of assets for tax purpose as on
31-3-PY is Rs. 150 lacs of which Rs. 60 lacs are attributable of Unit-II. Determine what would be the capital
gains of Axel. Ltd. on account of Slump sale.
Question 3 (slump sale) (CG ID 66)

X Ltd. has two units — one engaged in manufacture of computer hardware and the other involved in developing
software. As a restructuring drive, the company has decided to sell its software unit as a going concern byway
of slump sale for Rs. 385 lakh to a new company called S Ltd., in which it holds 74 per cent equity shares.
The balance sheet of X Ltd. as on March 31, being the date on which software unit has been transferred, is given
hereunder -
Liabilities Rs. In lakh Assets Rs. In lakh

Paid up share capital 300 Fixed assets (hardware unit) 170
General reserve 150 Fixed assets (software unit) 200
Share premium 50 Debtors (hardware unit) 140
Revaluation reserve 120 Debtors (software unit) 110
Current liabilities Inventories (hardware unit) 95
(hardware unit) 40
Current liabilities Inventories (software unit) 35
(software unit) 90
0750 75
The following additional information is available —
1. The Software unit is in existence since May 2011. Fixed assets of software unit include land which was
purchased at Rs. 40 lakh in the year 2008 and revalued atRs. 60 lakh as on March 31, 2015.
2. Fixed assets of software unit mirrored at Rs. 140 lakh (Rs. 200 lakh minus land value Rs. 60 lakh) is
written down value of depreciable assets as per books of account. However, the written down value of
these assets under section 43(6) isRs. 90 lakh.
Ascertain the tax liability, which would arise from slump sale to S Ltd. What would be your advice as a tax
consultant to make the restructuring plan of the company more tax-savvy, without changing the amount of sale
consideration?
Special provision for computation of capital gains in case of slump sale.

50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to
income-tax as capital gains arising from the transfer of long-term capital assets and shall be
deemed to be the income of the previous year in which the transfer took place :
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one
or more undertakings owned and held by an assessee for not more than thirty-six months immediately
preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of
short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth"
of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the
cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions
contained in the second proviso to section 48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form 83 along with the return of
income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288,
indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying
that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance
with the provisions of this section.
Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the
undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its
books of account :
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes
of computing the net worth.
Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,—
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance
with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;
(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is
allowable as a deduction under section 35AD, nil; and
(c) in the case of other assets, the book value of such assets.
83. See rule 6H and Form No. 3CEA. Under proviso to rule 12(2) audit report shall be furnished
electronically.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AN . 1
Question 1 (stamp duty) (Revision / Home work) (CG ID 01)

X owns a piece of land situated in Noida (date of acquisition: March 1, 1983, cost of acquisition: Rs. 19,291
value adopted by Stamp duty authority at the time of purchase: Rs. 45,000). On March 30, the piece of land is
transferred for Rs. 4 lakh.
1. The value adopted by Stamp duty authority is Rs. 5.5 lakh. X does not dispute it.
2. The value adopted by the Stamp duty authority is Rs. 5.75 lakh. X files an appeal under the Stamp Act and
Stamp duty valuation has been reduced to Rs. 4.90 lakh by the Allahabad High Court.
3. The value adopted by the Stamp duty authority is Rs. 5.60 lakh. X does not challenge it under the Stamp Act
However, he claims before the Assessing officer that Rs. 5.60 lakh is more than the fair market value of the
land. The Assessing Officer referred it to the Valuation Officer who determines Rs. 5.25 lakh as fair market
value.
4. In situation (3), suppose the value adopted by the Valuation Officer is Rs. 6.10 lakh.
Question 2 (stamp duty) (CG ID 18)

A piece of land owned by Mr. Mishra located on Jaipur-Delhi highway was acquired by NHAI in the F.Y. 2006-
07, but the award ordered in F.Y. 2007-08 was paid in the previous year. This land was purchased by him on 2-
4-1977 for Rs. 1,000. The fair market value of the land on 1-4-2001 was Rs. 900. Compensation paid was Rs.
5,00,000.
The other piece of land located in Chennai purchased in April 2005 for Rs. 25,00,000 was also sold by him in
February-PY for Rs. 35,00,000, but sale deed therefore could not be executed by 31-3-PY. The value for the
purpose of stamp duty applied by the stamp valuation authority was Rs. 38,00,000. Compute the income
chargeable to tax arising as a result of these transactions.
Question 3 (stamp duty) (Revision / Home work) (CG ID 19)

‘X’, purchased on 18-6-1982, house property for Rs. 2,25,000 which was sold to A on 18-10-PY for Rs.
8,75,000. The sub-registrar, at the time of registration of sale deed, charged stamp duty on Rs. 13,50,000 which
was paid by the buyer. The Assessing Officer while assessing for capital gain referred the matter to the valuation
officer who determined the value of property at Rs. 15,00,000 on the date of transfer. X seeks your advice on
the following:
(i) Is the Assessing Officer correct to charge capital gain on the value of Rs. 15,00,000 as determined
by valuation officer?
(ii) The amount of capital gain on which ‘X’ is required to pay capital gains tax.
Question 4 (stamp duty) (CG ID 65)

X transfers his residential house to Y for Rs. 10 lakh on April 1, The value of the said house as per stamp duty
regulations is Rs. 16 lakh. Y is a childhood friend of X.
Further, X gifts a plot of land (purchased by him on August 1, 2011) to Yon July 1 PY, The value as per stamp
duty regulations is Rs. 8 lakh. Y sells the land on March 1, at Rs. 14 lakh.
Compute the income of Y chargeable under the heads “Capital gains” and “Income from other sources”.
Special provision for full value of consideration in certain cases.

50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital
asset, being land or building or both, is less than the value adopted or assessed or assessable by
any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority")
for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or
assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration
received or accruing as a result of such transfer :
39
[Provided that where the date of the agreement fixing the amount of consideration and the date of
registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable
by the stamp valuation authority on the date of agreement may be taken for the purposes of computing
full value of consideration for such transfer:
Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part
thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic
clearing system through a bank account, on or before the date of the agreement for transfer.]
Following third proviso shall be inserted after the second proviso to sub-section (1) of section 50C by the
Finance Act, 2018, w.e.f. 1-4-2019 :
Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does
not exceed one hundred and five per cent of the consideration received or accruing as a result of
the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes
of section 48, be deemed to be the full value of the consideration.
(2) Without prejudice to the provisions of sub-section (1), where—
(a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable
by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property
as on the date of transfer;
(b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1)
has not been disputed in any appeal or revision or no reference has been made before any other
authority, court or the High Court,
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where
any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of
sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section
35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation
to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of
section 16A of that Act.
Explanation 1.—For the purposes of this section, "Valuation Officer" shall have the same meaning as in clause
(r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).
Explanation 2.—For the purposes of this section, the expression "assessable" means the price which the stamp
valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time
being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp
duty.
(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2)
exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section
(1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the
consideration received or accruing as a result of the transfer.
[Special provision for full value of consideration for transfer of share other than quoted share.
50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a capital
asset, being share of a company other than a quoted share, is less than the fair market value of such
share determined in such manner as may be prescribed, the value so determined shall, for the purposes
of section 48, be deemed to be the full value of consideration received or accruing as a result of such
transfer.
Explanation.—For the purposes of this section, "quoted share" means the share quoted on any recognised stock
exchange with regularity from time to time, where the quotation of such share is based on current transaction
made in the ordinary course of business.]
Fair market value deemed to be full value of consideration in certain cases.

50D. Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is
not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax
as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the
full value of the consideration received or accruing as a result of such transfer.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AO . 1
Question 1 (specific computations, advance money) (Revision / Home work) (CG ID 14)
R entered into an agreement with G for the sale of his property and received earnest money of Rs. 1,00,000 on
1-4-PY. The balance of Rs. 4,00,000 was to be paid within 3 months, failing to which R was entitled to a
compensation of Rs. 50,000. The earnest money was also liable to be forfeited. G defaulted in the payment of
the business within the time specified and, therefore, the earnest money was forfeited. A suit was also filed for
breach of contract and Rs. 50,000 was awarded, which was received on 24-3-PY. Discuss the nature of the two
receipts from the point of view of liability to tax.
Question 2 (specific computations, advance money) (CG ID 15)

R received a house in may, 2010 by way of Gift from Mr. G who had purchased the same in April, 1979 for Rs.
12,00,000. The cost of improvements incurred by G were Rs. 2,55,000 in March, 2000 and Rs. 3,40,000 in
November, 2008. The fair market value of the house as on 1-4-2001 was Rs. 9,14,000. Before this house was
gifted to R, G had received an advance of Rs. 3,00,000 in March, 2006 towards sale of this house from S but
the sale did not materialize and the advance was forfeited by G. the house was sold and registered by R on 12th
March PY for Rs. 38,00,000 when the stamp duty value is 48,00,000. However advance money of 125,000 for
the house was taken in cash on 1st December PY when the stamp duty value was 44,00,000. Assessee claimed
before the officer that stamp duty value was excessive and unreasonable and matter was referred to valuation
officer by officer, who value the house at 49,00,000. Ascertain the capital gains chargeable to tax.
Question 3 (specific computations, advance money) (Revision / Home work) (CG ID 89)
Mr. Ramesh purchased a plot of land in Chennai in June 2005 for 50 lakhs. He decided to sell the property to
Mr. Mahesh for 80 lakhs and received an advance of 2 lakhs in May, 2009. Mr. Mahesh was unable to complete
the agreement and hence, the entire advance was forfeited by Mr. Ramesh.
Again Mr. Ramesh entered into an agreement to sell the property to Mr. Rakesh for 95 lakhs and received
advance money of 2.50 lakhs in August. 2014. But again the transfer did not materialise due to which the
advance money was again forfeited.
On 4th January, 2015, the property was finally sold to Mr. Mukesh for 105 lakhs and the stamp duty value on
that date was 125 lakhs.
He acquired a new residential property for 130 lakhs by investing entire sale consideration and his business
income.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-AO . 1
Advance money received.

51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any
advance or other money received and retained by the assessee in respect of such negotiations shall be
deducted from the cost for which the asset was acquired or the written down value or the fair market
value, as the case may be, in computing the cost of acquisition :
Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for
transfer of a capital asset, has been included in the total income of the assessee for any previous year in
accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be
deducted from the cost for which the asset was acquired or the written down value or the fair market value,
as the case may be, in computing the cost of acquisition.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BA . 1
Question 1 (exemptions) (CG ID 60)

Mr. Adhisesha sells his house property, acquired in 1975 for Rs. 2.5 lacs, for a consideration of Rs. 85 lacs in
September PY. Cost of improvement incurred for this property in June 2000 was Rs. 3 lacs and in July 2006 Rs.
2.8 lacs. Expenses incurred for effecting sale is Rs. 1 lac. He acquired a new house property during January PY
for a consideration of Rs. 9 lacs at Mumbai and for 12 lakhs at Kanpur. Compute the taxable capital gains by
assuming that the fair market value as on 1.4.2001 at Rs. 10 lakhs.

Compute the net taxable capital gains of Smt. Megha on the basis of the following information:
A house was purchased on 1.05.1999 for Rs. 4,50,000 and was used as residence by the owner. The owner had
contracted to sell this property in June, 2009 for Rs. 10 lacs and had received an advance of Rs. 70,000 towards
sale. The intending purchaser did not proceed with the transaction and the advance was forfeited by the owner.
The property was sold in April, for Rs. 15,00,000. The owner, out of the sale proceeds, invested Rs. 4 lacs in a
new residential at Mumbai and Rs. 6 Lakhs in a residential house at Delhi in 9 months of sale.

R owns one residential house at Banglore which is self-occupied and also a house plot at pune. He sells the
house on 31-1-PY and the house plot on 15-2-PY for Rs. 20,00,000 and Rs. 9,00,000 respectively. The house
was purchased for Rs. 4,00,000 (indexed cost 9,00,000) and the plot for Rs. 2,00,000 (indexed cost 3,00,000)
few years back. R has purchased one new residential house on 25-4-PY for Rs. 15,00,000.
a) Compute the income chargeable under the head ‘Capital gains’.
b) Compute the income chargeable under the head ‘Capital gains’ if the investment of 15,00,000 is made
in two residential houses instead of one and amount 7,50,000 each.
c) Compute the income chargeable under the head ‘Capital gains’ if the investment of 15,00,000 is made
in two residential houses instead of one and amount 7,50,000 each on 15-03-PY.

R was the owner of two residential houses. On 2-4-PY he disposed one of the house and utilized the entire sale
proceeds to construct first floor on his second house which he completed by 15-3-PY. He seeks your advice as
to the taxability of transaction to capital gains under the provisions of Income-tax Act, 1961. Discuss.

X has acquired a residential house property in Delhi on April 1, 2000 for Rs. 10,00,000 and decided to sell the
same on May 3, 2003 to Ms. P and an advance of Rs. 25,000 was taken from her. The balance money was not
paid by Ms. P and X has forfeited the entire advance sum. On June 3, PY, he has sold this house to Y for Rs.
50,00,000. In the meantime on April 4, PY, he had purchased a residential house in Delhi for Rs. 8,00,000 where
he was staying with his family on rent for the last 5 years and paid the full amount as per the purchase agreement.
However, X does not possess any legal title till March 31, as such transfer was not registered with the
registration authority.
X has purchased another old house in Chennai on October 14, PY from Z, an Indian resident by paying Rs.
5,00,000 and purchase was registered with the appropriate authority.
Determine the taxable capital gain arising from above transactions in the hands of X.
Question 6 (exemptions) (Revision / Home work) (CG ID 38)

Mr. X sold a house on 15-6-PY. He deposited the amount of capital gains in “Capital Gains Account Scheme”
on 30-6-PY. He booked a flat from the said amount on 30-9-PY. The flats cost was equal to the capital gains.
Hence he claimed exemption under section 54. Thereafter, Mr. X paid the whole amount towards cost of flat
before end of year. But the builder was not able to finish the construction of the building and hence the builder
was unable to give possession of the flat in 5 years time from sale of old house. Discuss the liability of capital
gains tax.

Mr. A owns a residential house at C.G. Road. His two married sons are also staying with him. To meet the need
for larger area, he sells C.G. Road Flat and purchases three adjoining flat at Vastrapur in a new building. Whether
he can claim exemption under section 54 for all the flats ?
Whether it will make any difference if, the aforesaid three flats are located on different floors ? or are located in
different localities ?

X enters into a partnership with three other persons on July 1, to start a manufacturing business.
The following capital assets are contributed by X as his capital contribution:
Land Gold Preferences

Shares
For market value on the date of transfer X to the
firm (i.e., July 1,) 19,00,000 9,00,000 4,00,000
Amount recorded in books of the firm 17,00,000 6,90,000 4,50,000
Holding period 368 months 18 months 13 months
Cost of acquisition 1,500 4,40,000 4,70,000
Fair market value on January 1, 2001 90,000
On July 31 of assessment year i.e. on last date of filing return of income, he deposits Rs. 13,00,000 in a bank
account for purpose of availing exemption under section 54F (he owns one residential house). Construction of
a residential house at Bombay is completed on June next year of deposit, . Rs. 8,60,000, being the amount of
investment, is financed by withdrawing from the deposit account.

X acquired a plot of land on June 30, 2001 for Rs. 1,10,000. The funds invested were borrowed at the rate of 9
per cent per annum (the amount was repaid by X on March 31, 1985). X sells the plot of land on June 30, for
Rs. 15,00,000. What will be the amount of capital gains? Can X claim deduction of ground rent paid by him ?
Residential house property situated at Kolkata Rs.

Date of transfer December 30, PY
Date of purchase June 30, 1992
Sale consideration 30,00,000
Stamp duty value 35,00,000
Cost of acquisition 2,00,000
Expenses on transfer 40,000
Amount deposited in capital gains deposit account scheme on July 20, AY 21,00,000
To get the exemption under section 54, the following residential house property is purchased At Chennai by X
by withdrawing from the deposit account -
Date of purchase (after deposit) June 20,

Cost of acquisition 15,00,000
Find out the following-

1. Capital gain chargeable to tax for different assessment years;
2. X does not want to purchase or construct another property, what is the earliest date when he can
withdraw the Unutilized amount from the deposit account; and
3. Is it possible to take back the exemption given under section 54 in a subsequent year.

X sells shares in private limited company on July 10, for Rs. 8,05,000 (cost of acquisition on June 15, 1984 :
Rs. 60,000,expenses on sale : Rs.5,000). On July 10, PY, he owns one residential house property. To get the
benefit of exemption under section 54F, X deposits on July 30,AY Rs. 6,00,000 in Capital Gains Deposit
Account Scheme. By withdrawing from the Deposit Account, he purchases a residential house property at Delhi
on July 6 , for Rs. 4,80,000.
Ascertain-
1. The amount of capital gain chargeable to tax;
2. Tax treatment of the unutilized amount;
3. When can he withdraw the unutilized amount; and
4. What X has to do to ensure that exemption under section 54F is never taken back.
54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a
Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being
buildings or lands appurtenant thereto, and being a residential house, the income of which is
chargeable under the head "Income from house property" (hereafter in this section referred to as the original
asset), and the assessee has within a period of one year before or two years after the date on
which the transfer took place purchased, or has within a period of three years after that
date constructed, one residential house in India, then, instead of the capital gain being charged to
income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance
with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the residential house so purchased
or constructed (hereafter in this section referred to as the new asset), the difference between the
amount of the capital gain and the cost of the new asset shall be charged under section 45as
the income of the previous year; and for the purpose of computing in respect of the new asset any capital
gain arising from its transfer within a period of three years of its purchase or construction, as the case may
be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital
gain shall not be charged under section 45; and for the purpose of computing in respect of the new
asset any capital gain arising from its transfer within a period of three years of its purchase or construction,
as the case may be, the cost shall be reduced by the amount of the capital gain.
Following provisos shall be inserted after clause (ii) of sub-section (1) of section 54 by the Finance Act,
2019, w.e.f. 1-4-2020 :
Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may,
at his option, purchase or construct two residential houses in India, and where such option has been
exercised,—
(a) the provisions of this sub-section shall have effect as if for the words "one residential house in India",
the words "two residential houses in India" had been substituted;
(b) any reference in this sub-section and sub-section (2) to "new asset" shall be construed as a reference to
the two residential houses in India:
Provided further that where during any assessment year, the assessee has exercised the option referred to in
the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other
assessment year.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase
of the new asset made within one year before the date on which the transfer of the original
asset took place, or which is not utilised by him for the purchase or construction of the new asset before the
date of furnishing the return of income under section 139, shall be deposited by him before furnishing such
return [such deposit being made in any case not later than the due date applicable in the case of the assessee
for furnishing the return of income under sub-section (1) ofsection 139] in an account in any such bank or
institution as may be specified in, and utilised in accordance with, any scheme which the Central Government
may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by
proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by
the assessee for the purchase or construction of the new asset together with the amount so
deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the
purchase or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous
year in which the period of three years from the date of the transfer of the original asset
expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme
aforesaid.
Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
54F. (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual
or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset,
not being a residential house (hereafter in this section referred to as the original asset), and the assessee
has, within a period of one year before or two years after the date on which the transfer took place purchased, or
has within a period of three years after that date constructed, one residential house in India (hereafter in this
section referred to as the new asset), the capital gain shall be dealt with in accordance with the following
provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the
whole of such capital gain shall not be charged under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so
much of the capital gain as bears to the whole of the capital gain the same proportion as the cost
of the new asset bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply where—
(a) the assessee,—
(i) owns more than one residential house, other than the new asset, on the date of transfer of the
original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after
the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years
after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of
the original asset, is chargeable under the head "Income from house property".
"net consideration", in relation to the transfer of a capital asset, means the full value of the consideration received
or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original
asset, or constructs, within the period of three years after such date, any residential house, the income from
which is chargeable under the head "Income from house property", other than the new asset, the amount of
capital gain arising from the transfer of the original asset not charged under section 45 on the
basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section
(1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital
assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as
the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not
charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may
be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital
gains" relating to long-term capital assets of the previous year in which such new asset is transferred.
(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase
of the new asset made within one year before the date on which the transfer of the original asset took place,
or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing
the return of income under section 139, shall be deposited by him before furnishing such return [such
deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing
the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may
be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification
in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and,
for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or
construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new
asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase
or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount by which—
(a) the amount of capital gain arising from the transfer of the original asset not charged
under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case
may be, clause (b) of sub-section (1),
exceeds
(b) the amount that would not have been so charged had the amount actually utilised
by the assessee for the purchase or construction of the new asset within the period specified in sub-
section (1) been the cost of the new asset,
shall be charged under section 45 as income of the previous year in which the period of three years
from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme
aforesaid.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BB . 1
During the previous year ending on March 31, X sells the following :
Date sale Cost of Year of Fair market

Sale proceeds acquisition purchase Value on
(PY) April 1,
2001
Preference shares April 10, 4,90,000 1,00,000 2003-04 1,80,000
Agriculture land 1 May 25, 30,00,000 2,30,000 1973-74 3,40,000
(situated in 1 km limit of
Mumbai and population is
5,000)
Agriculture land 2 June 10, 49,00,000 6,17,250 2006-07 2,00,000
(situated in 1 km limit of
Mumbai and population is
8,00,000)
Debentures (listed) April 10, 3,17,900 2,30,615 1993-94 1,80,000
Personal car July 1, 1,25,000 70,000 1986-87 NA
On July 31, (being the due date of furnishing return of income), X deposits Rs. 1,00,000 under section 54B for
claiming exemption in future by purchasing agriculture land 3 situated in jurisdiction of municipality having
population of 5000 persons by withdrawing from the deposit account, Rs. 70,000 till January 9 of assessment
year. Agricultural land 3 is sold for 75,000 in just 2 months after its acquisition.
Question 2 (exemptions) (CG ID 75) (Revision / Home work)

X owned 5 acres of agriculture land within the city limits of Madras which he had purchased on October 1, 1982
for Rs. 5,00,000. On October 1, he sold the agriculture land for Rs. 70,00,000. On January 1, he purchased a
coffee estate for Rs. 20,00,000. The coffee estate was in a remote village and the nearest town was about 20
kilometers away from the estate. On February 28 of next year, he sold the coffee estate for Rs.35,00,000. You
are required to compute the income chargeable under the head “Capital gains”. what would be your answer if
the coffee estate was situate within the city limits of Ooty?

X sells agriculture land in Calcutta for Rs. 70,73,960 on July 1, which was purchased by him in 1982-83 for Rs.
6,80,000 (FMV as on 01-04-2001 is 600,000). On July 13, he purchases agriculture land of Rs. 40,000 in Delhi.
On July 30, AY, he deposits Rs.3,90,000 in the Deposit Account. Determine the amount of exemption under
section 54B.
54B. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital
asset being land which, in the two years immediately preceding the date on which the transfer took place, was
being used by the assessee being an individual or his parent, or a Hindu undivided family for
agricultural purposes (hereinafter referred to as the original asset), and the assessee has, within a period of
two years after that date, purchased any other land for being used for agricultural purposes, then,
instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took
place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter
referred to as the new asset), the difference between the amount of the capital gain and the
cost of the new asset shall be charged under section 45 as the income of the previous year; and for
the purpose of computing in respect of the new asset any capital gain arising from its transfer within a
period of three years of its purchase, the cost shall be nil; or
asset any capital gain arising from its transfer within a period of three years of its purchase, the cost
shall be reduced, by the amount of the capital gain.
(2) The amount of the capital gain which is not utilised by the assessee for the purchase of the new asset
before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing
such return such deposit being made in any case not later than the due date applicable in the case of the
assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank
or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government
may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof
of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for
the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new
asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of
the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which
the period of two years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BC . 1
X Ltd. located within the corporation limits decided in December-PY to shift its industrial undertaking to non-
urban area. The company sold some of the assets and acquired new assets in the process of shifting. The relevant
details are as follows:
(Rs. In lakhs)
Particulars Land Bldg. P/M Fur.
(i) Sale proceeds (Sale effected in March,-PY) 8 18 16 3
(ii) Indexed cost acquisition 4 10 12 2
(iii) Cost of acquisition in terms of section 50 1 4 5 2
(iv) Cost of new assets purchased in specified time
limit for the purpose of business in the new 4 7 17 2
place
During the process of shifting X Ltd has incurred transportation, uninstallation and re-installation expense on
shifting of some of its old plant and machinery to new location, amount 50,000 Rs.
Compute the capital gains of R Ltd.

X Ltd., a manufacturing company, purchases a factory building (constructed on a leasehold land) on May 6,
1998 for Rs.20 lakh (prior to this the company used the same building as a tenant for about 5 years). The building
is compulsory acquired by the Government on April 20, for which a sum of Rs. 60 lakh is paid as compensation
on March 14,. Compute the amount of capital gain chargeable to tax taking into consideration the following
information-
1. On April 1, the company owns two buildings (rate of depreciation : 10 per cent) one of which is acquired
by the Government. The depreciated value of the block on April 1, is Rs. 21.35 lakh.
2. The company purchases the factory building (constructed on a leasehold land) on April 6, AY for Rs. 15
lakh. Does it make difference if the factory building is purchased on March 31,?

X purchased a residential house in June 2001 for Rs. 22 lakh. He transfers the house on December 1, PY for Rs
100 lakh. He pays brokerage a 2 percent on sale price. He invests Rs. 80 lakh in April of AY in equity shares
of X Mfg. (Pvt.) Ltd, a newly formed manufacturing company which qualifies to be a medium enterprise under
the Micro, Small and Medium Enterprises Development Act, 2006. X is a shareholder in the company and holds
80 per cent of share capital.
The company utilises the sum of Rs. 80 lakh in the following manner:
1. Purchase of new machinery during April AY: Rs. 70 lakh (including Rs. 10 lakh for purchase of cars).
2. Deposit in specified bank on September 25, AY : Rs. 10 lakh.
The due date for filing return of income for X for assessment year September 30,. Assume that he files the return
on September 28, on time. Compute the taxable capital gain.
X, an individual, has income from salary and house property. Besides, he owns a business whose annual turnover
is not more than Rs. 25 lakh. On May 14, he transfers a residential house property (or a residential plot of land)
for Rs. 1,15,00,000 (expenses on transfer incurred by X : Rs. 3,00,000, indexed cost of acquisition : Rs.
14,60,000, year of acquisition : 1992-93, indexed cost of improvement : Rs. 8,15,000). Stamp duty value is Rs.
1,24,00,000 on which the purchaser pays stamp duty.
X Ltd. is incorporated on December 1, for manufacture or production of chemicals in Andhra Pradesh. There
are 10 shareholders in X Ltd. X is one of the shareholders. He holds 51 per cent shares (date of subscription of
shares in X Ltd: December 10, total investment by X in shares of X Ltd. : Rs.85,00,000). Out of Rs.85,00,000,
the company makes the following investments-
Date Investment Amount

March 1, New plant and machinery 40,00,000
July 1, AY New plant and machinery 6,00,000
July 10, AY Old plant and machinery 10,00,000
July 31, AY Amount deposited in capital gain deposit account (CGDA 1) 25,00,000
August 1, AY Amount deposited in capital gain deposit account (CGDA 2) 4,00,000
December 8, AY New plant and machinery (purchased by withdrawing from 22,50,000
CGDA 1)
December 12, AY New plant and machinery (purchased by withdrawing from 2,50,000
CGDA2)
Find out the amount of exemption under section 54GB.
54D. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of
compulsory acquisition under any law of a capital asset, being land or building or any right in
land or building, forming part of an industrial undertaking belonging to the assessee which,
in the two years immediately preceding the date on which the transfer took place, was being used by the
assessee for the purposes of the business of the said undertaking (hereafter in this section referred to as the
original asset), and the assessee has within a period of three years after that date purchased any other land
or building or any right in any other land or building or constructed any other building for the purposes of
shifting or re-establishing the said undertaking or setting up another industrial undertaking, then, instead of the
capital gain being charged to income-tax as the income of the previous year in which the transfer took place, it
shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the land, building or right so
purchased or the building so constructed (such land, building or right being hereafter in this section
referred to as the new asset), the difference between the amount of the capital gain and the cost
of the new asset shall be charged under section 45 as the income of the previous year; and for the
purpose of computing in respect of the new asset any capital gain arising from its transfer within a
period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
asset any capital gain arising from its transfer within a period of three years of its purchase or
construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
(2) The amount of the capital gain which is not utilised by the assessee for the purchase or construction of the
new asset before the date of furnishing the return of income under section 139, shall be deposited by him before
furnishing such return such deposit being made in any case not later than the due date applicable in the
case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in
any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the
Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be
accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already
utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited
shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or
construction of the new asset within the period specified in sub-section (1), then,—
the period of three years from the date of the transfer of the original asset expires; and
54G. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital
asset, being machinery or plant or building or land or any rights in building or land used for the
purposes of the business of an industrial undertaking situate in an urban area, effected in the course
of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as
the original asset) to any area (other than an urban area) and the assessee has within a period of one
year before or three years after the date on which the transfer took place,—
(a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area
to which the said undertaking is shifted ;
(b) acquired building or land or constructed building for the purposes of his business in the said area ;
(c) shifted the original asset and transferred the establishment of such undertaking to such area; and
(d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central
Government for the purposes of this section,
then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer
took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or
any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section
referred to as the new asset), the difference between the amount of the capital gain and the
cost of the new asset shall be charged under section 45 as the income of the previous year;
and for the purpose of computing in respect of the new asset any capital gain arising from its transfer
within a period of three years of its being purchased, acquired, constructed or transferred, as the case may
be, the cost shall be nil ; or
(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital
gain shall not be charged under section 45 ; and for the purpose of computing in respect of the
new asset any capital gain arising from its transfer within a period of three years of its being purchased,
acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of the
capital gain.
Explanation.—In this sub-section, "urban area" means any such area within the limits of a municipal corporation
or municipality as the Central Government may, having regard to the population, concentration of industries,
need for proper planning of the area and other relevant factors, by general or special order, declare to be an
urban area for the purposes of this sub-section.
(2) The amount of capital gain which is not appropriated by the assessee towards the cost and
expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1)
within one year before the date on which the transfer of the original asset took place, or which is not utilised by
him for all or any of the purposes aforesaid before the date of furnishing the return of income
under section 139, shall be deposited by him before furnishing such return such deposit being made in any
case not later than the due date applicable in the case of the assessee for furnishing the return of income under
sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and
utilised in accordance with, any scheme which the Central Government may, by notification in the Official
Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the
purposes of sub-section (1), the amount, if any, already utilised by the assessee for all or any of the purposes
aforesaid together with the amount, so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or any of the
purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that sub-section, then,—
the period of three years from the date of the transfer of the original asset expires ; and
54GA. (1) Notwithstanding anything contained in section 54G, where the capital gain arises from the transfer
of a capital asset, being machinery or plant or building or land or any rights in building or land used
for the purposes of the business of an industrial undertaking situate in an urban area, effected in
the course of, or in consequence of the shifting of such industrial undertaking to any Special Economic
Zone, whether developed in any urban area or any other area and the assessee has within a period of one year
before or three years after the date on which the transfer took place,—
(a) purchased machinery or plant for the purposes of business of the industrial undertaking in the Special
Economic Zone to which the said undertaking is shifted;
(b) acquired building or land or constructed building for the purposes of his business in the Special
Economic Zone;
(c) shifted the original asset and transferred the establishment of such undertaking to the Special Economic
Zone; and
(d) incurred expenses on such other purposes as may be specified in a scheme framed by the Central
Government for the purposes of this section,
then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer
took place, it shall, subject to the provisions of sub-section (2), be dealt with in accordance with the following
provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or
any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section
referred to as the new asset), the difference between the amount of the capital gain and the cost
of the new asset shall be charged under section 45 as the income of the previous year; and for the
purpose of computing in respect of the new asset any capital gain arising from its transfer within a period
of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost
shall be Nil; or
(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital gain
shall not be charged under section 45, and for the purpose of computing in respect of the new asset
any capital gain arising from its transfer within a period of three years of its being purchased, acquired,
constructed or transferred, as the case may be, the cost shall be reduced by the amount of the capital gain.
Explanation.—In this sub-section,—
(a) "Special Economic Zone" shall have the meaning assigned to it in clause (za) of section 2 of the Special
Economic Zones Act, 2005;
(b) "urban area" means any such area within the limits of a municipal corporation or municipality as the
Central Government may, having regard to the population, concentration of industries, need for proper
planning of the area and other relevant factors, by general or special order, declare to be an urban area for
the purposes of this sub-section.
(2) The amount of capital gain which is not appropriated by the assessee towards the cost and expenses
incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within one
year before the date on which the transfer of the original asset took place, or which is not utilised by him for all
or any of the purposes aforesaid before the date of furnishing the return of income under section 139,
shall be deposited by him before furnishing such return [such deposit being made in any case not later than the
due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section
139] in an account in any such bank or institution as may be specified in, and utilised in accordance with,
any scheme which the Central Government may, by notification, frame in this behalf and such return shall be
accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already
utilised by the assessee for all or any of the aforesaid purposes together with the amount so deposited shall be
deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or any of the
purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that sub-section, then,—
the period of three years from the date of the transfer of the original asset expires; and
54GB. (1) Where,—

(i) the capital gain arises from the transfer of a long-term capital asset, being a residential property (a
house or a plot of land), owned by the eligible assessee (herein referred to as the assessee);
and
(ii) the assessee, before the due date of furnishing of return of income under sub-section (1)of section
139, utilises the net consideration for subscription in the equity shares of an eligible company
(herein referred to as the company); and
(iii) the company has, within one year from the date of subscription in equity shares by the assessee,
utilised this amount for purchase of new asset,
then, instead of the capital gain being charged to income-tax as the income of the previous year in which the
transfer takes place, it shall be dealt with in accordance with the following provisions of this section, that is to
say,—
(a) if the amount of the net consideration is greater than the cost of the new asset, then, so much of
the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the
new asset bears to the net consideration, shall not be charged under section 45 as the income of the
previous year; or
(b) if the amount of the net consideration is equal to or less than the cost of the new asset , the
capital gain shall not be charged under section 45 as the income of the previous year.
(2) The amount of the net consideration, which has been received by the company for issue of shares to the
assessee, to the extent it is not utilised by the company for the purchase of the new asset before the
due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the
company, before the said due date in an account in any such bank or institution as may be
specified and shall be utilised in accordance with any scheme which the Central Government may, by
notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be
accompanied by proof of such deposit having been made.
(3) For the purposes of sub-section (1), the amount, if any, already utilised by the company for the purchase
of the new asset together with the amount deposited under sub-section (2) shall be deemed to be the cost of
the new asset:
Provided that if the amount so deposited is not utilised, wholly or partly, for the purchase of the new asset
within the period specified in sub-section (1), then,—
(i) the amount by which—
(a) the amount of capital gain arising from the transfer of the residential property not charged
under section 45 on the basis of the cost of the new asset as provided in sub-section (1),
exceeds—
(b) the amount that would not have been so charged had the amount actually utilised for the
purchase of the new asset within the period specified in sub-section (1)been the cost of the new
asset,
shall be charged under section 45 as income of the assessee for the previous year in which the period
of one year from the date of the subscription in equity shares by the assessee expires; and
(ii) the company shall be entitled to withdraw such amount in accordance with the scheme.
(4) If the equity shares of the company or the new asset acquired by the company are sold or
otherwise transferred within a period of five years from the date of their acquisition, the
amount of capital gain arising from the transfer of the residential property not charged under section 45as
provided in sub-section (1) shall be deemed to be the income of the assessee chargeable under the head
"Capital gains" of the previous year in which such equity shares or such new asset are sold or otherwise
transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the
hands of the assessee or the company, as the case may be.
(5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of
March, 2017 :
Provided that in case of an investment in eligible start-up, the provisions of this sub-section shall have the effect as
if for the figures, letters and words "31st day of March, 2017", the figures, letters and words "31st day of March,
2019" had been substituted.
(a) "eligible assessee" means an individual or a Hindu undivided family;
(b) "eligible company" means a company which fulfils the following conditions, namely:—
(i) it is a company incorporated in India during the period from the 1st day of April of the previous
year relevant to the assessment year in which the capital gain arises to the due date of furnishing
of return of income under sub-section (1) of section 139 by the assessee;
(ii) it is engaged in the business of manufacture of an article or a thing or in an eligible business;
(iii) it is a company in which the assessee has more than fifty per cent share capital or more than fifty
per cent voting rights after the subscription in shares by the assessee; and
(iv) it is a company which qualifies to be a small or medium enterprise under the Micro, Small and
Medium Enterprises Act, 2006 (27 of 2006) or is an eligible start-up;
(ba) "eligible start-up" and "eligible business" shall have the meanings respectively assigned to them
in Explanation below sub-section (4) of section 80-IAC;
(c) "net consideration" shall have the meaning assigned to it in the Explanation to section 54F;
(d) "new asset" means new plant and machinery but does not include—
(i) any machinery or plant which, before its installation by the assessee, was used either within or
outside India by any other person;
(ii) any machinery or plant installed in any office premises or any residential accommodation, including
accommodation in the nature of a guest-house;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether
by way of depreciation or otherwise) in computing the income chargeable under the head "Profits
and gains of business or profession" of any previous year:
[Provided that in the case of an eligible start-up, being a technology driven start-up so certified by the
Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette, the
new asset shall include computers or computer software.]
54H. Notwithstanding anything contained in sections 54, 54B, 54D, 54EC and 54F, where the transfer of the
original asset is by way of compulsory acquisition under any law and the amount of compensation
awarded for such acquisition is not received by the assessee on the date of such transfer, the period for acquiring
the new asset by the assessee referred to in those sections or, as the case may be, the period available to the
assessee under those sections for depositing or investing the amount of capital gain in relation to such
compensation as is not received on the date of the transfer, shall be reckoned from the date of receipt
of such compensation :
Provided that where the compensation in respect of transfer of the original asset by way of compulsory
acquisition under any law is received before the 1st day of April, 1991, the aforesaid period or periods, if expired,
shall extend up to the 31st day of December, 1991.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BD . 1

Mrs. X, resident woman, transfers a house property (received without consideration from her husband in 1991)
on January 16,. On the said transaction she earns a long-term capital gain of Rs. 1,01,50,000. She invests a sum
of Rs. 50,00,000 in capital gains bonds specified in section 54EC on January 5 out of the advance monies
received on account of transfer,. She further invests a sum of Rs. 50,00,000 in the same bonds after 3 months of
the first investment in bonds. She has raised Funds of 40,00,000 on the security of above bonds of Value
50,00,000 in the month of March of next year. Her other income for year is Rs. 46,000. Discuss the tax
consequence of the above transactions.

Ms. X purchased a land at a cost of Rs. 10 lakh in the financial year 2002-03 and held the same as her capital
asset till March 31, 2012. Ms. X started her real estate business on April 1, 2012 and converted the said land
into stock-in-trade of her business on the said date, when the fair market value of the land was Rs. 150 lakh. She
constructed 20 flats of equal size, quality and dimension. Cost of construction of each flat is Rs. 8 lakh.
Construction was completed in December PY. She sold 15 flats at Rs. 20 lakh per flat between January and
March PY. Remaining 5 flats were held in stock.
She invested Rs. 50 lakh in bonds issued by Rural Electrification Corporation Ltd. on March 31 PY.
Compute the amount of chargeable capital gain and business income in the hands of Ms. X arising from above
transactions.

XY & CO., a partnership firm, transfers a piece of land situated in Thane district on August 17, for Rs. 80 lakh.
The land purchased on March 6, 2000 for Rs. 1 lakh got registered on April 3, 2003 on payment of stamp duty
of Rs. 20,000. Expenses on land development and construction of boundary wall incurred in August 2003 were
of Rs. 1,50,000. The charges for the transfer of land paid to the broker were 2.5% of the sale consideration. Fair
market value of the land as on April 1, 2001 was Rs. 1,50,000. The firm invested Rs. 20 lakh on December 1,
in the bonds issued by National Highways Authority of India redeemable after a period of 84 months. Compute
the amount of capital gain chargeable to tax. Also give in brief the reasons and the provisions of the Act for each
of the items dealt with.

X Ltd., an Indian company, had been the owner of a plot of vacant land since 1973 when it had been acquired
at a cost of Rs. 10,000. The government compulsorily acquired the plot under the Land Acquisition Act and
after the Collector had given his award of compensation on January 2, 2004, took possession thereof
immediately. The amount of the award was Rs. 5,00,000 and the fair market value of the plot on April 1, 1981
was Rs.40,000. The amount was duly received by X Ltd. on June 6, 2005, but considering the amount of the
compensation awarded as too meager, it filed an appeal to Court. In the appeal decided on June 30, 2014 the
High Court increased the amount of the award by Rs.10,00,000 and also ordered payment of interest @ 6 per
cent per annum on the increased amount with effect from January 2,2004, the date of the award by the Collector.
Such interest up to the date of High Court’s order amounted to Rs. 4,50,000. The levy of interest was automatic
in accordance with the provisions of section 34 of the Land Acquisition Act. The government appealed to the
Supreme Court against the High Court decree, but as directed by the High Court paid both the additional
compensation and the interest to X Ltd. in September 2014 after taking a bond from the company promising to
refund whatever sum might be held to have been received in excess on the basis of the Supreme Court’s decision.
X Ltd. approaches you for advise on the following issues:
1. Was there any chargeable surplus as a result of the compulsory acquisition? What is the nature of such
surplus?
2. On what date did the surplus arise and in which year did it become assessable?
3. What was the amount of the chargeable surplus?
4. What was the effect of the High Court decree in regard to the assessment already completed? Could the
additional compensation be charged to tax in any particular assessment year (to be indicated by you if
the answer is in the affirmative?
5. How is the interest to be treated for taxation purposes? When is it assessable?
6. Can it can be claimed that there being an appeal filed before the Supreme Court, the enhanced
compensation or the interest, though actually received cannot be taxed because of the possibility of the
Supreme Court reversing or modifying the High Court decree?
7. Is there any legal provision enabling X Ltd. to reduce its liability to tax on the additional compensation
or interest?
Give your advice on all the issues stating your reasons.
X Ltd. sells the following assets-
Agriculture Bonus House property

land shares (let out)
Date of sale November 30, January 1, March 25,
Date of acquisition May 9, 1993 April 4, 1983 June 6, 1982
Sale consideration 9,00,000 3,50,000 10,00,000
Purchase consideration 70,000 Nil 1,00,000
The agriculture land is situated in urban area and used for agriculture purpose since 1994.
X Ltd. invests in the following assets during April AY-
1. Bonds of the National Highway Authority of India (redeemable 39 months) : Rs. 4,00,000.
2. Bonds (redeemable 60 months) of the Rural Electrification Corporation : Rs.5,00,000.
Find out the capital gains chargeable to tax.

X sells the following long-term capital assets on January 11, 2015 -
Residential Gold Silver Diamonds
house
property
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Expenses on transfer 10,000 81,000 6,000 32,000
The due date of filling return of income is July 31,. For claiming exemption under section 54 and 54EC, X
purchases the following asset-
Assets Date of Amount

acquisition Rs.
Land (for constructing a residential house) March 31, 1,00,000
Bank deposit (for constructing house) August 5,AY 50,000
Rural Electrification Corporation (redeemable after 33 months) July 5, AY 7,50,000
Bonds of National Highways Authority of India (redeemable after
54 months) July 10, AY 3,05,000
54EC. (1) Where the capital gain arises from the transfer of a long-term capital asset, being land or
building or both, (the capital asset so transferred being hereafter in this section referred to as the original
asset) and the assessee has, at any time within a period of six months after the date of such transfer,
invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt
with in accordance with the following provisions of this section, that is to say,—
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the
transfer of the original asset, the whole of such capital gain shall not be charged under section
45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of
the original asset, so much of the capital gain as bears to the whole of the capital gain the same
proportion as the cost of acquisition of the long-term specified asset bears to the whole of the
capital gain, shall not be charged under section 45 :
Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an
assessee during any financial year does not exceed fifty lakh rupees :
Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising
from transfer of one or more original assets, during the financial year in which the original asset or assets are
transferred and in the subsequent financial year does not exceed fifty lakh rupees.
(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into
money at any time within a period of three years from the date of its acquisition, the amount of capital
gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such
long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be
deemed to be the income chargeable under the head "Capital gains" relating to long-term capital asset of
the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer)
into money.
Following proviso shall be inserted in sub-section (2) of section 54EC by the Finance Act, 2018, w.e.f. 1-
4-2019 :
Provided that in case of long-term specified asset referred to in sub-clause (ii) of clause (ba) of
the Explanation occurring after sub-section (3), this sub-section shall have effect as if for the words "three
years", the words "five years" had been substituted.
Explanation.—In a case where the original asset is transferred and the assessee invests the whole or any part of
the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset
and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have
converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance
is taken.
(3) Where the cost of the long-term specified asset has been taken into account for the purposes of
clause (a) or clause (b) of sub-section (1),—
(a) a deduction from the amount of income-tax with reference to such cost shall not be allowed
under section 88 for any assessment year ending before the 1st day of April, 2006;
(b) a deduction from the income with reference to such cost shall not be allowed under section
80C for any assessment year beginning on or after the 1st day of April, 2006.
(a) "cost", in relation to any long-term specified asset, means the amount invested in such specified asset out
of capital gains received or accruing as a result of the transfer of the original asset;
(b) "long-term specified asset" for making any investment under this section during the period commencing
from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable
after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March,
2007,—
(i) by the National Highways Authority of India constituted under section 3 of the National Highways
Authority of India Act, 1988 (68 of 1988); or
(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the
Companies Act, 1956 (1 of 1956),
and notified by the Central Government in the Official Gazette for the purposes of this section with such
conditions (including the condition for providing a limit on the amount of investment by an assessee in
such bond) as it thinks fit:
Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions
specified in the notification, by the Central Government in the Official Gazette under the provisions of
clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall
be deemed to be a bond notified under this clause;
(ba) "long-term specified asset" for making any investment under this section on or after the 1st day of April,
2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by
the National Highways Authority of India constituted under section 3 of the National Highways Authority
of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed
and registered under the Companies Act, 1956 (1 of 1956) 78[; or any other bond notified by the Central
Government in this behalf].
Following clause (ba) shall be substituted for the existing clause (ba) of Explanation to section 54EC
by the Finance Act, 2018, w.e.f. 1-4-2019 :
(ba) "long-term specified asset" for making any investment under this section,—
(i) on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond,
redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st
day of April, 2018;
(ii) on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or
after the 1st day of April, 2018,
by the National Highways Authority of India constituted under section 3 of the National Highways
Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company
formed and registered under the Companies Act, 1956 (1 of 1956) or any other bond notified in the Official
Gazette by the Central Government in this behalf.
54EE. (1) Where the capital gain arises from the transfer of a long-term capital asset (herein in this section
referred to as the original asset) and the assessee has, at any time within a period of six months after the date
of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the
capital gain shall be dealt with in accordance with the following provisions of this section, namely:—
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer
of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of
the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion
as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain,
shall not be charged under section 45:
Provided that the investment made on or after the 1st day of April, 2016, in the long-term specified asset by an
assessee during any financial year does not exceed fifty lakh rupees:
Provided further that the investment made by an assessee in the long-term specified asset, from capital gains
arising from the transfer of one or more original assets, during the financial year in which the original
asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.
(2) Where the long-term specified asset is transferred by the assessee at any time within a
period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of
the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as
provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income
chargeable under the head "Capital gains" relating to long-term capital asset of the previous year in which
the long-term specified asset is transferred.
Explanation 1.—In a case where the original asset is transferred and the assessee invests the whole or any part
of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset
and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to
have transferred such specified asset on the date on which such loan or advance is taken.
(a) "cost", in relation to any long-term specified asset, means the amount invested in such specified asset out
of capital gains received or accruing as a result of the transfer of the original asset;
(b) "long-term specified asset" means a unit or units, issued before the 1st day of April, 2019, of such
fund as may be notified by the Central Government in this behalf.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BE . 1
Question 1 (Others) (CG ID 30)

X had taken a loan of 15 Lakhs under registered mortgage deed dated July 16, 2008 against the house which
was purchased by him on March 26, 1982 for Rs. 5 lakh. The said property is inherited by his son A during July
of PY. Under Will for obtaining a clear title thereof has paid the outstanding amount of loan on February 12,
PY of Rs. 15 lakh to the bank. The said house property is sold by A on March 16, PY for Rs. 50 lakh. State with
reasons the amount chargeable to capital gains.
MCQ-1 Your Options are

A 15 lakhs will be cost of improvement
B 15 lakhs will be cost of acquisition
C 15 lakhs will be expenditure on account of transfer
D 15 lakhs will be capital repayment and not part of computation of capital gains in any way.
MCQ-2 Your Options are

A Capital Gains will be Long term in nature
B Capital Gains will be Short term in nature
C A or B above at option of assessee
D A or B above at option of officer
Question 2 (Others) (CG ID 67)

Mrs. X has submitted the following details of transactions. You are required to discuss the tax treatment of the
same.
1. Mrs. X invested in a Plot of land at Noida in 1982-83 for cost of Rs. 5,05,000. This plot of land fetches
Lease rent of 21,000 per month generally. During the year she has entered in to agreement to lease the
plot of land at 20,000 per month and at the time of entering in to agreement she has collected a lump
sum payment of Rs. 350,000 on account of lease premium.
2. Mrs. X has received Rs. 250,000 cash and House worth 15 Lakhs as alimony from her husband in
consideration to live apart.
3. She has sold during the year, ancestral silver utensils for 260,000 (FMV as on 01-04-01 Rs. 23,000), her
personal car (Maruti swift) 125,000 (Purchased for Rs. 525,000), her old designer garments and sandals
Rs. 35,000.
4. When her father died 6 years back, he had some of pet horses. These horses had delivered pony, which
is sold for 250,000.
5. She is operating a dairy farm as her business activity. In dairy farm there was 3rd generation of cows and
calves. Some of the calves has been sold for Rs. 160,000.
6. Her father had left behind one bunglow in Chennai. She has sold bunglow for 10 lakhs. Land for the
bunglow was purchased by her father in 1971 for Rs. 25,000 (FMV as on 01-04-2001 Rs. 200,000) and
Construction on that was done 1 years back at cost of Rs. 52,000.
7. She has plan to sell her kidney to one rich women for 11 crore lumpsum.
8. She is staying in house which is originally acquired by her father, but by will transferred to her brother.
She is occupying this house since last many years. Now brother has decided to sell the house and paid
her 3 lakhs lumpsum to vacate the house so that vacant possession can be given to the buyer of the house.
9. Her fathers HUF was being parted by meats and bonds, she has received her share in the HUF property
Rs. 375,000.
Indexation to be ignored.
MCQ-1 In relation to (1)

Your Options are
A Lease Rent 21000 pm will be House Property Income
B Lease Rent 21000 pm will be IFOS
C Lease Rent 20000 pm will be House Property Income
D Lease Rent 20000 pm will be IFOS

Your Options are
A Rs. 3,50,000 will be taxed under capital gains head and cost will be Nil
B Rs. 3,50,000 will be taxed under capital gains head and cost will be Reasonable cost
C Rs. 3,50,000 will be taxed as IFOS and no expense will be allowed as deduction.
D Rs. 3,50,000 will be taxed as Business Income and no expense will be allowed as deduction.

Your Options are
A Rs. 2,50,000 is Not taxable However 15,00,000 will be taxable as IFOS
B Rs. 2,50,000 is taxable as Capital Gains However 15,00,000 will be taxable as IFOS
C Rs. 2,50,000 is Not taxable However 15,00,000 will be taxable as Capital Gains
D Nothing will be taxable

Your Options are
A Silver Utensils, Personal Car, garments and sandals will not be taxable under any head of
income
B Silver Utensils, Personal Car, garments and sandals will be taxable under IFOS since amount
is credited to her profit and loss account credit side.
C Sale price of Personal car will be adjusted from block of assets, other asses will be taxable
under capital gains.
D None of above

Your Options are
A Sale price of pony will be taxed under capital gains and cost will be Nil as self generated
assets.
B Sale price of pony will not be taxed under capital gains but taxed as IFOS
C Sale price of pony will not be taxed under capital gains but taxed under PGBP
D None of above

Your Options are
A Calf is a capital asset and thus taxable under head capital gains
B Calf is not a capital asset and thus not taxable under head capital gains
C Calf is a capital asset however not taxable under head capital gains.
D Calf is a business asset and taxable under PGBP

Your Options are
A Sale Bunglow (land with building) is one asset sold and it is long term.
B Sale Bunglow (land with building) is one asset sold however land will be long term and
building will be short term.
C Sale Bunglow (land with building) is one asset sold and it is short term.
D Sale Bunglow (land with building) are separate assets sold however land will be long term
and building will be short term.

Your Options are
A Sale of Kidney will be exempt u/s 10
B Sale of Kidney will not be taxable as capital gains
C Sale of Kidney will be taxable as IFOS
D Sale of Kidney will be taxable as business income.

Your Options are
A 3,00,000 will be taxed under the head capital gains
B 3,00,000 will be taxed under the head IFOS
C 3,00,000 will be taxed under the head PGBP
D 3,00,000 will not be taxed
MCQ- In relation to (9)

10 Your Options are
A 3,75,000 will not be taxable
B 3,75,000 will be taxable as IFOS
C 3,75,000 will be taxable as PGBP
D 3,75,000 will be taxable as Capital Gains
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BF . 1

V, an individual, owned three residential houses which were let out. Besides, he and his four brothers co-owned
a residential house in equal shares. He sold one residential house owned by him during the previous year. Within
a month from the date of such sale, the four brothers executed a release deed in respect to their shares in the co-
owned residential house in favour of V for a monetary consideration. V utilized the entire long-term capital gain
arising out of the sale of the residential house for payment of the said consideration to his four brothers. V is not
using the house, in respect of which his brothers executed a release deed, for his own residential purposes, but
has let it out to another person, who is using it for his residential purposes. Is V eligible for exemption under
section 54 of the Income-tax Act, 1961 in respect of the long-term capital gain arising from the sale of his
residential house, which he utilized for acquiring the shares of his brothers in the co-owned residential house ?
Will the ownership of two more houses by him or the date of sale of the residential house and non-use of the
new house for his own residential purposes disentitle him to exemption ?

R is a member of a Hindu undivided family which owned a house for the purpose of residence. There was a
partial partition of the family and instead of selling property to an outsider, the property was allotted to R for a
consideration of Rs. 5 lakhs. Release deeds were accordingly executed in favour of R by the other members of
the family. R had also his individual property which he sold during the same previous year, thereby making a
capital gain of Rs. 5 lakhs, which he wants to set off against the consideration fixed for the family property.
Discuss the impact of these arrangements on the assessments of the family and R.

Mr. A who transfers land and building on 02.01.PY, furnishes the following information:
Net consideration received Rs. 100 lakhs. Value adopted by stamp valuation authority, which was not contested
by Mr. A Rs. 120 lakhs. Value ascertained by Valuation officer on reference by the Assessing officer Rs. 130
lakhs.
This land was distributed to Mr. A on the partial partition of his HUF on 1.4.2001 Fair market value of the land
as on 1.4.2001 was Rs. 1,10,000. A residential building was constructed on the above land by Mr. A at a cost of
Rs. 3,20,000 (construction completed on 01.12.2007).
Short-term capital loss incurred on sale of shares during 2 years preceding the PY Rs. 2,05,000.
Mr. A seeks your advice as to the amount to be invested in NHAI bonds so as to be exempt from clutches of
capital gain tax.
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BF . 2

In the year, Mr. X has sold immovable property and has earned a long term capital gain amounting to Rs. 5 lacs,
which he has already invested in the investments specified under section 54EC for claiming exemption from
long term capital gains tax on such transaction. On the other hand he has also sold another property in which he
has incurred a long term capital loss of Rs. 5 lacs. Mr. X proposes to claim exemption under section 54EC and
carry forward the capital loss for the set off in the subsequent years. Is the contention of the Mr. X correct ?
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BG . 1
Question (CG ID 101) (Home work)

X Ltd. is a company in which the whole of its share capital was held by Y Ltd. Both X Ltd. and Y Ltd. are Indian
companies. X Ltd. had made investment in shares of ABC Ltd. in 1979 for Rs. 3,00,000 which it sold to Y Ltd.
on April 1, 2009 for a consideration of Rs. 30,00,000.
The fair market value of these shares of ABC Ltd., as on April 1, 2001 is Rs.20,00,000. Y Ltd. disinvested 5%
of the shares held by it in X Ltd., in January 2018 by sale to public. It sold the shares in ABC Ltd. in March
2018 acquired by it from X Ltd. for a sum of Rs. 70,00,000.
Discuss the issue with relevant provisions and tax effects of these transactions in the hands of X Ltd. and Y Ltd.
in the relevant assessment years.
The cost inflation index Value for the Financial Year 2017-18 is 272. (7 marks)
Question (CG ID 102) (Home work)
Answer the following case. Your answer should cover (1) Issues involved; (2)Provisions applicable; (3)
Shri Chandok is running a factory in Nagpur for the past 10 years. He sold the factory building for Rs. 80 lakhs
and the consideration was appropriated as Rs. 20 lakhs for the building and Rs. 50 lakhs for the land underneath
the building. The factory building is the only asset of the block on which depreciation was claimed and whose
WDV was Rs. 1,80,000. The indexed cost of acquisition of land amounts to Rs. 22 lakhs. He deposited Rs. 48
lakhs in capital gain bonds of NHAI within 2 months after the sale of the factory building. The Assessing Officer
disallowed the claim of exemption on the reasoning that capital gain on transfer of depreciable asset being short-
term is not eligible for exemption under section 54EC. Is the action of the Assessing Officer valid in law?
C.A. Kalpesh Sanghavi Capital Gains - P a g e | F14-BG . 2

F54 – A 06 De-mat
F54 – A 09 Financial Assets V.Imp
F54 – A 87 Company in liquidation V.Imp
F54 – A 20 Slump sale
F54 – A 66 Slump sale V.Imp
F54 – A 18 Stamp duty V.Imp
F54 – A 15 Advance monies V.Imp
F54 – A 23 54 V.Imp
F54 – A 27 54
F54 – A 68 54B
F54 – A 24 54G V.Imp
F54 – A 83 54GB V.Imp
F54 – A 28 54EC
F54 – A 62 Family concept
C.A. Kalpesh Sanghavi Income from other sources - P a g e | F15 . 1


A08 D03 Dividend of 2(22)(e)
A08 D04 Dividend of 2(22)(e)
A08 G01 Gift and then sell V.Imp

A08 G03 Gift V.Imp
A08 L01 Property Transaction V.Imp

A08 V01 Valuation V.Imp
C.A. Kalpesh Sanghavi Advance tax Interest - P a g e | F16 . 1
Sub-Topics Sections
207 to 219
A Advance Tax and Interest 234A,to D
237 to 245
269SS, T
B Penalties
270 to 275
C.A. Kalpesh Sanghavi Advance tax Interest - P a g e | F16 . 2

C.A. Kalpesh Sanghavi 269SS - P a g e | F17-A . 1
Question 01 (Reasonable Cause)

The assessee a subsidiary company of another purchase certain goods from the holding company. It could not
repay the price. The amount payable was converted into a loan of rupees 25,000 & the remaining odd amount
was paid by cheque. The A.O. wants to create this as contravention of the provisions of section 269SS &
accordingly the joint commissioner wants to levy a penalty u/s 271 D.
Your Options are
A No penalty, since amount of loan do not involve any cash transaction.
B Penalty will be imposed 25000 since the transaction is without account payee cheque.
C Penalty will be imposed 5000 since it exceeds the limit of 20,000
D None of above
Question 02 (Reasonable Cause) (Revision / Home work)

A dentist took loan of 100,000 from friends & relatives in cash for repayment of installments of his flat & for
purchasing instruments for his Clinic A penalty was levied u/s 271 D. Is it justified?
Your Options are
A Penalty will be 80,000
B Penalty will be 100,000
C Penalty will be 100,000 but assessee can claim relief u/s 273B
D None of the above

The assessee firm repaid deposits in cash Rs. 25,000. The assessee explained that it had three sister concerns &
their partners were closely related to each other. Funds were often transferred among them according to the
requirement so, they were not deposits. Hence, the penalty u/s. 271 E is not justified. Do you agree?
Your Options are
A Penalty of 5000 not justified since it is marginally higher then 20,000.
B Penalty of 25000 not justified on premise that assessee is firm and amount is paid to sister
concern.
C Penalty of 25000 not justified on the premise that it is not loan / deposit transaction.
D Penalty of 25000 not justified on the premise of 273B.

A person has repaid the deposit in cash Rs. 30,000. He did not have any business activity or profession so there
were no books of accounts. A penalty has been imposed u/s 271 E. The person repaying the deposit argues that
the deposits when accepted were treated as genuine. for Income Tax assessment. Hence, at the time of repayment
also they should be considered as genuine and no penalty should be levied. Is the argument acceptable?
Your Options are

A Penalty is imposable 60000 (30000 for acceptance and 30000 for repayment)
B Penalty is imposable 30000 for repayment
C Penalty not imposable at all.
D None of the above

Assessee company received from one ‘S’ cash amounts of Rs. 7,000 on 12-10 and Rs. 34,000 on 20-2 Latter
amount was received admittedly towards share application money but as no shares could be allotted to ‘S’, it
was subsequently transferred to loan account of ‘S’. Penalty for violating section 269SS was imposed on
assessee in respect of total amount of Rs. 41,000.
1. Whether both receipts had to be taken into account for purpose of application of penalty in as much as
first receipt remained unpaid at time of receipt of second receipt.
2. Whether it would be incorrect to construe share application money as loan or deposit in as much as
enlargement of meaning of loan or deposit.
3. Whether, therefore, assessee’s case fell out of purview of section 269SS and penalty imposed on it under
section 271D.
Your Options are i.r.t. (1)

A Both the receipt together is not to be considered for the application of penalty
B Both the receipt together is to be considered for the penalty if any
C Both the receipt together is to be considered but the penalty will not be the total of both the
receipt
D None of above

A Penalty will be 41,000 u/s 269SS
B Penalty will be 34,000 u/s 269SS
C Penalty will be 21,000 u/s 269SS
D Penalty u/s 269SS will not be applicable

A Share application money is a liability in the books and thus loan.
B Share application money is not a loan transaction, thus not covered by 269SS
C Share application money is genuine transaction and 269SS do not apply
D Loan or deposit will include any liability in the balance sheet.

A Assessee case is out side perview of 269SS
B 269SS will be applicable since ultimately share application money is converted to loan
C 269SS will be applicable since it was a cash transaction
D All of the above is acceptable

The Assessing Officer had levied penalty on the assessee on the ground that it had received an amount of Rs.
6,49,344 from D otherwise than by account payee cheque or account payee bank draft. The Tribunal deleted the
penalty of 269SS because it found that the amount was an advance for purchase of a truck and the amount was
adjusted against the value of the truck. This fact had also not been denied by the Department. The truck had
been transferred by the assessee to D as per the oral agreement between the parties. You are required to offer
your comments.
Your Options are

A No penalty u/s 269SS rw 271D
B No penalty u/s 269SS rw 271E
C No penalty u/s 269T rw 271D
D No penalty u/s 269T rw 271E
Your Options are

A 269ST will be applicable
B Depreciation on this asset will not be applicable
C A and B both is acceptable
D A is acceptable but B is not acceptable

The assessee had received foreign inward remittances from the USA amounting to Rs. 16.61 lakhs from BSRK's
account, the CEO and main shareholder of the company into the company's current account with the Global
Trust Bank. According to the assessee, since it was in liquidity crunch and incurring cash losses, to save
considerable time and expenses, it received the amount through foreign inward remittance instead of account
payee cheque/demand draft. According to the Department, such transfer of money did not tantamount to account
payee cheque and account payee draft, it was only otherwise than such mode. Penalty under section 271D of the
Income-tax Act, 1961, was imposed against the assessee on the ground that it violated the provisions of section
269SS. Whether the imposition of penalty will be justified
Your Options are

A Penalty not to be imposed for the reason that there is no Cash Transaction
B Penalty not to be imposed for the reason that there is transaction through banking channel
however there is no account payee cheque drawn
C Penalty not to be imposed for the reason that intention of law is put check on cash transaction
by means of 269 SS / T as the case may be.
D All of the above are acceptable

Whether payment of amount made by a partner to a firm Rs. 300,000 cash payment to self and does not partake
character of loan or deposit in general law and, therefore, provisions of section 269SS are not applicable and no
penalty is imposable under section 271D. whether you agree with this.
Your Options are

A Partner and firm is the same thus there can never be any penalty for inter se transactions.
B Partner and firm is not the same under the income tax act since they are separately assessable
thus always penalty to be imposed.
C Partner and firm transactions to be studied / analysed properly and it may or may not involve
penalty based on case laws.
D None of above

Where assessee-company purchased goods from its holding company and while it paid part purchase price by
account-payee cheque, for rest of purchase price it made adjustment in its books of account by transferring
equivalent amount from ‘goods purchase account’ to ‘Sarafi account’ standing in holding company’s name. You
are required to answer whether such adjustment attract penalty within meaning of section 269SS.
Your Options are

A “Sarafi Account” is not loan account and thus there is no penalty.
B Goods purchase account ……….Db
To Sarafi Account ………….Cr
This is just a journal entry which does not amount to any cash transaction and thus no penalty.
C Holding subsidiary is related party and “sarafi account” can also be treated as “current
account” which is not loan account any was and thus no penalty.
D All of above are acceptable

Fearless General Finance & Investment Limited, a residuary non-banking company, accepts public deposits,
issues deposit certificate and repays the same after some period of time along with interest, under different
schemes run by it. Following transactions were noted from their books of account:
(i) Mr. A, an individual, has deposited 15,000 on 1 May, for 48 months by bearer cheque and another 15,000 on
31 June, in cash to purchase a new certificate of 48 months tenure.
(ii) Mr. A has applied for premature withdrawal against both the certificates and the company has paid him
16,500, by a bearer cheque, against principal and interest on 23rd March, due against his first certificate and
15,500 in cash on 25 March, against the second certificate.
Discuss the violation of income tax provision, if any, and consequential penalty for each transaction. Will it
make any difference if the certificates were held by Mr. A with his wife Mrs. A, jointly, while repaying back in
cash or bearer cheque ?
Your Options are i.r.t. (i)

A 269SS will apply to fearless Limited and Penalty 269SS will be 10,000
B 269SS will apply to fearless Limited and Penalty 269SS will be 15,000
C 269SS will apply to fearless Limited and Penalty 269SS will be 30,000
D 269SS will apply to Mr. A and Penalty will be 15,000
Your Options are i.r.t. (ii)

A 269ST will apply to Fearless Limited and Penalty will be 16,500
B 269ST will apply to Fearless Limited and Penalty will be 32,000
C 269ST will apply to Fearless Limited and Penalty will be 12,000
D 269ST will apply to Mr. A and Penalty will be 32,000
Your Options are i.r.t.

A Total Penalty on Fearless Limited will be 15000 for acceptance and 16,500 for repayment
B Total Penalty on Fearless Limited will be 15000 for acceptance and Nil for repayment
C Total Penalty on Fearless Limited will be Nil for acceptance and 16,500 for repayment
D Total Penalty on Mr. A will be 15000 for acceptance and 16,500 for repayment

An assessee had credited a sum of 50,000 in cash in the account of Madan, said to represent a loan obtained
from him. The Assessing Officer, having gone into the genuineness of the transaction, disbelieved the story of
loan and treated the sum of 50,000 as the income of the assessee from undisclosed sources. He also started
proceedings under section 271D and levied a penalty of 50,000 on the assessee for having accepted the loan in
contravention of section 269SS. Examine the correctness of the levy.
Your Options are

A Assessee income will be 50,000 and same will also be subject matter of penalty.
B Deemed income and penalty provisions can be applied to same transaction based on literal
interpretation of law
C Same transaction can not be treated as loan and income as the case may be.
D None of above
269SS. No person shall take or accept from any other person (herein referred to as the depositor), any
loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee
bank draft or use of electronic clearing system through a bank account, if,—
(a) the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit
and specified sum; or
(b) on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified
sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether
repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the
aggregate amount referred to in clause (b),
is twenty thousand rupees or more:
Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken
or accepted from, or any loan or deposit or specified sum taken or accepted by,—
(a) the Government;
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of
2013);
(e) such other institution, association or body or class of institutions, associations or bodies which the
Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official
Gazette:
Provided further that the provisions of this section shall not apply to any loan or deposit or specified sum,
where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom
the loan or deposit or specified sum is taken or accepted, are both having agricultural income and
neither of them has any income chargeable to tax under this Act.
(i) "banking company" means a company to which the provisions of the Banking Regulation Act, 1949 (10
of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
(ii) "co-operative bank" shall have the same meaning as assigned to it in Part V of the Banking Regulation
Act, 1949 (10 of 1949) ;
(iii) "loan or deposit" means loan or deposit of money;
(iv) "specified sum" means any sum of money receivable, whether as advance or otherwise, in relation to
transfer of an immovable property, whether or not the transfer takes place.
269ST. No person shall receive an amount of two lakh rupees 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:
Provided that the provisions of this section 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 section 269SS;
(iii) such other persons or class of persons or receipts, which the Central Government may, by notification
in the Official Gazette, specify.
(a) "banking company" shall have the same meaning as assigned to it in clause (i) of
the Explanation to section 269SS;
(b) "co-operative bank" shall have the same meaning as assigned to it in clause (ii) of
the Explanation to section 269SS.]
269T. No branch of a banking company or a co-operative bank and no other company or co-
operative society and no firm or other person shall repay any loan or deposit made with it or any
specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn
in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic
clearing system through a bank account if—
(a) the
, or
(b) the
or, as the case may be, the other company or co-operative society or
the firm, or other person either in his own name or jointly with any other person on the date of such
repayment together with the interest, if any, payable on such loans or deposits, or
(c) the
with any other person on the date of such repayment together with the interest, if any, payable
on such specified advances,
is twenty thousand rupees or more:
Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment
may also be made by crediting the amount of such loan or deposit to the savings bank account or the current
account (if any) with such branch of the person to whom such loan or deposit has to be repaid :
Provided further that nothing contained in this section shall apply to repayment of any loan or deposit
or specified advance taken or accepted from—
(i) Government;
(ii) any banking company, post office savings bank or co-operative bank;
(iii) any corporation established by a Central, State or Provincial Act;
(iv) any Government company28 as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(v) such other institution, association or body or class of institutions, associations or bodies which the
Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official
Gazette.
(i) "banking company" shall have the meaning assigned to it in clause (i) of the Explanation to section
269SS;
(ii) "co-operative bank" shall have the meaning assigned to it in Part V of the Banking Regulation Act,
1949 (10 of 1949);
(iii) "loan or deposit" means any loan or deposit of money which is repayable after notice or repayable after
a period and, in the case of a person other than a company, includes loan or deposit of any nature;
(iv) "specified advance" means any sum of money in the nature of advance, by whatever name called, in
relation to transfer of an immovable property, whether or not the transfer takes place.
271D. (1) If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions
of section 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.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.
271DA. (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable
to pay, by way of penalty, a sum equal to the amount of such receipt:
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.]
271E. (1) If a person repays any loan or deposit or specified advance referred to in section 269T otherwise than
in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal
to the amount of the loan or deposit or specified advance so repaid.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.
273B. Notwithstanding anything contained in the provisions of clause (b) of sub- section (1) of section
271, section 271A, section 271AA section 271B, section 271BA, section 271BB, section 271C, section
271CA, section 271D, section 271E, section 271F, section 271FA, section 271FAB, section 271FB, section
271G, section 271GA, 61[section 271GB,] section 271H, section 271-I, 62[section 271J,] clause (c) or clause (d)
of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B or sub-
section (1) or sub-section (1A) of section 272BB or sub-section (1) of section 272BBB or clause (b) of sub-
section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on
the person or the assessee, as the case may be, for any failure referred to in the said provisions if he
proves that there was reasonable cause for the said failure.
C.A. Kalpesh Sanghavi Penalties Under Reporting of Income - P a g e | F18-A . 1
Question 1 (Scope of Penalty) (ID - 03)

Mr. X submitted following details, you are required to discuss penalty provisions for the same.
Return of loss submitted. (-) 2,00,000
Additions made by Assessing Officer.
(1) on account of question of law 1,20,000
(2) on account of question of facts 1,80,000
(3) intangible additions 60,000 3,60,000
Assessed income 1,60,000
Compute the under reported income.
Question 2 (Scope of Penalty) (ID - 04) (Revision / Home work)

Anurag Traders, a partnership firm, for the year, filed its return of income on an income of Rs. 40,000. The
assessment was completed on an income of Rs. 1,20,000 in the month of June, 1999. The additions included (a)
profit on suppressed sales of Rs. 40,000, (b) disallowances in expenses Rs. 40,000. The assessment became final
as no appeal was preferred. Penalty proceedings were initiated on the charge of concealment of income of
suppressed profits. After considering the explanation to the notice to the penalty, penalty was levied on the
charge that inaccurate particulars were furnished. M/s.Anurag Traders contents that the Order of penalty is bad
in law. Is the contention justified.
Your Options are

A The penalty is correctly imposed
B The penalty is correctly imposed for the reason that income was suppressed
C The penalty order is bad in law
D None of the above

A notice to levy penalty was issued. The assessee in response thereto filed a written submission requesting to
decide the matter. The Assessing Officer before whom this reply was filed retired and the officer, who succeeded
him passed the penalty order without providing any further opportunity, but by taking into cognizance the reply
filed by the assessee. Whether the order by the Assessing Officer is valid ?
Your Options are

A The penalty is bad in law since succeeded officer has not given and re-hearing.
B The penalty is bad in law since assessee did not ask for any re-hearing to succeeding officer.
C The penalty order is good in law
D None of the above

A trust, set up wholly for charitable purposes, furnishes its return of income in respect of year; declaring an
income of Rs. 1,40,000. The Assessing Officer on scrutiny of the return finds that the income of the trust is
exempt from tax. Are there any penal consequences for the trust's failure of furnish the return of income within
the prescribed time ?
Your Options are

A No Penalty
B Penalty 100 per day of default
C Penalty 200 per day of default
D None of above

State the conditions, if any, to be satisfied by an assessee in order to get relief under section 273A of the Income-
tax Act, 1961 regarding the waiver of penalty. Can the Commissioner of Income-tax refuse to grant relief when
the conditions laid down in the section are complied with by the assessee ?

Specify with reason, whether the following acts can be considered as
(I) Tax planning; or (ii) Tax management; or (iii) Tax evasion.
(i) An individual tax payer making tax saver deposit of 100,000 in a nationalised bank.
(ii) A partnership firm obtaining declaration from lenders/depositors in Form No. 15G/15H and
forwarding the same to income-tax authorities.
(iii) A company installed an air-conditioner costing 75,000 at the residence of a director as per terms of
his appointment but treats it as fitted in quality control section in the factory. This is with the objective
to treat it as plant for the purpose of computing depreciation.
(iv) RR Ltd. issued a credit note for 80,000 as brokerage payable to Mr. Ramana who is the son of the
managing director of the company. The purpose is to increase the total income of Mr. Ramana from
4,00,000 to 4,80,000 and reduce the income of RR Ltd. correspondingly.
(v) A company remitted provident fund contribution of both its own contribution and employees’
contribution on monthly basis before due date.

Mango Ltd. has inadvertently claimed deduction in respect of provision made for payment of gratuity in its
return of income. However, this was shown as disallowance in the tax audit report filed U/s. 44AB. The
Assessing Officer initiated proceedings for levy of penalty. The company pleads that the claim was inadvertent
as the return was computer filed by its administrative staff. Decide the correctness of action proposed by the
Assessing Officer.
Your Options are

A No Penalty, since it indicates that disclosure was made in books
B No Penalty, since assessee accepted that it was his mistake
C Penalty will be levied, for the reason that tax liability was under reported.
D None of the above
Question 1 (Penalty) (ID - 01)

Mr. X submitted following details, you are required to determine under reported income.
Return of loss furnished (-) 7,00,000
Concealed income under section 143(3) 3,00,000
Assessed loss (-) 4,00,000

X. Ltd. submitted following details, you are required to determine under reported income.
Return of loss submitted by X Ltd. (-) 1,50,000
Additions made on account of concealment by Assessing Officer u/s 143(3) 2,50,000
Total income assessed 1,00,000
Question 4 (Penalty) (ID - 05) (Revision / Home work)

KP Madhusudan & Co., a partnership firm, had taken certain bank drafts for payments to suppliers of rice and
it had made entries in the accounts a few days later, but not on the dates on which the bank drafts were obtained.
The explanation of the assessee was that since sufficient cash balance was not available on those dates, it had
obtained hand loans from friends and, as it had expected to repay such loans within a short time, no entries were
made in its books of account in respect thereof. Due to inability to furnish evidence for such loans, the assessee
offered the amount of Rs.93,000 as additional income towards unexplained investment. Penalty proceedings
were initiated by Assessing Officer of Income-tax Act and levied a penalty. Is the levy of penalty justifiable ?
Your Options are

A Penalty is to be levied since cash transaction in violation of law was already carried out
B Penalty is to be levied because assessee admitted it as un-explained investment due to
inability to furnish evidence
C Penalty is to be levied because tax liability before income addition is less then after addition.
D All of the above
Question 5 (Penalty) (ID - 07) (Revision / Home work)

Can penalty of the Income-tax Act for concealment of income or particulars thereof be imposed on “intangible”
additions to income made by the Assessing Officer. Can these additions be utilised by the assessees to explain
investments made in the subsequent years ?
Is there any time limit for initiation of penalty proceedings in such cases ? Discuss.
Your Options are

A As per 270A(4) intangible additions can be used to explain the source of income.
B As per 270A(12) intangible additions can be used to explain the source of income.
C As per 270A(12) intangible additions can not be used to explain the source of income.
D None of the above

M/s. XYZ is a firm. The following are the particulars furnished by the firm:
(1) As per the return of income furnished 139(1) - 50,00,000
(2) Determined under section 143(1)(a) - 60,00,000
(3) Assessed under section 143(3) - 75,00,000
(4) Reassessed under section 147 – 95,00,000
Can penalty be levied under section 270A.
Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of income. However, the
total income assessed in respect of such year under section 143(3) is 12 lakh. is penalty under section 270A
attracted in this case, and if so, what is the quantum of penalty leviable?

For the previous year, the Assessing Officer makes the following observations:
The assessee has purchased on June 3, gold of Rs. 2 lakh for which he is unable to offer any explanation. On his
daughter’s marriage, the assessee spends Rs. 12 lakh on May 15, and the assessee fails to explain the source of
expenditure.
1. Can the Assessing Officer levy penalty ?
2. Is it possible for the assessee to argue in the penalty proceedings that the aforesaid investment/expenditure
have been made out of following additions made by the Department in earlier years.
Assessment years Additions made Whether penalty was levied

B5 20,00,000 Yes only on Rs. 1,20,000
B4 3,00,000 Yes only on Rs. 80,000
B3 Nil -
B2 7,00,000 No
B1 50,000 No
B1 is before year of assessment year (earlier year)
Question 1 (Flat Penalty) (ID - 06) (Revision / Home work)

GK Ltd. filed its return of income on 1.12.AY with total income of 35,00,000. The assessing officer levied a
penalty of Rs. 5,000 as late fees. The assessee makes a submission to the CIT (Appeals) that he has furnished
the return of Income within the due date specified in Section 139(4) and hence no penalty should. Discuss.
Your Options are

A Late fees as per 234F – 5000
B Late fees as per 234F – 10,000
C Late fees as per 234F - 1,000
D No Late Fees
Question 2 (Flat Penalty) (ID - 12) (Revision / Home work)

X, an individual whose total sales in the business of food grains for the year was 600 lacs, did not maintain
books of account. The Assessing Officer levied penalty of 25,000 under section 271A for non-maintenance of
books of account and penalty of 150,000 under section 271B for not getting the books audited as required by
section 44AB. Is the Assessing Officer justified in levying penalty under section 271B?
Your Options are

A Penalty will be 271A – 25,000 and 271B – 1,50,000
B Penalty will be 271A – 50,000 and 271B – 3,00,000
C Penalty will be 271A – 25,000
D None of the above
C.A. Kalpesh Sanghavi Penalties Under Reporting of Income P a g e | F18-B . 1
Question (ID - 51) (Revision / Home work)

Pramod, a resident individual of age of 52 years, has not furnished his return of income for the year. However,
his total income for such year as assessed u/s 143(3) is Rs. 14 lakhs.
Whether penalty U/S 270A attracted? If yes, what will be the quantum of penalty leviable?
[Note : Assume that this is not a case of misreporting]. (3 marks)
MCM is a firm liable to tax at the rate of 30% and has filed its return of income. The following information are
provided to you :
(1) Returned total income – Rs. 1,00,00,00
(2) Total income determined U/s 143 (1) (a) – Rs. 1,20,00,000
(3) Total income assessed U/s 143 (3) –Rs. 1,60,00,000
(4) Total income reassessed U/s 147 – Rs. 1,90,00,000
Considering that none of the additions or disallowances made in the assessment or reassessment as above
qualifies under section 270A(6), compute the amount of penalty to be levied U/s 270A of the Income-tax
Act,1961 at the time of assessment U/s 143(3) and at the time of reassessment U/s 147 (Assume under-reporting
of income is not on account of misreporting). (6 marks)
Discuss the following in the context of the provisions of Income-tax Act 1961:
Penalty to be imposed on an assessee is to be based upon the law as it stood at the time that default was
committed or upon the law as it stands in the financial year in which the assessment was made. Suppose an
assesse files return of income in response to a notice of reassessment, and any concealment was detected, and
at the time the laws relating to imposition of penalty was different from the provisions at the time when the
original return was filed, which law should be applicable in this case? (4 marks)
C.A. Kalpesh Sanghavi Penalties Under Reporting of Income P a g e | F18-B . 2

F18 01 Return of loss have been submitted
F18 21 Full computation V.Imp
F18 11 Past additions V.Imp
C.A. Kalpesh Sanghavi Penalties Under Reporting of Income P a g e | F18-C . 1
Penalty for under-reporting and misreporting of income.

270A. (1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or
Commissioner may, during the course of any proceedings under this Act, direct that any person who has
under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-
reported income.
(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 under clause
(a) of sub-section (1) of section 143;
(b) the income assessed is greater than the maximum amount not chargeable to tax, where no
return of income has been furnished;
(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 as per the provisions of section
115JB or section 115JC, as the case may be, is greater than the deemed total income
determined in the return processed under clause (a) of sub-section (1) of section 143;
(e) the amount of deemed total income assessed as per the provisions of section 115JB or section
115JC is greater than the maximum amount not chargeable to tax, where no return of income
has been filed;
(f) the amount of deemed total income reassessed as per the provisions of section
115JB or section 115JC, as the case may be, 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.
(3) The amount of under-reported income shall be,—
(i) in a case where income has been assessed for the first time,—
(a) if return has been furnished, the difference between the amount of income assessed
and the amount of income determined under clause (a) of sub-section (1) of section 143;
(b) in a case where no return has been furnished,—
(A) the amount of income assessed, in the case of a company, firm or local authority; and
(B) the difference between the amount of income assessed and the maximum amount
not chargeable to tax, in a case not covered in item (A);
(ii) in any other case, the difference between the amount of income reassessed or recomputed and the
amount of income assessed, reassessed or recomputed in a preceding order:
Provided that where under-reported income arises out of determination of deemed total income in accordance
with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be
determined in accordance with the following formula—
Provided further that where the amount of under-reported income on any issue is considered both under the
provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be
reduced from total income assessed while determining the amount under item D.
(a) "preceding order" means an order immediately preceding the order during the course of which the
penalty under sub-section (1) has been initiated;
(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return
or converting that loss into income, the amount of under-reported income shall be the difference
between the loss claimed and the income or loss, as the case may be, assessed or reassessed.
(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in
any assessment year is claimed to be an amount added to income or deducted while computing
loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which
such receipt, deposit or investment appears (hereinafter referred to as "preceding year") and no penalty was
levied for such preceding year, then, the under-reported income shall include such amount as is
sufficient to cover such receipt, deposit or investment.
(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the
preceding year in the following order—
(a) the preceding year immediately before the year in which the receipt, deposit or investment appears,
being the first preceding year; and
(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt,
deposit or investment, the year immediately preceding the first preceding year and so on.
(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—
(a) the amount of income in respect of which the assessee offers an explanation and the Assessing
Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the
case may be, is satisfied that the explanation is bona fide and the assessee has disclosed
all the material facts to substantiate the explanation offered;
(b) the amount of under-reported income determined on the basis of an estimate, if the accounts
are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or
the Commissioner or the Principal Commissioner, as the case may be, but the method employed
is such that the income cannot properly be deduced therefrom;
(c) the amount of under-reported income determined on the basis of an estimate, if the
assessee has, on his own, estimated a lower amount of addition or disallowance on the
same issue, has included such amount in the computation of his income and has disclosed all the facts
material to the addition or disallowance;
(d) the amount of under-reported income represented by any addition made in conformity with the
arm's length price determined by the Transfer Pricing Officer, where the assessee had
maintained information and documents as prescribed under section 92D, declared the international
transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and
(e) the amount of undisclosed income referred to in section 271AAB.
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax
payable on under-reported income.
(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is
in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall
be equal to two hundred per cent of the amount of tax payable on under-reported income.
(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—
(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.
(10) The tax payable in respect of the under-reported income shall be—
(a) where no return of income has been furnished and the income has been assessed for the first time,
the amount of tax calculated on the under-reported income as increased by the maximum
amount not chargeable to tax as if it were the total income;
(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed,
reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-
reported income as if it were the total income;
(c) in any other case, determined in accordance with the formula—
(X—Y)
where,
(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition
or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other
assessment year.
(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing
Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.]
Fee for default in furnishing return of income.

234F. (1) Without prejudice to the provisions of this Act, where a person required to furnish a return of
income under section 139, fails to do so within the time prescribed in sub-section (1) of the said section, he
shall pay, by way of fee, a sum of,—
(a) five thousand rupees, if the return is furnished on or before the 31st day of December of
the assessment year;
(b) ten thousand rupees in any other case:
(2) The provisions of this section shall apply in respect of return of income required to be furnished for the
assessment year commencing on or after the 1st day of April, 2018.
Failure to keep, maintain or retain books of account, documents, etc.

271A. Without prejudice to the provisions of 39[section 270A or] section 271, if any person fails to keep and
maintain any such books of account and other documents as required by section 44AA or the rules
made thereunder, in respect of any previous year or to retain such books of account and other documents for the
period specified in the said rules, the Assessing Officer or the Commissioner (Appeals) may direct that such
person shall pay, by way of penalty, a sum of twenty-five thousand rupees.
Failure to get accounts audited.

271B. If any person fails to get his accounts audited in respect of any previous year or years relevant to an
assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may
direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales,
turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such
previous year or years or a sum of one hundred fifty thousand rupees, whichever is less.
C.A. Kalpesh Sanghavi Collection and Recovery Measure -P a g e | F19-A. 1
Sub-Topics Sections
Certain Transfers to be void and Provisional
A 281, 281B
Attachment
B Tax recovery procedure 220 to 232
C Settlement of Cases 245A to 245M
Part A of Recovery Procedure
Question 01 (Certain transfer to be void and provisional attachment) (ID 01) (Revision / Home work)
Recovery proceedings were initiated against the assessee and her husband. Since the arrears could not be realised
the assessee’s property was attached u/s 281B in February. The assessee got divorced by pronouncing TALAQ
on 15th March. The assessee filed an objection petition stating that the properties were gifted in the past by oral
gift to her by her ex-husband and she had been separated by the pronouncement of “Talaq” (divorce) and was
in no way responsible for the personal liability of her ex-husband.
Your Options are

A 281B is Justified since recovery proceeding relates prior to divorce
B 281B is Justified since property was not her self earned, thus she was not the real owner of
the property.
C 281B is Justified since it appear that evidence of oral gift was not clearly available.
D All of the above together acceptable
One M/s. Simplex Enterprises had booked and was allotted shop at Pune 10 years back. The Mr. Kalpesh
Sanghavi (defaulter) paid the earnest money for procuring the said allotment on January, 2015. In June, 2016,
the Mr. Kalpesh Sanghavi paid the balance money to the builder and obtained the possession of the said shop.
In July, 2017, the Mr. Jayanti purchased rights, title and interest of the Mr. Kalpesh Sanghavi in the said shop.
Joint Sale deed was executed. The Tax Recovery Officer at Pune under the certificate from Tax Recovery
Officer, attached the said shop and declare the sale as void.
Your Options are
A 281 is Justified for the transfer of property made by Mr. Kalpesh since NOC is not obtained
from department for the said transfer
B 281 is Justified for the transfer of property made by Mr. Kalpesh since value of the property
is more then 100,000
C 281 is not justified for the transfer made by Mr. Kalpesh to Jayanti
D None of the above
Your Options are

A 281 is declaratory provision and does not have any procedure of recovery in itself.
B 281 is capable of doing recovery in itself
C 281 is capable of issuing notice to Mr. Kalpesh regarding transaction being void
D 281 is handicapped provisions
N was liable to pay certain sums on account of income tax, penalty, interest and fine. Notices under section
226(3), were issued and served upon the tenants of N asking the tenants to pay the rent to the Department. The
son of N and N’s wife filed a writ petition challenging the notices since they were co-owners of property. It was
claimed in the writ petition that N had executed a deed of trust, concerning his shares in the premises in question
and appointed the petitioners the trustees thereof. The Revenue filed an affidavit-in-opposition and declare the
transaction as void under section 281 contending that the deed of trust was created fraudulently.
Your Options are

A Revenue’s action to declare transfer as void is justified
B Revenue has exceeded its authority, however considering the intention of law action is
justified.
C Revenue’s action to declare transfer as void 281 is not justified.
D None of the above
Your Options are

A Issue of notice on tenants to pay rent to department is not justified.
B Department is having enough powers to do garnishee procedure.
C The tenants have option to deposit rent with department.
D The tenants may or may not deposit the rent to department.
Mr. X a stock broker is insolvent. His tax dues are Rs. 30 crore. He has his personal house worth 25 crore, stock
membership card (rights) worth 12 crore, motor cars 2 crores and bank balance 10 crores. Motor cars are gifted
to his friend just 30 days before his insolvency. Stock membership card is forfeited by stock exchange. You are
required to answer whether all the assets can be attached u/s 281 read with 281B. what are the priority of the
attachment.
Your Options are

A Membership card can not be attached
B Membership card can be attached
C Membership card is valuable thing thus can be attached
D None of the above
Your Options are

A 1. Personal house - 25
2. Bank balance – 10
3. Motor cars – 2
B 1. Bank balance – 10
2. Personal house - 25
3. Motor cars – 2
C 1. Motor cars – 2
2. Bank balance – 10
3. Personal house - 25
D Any order at the option of the officer
The regular assessment of Ms. Swati completed u/s 143(3) on 16-07-2017. On 18-01-2019, she received a notice
issued u/s 148 for income escaping assessment. Further, on 25-03-2019, during the pendency of such proceeding
for income escaping assessment, the A.O. attaches the house property of Ms. Swati.
Now, aggrieved Swati seeks your opinion (being a Chartered Accountant) as to :
(1) The circumstances under which the A.O. can make provisional attachment of property of the assesse.
(2) The period of time for which such attachment can take place.
(3) Can such attachment be revoked by the A.O. and if yes, how?
Discuss the relevant provisions of law to satisfy the aggrieved assesse, Ms.Swati. (5 marks)
Your Options are i.r.t (1)

A Officer can attach property any time during the course of the assessment
B With the intention to protect the interest of revenue officer can attach the property.
C Officer can attach the property since assessee is travelling abroad and not likely to return
D Officer can attach the property if the property value is more then 250000 at any time during
the previous year

A Attachment can take place for 3 months
B Attachment can take place for 6 months
C Attachment can take place for 9 months
D Any time till the officer passes the order

A Attachment can be revoked by officer at his own discretion
B Attachment can be revoked any time after passing the order of attachment
C Attachment can be revoked when assessee provides the appropriate amount of bank
guarantee
D Attachment can be revoked only by the higher authority above the assessing officer.
Certain transfers to be void.

281. (1) Where, during the pendency of any proceeding under this Act or after the completion thereof, but
before the service of notice under rule 2 of the Second Schedule, 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 :
Provided that 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, as the
case may be, without notice of such tax or other sum payable by the assessee ; or
(ii) with the previous permission of the Assessing Officer.
and
Explanation.—In this section, "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.
Provisional attachment to protect revenue in certain cases.

281B. (1) Where, during the pendency of any proceeding for the assessment of any income or for the
assessment or reassessment of any income which has escaped assessment, 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 Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or
Commissioner, Principal Director General or Director General or Principal Director or Director, by order in
writing, attach provisionally any property belonging to the assessee in the manner provided in the
Second Schedule.
Explanation.—67[***]
(2) Every such provisional attachment shall cease to have effect after the expiry of a period of six months from
the date of the order made under sub-section (1) :
Provided that the 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 two years or sixty days after the date of order
of assessment or reassessment, whichever is later.
(3) Where the assessee furnishes a guarantee from a scheduled bank for an amount not less than the
fair market value of the property provisionally attached under sub-section (1), the Assessing Officer shall, by
an order in writing, revoke such attachment:
Provided that where the Assessing Officer is satisfied that a guarantee from a scheduled bank for an amount
lower than the fair market value of the property is sufficient to protect the interests of the revenue,
he may accept such guarantee and revoke the attachment.
(4) The Assessing Officer may, for the purposes of determining the value of the property provisionally attached
under sub-section (1), make a reference to the Valuation Officer referred to in section 142A, who shall
estimate the fair market value of the property in the manner provided under that section and submit a report of
the estimate to the Assessing Officer within a period of thirty days from the date of receipt of such reference.
(5) An order revoking the provisional attachment under sub-section (3) shall be made—
(i) within forty-five days from the date of receipt of the guarantee, where a reference to the
Valuation Officer has been made under sub-section (4); or
(ii) within fifteen days from the date of receipt of guarantee in any other case.
(6) Where a notice of demand specifying a sum payable is served upon the assessee and the assessee fails to
pay that sum within the time specified in the notice of demand, the Assessing Officer may invoke the
guarantee furnished under sub-section (3), wholly or in part, to recover the amount.
(7) The Assessing Officer shall, in the interests of the revenue, invoke the bank guarantee, if the assessee
fails to renew the guarantee referred to in sub-section (3), or fails to furnish a new guarantee from a
scheduled bank for an equal amount, fifteen days before the expiry of the guarantee referred to in sub-section
(3).
(8) The amount realised by invoking the guarantee referred to in sub-section (3) shall be adjusted
against the existing demand which is payable by the assessee and the balance amount, if any, shall be
deposited in the Personal Deposit Account of the Principal Commissioner or Commissioner in the branch of the
Reserve Bank of India or the State Bank of India or of its subsidiaries or any bank as may be appointed by the
Reserve Bank of India as its agent under the provisions of sub-section (1) of section 45 of the Reserve Bank of
India Act, 1934 (2 of 1934) at the place where the office of the Principal Commissioner or Commissioner is
situate.
(9) Where the Assessing Officer is satisfied that the guarantee referred to in sub-section (3) is not
required any more to protect the interests of the revenue, he shall release that guarantee forthwith.
Explanation.—For the purposes of this section, the expression "scheduled bank" shall mean a bank included in
the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).]
C.A. Kalpesh Sanghavi Collection and Recovery Measure -P a g e | F19-B. 1
Part B of Recovery Procedure

Question 01 (TRO procedure) (Revision / Home work)
The assessing officer served a notice of demand on the assessee for the tax payable Rs. 2,000. The notice was
served on 1st July, giving him time up to 31st July. The assessee paid it on 30th September. What are the
consequences? Can the assessee have any relief ?
Your Options are

A Interest will be charged
B Penalty will be levied
C Interest and Penalty both will be levied
D Since amount is small no other consequence under the law

If an assessee has filed an Appeal U/s. 246, can the A.O. treat the assessee as assessee In default for non-payment
of tax as communicated by notice of demand ?
Can it be equaled with power of appellate authority to grant stay of recovery ?
Your Options are

A Pending the appeal assessee is not in default
B When tax is not paid assessee is always in default
C Pending the appeal assessee will be never have to pay taxes
D None of the above
Your Options are

A TRO has power to grant time to assessee to pay taxes and stay the matter
B TRO can not stay the matter
C TRO’s power to grant time is different then Appellate authority’s power to stay the matter
D None of above

A recovery certificate U/s. 222 is to be issued. But the assessee Mr. Lal has died. Son of Mr. Lal is Mr. Thorat
who is at the age of 47. Advice the A.O. regarding to course of action.
Your Options are

A Certificate is to be issued in name of Mr. Thorat
B Certificate is to be issued in name of Mr. Lal
C Certificate is to be issued in name of Mr. Thorat and Mr. Lal Jointly
D Certificate can not be issued since Mr. Las has died.

A recovery certificate U/s. 222 is prepared by an A.O in Mumbai. The assessee is having property a part of
which is in Madhya Pradesh. What is the remedy available to this A.O.? Can he correct any clerical or
arithmetical error in such certificate which is discovered subsequently ?
OR
Mr. Sukesh Is an assessee deemed to be in default U/s. 220. The recovery is to be made from him, but he is not
having any property in India. However, it is understood that he has a lot of property in foreign countries. What
is the course to action available to the revenue in such a case ?
Your Options are

A AO from Mumbai should travel in Train Second Class to Madhya Pradesh for recovery
B AO from Mumbai contact AO of Madhya Pradesh on telephone and request for recovery
C AO from Mumbai forward the certificate to AO of Madhya Pradesh
D None of above
Your Options are

A AO can not alter / amend the certificate of recovery already issued.
B AO is permitted to correct the arithmetical errors but not the clerical error
C AO should pass appropriate orders for the correction in certificate
D AO is permitted to correct the arithmetical errors and the clerical error
Your Options are (in relation to Mr. Sukesh)

A Recovery officer should travel to every country to find out the property location and
recovery.
B Recovery officer in India should contact the government of every country where property is
situated.
C Recovery officer in India must forward certificate to Recovery officer in respective countries
for the recovery of tax dues
D Recovery officer in India should apply the provision of black money act

When can the T.R.O. stay the proceedings for recovery of tax? What is the ultimate result of such stay?
Your Options are

A TRO can not stay the recovery procedure
B TRO can grant only time to make the payment of taxes
C TRO can grant time and instalment facility to make the payment of taxes
D TRO must apply court for the stay procedure

What is meant by 'Garnishee Proceedings'? When can TRO Initiate such proceedings?
Your Options are

A Garnishee Proceeding means Fast recovery of taxes
B Garnishee Proceeding means assessee will have to pay tax in top priority to government
C Garnishee Proceeding means recovery of taxes from debtors of assessee
D Garnishee Proceeding means Garnish the procedure
Your Options are

A TRO can not do Garnishee Proceeding
B TRO should apply to court to do Garnishee Proceeding
C TRO and Garnishee is one and the same thing
D TRO can do Garnishee Proceeding

A notice of demand has been served on the assessee and he failed to pay the dues. Can the government file a
suit for recovery instead of using the modes of recovery under chapter XVII of Income Tax Act, 1961?
Your Options are

A Government may apply Recovery procedure and also opt to file suit of recovery.
B Government can only do either of one procedure namely, recovery procedure and filing suit
for recovery.
C A and B both are not correct
D None of above
220. (1) Any amount, otherwise than by way of advance tax, specified as payable in a notice of demand
under section 156 shall be paid within thirty days of the service of the notice at the place and to the person
mentioned in the notice :
Provided that, where the Assessing Officer has any reason to believe that it will be detrimental to revenue
if the full period of thirty days aforesaid is allowed, he may, with the previous approval of the Joint
Commissioner, direct that the sum specified in the notice of demand shall be paid within such period being a
period less than the period of thirty days aforesaid, as may be specified by him in the notice of demand.
(1A) Where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the
case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such
demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal
of the proceedings, as the case may be, and any such notice of demand shall have the effect as specified in
section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (11 of 1964).
(2) If the amount specified in any notice of demand under section 156 is not paid within the period
limited under sub-section (1), the assessee shall be liable to pay simple interest at one per cent for every
month or part of a month comprised in the period commencing from the day immediately following the end
of the period mentioned in sub-section (1) and ending with the day on which the amount is paid :
Provided that, where as a result of an order under section 154, or section 155, or section 250, or section 254,
or section 260, or section 262, or section 264 or an order of the Settlement Commission under sub-section (4)
of section 245D, the amount on which interest was payable under this section had been reduced, the interest
shall be reduced accordingly and the excess interest paid, if any, shall be refunded :
Provided further that where as a result of an order under sections specified in the first proviso, the amount on
which interest was payable under this section had been reduced and subsequently as a result of an order under
said sections or section 263, the amount on which interest was payable under this section is increased, the
assessee shall be liable to pay interest under sub-section (2) from the day immediately following the end of the
period mentioned in the first notice of demand, referred to in sub-section (1) and ending with the day on which
the amount is paid:
Provided also that in respect of any period commencing on or before the 31st day of March, 1989 and ending
after that date, such interest shall, in respect of so much of such period as falls after that date, be calculated at
the rate of one and one-half per cent for every month or part of a month.
(2A) Notwithstanding anything contained in sub-section (2), 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 under the said sub-section if he is satisfied that—
(i) payment of such amount has caused or would cause genuine hardship to the assessee ;
(ii) 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
(iii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the
recovery of any amount due from him:
Provided that the order accepting or rejecting the application of the assessee, either in full or in part,
shall be passed within a period of twelve months from the end of the month in which the application is
received:
Provided further that 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:
Provided also that where any application is pending as on the 1st day of June, 2016, the order shall be passed
on or before the 31st day of May, 2017.]
(2B) Notwithstanding anything contained in sub-section (2), where interest is charged under sub-section (1A)
of section 201 on the amount of tax specified in the intimation issued under sub-section (1) of section 200A for
any period, then, no interest shall be charged under sub-section (2) on the same amount for the same period.
(2C) Notwithstanding anything contained in sub-section (2), where interest is charged under sub-section (7)
of section 206C on the amount of tax specified in the intimation issued under sub-section (1) of section
206CB for any period, then, no interest shall be charged under sub-section (2) on the same amount for the same
period.
(3) Without prejudice to the provisions contained in sub-section (2), on an application made by the assessee
before the expiry of the due date under sub-section (1), the Assessing Officer may extend the time for payment
or allow payment by instalments, subject to such conditions as he may think fit to impose in the
circumstances of the case.
(4) If the amount is not paid within the time limited under sub-section (1) or extended under sub-section (3),
as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed
to be in default.
(5) If, in a case where payment by instalments is allowed under sub-section (3), the assessee commits defaults
in paying any one of the instalments within the time fixed under that sub-section, the assessee shall be
deemed to be in default as to the whole of the amount then outstanding, and the other instalment
or instalments shall be deemed to have been due on the same date as the instalment actually in default.
(6) Where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may,
in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case,
treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though
the time for payment has expired, as long as such appeal remains undisposed of.
(7) Where an assessee has been assessed in respect of income arising outside India in a country the laws of
which prohibit or restrict the remittance of money to India, the Assessing Officer shall not treat the
assessee as in default in respect of that part of the tax which is due in respect of that amount of his
income which, by reason of such prohibition or restriction, cannot be brought into India, and shall continue to
treat the assessee as not in default in respect of such part of the tax until the prohibition or restriction is removed.
Explanation.—For the purposes of this section, income shall be deemed to have been brought into India if it has
been utilised or could have been utilised for the purposes of any expenditure actually incurred by the assessee
outside India or if the income, whether capitalised or not, has been brought into India in any form.
221. (1) 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 under sub-section (2) of section 220,
be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of
a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct,
so, however, that the total amount of penalty does not exceed the amount of tax in arrears :
Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being
heard :
Provided further that where the assessee proves to the satisfaction of the Assessing Officer that the default
was for good and sufficient reasons, no penalty shall be levied under this section.
Explanation.—For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any
penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the
tax.
222. (1) 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 specifying
the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the
Second Schedule 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.
Explanation.—For the purposes of this sub-section, the assessee's movable or immovable property shall
include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973,
by the assessee to his spouse or minor child or son's wife or son's minor child, otherwise than for
adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so
far as the movable or immovable property so transferred to his minor child or his son's minor child is concerned,
it shall, even after the date of attainment of majority by such minor child or son's minor child, as the case may
be, continue to be included in the assessee's movable or immovable property for recovering any arrears due from
the assessee in respect of any period prior to such date.
(2) The Tax Recovery Officer may take action under sub-section (1), notwithstanding that proceedings for
recovery of the arrears by any other mode have been taken.
223. (1) The Tax Recovery Officer competent to take action under section 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,
the jurisdiction for this purpose being the jurisdiction assigned to the Tax Recovery Officer under the
orders or directions issued by the Board, or by the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner who is authorised in this behalf by the Board in pursuance of section
120.
(2) Where an assessee has property within the jurisdiction of more than one Tax Recovery Officer and
the Tax Recovery Officer by whom the certificate is drawn up—
(a) is not able to recover the entire amount by sale of the property, movable or immovable, within his
jurisdiction, or
(b) is of the opinion that, for the purpose of expediting or securing the recovery of the whole
or any part of the amount under this Chapter, it is necessary so to do,
he may send the certificate or, where only a part of the amount is to be recovered, a copy of the certificate
certified in the prescribed manner57 and specifying the amount to be recovered to a Tax Recovery Officer
within whose jurisdiction the assessee resides or has property and, thereupon, that Tax Recovery Officer
shall also proceed to recover the amount under this Chapter as if the certificate or copy thereof had been drawn
up by him.
Validity of certificate and cancellation or amendment thereof.

224. It shall not be open to the assessee to dispute the correctness of any certificate drawn up by the Tax
Recovery Officer on any ground whatsoever, but it shall be lawful for the Tax Recovery Officer to cancel
the certificate if, for any reason, he thinks it necessary so to do, or to correct any clerical or arithmetical
mistake therein.
Stay of proceedings in pursuance of certificate and amendment or cancellation thereof.

225. (1) It shall be lawful for the Tax Recovery Officer to grant time for the payment of any tax and
when he does so, he shall stay the proceedings for the recovery of such tax until the expiry of the time so
granted.
(2) Where the order giving rise to a demand of tax for which a certificate has been drawn up is modified
in appeal or other proceeding under this Act, and, as a consequence thereof, the demand is reduced but the
order is the subject-matter of further proceeding under this Act, the Tax Recovery Officer shall stay the
recovery of such part of the amount specified in the certificate as pertains to the said reduction for the
period for which the appeal or other proceeding remains pending.
(3) Where a certificate has been drawn up and subsequently the amount of the outstanding demand is reduced
as a result of an appeal or other proceeding under this Act, the Tax Recovery Officer shall, when the order which
was the subject-matter of such appeal or other proceeding has become final and conclusive, amend the
certificate, or cancel it, as the case may be.
226. (1) Where no certificate has been drawn up under section 222, the Assessing Officer may recover the tax
by any one or more of the modes provided in this section.
(1A) Where a certificate has been drawn up under section 222, the Tax Recovery Officer may, without prejudice
to the modes of recovery specified in that section, recover the tax by any one or more of the modes provided in
this section.
(2) If any assessee is in receipt of any income chargeable under the head "Salaries", the Assessing Officer
or Tax Recovery Officer may require any person paying the same to deduct from any payment subsequent
to the date of such requisition any arrears of tax due from such assessee, and such person shall comply with any
such requisition and shall pay the sum so deducted to the credit of the Central Government or as the Board
directs :
Provided that any part of the salary exempt from attachment in execution of a decree of a civil court under
section 60 of the Code of Civil Procedure, 1908 (5 of 1908), shall be exempt from any requisition made under
this sub-section.
(3) (i) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in
writing require any person from whom money is due or may become due to the assessee or any
person who holds or may subsequently hold money for or on account of the assessee to pay to the
Assessing Officer or Tax Recovery Officer either forthwith upon the money becoming due or being held or
at or within the time specified in the notice (not being before the money becomes due or is held) so much of the
money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money
when it is equal to or less than that amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any
money for or on account of the assessee jointly with any other person and for the purposes of this sub-section,
the shares of the joint holders in such account shall be presumed, until the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the assessee at his last address known to the
Assessing Officer or Tax Recovery Officer, and in the case of a joint account to all the joint holders at their
last addresses known to the Assessing Officer or Tax Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-
section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a
it shall not be necessary
(v) Any claim respecting any property in relation to which a notice under this sub-section has been issued
arising after the date of the notice shall be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section 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 contained in this sub-section shall be deemed to require
such person to pay any such sum or part thereof, as the case may be, 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.
(vii) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, amend or revoke
any notice issued under this sub-section or extend the time for making any payment in pursuance of such
notice.
(viii) The Assessing Officer or Tax Recovery Officer shall grant a receipt for any amount paid in
compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged
from his liability to the assessee to the extent of the amount so paid.
(ix) Any person discharging any liability to the assessee after receipt of a notice under this sub-section
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.
(x) If the person to whom a notice under this sub-section 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 sections
222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in
exercise of his powers under section 222.
(4) The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody there is
money belonging to the assessee for payment to him of the entire amount of such money, or, if it is more
than the tax due, an amount sufficient to discharge the tax.
(5) The Assessing Officer or Tax Recovery Officer may, if so authorised by the Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or Commissioner by general or special order, recover
any arrears of tax due from an assessee by distraint and sale of his movable property in the
manner laid down in the Third Schedule.
227. If the recovery of tax in any area has been entrusted to a State Government under clause (1) of article
258 of the Constitution, the State Government may direct, with respect to that area or any part thereof; that tax
shall be recovered therein with, and as an addition to, any municipal tax or local rate, by the same
person and in the same manner as the municipal tax or local rate is recovered.
228A. (1) Where an agreement is entered into by the Central Government with the Government of any
country outside India for recovery of income-tax under this Act and the corresponding law in force in that
country and the Government of that country or any authority under that Government which is specified in this
behalf in such agreement sends to the Board a certificate for the recovery of any tax due under such
corresponding law from a person having any property in India, the Board may forward such certificate to
any Tax Recovery Officer within whose jurisdiction such property is situated and thereupon such Tax
Recovery Officer shall—
(a) proceed to recover the amount specified in the certificate in the manner in which he would proceed
to recover the amount specified in a certificate drawn up by him under section 222; and
(b) remit any sum so recovered by him to the Board after deducting his expenses in connection with
the recovery proceedings.
(2) Where an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery
Officer may, if the assessee has property in a country outside India (being a country with which the Central
Government has entered into an agreement for the recovery of income-tax under this Act and the corresponding
law in force in that country), forward to the Board a certificate drawn up by him under section 222 and
the Board may take such action thereon as it may deem appropriate having regard to the terms of
the agreement with such country.
229. Any sum imposed by way of interest, fine, penalty, or any other sum payable under the provisions of this
Act, shall be recoverable in the manner provided in this Chapter for the recovery of arrears of tax.
232. The several modes of recovery specified in this Chapter shall not affect in any way—
(a) any other law for the time being in force relating to the recovery of debts due to Government; or
(b) the right of the Government to institute a suit for the recovery of the arrears due from the assessee;
and it shall be lawful for the Assessing Officer or the Government, as the case may be, to have recourse to any
such law or suit, notwithstanding that the tax due is being recovered from the assessee by any mode specified
in this Chapter.
C.A. Kalpesh Sanghavi Collection and Recovery Measure -P a g e | F19-C. 1
Part C of Recovery Procedure

Question: (ID 01) (ITCC)
Mr. D a foreign citizen came to India on Special assignment for rendering technical services to an Indian
company Tata motors limited. His remuneration is paid $10,000 outside India. He is leaving from India on 16th
September in Etihad airways Flight No. 6E-955.
Your Options are

A Mr. D should ensure that his tax is deducted at source in India before his departure.
B Mr. D should ensure that his return is filed in India before his departure.
C Mr. D should ensure that he is possessing appropriate certificate from Tata Motors before his
departure.
D Mr. D should inform his assessing officer the fact that he is leaving the country before his
departure.
Your Options are

A Etihad airways will be personally liable to income tax department for tax dues of Mr. D if it
allows to travel Mr. D without NOC from appropriate tax authorities.
B Etihad airways will not be personally liable to income tax department for tax dues of Mr. D
if it allows to travel Mr. D without NOC from appropriate tax authorities.
C Etihad airways will be personally liable to income tax department for tax dues of Mr. D.
D Etihad airways will be personally liable to income tax department for tax dues of Mr. D
because Mr. D has not filed return of income in India before the departure.
230. (1) Subject to such exceptions as the Central Government may, by notification in the Official Gazette,
specify in this behalf, no person,—
(a) who is not domiciled in India;
(b) who has come to India in connection with business, profession or employment; and
(c) who has income derived from any source in India,
shall leave the territory of India by land, sea or air unless he furnishes to such authority as
may be prescribed—
(i) an undertaking in the prescribed form from his employer; or
(ii) through whom such person is in receipt of the income,
to the effect that tax payable by such person who is not domiciled in India shall be paid by the
employer referred to in clause (i) or the person referred to in clause (ii), and the prescribed authority shall, on
receipt of the undertaking, immediately give to such person a no objection certificate, for leaving India:
(1A) Subject to such exceptions as the Central Government may, by notification in the Official Gazette, specify
in this behalf, every person, who is domiciled in India at the time of his departure from India, shall furnish,
in the prescribed form to the income-tax authority or such other authority as may be prescribed—
(a) the permanent account number allotted to him under section 139A:
Provided that in case no such permanent account number has been allotted to him, or his total income
is not chargeable to income-tax or he is not required to obtain a permanent account number under this
Act, such person shall furnish a certificate in the prescribed form;
(b) the purpose of his visit outside India;
(c) the estimated period of his stay outside India:
Provided that no person—
(i) who is domiciled in India at the time of his departure; and
(ii) in respect of whom circumstances exist which, in the opinion of an income-tax authority render
it necessary for such person to obtain a certificate under this section,
shall leave the territory of India by land, sea or air unless he obtains a certificate from the income-tax
authority stating that he has no liabilities under this Act, or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-
tax Act, 1958 (18 of 1958), or the Expenditure-tax Act, 1987 (35 of 1987), or that satisfactory arrangements
have been made for the payment of all or any of such taxes which are or may become payable by that person
:
Provided* that no income-tax authority shall make it necessary for any person who is domiciled in India to
obtain a certificate under this section unless he records the reasons therefor and obtains the prior approval
of the Principal Chief Commissioner or Chief Commissioner of Income-tax.
(2) If the owner or charterer of any ship or aircraft carrying persons from any place in the territory of India
to any place outside India allows any person to whom sub-section (1) or the first proviso to sub-section
(1A) applies to travel by such ship or aircraft without first satisfying himself that such person is in possession
of a certificate as required by that sub-section, he shall be personally liable to pay the whole or any part of
the amount of tax, if any, payable by such person as the Assessing Officer may, having regard to the
circumstances of the case, determine.
(3) In respect of any sum payable by the owner or charterer of any ship or aircraft under sub-section (2),
the owner or charterer, as the case may be, shall be deemed to be an assessee in default for such sum, and
such sum shall be recoverable from him in the manner provided in this Chapter as if it were an arrear of tax.
(4) The Board may make rules for regulating any matter necessary for, or incidental to, the purpose of carrying
out the provisions of this section.
Explanation.—For the purposes of this section, the expressions "owner" and "charterer" include any
representative, agent or employee empowered by the owner or charterer to allow persons to travel by the ship
or aircraft.
C.A. Kalpesh Sanghavi Settlement of cases - P a g e | F20 . 1
Question 1 (SLID 01) (Revision / Home work)

Write short notes on the Constitution of Settlement Commission.
Question 2 (SLID 02) (Revision / Home work)

Benches of Settlement Commission [Section 245BA].
Question: 3 (SLID 03) (Revision / Home work)

State briefly the proceedings for assessment in respect of which application can be made before Settlement
Commission on or after 1.6.2007 in relation to search matter. Explain the provisions relating to admission of
application before Settlement Commission made on or after 1.6.2007.
Your Options are

A Application can be made before the date of search
B Application can be made after the date of search but before the date of issue of notice
C Application can be made after the date of issue of notice for assessment but before the date
of passing the order
D Search cases cannot apply to settlement commission

An Assessee’s case is pending in appeal before the income Tax Appellate Tribunal for Assessment Year 2005-
06. Since the appeal is pending, the Assessee wishes to file an application to the Settlement Commission for
disclosing additional income, the income tax on which is Rs. 15 Lakhs. Is it possible to make such application?
Your Options are

A When the matter is pending before Appellate Tribunal, alternatively application can be made
to settlement commission
B When the matter is pending before Appellate Tribunal, the settlement commission procedure
is abated
C When the matter is pending before Appellate Tribunal, application cannot be made to
settlement commission
D None of the above
Will your answer be different if the Tribunal sets aside the case and restores the matter to CIT (Appeals) ?
Your Options are

A When matter is before the CIT(A) the settlement commission application can be made
B When matter is before the CIT(A) the settlement commission application cannot be made
C When matter is before the CIT(A) the CIT(A) procedure is to be completed first and then
application to be made to settlement commission
D None of the above

Briefly describe the manner of computation of Additional Income Tax Payable where the return of income is
filed by the assessee before applying to settlement commission.
Your Options are

A the amount of tax calculated in application to settlement commission as increased by the
amount of tax calculated on the total income returned for that year
B the amount of tax calculated in application to settlement commission as reduced by the
amount of tax calculated on the total income returned for that year
C The amount of tax disclosed to settlement commission out of un-disclosed source
D Total tax liability of the assessee including tax on disclosed and un-disclosed source

The orders of the Settlement Commission are conclusive.
Your Options are

A Orders of settlement commission are conclusive
B Orders of settlement commission are arbitrary
C Orders of settlement commission are full and final
D Orders of settlement commission are like court orders

Explain the consequences in case of rejection of the application by Settlement Commission [Section 245HA].
Your Options are

A Income tax authority will take the matter to the court
B Income tax authority will use all the material and proceed with the assessment
C Income tax authority will demand the taxes as per application to settlement commission
D None of the above
CIT (Appeals) empowered to consider an appeal filled by an assessee challenging the order of assessment in
respect of which the proceedings before the Settlement Commission abates.
Your Options are

A Order of assessment in respect of which settlement commission procedure abated is
appealable to CIT (A)
B Order of assessment in respect of which settlement commission procedure abated is not
appealable to CIT (A)
C Order of assessment in respect of which settlement commission procedure abated is
appealable to Tribunals directly instead of CIT(A)
D Order of assessment in respect of which settlement commission procedure abated is not
appealable.

When can a subsequent application to the Settlement Commission be barred ?
Your Options are

A Application to settlement commission can be made only once in life time
B Application to settlement commission can be made twice in life time
C Application to settlement commission can be made only once in 10 years
D None of above

Discuss the powers of the Settlement Commission. [Section 245H]
Power of the Settlement Commission to grant immunity from prosecution and penalty is limitless. Discuss.
Your Options are

A Settlement commission is empowered to grant immunity from penalty and Prosecution.
B Settlement commission is empowered to grant immunity from penalty and Prosecution and
interest.
C Settlement commission is empowered to grant immunity from full payment of taxes
D None of above
Question: 10 (SLID 10)

The Settlement Commission does not have the power u/s 245D to reduce or waive the interest payable by an
assessee under the provisions of Section 234A, 234B or 234C. discuss.
Your Options are

A Settlement commission can reduce or waive interest of 234A / 234B / 234C
B Settlement commission cannot reduce or waive interest of 234A / 234B / 234C
C Settlement commission can reduce or waive interest of 234A / 234B / 234C up to 10,000
D Settlement commission can reduce or waive interest of 234A / 234B / 234C up to 50,000

There are parallel provisions which empower the Settlement Commission as well as the income – tax authorities
to reduce or waive penalties and grant immunity from prosecution. In what respects do they overlap and in what
respects do they differ?

Company X has made application to settlement commission, it has disclosed the tax liability of Rs. 23 crore.
Once application was accepted and hearing was given to the assessee it disclosed additional income and offered
tax of Rs. 8 crore additionally. Settlement commission has accepted the revised application. Whether the action
of the settlement commission is justified ?

Seizures were made from Mr. Sunder pursuant to a search conducted in his premises. He filed an application for
settlement by claiming to have received the amount by way of loans from several persons. The Settlement
Commission accepted his statement and made an order. The CBI, however, conducted enquiry at the instance
of the Revenue regarding the claimed amount of loans and opined that the alleged lenders had no means or
financial capacity to advance such huge loans to Mr. Sunder and were mere name lenders only. The
Commissioner filed an application under section 245D(6) praying for the order to be declared void and for
withdrawal of benefit granted. Mr. Sunder, however, contended that the order of the Settlement Commission
was final and any fresh analysis would amount to sitting in judgment over an earlier decision, for which the
Settlement Commission was not empowered. Discuss the correctness of Mr. Sunder’s contention.

The business premises of Mr. Amit was subjected to a survey under section 133A of the Act. There were some
incriminating materials found at the time of survey. The assessee apprehends reopening of assessments of the
earlier years. He wants to know whether he can approach the Settlement Commission. Explain briefly the basic
conditions to be satisfied and the benefits that may accrue to Mr. Amit by approaching the Settlement
Commission.
Your Options are

A Mr. Amit must wait for Re-assessment notice to be issued and then apply to settlement
commission
B Mr. Amit can apply to settlement commission after completion of survey but before the issue
of notice
C Mr. Amit can apply to settlement commission after passing of order of re-assessment
D None of above

Whether the Commissioner (Appeals) is empowered to consider an appeal filed by an assessee challenging the
order of assessment in respect of which the proceedings before the Settlement Commission abates? Examine
with the relevant provisions of law. (3 marks)
Your Options are
A CIT (A) has the powers
B CIT (A) does not have the powers
C CIT (A) is of rank below of Settlement commission and thus do not have powers
D Concept of merger do not apply
245A. In this Chapter, unless the context otherwise requires,—

(a) "Bench" means a Bench of the Settlement Commission;
(b) "case" means any proceeding for assessment under this Act, of any person in respect of any assessment
year or assessment years which may be pending before an Assessing Officer on the date on which
an application under sub-section (1) of section 245C is made.
Explanation.—For the purposes of this clause—
(i) a proceeding for assessment or reassessment or recomputation under section 147 shall be
deemed to have commenced—
(a) from the date on which a notice under section 148 is issued for any assessment year;
(b) from the date of issuance of the notice referred to in sub-clause (a), for any other
assessment year or assessment years for which a notice under section 148 has not been
issued, but such notice could have been issued on such date, if the return of income for the
other assessment year or assessment years has been furnished under section 139 or in
response to a notice under section 142;
(ii) [***]
(iii) a proceeding for making fresh assessment in pursuance of an order under section 254 or section
263 or section 264, setting aside or cancelling an assessment shall be deemed to have
commenced from the date on which such order, setting aside or cancelling an
assessment was passed;
(iiia) a proceeding for assessment or reassessment for any of the assessment years, referred to in clause
(b) of sub-section (1) of section 153A in case of a person referred to in section 153A or section
153C, shall be deemed to have commenced on the date of issue of notice initiating such
proceeding and concluded on the date on which the assessment is made;
(iv) a proceeding for assessment for any assessment year, other than the proceedings of assessment or
reassessment referred to in clause (i) or clause (iii) or clause (iiia)*, shall be deemed to have
commenced from the date on which the return of income for that assessment year is
furnished under section 139 or in response to a notice served under section 142 and concluded
on the date on which the assessment is made; or on the expiry of [the time specified for making
assessment under sub-section (1) of section 153], in case where no assessment is made;
(c) "Chairman" means the Chairman of the Settlement Commission;
(d) "income-tax authority" means an income-tax authority specified in section 116;
(e) "Member" means a Member of the Settlement Commission, and includes the Chairman and a Vice-
Chairman;
(f) "Settlement Commission" means the Income-tax Settlement Commission constituted under section
245B;
(g) "Vice-Chairman" means a Vice-Chairman of the Settlement Commission and includes a Member who
is senior amongst the Members of a Bench.
245B. (1) The Central Government shall constitute a Commission to be called the Income-tax
Settlement Commission for the settlement of cases under this Chapter.
(2) The Settlement Commission shall consist of a Chairman and as many Vice-Chairmen and
other members as the Central Government thinks fit and shall function within the Department of the Central
Government dealing with direct taxes.
(2A) [***]
(3) The Chairman, Vice-Chairman and other members of the Settlement Commission shall be appointed by the
Central Government from amongst persons of integrity and outstanding ability, having special knowledge of,
and, experience in, problems relating to direct taxes and business accounts:
Provided that, where a member of the Board is appointed as the Chairman , Vice-Chairman or as a member of
the Settlement Commission, he shall cease to be a member of the Board.
245BA. (1) Subject to the other provisions of this Chapter, the jurisdiction, powers and authority of the
Settlement Commission may be exercised by Benches thereof.
(2) Subject to the other provisions of this section, a Bench shall be presided over by the Chairman or a
Vice-Chairman and shall consist of two other Members.
(3) The Bench for which the Chairman is the Presiding Officer shall be the principal Bench and the other
Benches shall be known as additional Benches.
(4) Notwithstanding anything contained in sub-sections (1) and (2), the Chairman may authorise the Vice-
Chairman or other Member appointed to one Bench to discharge also the functions of the Vice-Chairman or, as
the case may be, other Member of another Bench.
(5) Notwithstanding anything contained in the foregoing provisions of this section, and subject to any rules that
may be made in this behalf, when one of the persons constituting a Bench (whether such person be the Presiding
Officer or other Member of the Bench) is unable to discharge his functions owing to absence, illness or any
other cause or in the event of the occurrence of any vacancy either in the office of the Presiding Officer or in
the office of one or the other Members of the Bench, the remaining two persons may function as the Bench and
if the Presiding Officer of the Bench is not one of the remaining two persons, the senior among the remaining
persons shall act as the Presiding Officer of the Bench :
Provided that if at any stage of the hearing of any such case or matter, it appears to the Presiding Officer that
the case or matter is of such a nature that it ought to be heard of by a Bench consisting of three Members, the
case or matter may be referred by the Presiding Officer of such Bench to the Chairman for transfer to such
Bench as the Chairman may deem fit.
(5A) Notwithstanding anything contained in the foregoing provisions of this section, the Chairman may, for the
disposal of any particular case, constitute a Special Bench consisting of more than three Members.
(6) Subject to the other provisions of this Chapter, the places at which the principal Bench and the additional
Benches shall ordinarily sit shall be such as the Central Government may, by notification in the Official Gazette,
specify and the Special Bench shall sit at a place to be fixed by the Chairman.
245BB. (1) In the event of the occurrence of any vacancy in the office of the Chairman by reason of his
death, resignation or otherwise, the Vice-Chairman or, as the case may be, such one of the Vice-Chairmen as
the Central Government may, by notification in the Official Gazette, authorise in this behalf, shall
act as the Chairman until the date on which a new Chairman, appointed in accordance with the provisions
of this Chapter to fill such vacancy, enters upon his office.
(2) When the Chairman is unable to discharge his functions owing to absence, illness or any other cause,
the Vice-Chairman or, as the case may be, such one of the Vice-Chairmen as the Central Government may, by
notification in the Official Gazette, authorise in this behalf, shall discharge the functions of the
Chairman until the date on which the Chairman resumes his duties.
Power of Chairman to transfer cases from one Bench to another.

245BC. On the application of the assessee or the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner and after notice to them, and after hearing such of them as he may
desire to be heard, or on his own motion without such notice, the Chairman may transfer any case
pending before one Bench, for disposal, to another Bench.
Decision to be by majority.
245BD. If the Members of a Bench differ in opinion on any point, the point shall be decided according to the
opinion of the majority, if there is a majority, but if the Members are equally divided, they shall
state the point or points on which they differ, and make a reference to the Chairman who shall either hear
the point or points himself or refer the case for hearing on such point or points by one or more of the other
Members of the Settlement Commission and such point or points shall be decided according to the opinion
of the majority of the Members of the Settlement Commission who have heard the case, including
those who first heard it.
245C. (1) An assessee may, at any stage of a case relating to him, make an application in such form and in
such manner as may be prescribed, and containing a full and true disclosure of his income which has not
been disclosed before the Assessing Officer, the manner in which such income has been derived,
the additional amount of income-tax payable on such income and such other particulars as may be
prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of
in the manner hereinafter provided :
Provided that no such application shall be made unless,—
(i) in a case where proceedings for assessment or reassessment for any of the assessment years referred to
in clause (b) of sub-section (1) of section 153A or clause (b) of sub-section (1) of section 153B in case
of a person referred to in section 153A or section 153C have been initiated, the additional amount of
income-tax payable on the income disclosed in the application exceeds fifty lakh rupees,
(ia) in a case where—
(A) the applicant is related to the person referred to in clause (i) who has filed an application (hereafter
in this sub-section referred to as "specified person"); and
(B) the proceedings for assessment or re-assessment for any of the assessment years referred to in
clause (b) of sub-section (1) of section 153A or clause (b) of sub-section (1) of section 153B in
case of the applicant, being a person referred to in section 153A or section 153C, have been
initiated,
the additional amount of income-tax payable on the income disclosed in the application
exceeds ten lakh rupees,
(ii) in any other case, the additional amount of income-tax payable on the income disclosed in the
application exceeds ten lakh rupees,
and such tax and the interest thereon, which would have been paid under the provisions of this Act had the
income disclosed in the application been declared in the return of income before the Assessing Officer on the
date of application, has been paid on or before the date of making the application and the proof
of such payment is attached with the application.
Explanation.—For the purposes of clause (ia),—
(a) the applicant, in relation to the specified person referred to in clause (ia), means,—
(i) where the specified person is an individual, any relative of the specified person;
(ii) where the specified person is a company, firm, association of persons or Hindu undivided family,
any director of the company, partner of the firm, or member of the association or family, or any
relative of such director, partner or member;
(iii) any individual who has a substantial interest in the business or profession of the specified person,
or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest
in the business or profession of the specified person or any director, partner or member of such
company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or
member, as the case may be, has a substantial interest in the business or profession of the specified
person; or any director, partner or member of such company, firm, association or family or any
relative of such director, partner or member;
(vi) any person who carries on a business or profession,—
(A) where the specified person being an individual, or any relative of such specified person, has
a substantial interest in the business or profession of that person; or
(B) where the specified person being a company, firm, association of persons or Hindu undivided
family, or any director of such company, partner of such firm or member of the association
or family, or any relative of such director, partner or member, has a substantial interest in the
business or profession of that person;
(b) a person shall be deemed to have a substantial interest in a business or profession, if—
(A) in a case where the business or profession is carried on by a company, such person is, on the date
of search, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend,
whether with or without a right to participate in profits) carrying not less than twenty per cent of
the voting power; and
(B) in any other case, such person is, on the date of search, beneficially entitled to not less than twenty
per cent of the profits of such business or profession.
(1A) For the purposes of sub-section (1) of this section, the additional amount of income-tax payable in
respect of the income disclosed in an application made under sub-section (1) of this section shall be the amount
calculated in accordance with the provisions of sub-sections (1B) to (1D).
(1B) Where the income disclosed in the application relates to only one previous year,—
(i) if the applicant has not furnished a return in respect of the total income of that year, then, tax shall
be calculated on the income disclosed in the application as if such income were the total income;
(ii) if the applicant has furnished a return in respect of the total income of that year, tax shall be
calculated on the aggregate of the total income returned and the income disclosed in the
application as if such aggregate were the total income.
(1C) The additional amount of income-tax payable in respect of the income disclosed in the application relating
to the previous year referred to in sub-section (1B) shall be,—
(a) in a case referred to in clause (i) of that sub-section, the amount of tax calculated under that
clause;
(b) in a case referred to in clause (ii) of that sub-section, the amount of tax calculated under that clause
as reduced by the amount of tax calculated on the total income returned for that year;
(c) [***].
(1D) Where the income disclosed in the application relates to more than one previous year, the additional
amount of income-tax payable in respect of the income disclosed for each of the years shall first be calculated
in accordance with the provisions of sub-sections (1B) and (1C) and the aggregate of the amount so arrived
at in respect of each of the years for which the application has been made under sub-section (1) shall be the
additional amount of income-tax payable in respect of the income disclosed in the application.
(1E) [***]
(2) Every application made under sub-section (1) shall be accompanied by such fees as may be prescribed.
(3) An application made under sub-section (1) shall not be allowed to be withdrawn by the applicant.
(4) An assessee shall, on the date on which he makes an application under sub-section (1) to the Settlement
Commission, also intimate the Assessing Officer in the prescribed manner of having made such
application to the said Commission.
245D. (1) On receipt of an application under section 245C, the Settlement Commission shall, within seven days
from the date of receipt of the application, issue a notice to the applicant requiring him to explain as to why
the application made by him be allowed to be proceeded with, and on hearing the applicant, the Settlement
Commission shall, within a period of fourteen days from the date of the application, by an order in
writing, reject the application or allow the application to be proceeded with:
Provided that where no order has been passed within the aforesaid period by the Settlement Commission,
the application shall be deemed to have been allowed to be proceeded with.
(1A) [Omitted by the Finance (No. 2) Act, 1991, w.e.f. 27-9-1991.]
(2) A copy of every order under sub-section (1) shall be sent to the applicant and to the Principal
Commissioner or Commissioner.
(2A) Where an application was made under section 245C before the 1st day of June, 2007, but an order under
the provisions of sub-section (1) of this section, as they stood immediately before their amendment by the
Finance Act, 2007, has not been made before the 1st day of June, 2007, such application shall be deemed to
have been allowed to be proceeded with if the additional tax on the income disclosed in such application and
the interest thereon is paid on or before the 31st day of July, 2007.
Explanation.—In respect of the applications referred to in this sub-section, the 31st day of July, 2007 shall be
deemed to be the date of the order of rejection or allowing the application to be proceeded with under sub-
section (1).
(2B) The Settlement Commission shall,—

(i) in respect of an application which is allowed to be proceeded with under sub-section (1), within
thirty days from the date on which the application was made; or
(ii) in respect of an application referred to in sub-section (2A) which is deemed to have been allowed to be
proceeded with under that sub-section, on or before the 7th day of August, 2007,
call for a report from the Principal Commissioner or Commissioner, and the Principal Commissioner or
Commissioner shall furnish the report within a period of thirty days of the receipt of communication from
the Settlement Commission.
(2C) Where a report of the Principal Commissioner or Commissioner called for under sub-section (2B) has been
furnished within the period specified therein, the Settlement Commission may, on the basis of the report and
within a period of fifteen days of the receipt of the report, by an order in writing, declare the
application in question as invalid, and shall send the copy of such order to the applicant and the
Principal Commissioner or Commissioner:
Provided that an application shall not be declared invalid unless an opportunity has been given to the
applicant of being heard:
Provided further that where the Principal Commissioner or Commissioner has not furnished the report
within the aforesaid period, the Settlement Commission shall proceed further in the matter without
the report of the Principal Commissioner or Commissioner.
(2D) Where an application was made under sub-section (1) of section 245C before the 1st day of June, 2007 and
an order under the provisions of sub-section (1) of this section, as they stood immediately before their
amendment by the Finance Act, 2007, allowing the application to have been proceeded with, has been passed
before the 1st day of June, 2007, but an order under the provisions of sub-section (4), as they stood immediately
before their amendment by the Finance Act, 2007, was not passed before the 1st day of June, 2007, such
application shall not be allowed to be further proceeded with unless the additional tax on the income disclosed
in such application and the interest thereon, is, notwithstanding any extension of time already granted by the
Settlement Commission, paid on or before the 31st day of July, 2007.
(3) The Settlement Commission, in respect of—

(i) an application which has not been declared invalid under sub-section (2C); or
(ii) an application referred to in sub-section (2D) which has been allowed to be further
proceeded with under that sub-section,
may call for the records from the Principal Commissioner or Commissioner and after examination of such
records, if the Settlement Commission is of the opinion that any further enquiry or investigation in the
matter is necessary, it may direct the Principal Commissioner or Commissioner to make or cause to be made
such further enquiry or investigation and furnish a report on the matters covered by the application and
any other matter relating to the case, and the Principal Commissioner or Commissioner shall furnish the report
within a period of ninety days of the receipt of communication from the Settlement Commission:
Provided that where the Principal Commissioner or Commissioner does not furnish the report within the
aforesaid period, the Settlement Commission may proceed to pass an order under sub-section (4) without such
report.
(4) After examination of the records and the report of the Principal Commissioner or Commissioner, if any,
received under—
(i) sub-section (2B) or sub-section (3), or
(ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act,
2007,
and after giving an opportunity to the applicant and to the Principal Commissioner or Commissioner
to be heard, either in person or through a representative duly authorised in this behalf, and after examining
such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in
accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the
application and any other matter relating to the case not covered by the application, but referred to in the report
of the Principal Commissioner or Commissioner.
(4A) The Settlement Commission shall pass an order under sub-section (4),—
(i) in respect of an application referred to in sub-section (2A) or sub-section (2D), on or before the 31st
day of March, 2008;
(ii) in respect of an application made on or after the 1st day of June, 2007 but before the 1st day of June,
2010, within twelve months from the end of the month in which the application was made;
(iii) in respect of an application made on or after the 1st day of June, 2010, within eighteen months from
the end of the month in which the application was made.
(5) Subject to the provisions of section 245BA, the materials brought on record before the Settlement
Commission shall be considered by the Members of the concerned Bench before passing any order under sub-
section (4) and, in relation to the passing of such order, the provisions ofsection 245BD shall apply.
(6) Every order passed under sub-section (4) shall provide for the terms of settlement including any demand
by way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid
and all other matters to make the settlement effective and shall also provide that the settlement shall be void if
it is subsequently found by the Settlement Commission that it has been obtained by fraud or
misrepresentation of facts.
(6A) Where any tax payable in pursuance of an order under sub-section (4) is not paid by the assessee
within thirty-five days of the receipt of a copy of the order by him, then, whether or not the Settlement
Commission has extended the time for payment of such tax or has allowed payment thereof by instalments, the
assessee shall be liable to pay simple interest at one and one-fourth per cent for every month or part of
a month on the amount remaining unpaid from the date of expiry of the period of thirty-five days aforesaid.
(6B) The Settlement Commission may, with a view to rectifying any mistake apparent from the record, amend
any order passed by it under sub-section (4)—
(a) at any time within a period of six months from the end of the month in which the order was passed;
or
(b) at any time within the period of six months from the end of the month in which an application for
rectification has been made by the Principal Commissioner or the Commissioner or the
applicant, as the case may be:
Provided that no application for rectification shall be made by the Principal Commissioner or the
Commissioner or the applicant after the expiry of six months from the end of the month in which an order
under sub-section (4) is passed by the Settlement Commission:
Provided further that an amendment which has the effect of modifying the liability of the applicant shall
not be made under this sub-section unless the Settlement Commission has given notice to the applicant and the
Principal Commissioner or Commissioner of its intention to do so and has allowed the applicant and the
Principal Commissioner or Commissioner an opportunity of being heard.
(7) Where a settlement becomes void as provided under sub-section (6), the proceedings with respect to the
matters covered by the settlement shall be deemed to have been revived from the stage at which the application
was allowed to be proceeded with by the Settlement Commission and the income-tax authority concerned,
may, notwithstanding anything contained in any other provision of this Act, complete such proceedings at
any time before the expiry of two years from the end of the financial year in which the
settlement became void.
(8) For the removal of doubts, it is hereby declared that nothing contained in section 153 shall apply to any order
passed under sub-section (4) or to any order of assessment, reassessment or recomputation required to be made
by the Assessing Officer in pursuance of any directions contained in such order passed by the Settlement
Commission and nothing contained in the proviso to sub-section (1) of section 186 shall apply to the cancellation
of the registration of a firm required to be made in pursuance of any such directions as aforesaid.
Power of Settlement Commission to order provisional attachment to protect revenue.

245DD. (1) Where, during the pendency of any proceeding before it, the Settlement Commission is of the
opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, it may, by order,
attach provisionally any property belonging to the applicant in the manner provided in the Second
Schedule :
Provided that where a provisional attachment made under section 281B is pending immediately before an
application is made under section 245C, an order under this sub-section shall continue such provisional
attachment up to the period up to which an order made under section 281Bwould have continued if such
application had not been made :
Provided further that where the Settlement Commission passes an order under this sub-section after the expiry
of the period referred to in the preceding proviso, the provisions of sub-section (2) shall apply to such order as
if the said order had originally been passed by the Settlement Commission.
(2) Every provisional attachment made by the Settlement Commission under sub-section (1) shall cease to
have effect after the expiry of a period of six months from the date of the order made under sub-section
(1) :
Provided that the Settlement Commission may, for reasons to be recorded in writing, extend the aforesaid
period by such further period or periods as it thinks fit.
245E. If the Settlement Commission is of the opinion (the reasons for such opinion to be recorded by it in
writing) that, for the proper disposal of the case pending before it, it is necessary or expedient to reopen any
proceeding connected with the case but which has been completed under this Act by any income-tax authority
before the application under section 245C was made, it may, with the concurrence of the applicant, reopen such
proceeding and pass such order thereon as it thinks fit, as if the case in relation to which the application for
settlement had been made by the applicant under that section covered such proceeding also :
Provided that no proceeding shall be reopened by the Settlement Commission under this section if the period
between the end of the assessment year to which such a proceeding relates and the date of application for
settlement under section 245C exceeds nine years :
245F. (1) In addition to the powers conferred on the Settlement Commission under this Chapter, it shall have
all the powers which are vested in an income-tax authority under this Act.
(2) Where an application made under section 245C has been allowed to be proceeded with under section 245D,
the Settlement Commission shall, until an order is passed under sub-section (4) of section 245D, have, subject
to the provisions of sub-section (3) of that section, exclusive jurisdiction to exercise the powers and perform the
functions of an income-tax authority under this Act in relation to the case :
Provided that where an application has been made under section 245C on or after the 1st day of June, 2007, the
Settlement Commission shall have such exclusive jurisdiction from the date on which the application was made:
Provided further that where—
(i) an application made on or after the 1st day of June, 2007, is rejected under sub-section (1) of section
245D; or
(ii) an application is not allowed to be proceeded with under sub-section (2A) of section 245D, or, as the
case may be, is declared invalid under sub-section (2C) of that section; or
(iii) an application is not allowed to be further proceeded with under sub-section (2D) of section 245D,
the Settlement Commission, in respect of such application shall have such exclusive jurisdiction upto the
date on which the application is rejected, or, not allowed to be proceeded with, or, declared invalid,
or, not allowed to be further proceeded with, as the case may be.
(3) Notwithstanding anything contained in sub-section (2) and in the absence of any express direction to the
contrary by the Settlement Commission, nothing contained in this section shall affect the operation of any other
provision of this Act requiring the applicant to pay tax on the basis of self-assessment in relation to the matters
before the Settlement Commission.
(4) For the removal of doubt, it is hereby declared that, in the absence of any express direction by the Settlement
Commission to the contrary, nothing in this Chapter shall affect the operation of the provisions of this Act in so
far as they relate to any matters other than those before the Settlement Commission.
(5) [***]
(6) [***]
(7) The Settlement Commission shall, subject to the provisions of this Chapter, have power to regulate its
own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers
or of the discharge of its functions, including the places at which the Benches shall hold their sittings.
245G. No person shall be entitled to inspect, or obtain copies of, any reports made by any income-tax
authority to the Settlement Commission; but the Settlement Commission may, in its discretion, furnish copies
thereof to any such person on an application made to it in this behalf and on payment of the prescribed fee :
Provided that, for the purpose of enabling any person whose case is under consideration to rebut
any evidence brought on record against him in any such report, the Settlement Commission shall, on
an application made in this behalf, and on payment of the prescribed fee by such person, furnish him
with a certified copy of any such report or part thereof relevant for the purpose.
245H. (1) The Settlement Commission may, if it is satisfied that any person who made the application for
settlement under section 245C has co-operated with the Settlement Commission in the proceedings before
it and has made a full and true disclosure of his income and the manner in which such income has been derived,
grant to such person, subject to such conditions as it may think fit to impose for the reasons to be recorded
in writing, immunity from prosecution for any offence under this Act or under the Indian Penal Code
(45 of 1860) or under any other Central Act for the time being in force and also (either wholly or in part) from
the imposition of any penalty under this Act, with respect to the case covered by the settlement :
Provided that no such immunity shall be granted by the Settlement Commission in cases where the proceedings
for the prosecution for any such offence have been instituted before the date of receipt of the application
under section 245C :
Provided further that the Settlement Commission shall not grant immunity from prosecution for any offence
under the Indian Penal Code (45 of 1860) or under any Central Act other than this Act and the Wealth-tax Act,
1957 (27 of 1957) to a person who makes an application undersection 245C on or after the 1st day of June, 2007.
(1A) An immunity granted to a person under sub-section (1) shall stand withdrawn if such person
fails to pay any sum specified in the order of settlement passed under sub-section (4) of section
245D within the time specified in such order or within such further time as may be allowed by the Settlement
Commission, or fails to comply with any other 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.
(2) An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Settlement
Commission, if it is satisfied that such person had, in the course of the settlement proceedings,
concealed any particulars material to the settlement or had given false evidence, and thereupon such
person may be tried for the offence with respect to which the immunity was granted or for any other offence of
which he appears to have been guilty in connection with the settlement and shall also 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.
245HA. (1) Where—

(i) an application made under section 245C on or after the 1st day of June, 2007 has been rejected under
sub-section (1) of section 245D; or
(ii) an application made under section 245C has not been allowed to be proceeded with under sub-section
(2A) or further proceeded with under sub-section (2D) of section 245D; or
(iii) an application made under section 245C has been declared as invalid under sub-section (2C)
of section 245D; or
(iiia) in respect of any application made under section 245C, an order under sub-section (4) of section
245D has been passed not providing for the terms of settlement; or
(iv) in respect of any other application made under section 245C, an order under sub-section (4)
of section 245D has not been passed within the time or period specified under sub-section (4A)
of section 245D,
the proceedings before the Settlement Commission shall abate on the specified date.
Explanation.—For the purposes of this sub-section, "specified date" means—
(a) in respect of an application referred to in clause (i), the day on which the application was rejected;
(b) in respect of an application referred to in clause (ii), the 31st day of July, 2007;
(c) in respect of an application referred to in clause (iii), the last day of the month in which the application
was declared invalid;
(ca) in respect of an application referred to clause (iiia), the day on which the order under sub-section (4)
of section 245D was passed not providing for the terms of settlement;
(d) in respect of an application referred to in clause (iv), on the date on which the time or period specified
in sub-section (4A) of section 245D expires.
(2) Where a proceeding before the Settlement Commission abates, the Assessing Officer, or, as the case may
be, any other income-tax authority before whom the proceeding at the time of making the application was
pending, shall dispose of the case in accordance with the provisions of this Act as if no application
under section 245C had been made.
(3) For the purposes of sub-section (2), the Assessing Officer, or, as the case may be, other income-tax
authority, shall be entitled to use all the material and other information produced by the
assessee before the Settlement Commission or the results of the inquiry held or evidence recorded by the
Settlement Commission in the course of the proceedings before it, as if such material, information, inquiry and
evidence had been produced before the Assessing Officer or other income-tax authority or held or recorded by
him in the course of the proceedings before him.
(4) For the purposes of the time-limit under sections 149, 153, 153B, 154, 155, 158BE and 231 and for the
purposes of payment of interest under section 243 or 244 or, as the case may be, section 244A, for making the
assessment or reassessment under sub-section (2), the period commencing on and from the date of the
application to the Settlement Commission under section 245C and ending with "specified date"
referred to in sub-section (1) shall be excluded; and where the assessee is a firm, for the purposes of the
time-limit for cancellation of registration of the firm under sub-section (1) of section 186, the period aforesaid
shall, likewise, be excluded.
245HAA. Where an application made under section 245C on or after the 1st day of June, 2007, is rejected
under sub-section (1) of section 245D, or any other application made under section 245C is not allowed to be
proceeded with under sub-section (2A) of section 245D or is declared invalid under sub-section (2C) of section
245D or has not been allowed to be further proceeded with under sub-section (2D) of section 245D or an order
under sub-section (4) of section 245D has not been passed within the time or period specified under sub-
section (4A) of section 245D, the Assessing Officer shall allow the credit for the tax and interest paid on
or before the date of making the application or during the pendency of the case before the Settlement
Commission.
245-I. Every order of settlement passed under sub-section (4) of section 245D shall be conclusive as to the
matters stated therein and no matter covered by such order shall, save as otherwise provided in this Chapter,
be reopened in any proceeding under this Act or under any other law for the time being in force.
245J. Any sum specified in an order of settlement passed under sub-section (4) of section 245D may, subject to
such conditions, if any, as may be specified therein, be recovered, and any penalty for default in making payment
of such sum may be imposed and recovered in accordance with the provisions of Chapter XVII, by the Assessing
Officer having jurisdiction over the person who made the application for settlement under section 245C.
245K. (1) Where—

(i) an order of settlement passed under sub-section (4) of section 245D provides for the imposition of a
penalty on the person who made the application under section 245C for settlement, on the ground of
concealment of particulars of his income; or
(ii) after the passing of an order of settlement under the said sub-section (4) in relation to a case, such
person is convicted of any offence under Chapter XXII in relation to that case; or
(iii) the case of such person was sent back to the Assessing Officer by the Settlement Commission on or
before the 1st day of June, 2002,
then, he or any person related to such person (herein referred to as related person) shall not be entitled to apply
for settlement under section 245C in relation to any other matter.
(2) Where a person has made an application under section 245C on or after the 1st day of June, 2007
and if such application has been allowed to be proceeded with under sub-section (1) of section 245D, such
person or any related person shall not be subsequently entitled to make an application
under section 245C.
Explanation.—For the purposes of this section, "related person" with respect to a person means,—
(i) where such person is an individual, any company in which such person holds more than fifty per cent
of the shares or voting rights at any time, or any firm or association of persons or body of individuals
in which such person is entitled to more than fifty per cent of the profits at any time, or any Hindu
undivided family in which such person is a karta;
(ii) where such person is a company, any individual who held more than fifty per cent of the shares or
voting rights in such company at any time before the date of application before the Settlement
Commission by such person;
(iii) where such person is a firm or association of persons or body of individuals, any individual who was
entitled to more than fifty per cent of the profits in such firm, association of persons or body of
individuals, at any time before the date of application before the Settlement Commission by such person;
(iv) where such person is a Hindu undivided family, the karta of that Hindu undivided family.
245L. Any proceeding under this Chapter before the Settlement Commission shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228, and for the purposes of section 196, of the Indian Penal
Code (45 of 1860).
C.A. Kalpesh Sanghavi Liability in Special cases - P a g e | F21-A . 1
Sub-Topics Sections
A Liability in special Cases 159 to 181
B
C
Question (Accelerated assessment) (ID – 01) (Revision / Home work)

An assessee has applied for tax clearance certificate. Can the AO. make an assessment U/s. 174?
Your Options are

A Application of Tax clearance certificate is routine procedure and thus 174 should not be
applied.
B Application of Tax clearance certificate is reasons enough for officer to invoke 174.
C Assessing officer must always invoke 174
D None of above
Question (Accelerated assessment) (ID – 02) (Revision / Home work)

In pursuance of an agreement entered into with a non-resident firm by the company X, the firm supplied
drawings and designs, etc. One Mr. Davis, one of the partners of the firm, also visited India to supervise the
erection of the plant and the firm was paid some remuneration as per the agreement. The presence of the partner
of the non-resident firm in India was brought to the notice of the Income-tax Officer, who recorded his statement
also. Company X also requested the officer to make a note of 174 and make the assessment on Mr Davis before
he leaves India. The Income-tax Officer, however, issued a notice to the company to show cause why it should
not be treated as agent of the non-resident firm. Officer also treated the company as agent of non-resident.
Whether action of the officer is justified ?
Your Options are

A AO is not Justified since Section 174 and Section 160 are mutually exclusive
B AO is not Justified since Section 174 and Section 160 are not mutually exclusive
C AO is not Justified since Section 174 and Section 160 can operate simultaneously
D AO is Justified
Question (Accelerated assessment) (ID – 11)

Assessee company X is selling its factory building plant and machinery to Company Y on 1-6-2011. Net income
of the company as on the date is 30 crore. Assessing officer is invoking the provisions of section 175 and making
the assessment of the company immediately by issuing a notice. Assessing officer has worked out the tax liability
as 30 crore * tax rate % + SC and CESS (tax rate for AY 2012-13). However CIT is of the view that tax liability
should be worked as 30 crore * tax rate % + SC and CESS (tax rate for AY 2011-12) since the previous year
is same as assessment year. You are required to offer your comments on the issue.
Your Options are

A Tax rate of AY 12-13 will apply
B Tax rate of AY 12-13 will apply if the finance act is already passed appropriately
C Tax rate of AY 11-12 will always apply
D None of above
Assessment of persons leaving India.

174. (1) Notwithstanding anything contained in section 4, 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.
(2) 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.
(3) 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.
(4) For the purpose of making an assessment under sub-section (1), the Assessing Officer may serve a notice
upon such individual requiring him to furnish within such time, not being less than seven days, as may be
specified in the notice, a return in the same form and verified in the same manner as a return under clause (i) of
sub-section (1) of section 142, setting forth his total income for each completed previous year comprised in the
period referred to in sub-section (1) and his estimated total income for any part of the previous year comprised
in that period; 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 under clause (i) of sub-section (1) of section 142.
(5) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any
other provision of this Act.
(6) Where the provisions of sub-section (1) are applicable, any notice issued by the Assessing Officer
under clause (i) of sub-section (1) of section 142 or section 148 in respect of any tax chargeable under any other
provision of this Act may, notwithstanding anything contained in clause (i) of sub-section (1) of section
142 or section 148, as the case may be, require the furnishing of the return by such individual
within such period, not being less than seven days, as the Assessing Officer may think
proper.
Assessment of association of persons or body of individuals or artificial juridical person formed for a
particular event or purpose.
174A. Notwithstanding anything contained in section 4, where it appears to the Assessing Officer that any
association of persons or a body of individuals or an artificial juridical person, formed or
established or incorporated for a particular event or purpose is likely to be dissolved in the
assessment year in which such association of persons or a body of individuals or an artificial
juridical person was formed or established or incorporated or immediately after such assessment year, the
total income of such association or body or juridical person for the period from the expiry of the previous year
for that assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year, and
the provisions of sub-sections (2) to (6) of section 174 shall, so far as may be, apply to any proceedings in the
case of any such person as they apply in the case of persons leaving India.
Assessment of persons likely to transfer property to avoid tax.

175. Notwithstanding anything contained in section 4, if it appears to the Assessing Officer during any
current assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise
part with any of his assets with a view to avoiding payment of any liability under the provisions
of this Act, the total income of such person for the period from the expiry of the previous year for that assessment
year to the date when the Assessing Officer commences proceedings under this section shall be chargeable to
tax in that assessment year, and the provisions of sub-sections (2), (3), (4), (5) and (6) of section 174 shall, so
far as may be, apply to any proceedings in the case of any such person as they apply in the case of persons
leaving India.
Discontinued business.
176. (1) Notwithstanding anything contained in section 4, where any business or profession is discontinued
in any assessment year, the income of the period from the expiry of the previous year for that assessment
year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged
to tax in that assessment year.
(2) 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.
(3) Any person discontinuing any business or profession shall give to the Assessing Officer
notice of such discontinuance within fifteen days thereof.
(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be
deemed to be the income of the recipient and charged to tax accordingly in the year of
receipt, if such sum would have been included in the total income of the person who carried on
the business had such sum been received before such discontinuance.
(4) Where any profession is discontinued in any year on account of the cessation of the profession by, or the
retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be
deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would
have been included in the total income of the aforesaid person had it been received before such discontinuance.
(5) Where an assessment is to be made under the provisions of this section, the Assessing Officer may
serve on the person whose income is to be assessed or, in the case of a firm, on any person who was a partner
of such firm 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 under clause (i) of sub-
section (1) of section 142 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice
were a notice issued under clause (i) of sub-section (1) of section 142.
(6) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under
any other provision of this Act.
(7) Where the provisions of sub-section (1) are applicable, any notice issued by the Assessing Officer under
clause (i) of sub-section (1) of section 142 or section 148 in respect of any tax chargeable under any other
provisions of this Act may, notwithstanding anything contained in clause (i) of sub-section (1) of section
142 or section 148, as the case may be, require the furnishing of the return by the person to whom the aforesaid
notices are issued within such period, not being less than seven days, as the Assessing Officer may think proper.
C.A. Kalpesh Sanghavi Liability in Special cases - P a g e | F21-B . 1
Question (legal heirs and executors) (ID – 02) (Revision / Home work)
A notice of demand has been sent to the Mr. Majmudar a deceased assessee during his lifetime. The assessing
officer wants to recover the dues from his son Mr. Hari. Is there any necessity of sending further notice?
Your Options are

A Demand notice should be again send to Mr. Hari
B Demand notice should be again send to Mr. Hari (in joint name of Mr. Majmudar and Mr.
Hari)
C Demand notice should be again send to Mr. Hari in 30 days after death of Mr. Majmudar
D Demand notice need not be send again.
The assessee died leaving behind 3 sons as legal representative. The assessing officer served notice U/s 148 on
one of them. How far the proceedings are valid?
Your Options are

A Re-assessment notice should be send to all the 3 sons
B Re-assessment notice should be send to eldest son
C Re-assessment notice should be send to any one of the sons
D No need to serve notice on sons, rather it should be send to deceased assessee as per the data
available.
While making an assessment on executor, as AOP U/s 168(1) (b) the assessing officer noticed that there were
some brought forward losses. Can these be allowed to be set off ?
Your Options are

A Losses of deceased is not allowed to be set off in hands of executors since executor is not the
assessee.
B Losses of deceased is not allowed to be set off in hands of executors since executor is acting
in fiduciary capacity.
C Both A and B are acceptable
D Losses of deceased will be allowed to be set off in the hands of executor
One Mr. B having extensive business interests did not file returns. He died leaving behind ten legal
representatives of which one is J. J filed return pursuant to notice and personally signed it. However, assessment
orders were made mentioning the names of all ten legal representatives. On appeal, J contended for the first time
that inasmuch as all the legal representatives of Mr. B were not given notice of the assessment proceedings, the
assessments made were illegal and void. Whether the notice to J was in order ?
Your Options are

A Notice to J and order pursuant to that is not Justified since there were 10 legal representatives
known to the revenue.
B Notice to J and order pursuant to that is not Justified anyways.
C Notice to J is not valid but order is valid.
D Notice to J and order pursuant to that is Justified.
Question (legal heirs and executors) (ID – 06)

On the death of Mr Kalpesh Sanghavi who had not left any Will, the properties were managed by his mother.
The widow of the deceased did not receive any share from the estate till year end. Her mother-in- law filed a
consolidated return showing income of 6 lakhs and the ITO made assessment on the widow for her 50 % share
in income and assets. Is the action of the officer justified ?
You are also requested to advise assessing officer on making the assessment of the said income in correct
manner.
Your Options are

A Action of the officer is Justified since tax dues have to be recovered
B Action of the officer is Justified since it is correct assessment procedure
C Action of the officer is Justified since widow is wife of deceased
D Action of the officer is not Justified
Legal representatives.
159. (1) Where a person dies, his legal representative shall be liable to pay any sum which the
deceased would have been liable to pay if he had not died, in the like manner and to the
same extent as the deceased.
(2) For the purpose of making an assessment (including an assessment, reassessment or recomputation
under section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the
legal representative in accordance with the provisions of sub-section (1),—
(a) any proceeding taken against the deceased before his death shall be deemed to have
been taken against the legal representative and may be continued against the legal
representative from the stage at which it stood on the date of the death of the deceased;
(b) any proceeding which could have been taken against the deceased if he had survived, may be taken
against the legal representative; and
(c) all the provisions of this Act shall apply accordingly.
(3) The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an
assessee.
(4) Every legal representative shall be personally liable for any tax payable by him in his capacity
as legal representative if, while his liability for tax remains undischarged, he creates a charge on
or disposes of or parts with any assets of the estate of the deceased, which are in, or may come
into, his possession, but such liability shall be limited to the value of the asset so charged, disposed of or
parted with.
(5) The provisions of sub-section (2) of section 161, section 162, and section 167, shall, so far as may be and to
the extent to which they are not inconsistent with the provisions of this section, apply in relation to a legal
representative.
(6) The liability of a legal representative under this section shall, subject to the provisions of sub-section (4) and
sub-section (5), be limited to the extent to which the estate is capable of meeting the liability.
Executors.
168. (1) Subject as hereinafter provided, the income of the estate of a deceased person shall be chargeable
to tax in the hands of the executor,—
(a) if there is only one executor, then, as if the executor were an individual; or
(b) if there are more executors than one, then, as if the executors were an association of persons;
and for the purposes of this Act, the executor shall be deemed to be resident or non-resident
according as the deceased person was a resident or non-resident during the previous year in which his
death took place.
(2) The assessment of an executor under this section shall be made separately from any assessment
that may be made on him in respect of his own income.
(3) Separate assessments shall be made under this section on the total income of each completed previous
year or part thereof as is included in the period from the date of the death to the date of complete
distribution to the beneficiaries of the estate according to their several interests.
(4) In computing the total income of any previous year under this section, any income of the estate of that
previous year distributed to, or applied to the benefit of, any specific legatee of the estate during that
previous year shall be excluded; but the income so excluded shall be included in the total income of
the previous year of such specific legatee.
Explanation.—In this section, "executor" includes an administrator or other person administering the estate of
a deceased person.
C.A. Kalpesh Sanghavi Liability in Special cases - P a g e | F21-C . 1
Question (Succession of Business) (ID – 07) (Revision / Home work)

In the following cases, mention whether there is a ‘succession’ for the purpose of section 170 of Income Tax
Act.
a) B and Co. owned rolling mills and other manufacturing units. It transferred the rolling milts to a newly
formed company.
b) A HUF carried on a money lending business. It was partitioned and the erstwhile co-parceners carried on
the same business in partnership.
c) A five member HUF carried on a money lending business. The HUF was partitioned. One of the members
was assigned a one fifth share of the assets of the business and separated. The other four carried on the
business at old premises in the manner in which it was carried on before partition.
Your Options are i.r.t.

A A and B are succession
B A and B and C are succession
C A and C are succession
D C and B are succession
Question (Discontinuation of business) (ID – 08) (Revision / Home work)

A business of firm was discontinued during the previous year. Assessing officer wants to make cumulative
assessment i.e. assessment of the earlier previous year in which business existed for the whole year and the part
of the next previous year during which business was discontinued is such cumulative assessment valid?
Your Options are

A Cumulative Assessment is valid since it is squarely covered by 176
B Cumulative Assessment is valid since it is squarely covered by 176 rw 189
C Cumulative Assessment is valid for assessee being Firm
D Cumulative assessment is not valid
Question (Discontinuation of business) (ID – 09) (Revision / Home work)

An HUF was carrying on a business. It was partitioned & the business was split Two of the erstwhile members
continued the business activities as their own, taking over the premises of the business. Does section 176 apply
?
Your Options are

A 176 do not apply since business was partitioned
B 176 do not apply since business was partitioned and split
C 176 do not apply since business was carried on by HUF and partition of HUF is not regarded
as transfer
D 176 applies
Succession to business otherwise than on death.

170. (1) Where a person carrying on any business or profession (such person hereinafter in this section
being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this
section referred to as the successor) who continues to carry on that business or profession,—
(a) the predecessor shall be assessed in respect of the income of the previous year in which the
succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of
succession.
(2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the
assessment of the income of the previous year in which the succession took place up to the date of succession
and of the previous year preceding that year shall be made on the successor in like manner and to the
same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so
far as may be, apply accordingly.
(3) When any sum payable under this section in respect of the income of such business or profession for the
previous year in which the succession took place up to the date of succession or for the previous year preceding
that year, assessed on the predecessor, cannot be recovered from him, the Assessing Officer shall record
a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and
recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum
so paid.
(4) Where any business or profession carried on by a Hindu undivided family is succeeded to, and
simultaneously with the succession or after the succession there has been a partition of the joint family property
between the members or groups of members, the tax due in respect of the income of the business or profession
succeeded to, up to the date of succession, shall be assessed and recovered in the manner provided in section
171, but without prejudice to the provisions of this section.
Explanation.—For the purposes of this section, "income" includes any gain accruing from the transfer, in any
manner whatsoever, of the business or profession as a result of the succession.
C.A. Kalpesh Sanghavi Liability in Special cases - P a g e | F21-D . 1
Question (Companies in liquidation) (ID – 10)
Imperial Chit Funds (P) Ltd. was under liquidation. On completion of assessment the official liquidator informed
the I.T.O. that tax dues determined constituted debt provable in the winding up proceedings as 10 lakhs. I.T.O.
however, issued a certificate to the T.R.O. and demanded the tax dues immediately and issued a demand notice
of 13 lakhs including 3 lakhs likely to become due there after. Can the income tax department be treated as a
secured creditor' and the amount set aside by official liquidator U/s 178(3)(b) fall outside the area of winding
up proceedings? Can the A.O. be entitled to payment of tax demand otherwise than as winding up procedure of
Companies Act ?
Your Options are

A Department will be secured creditor for 3 lakhs
B Department will be secured creditor for 13 lakhs
C Department will be secured creditor for 23 lakhs
D None of above
Question (Directors Private Limited Companies) (ID – 11)

Kalpesh Sanghavi was a director in a private company floated by, his brother. He resigned from directorship of
the company with effect from 31-3-PY. For the year, tax and interest were found due against the company. As
the departmental authorities could not recover the outstanding dues from the company, proceedings were
initiated against Kalpesh Sanghavi under section 179(1). His salary from his employer, Punjab Roadways was
attached in month of August. Subsequently, the company filed a revision petition for the stay against recovery
proceedings. Can the recovery proceedings against Kalpesh Sanghavi be stayed ?
OR
In respect of the taxes due from a private limited company, which could not be recovered from it, the
Tax Recovery Officer attached the properties of an erstwhile director for recovery thereof. It was
contended by the director that notice under section 156 had not been served on him and, therefore, the
proceedings for recovery were not valid. What is the correct legal position ?
OR
'A' was a director of a Private Company floated by his brother. He resigned on 31st March. Tax and
interest was due from the Company. Proceedings were initiated against ‘A’. His salary was attached.
Company filed a revision petition for stay of recovery against the company. Can recovery against 'A' be
stayed ?
Your Options are

A The mere pendency of the revision petition cannot be made a ground for issue of a direction
to stop making recovery of the tax as the filing of the revision petition by the company does
not operate a stay against the recovery proceedings against Mr. Kalpesh Sanghavi
B Since revision petition is filed by the company the recovery proceeding cannot be initiated
by against Mr. Kalpesh Sanghavi
C A or B above
D A and B above
Your Options are

A Recovery against Mr. A is valid
B Recovery against Mr. A is not valid
C Recovery against Mr. A is not valid since section 179 do not apply
D Recovery against Mr. A is not valid since section 179 apply
Company in liquidation.
178. (1) Every person—
(a) who is the liquidator of any company which is being wound up, whether under the orders of a
court or otherwise; or
(b) who has been appointed the receiver of any assets of a company,
(hereinafter referred to as the liquidator) shall, within thirty days after he has become such
liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the
income of the company.
(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may
deem fit, notify to the liquidator within three months from the date on which he receives notice of the
appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to
provide for any tax which is then, or is likely thereafter to become, payable by the company.
(3) The liquidator—
(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner, part with any of the assets of the company or the properties in his
hands until he has been notified by the Assessing Officer under sub-section (2) ; and
(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside
such amount, shall not part with any of the assets of the company or the properties in his hands :
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or
properties for the purpose of the payment of the tax payable by the company or for making any payment to
secured creditors whose debts are entitled under law to priority of payment over debts due to Government on
the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the
opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner reasonable.
(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the
amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his
hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of
the tax which the company would be liable to pay :
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal
liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under
this section shall attach to all the liquidators jointly and severally.
(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any
other law for the time being in force 29[except the provisions of the Insolvency and Bankruptcy Code, 2016].
Liability of directors of private company in liquidation.

179. (1) Notwithstanding anything contained in the Companies Act, 195630 (1 of 1956), 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 unless 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.
(2) Where a private company is converted into a public company and the tax assessed in respect of any income
of any previous year during which such company was a private company cannot be recovered, then, nothing
contained in sub-section (1) shall apply to any person who was a director of such private company in relation to
any tax due in respect of any income of such private company assessable for any assessment year commencing
before the 1st day of April, 1962.
Explanation.—For the purposes of this section, the expression "tax due" includes penalty, interest or any other
sum payable under the Act.
C.A. Kalpesh Sanghavi Agricultural Income - P a g e | F22 . 1
Question 1 (ID 01)

X Ltd. grows sugarcane to manufacture sugar. Data is as follows
Rs.
Cost of cultivation of sugarcane 6
Market value of sugarcane when sugarcane is transferred to factory 9
Other manufacturing cost 6
Sales turnover of sugar 22
Salary of managing director who looks after agriculture as well as non-agricultural
2
operations of the company
You are required to find out the agricultural income of the company.
Question 2 (ID 02)

For the year, net agricultural income of an assessee is Rs. 86,000 and non-agricultural income is Rs. 12,65,000.
The taxpayer contributes Rs. 40,000 towards public provident fund. Find out the tax if the taxpayer is:
(a) Mrs. X, an individual (22 years).
(b) A Ltd. an Indian company.

F22 01 Mix activity V.Imp
F22 02 Tax liability
Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the
following clauses shall not be included—
(1) agricultural income ;
Definitions.
2. In this Act, unless the context otherwise requires,—
(1A) "agricultural income"2 means—
(a) any rent or revenue derived from land which is situated in India and is used for agricultural
purposes;
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily
employed by a cultivator or receiver of rent-in-kind to render the produce raised or received
by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received
by him, in respect of which no process has been performed other than a process of the nature
described in paragraph (ii) of this sub-clause;
(c) any income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any
land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and
(iii) of sub-clause (b) is carried on :
Provided that—
(i) the building is on or in the immediate vicinity of the land, and is a building which
the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason
of his connection with the land, requires as a dwelling house, or as a store-house, or other
out-building, and
(ii) the land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government as such or where the land is not so
assessed to land revenue or subject to a local rate, it is not situated—
(A) in any area which is comprised within the jurisdiction of a municipality (whether known
as a municipality, municipal corporation, notified area committee, town area committee,
town committee or by any other name) or a cantonment board and which has a
population of not less than ten thousand; or
(B) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than
ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or
one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or
ten lakh.
Explanation 1.—For the removal of doubts, it is hereby declared that revenue derived from land shall
not include and shall be deemed never to have included any income arising from the transfer of any land
referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section.
Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building
or land referred to in sub-clause (c) arising from the use of such building or land for any purpose
(including letting for residential purpose or for the purpose of any business or profession) other than
agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.
Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown
in a nursery shall be deemed to be agricultural income.
Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), "population" means the
population according to the last preceding census of which the relevant figures have been published
before the first day of the previous year;
C.A. Kalpesh Sanghavi Exemption - P a g e | F23 . 1
Question 1
R Ltd. furnishes the following particulars for the year.
Total sales of the above undertaking 50,00,000
Domestic sales 10,00,000
Money brought to India in convertible foreign exchange upto 30-9-AY 36,00,000
Profit from the above undertaking 5,00,000
Compute the deduction available from the total income under section 10AA.
Question 2
R & Co., a partnership concern, has established in special economic zone in a free trade zone. It furnishes the
following particulars of its 2nd year of operations for the previous year:
Rs.
Total sales of business 1,00,00,000
Profit of business 10,00,000
Out of the total export sales, realization of a sale of Rs. 5,00,000 is difficult because of insolvency of buyer.
Realisation of rest of the sales has been received in time. The plant and machinery used in the business has been
depreciated @ 15% on SLM basis and depreciation of Rs. 3,00,000 is charged in profit & loss account. Compute
the taxable income of R & Co.
Question 3 (Revision / Home work)

A company is engaged in SEZ. It has started a new undertaking for which approval as a 100% export oriented
undertaking has been obtained from the CBDT. It furnishes the following data and requests you to compute the
deduction allowable to it under section 10AA.
(Rs. In
lacs)
Total profit of the company for the previous year 50
Total turnover i.e. Export, Sales and Domestic Sales for the previous year 500
Consideration received in respect of export of software received in convertible foreign 250
exchange within 6 months of the end of the previous year
Sale proceeds credited to a separate account in a bank outside India with the approval of 50
R.B.I.
Telecom and insurance charges attributable to export of software 10
Staff costs and travel expenses incurred in foreign exchange to provide technical 40
assistance outside India to a client
X Ltd. is a manufacturing and trading company. It owns 3 units. Unit A manufactures goods in a special
economic zone for export purposes and qualified for exemption under section 10AA. Unit B is manufacturing
unit and goods are sold in domestic market. It is not qualified for any tax holiday. Unit C owns retail outlets in
different parts of country. From the information given below find out net income of X Ltd. for the year
Unit A Unit B Unit C

Net profit as per profit and loss account 90 -(40) 10
Turnover 1200 400 150
Out of which how much is export turnover 1180 10 -
Amount remitted in convertible foreign exchange up to September 2
1002 -
30, AY
Freight and insurance (charged over and above sale price from
importers and included in amount remitted in convertible foreign 10 - -
exchange as well as turnover given above)
X Ltd. has an undertaking (Unit X) in Special Economic Zone (SEZ) and another undertaking (Unit Y) in Free
Trade Zone (FTZ) for manufacturing of computer software. It furnishes the following particulars of its 2nd year
of operations ending March 31, 2018 –
Rs. (in Lakh)
Unit X Unit Y
Total Sales 180 120
Export sales (inclusive of Rs. 10 lakh onsite development of computer software 120 10
outside India by Unit X)
Profit earned (after claim of bad debts under section 36(1)(vii) in Unit X) 63 36
Plant and machinery used in business has been depreciated at 15 percent on straight line method (SLM) basis
and depreciation of Rs. 9 lakh was charged to Profit and Loss Account in the proportion of sales during the
previous year. Rs. 100 lakh were realized out of export sales in time and balance of Rs. 20 lakh becomes
irrecoverable due to bankruptcy of one of the foreign buyers in Unit X.
Compute the deduction under section 10AA and taxable income of X Ltd. for the assessment year 2018-19.

F23 03 Computation V.Imp
F23 04 Computation (multiple units) V.Imp
F23 05 Computation (multiple units)
Special provisions in respect of newly established Units in Special Economic Zones.

10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an
entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from
his Unit, who begins to manufacture or produce articles or things or provide any services during the
previous year relevant to any assessment year commencing on or after the 1st day of 90[April, 2006, but before
the first day of April, 2021, the following deduction shall be allowed]—
(i) hundred per cent of profits and gains derived from the export, of such articles or things or from
services for a period of five consecutive assessment years beginning with the assessment year
relevant to the previous year in which the Unit begins to manufacture or produce such articles or things
or provide services, as the case may be, and fifty per cent of such profits and gains for further five
assessment years and thereafter;
(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent
of the profit as is debited to the profit and loss account of the previous year in respect of which
the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic
Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of
the assessee in the manner laid down in sub-section (2).
91
[Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section
shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act,
before giving effect to the provisions of this section and the deduction under this section shall not exceed such
total income of the assessee.]
(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are
fulfilled, namely :—
(a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised—
(i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a
period of three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the
undertaking other than for distribution by way of dividends or profits or for remittance outside
India as profits or for the creation of any asset outside India;
(b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b)
of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant
along with the return of income92 for the assessment year relevant to the previous year in which such
plant or machinery was first put to use.
(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii)
of sub-section (1),—
(a) has been utilised for any purpose other than those referred to in sub-section (2), the amount so utilised;
or
(b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-
section (2), the amount not so utilised,
shall be deemed to be the profits,—
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified
in sub-clause (i) of clause (a) of sub-section (2),
and shall be charged to tax accordingly :
Provided that where in computing the total income of the Unit for any assessment year, its profits and gains
had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking,
being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten
consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause
(ii) of sub-section (1).
Explanation.—For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had
already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred
to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income
under this section :
Provided further that where a Unit initially located in any free trade zone or export processing zone is
subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export
processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above
shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture,
or produce or process such articles or things or services in such free trade zone or export processing zone:
Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently
located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone
into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to
above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect
from the 1st day of April, 2006.
(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:—
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous
year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special
Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is
formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of
any such undertaking as is referred to in section 33B, in the circumstances and within the period
specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.
Explanation.—The provisions of Explanations 1 and 2 to sub-section (3) of sec-tion 80-IA shall apply for the
purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
(5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred,
before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of
amalgamation or demerger,—
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being
the company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged
Unit being the company as if the amalgamation or demerger had not taken place.
(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far
as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or
set off.
(7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services
(including computer software) shall be the amount which bears to the profits of the business of the
undertaking, being the Unit, the same proportion as the export turnover in respect of such articles
or things or services bears to the total turnover of the business carried on by the undertaking :
Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33
of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent
assessment years.
(8) The provisions of sub-sections (5)93 and (6) of section 10A shall apply to the articles or things or services
referred to in sub-section (1) as if—
(a) for the figures, letters and word "1st April, 2001", the figures, letters and word "1st April, 2006" had
been substituted;
(b) for the word "undertaking", the words "undertaking, being the Unit" had been substituted.
(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in
relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred
to in section 80-IA.
(10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified
business, referred to in clause (c) of sub-section (8) of section 35AD, for any assessment year, no deduction
shall be allowed under the provisions of section 35AD in relation to such specified business for the
same or any other assessment year.]

(i) "export turnover" means the consideration in respect of export by the undertaking, being the Unit of
articles or things or services received in, or brought into, India by the assessee but does not
include freight, telecommunication charges or insurance attributable to the delivery of the
articles or things outside India or expenses, if any, incurred in foreign exchange in rendering
of services (including computer software) outside India;
(ii) "export in relation to the Special Economic Zones" means taking goods or providing services out of
India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or
otherwise;
(iii) "manufacture" shall have the same meaning as assigned to it in clause (r) of section 2 of the Special
Economic Zones Act, 2005;
(iv) "relevant assessment year" means any assessment year falling within a period of fifteen consecutive
assessment years referred to in this section;
(v) "Special Economic Zone" and "Unit" shall have the same meanings as assigned to them under clauses
(za) and (zc) of section 2 of the Special Economic Zones Act, 2005.
Explanation 2.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site
development of computer software (including services for development of software) outside India shall be deemed
to be the profits and gains derived from the export of computer software outside India.
C.A. Kalpesh Sanghavi Deductions - P a g e | F24 . 1

C.A. Kalpesh Sanghavi Set off - P a g e | F25-A . 1
Sub-Topics Sections
A Set off 70 to 80
B Clubbing 60 to 65
Question 7 (Carry forward and set off) (SLID 007) (Revision / Home work)
Mr. Madhukant was carrying on proprietary business in Name of M/s Mahavir of speculation in shares, cotton
and other commodities. Mr. Madhukant has carried forward loss of 2 Lakhs of the said business. He died leaving
behind his widow, a son and a daughter. Three heirs of Madhukant entered into a partnership and executed a
partnership deed wherein they agreed to carry on the said business of speculation. In the said speculation
business carried on in the name of the M/s MM a partnership firm, profits were earned by firm 10 Lakhs and
the assessee sought to carry forward and set off the losses incurred by the deceased in his proprietary business
against the income from the speculation business of the partnership firm.
Your Options are

A Total Income of M/s MM will be 10 Lakhs
B Total Income of M/s MM will be 8 Lakhs
C Total Income of M/s MM will be 18 Lakhs
D None of above
OR
Smt. Bhanu succeeded to the business of her husband Sri. Bhavesh who died on 10 September. She carried on
the business as proprietary. The business of Bhavesh up to the date of his death resulted in a loss amounting to
1 Lakh. Smt. Bhanu earned profit in business for the year Amount 15 Lakhs.
Your Options are

A Total Income of Bhanu will be 14 Lakhs
B Total Income of Bhanu will be 15 Lakhs
C Total Income of Bhanu will be 16 Lakhs
D None of above
X provides the following information:
Sales (retail trade in garments) (no books of accounts maintained) 32,00,000
Rent from house property at Chennai (computed) 120,000
Vacant site lease rent 12,000
X purchases 20,000 shares of A.Co. Ltd., declares 1 : 1 bonus on January 1, 2003.
X sells 1,000 bonus shares in September of previous year for Rs.1,20,000.
X gets Rs.50,000 on February 12, being amount due from Y relating to electronic goods supplied by X’s father,
which was written off as bad debt by his father 4 years back and allowed as deduction. X’s father died 2 years
back.
X’s father has brought business loss relating to discontinued automobile business of 3 years back : Rs.2,00,000;
brought forward depreciation relating to the same business : Rs.1,50,000.
Compute gross total income of X.
From the following data, you are required to work out the total income chargeable to tax of X Ltd., a domestic
company.:
Business loss 50,00,000
Property income 45,00,000
Income from other sources 1,00,000
Capital gains:
Short-term 3,00,000
Long-term 10,00,000
Your Options are

A Total income 900,000 will be taxed @ 20 % + Applicable surcharge + CESS
B Total income 900,000 will be taxed @ 30 % + Applicable surcharge + CESS
C Either A or B can be preferred by the Company X
D None of above
C.A. Kalpesh Sanghavi Set off - P a g e | F25-B . 1
Question 1 (special treatment for partnership firms) (SLID 011)

R, S and G are equal partners of a firm. The firms c/f loss was determined as Rs. 78,000. S retired from the firm
and P joined on 1-4 of previous year as an equal partner. The firm made a profit of Rs. 84,000 for the previous
year but it wants to set off the carried forward loss of Rs. 78,000 of the previous year against this profit. Examine
the validity of the firms claim and allocate the shares of R, Sand G.
Problem 2 (special treatment for partnership firms) (ID 12)

X, Y and Z (1:1:2) are three partners of a firm. Brought Forward income of the firm is (-) Rs. 1,30,000 (out of
which unadjusted depreciation is Rs. 40,000). On April 30, Z retires from the firm and the other partners carry
on the same business. The income of the firm for the year before adjusting of the aforesaid loss and depreciation
is Rs. 1,08,000. Compute the net income of the firm after adjustment of loss and depreciation. Assume that
salary and interest are not paid to partners.
C.A. Kalpesh Sanghavi Set off - P a g e | F25-B . 1
78. (1) Where a change has occurred in the constitution of a firm, nothing in this Chapter shall entitle the
firm to have carried forward and set off so much of the loss proportionate to the share of a retired
or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.
(2) Where any person carrying on any business or profession has been succeeded in such capacity by another
person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the
person incurring the loss to have it carried forward and set off against his income.
C.A. Kalpesh Sanghavi Set off - P a g e | F25-C . 1
Question 1 (Special treatment for companies) (SLID 010)

X (P.) Ltd. has share capital in the form of equity share capital. The shares were held up to March 31, 2003 by
four members A, B, C, & D equally. The company made losses/ profits for the past three assessment years as
follows:
Assessment year Business loss Unabsorbed depreciation Total

2001-02 Nil 15,00,000 15,00,000
2002-03 Nil 12,00,000 12,00,000
2003-04 19,00,000 9,00,000 28,00,000
Total 19,00,000 36,00,000 55,00,000
The above figures have been accepted by the tax department.
During the previous year ending March 31,2004, A sold his shares to y and during the previous year March 31,
2005, B sold his shares to Z. The profits for past two previous year are as follows:
For the year ending March 31, 2004: Rs.18,00,000 (before charging depreciation Rs.9,00,000)
For the year ending March 31, 2005: Rs.45,00,000 (before charging depreciation Rs.7,50,000)
Compute the taxable income for assessment year 2005-06. Workings must form part of your answer.
Question 3 (Business ID 72) (computation of business income) (Special treatment for companies)
X,Y and Z carried on a business of running hotels in partnership firm. In order to increase its scale of operation
and meet its fund requirement, the firm decided to carry on its business through corporate route. For that purpose,
a company under the name and style XYZ Hospitality (P.) Ltd. Was formed 2 years back and the business of
the partnership firm as a whole was succeeded by the company. The company’s profit and loss account for the
year shows a net profit of Rs. 450 lakh after debit / credit of the following items
1. Interest of Rs. 3 lakh paid to Allahabad Bank on a term loan taken for the purpose of acquiring a land a
Bhubaneswar for a new hotel to be set up.
2. Depreciation charged: Rs. 40 lakh.
3. Rs. 2 lakh credited on account of waiver of dues obtained from a supplier of the erstwhile firm against
supply of certain materials.
4. Rs. 1.18 lakh being the aggregate of amounts paid in cash to D, a transport contractor, as follows-
Date of payment Rs. In lakh
June 5, 0.15
July 20, 0.21
September 20, 0.22
November 3, 0.26
November 5, 0.36
Tax was not deducted at source as D submitted a certificate under section 197(1), which he had obtained
from TDS circle of the Income-tax Department.
5. Rs. 50,000 being proportionate part of the cost of animals (purchased and kept for entertainment of the
guests of hotel), is debited in the profit and loss account as amortization of expenditure as per the
accounting policy of the company.
6. Rs. 10,000 is credited on account of sale proceeds of carcass of animal which died during the year.
7. Provision for bad and doubtful debts: Rs. 12 lakh
8. Payment of Rs. 25 lakh to some employees as compensation for voluntary retirement, as per scheme.
9. Foreign exchange fluctuation loss (net) amounting to Rs. 30 lakh arising from restatement of the year
end liabilities to foreign suppliers of provisions and beverages as per the requirement of AS-11 of ICAI.
Other information-
1. Depreciation as per the Income-tax Act: Rs. 65 lakh.

2. Cost of animal died as referred to in (6) above was Rs. 2 lakh.
3. Debt of Rs. 4 lakh due from one corporate customer for three months has been written off during the
year after giving few reminders by debiting provision for bad and doubtful debts account.
4. The erstwhile firm was allowed exemption of Rs. 50 lakh under section 47(xiii) in respect of long-term
capital assets transferred to the company.
5. The company’s voting rights till 01-04-PY were held as follows:
X 40 percent
Y 30 percent
Z 15 percent
Others 15 percent
During the year, shares constituting 36 percent voting rights are transferred by X to his son-in-law.
6. Unabsorbed business loss and unabsorbed depreciation of Rs. 10 lakh each have been carried forward
from 9 years back.
7. The company has subsidiary company, PQR Ltd. (a closely held company). During the year the company
obtains a temporary loan of Rs. 12 lakh from its subsidiary company. Accumulated profit of the
subsidiary company is Rs. 30 lakh at the time of payment of the loan. The loan is repaid by the company
before the end of the year.
Compute total income of XYZ (P.) Ltd. indicating reason for treatment of each of the items.
Ignore the provisions relating to the minimum alternate tax.
79. Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in
a previous year,—
(a) in the case of a company not being a company in which the public are substantially interested
and other than a company referred to in clause (b), no loss incurred in any year prior to the
previous year shall be carried forward and set off against the income of the previous year, unless on
the last day of the previous year, the shares of the company carrying not less than fifty-one per cent of the
voting power were beneficially held by persons who beneficially held shares of the company carrying not
less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was
incurred;
(b) in the case of a company, not being a company in which the public are substantially interested
but being an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to
the previous year shall be carried forward and set off against the income of the previous year, if, all
the shareholders of such company who held shares carrying voting power on the last
day of the year or years in which the loss was incurred,—
(i) continue to hold those shares on the last day of such previous year; and
(ii) such loss has been incurred during the period of seven years beginning from the year in
which such company is incorporated:
Provided that nothing contained in this section shall apply to a case where a change in the said voting
power and shareholding takes place in a previous year consequent upon the death of a shareholder or on
account of transfer of shares by way of gift to any relative of the shareholder making such gift:
Provided further that nothing contained in this section shall apply to any change in the shareholding of
an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger
of a foreign company subject to the condition that fifty-one per cent shareholders of the amalgamating or
demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign
company:
Provided also that nothing contained in this section shall apply to a company where a change in the
shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency
and Bankruptcy Code, 2016 (31 of 2016), after affording a reasonable opportunity of being heard to the
jurisdictional Principal Commissioner or Commissioner.
C.A. Kalpesh Sanghavi Set off - P a g e | F25-D . 1
Question 1 (SLID 018) (Dividend and bonus stripping)

W purchase 1,000 Units of UTI Rs. 12,500 on 1.4. UTI declares dividend on 31.5 (record date) at Rs. 3 per unit.
W sells the entire 1,000 units on 30.9 for Rs. 9,000. You are required to compute the capital loss.
Question 2 (SLID 019) (Dividend and bonus stripping)

R, an individual resident in India bought 1,000 equity shares of Rs. 10 each of A Ltd at Rs. 50 per share on
30.05. He sold 700 equity shares at Rs. 35 per share on 30.9 and the remaining 300 shares at Rs. 25 per share
on 20.12. A Ltd declared a dividend of 50% the record date being 10.08. R sold on 01.02 a house from which
he derived a long term capital gain of Rs. 75,000. Compute the capital gain.
Problem 3 (Dividend and bonus stripping) (Revision / Home work) (ID 21)
X purchases on May 10, 1000 preference shares of Rs. 10 each in A Ltd. @ Rs. 55.55. On October 20, he
transfers 800 shares @ Rs. 37 per share and remaining 200 shares are transferred on December 20, @ Rs. 20
per share. A Ltd. Declares 50 per cent dividend (record date : August 3,). During previous year, he has generated
long term capital gain of Rs. 76,000 on sale of gold.
Your Options are

A Total income will be 62,050
B Total income will be 58,050
C Total income will be 76,000
D None of above
94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as "the owner")
sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction
is that any interest becoming payable in respect of the securities is receivable otherwise than by the
owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-
tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the
income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed
to include references to buying or acquiring similar securities, so, however, that where similar securities are
bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under
if the original securities had been bought back or reacquired.
(2) Where any person has had at any time during any previous year any beneficial interest in any securities, and
the result of any transaction relating to such securities or the income thereof is that, in respect of such securities
within such year, either no income is received by him or the income received by him is less than the sum to
which the income would have amounted if the income from such securities had accrued from day to day and
been apportioned accordingly, then the income from such securities for such year shall be deemed to be the
income of such person.
(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had
a beneficial interest in the securities, as the case may be, proves to the satisfaction of the Assessing Officer—
(a) that there has been no avoidance of income-tax, or
(b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case
in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred
to in sub-section (1) or sub-section (2).
(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or
acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that
interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income
by reason of the provisions contained in sub-section (1), no account shall be taken of the transaction in
computing for any of the purposes of this Act the profits arising from or loss sustained in the business.
(5) Sub-section (4) shall have effect, subject to any necessary modifications, as if references to selling back or
retransferring the securities included references to selling or transferring similar securities.
(6) The Assessing Officer may, by notice in writing, require any person to furnish him within such time as he
may direct (not being less than twenty-eight days), in respect of all securities of which such person was the
owner or in which he had a beneficial interest at any time during the period specified in the notice, such
particulars as he considers necessary for the purposes of this section and for the purpose of discovering whether
income-tax has been borne in respect of the interest on all those securities.
(7) Where—
(a) any person buys or acquires any securities or unit within a period of three months prior to the
record date;
(b) such person sells or transfers—
(i) such securities within a period of three months after such date; or
(ii) such unit within a period of nine months after such date;
(c) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent
such loss does not exceed the amount of dividend or income received or receivable on such securities or
unit, shall be ignored for the purposes of computing his income chargeable to tax.
(8) Where—
(a) any person buys or acquires any units within a period of three months prior to the record date;
(b) such person is allotted additional units without any payment on the basis of holding of such units
on such date;
(c) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine
months after such date, while continuing to hold all or any of the additional units referred to in clause
(b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be
ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in
any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of
purchase or acquisition of such additional units referred to in clause (b) as are held by him on the
date of such sale or transfer.
(a) "interest" includes a dividend ;
(aa) "record date" means such date as may be fixed by—
(i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as
referred to in the Explanation to clause (35) of section 10, for the purposes of entitlement of the
holder of the units to receive income, or additional unit without any consideration, as the case
may be;
(b) "securities" includes stocks and shares ;
(c) securities shall be deemed to be similar if they entitle their holders to the same rights against the same
persons as to capital and interest and the same remedies for the enforcement of those rights,
notwithstanding any difference in the total nominal amounts of the respective securities or in the form
in which they are held or in the manner in which they can be transferred;
(d) "unit" shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB.

F25 11 Firms special adjustment
F25 10 Companies Special Adjustment
F25 72 Full Computation V.Imp
F25 18 Dividend stripping

F25 19 Dividend stripping V.Imp
C.A. Kalpesh Sanghavi Clubbing - P a g e | F26 . 1
C.A. Kalpesh Sanghavi TDS TCS - P a g e | F27 . 1
C.A. Kalpesh Sanghavi Tax Planning - P a g e | F28 . 1
Question (GAAR and Tax Avoidance) (ID 01)
V Tech Ltd is a company resident of country Cl. It enters into an agreement with Z Energy Ltd.. an Indian
company for setting up e power plant in India. It is a composite contract for an agreed pnce of US$ 100 million.
The payment has been split in the following parts as per separate agreements
(i) US$ 10 million for design of power plant outside India (payment for which is taxable at 10% on gross basis)
(ii) US$ 70 million for offshore supplies of equipment etc (not taxable as no role is played by any PE in India.
There are not subject to import duty)
(iii) US$ 20 million for local supplies and installation charges (taxable on net income basis)
It is found that the fair market value of offshore design is about USD 30 million; therefore is under invoiced.
On the other hand, offshore supplies were over invoiced. The arrangement resulted in significant tax benefit to
the taxpayer. Can GAAR be invoked in such a case ?
Under the provisions of a tax treaty between India and country F4. Any capital gains arising from the sale of
shares of lndco, an Indian company would be taxable only in F4 if the transferor is a resident of F4 except where
the transferor holds more than 10% interest in the capital stack of lndco. A company. A Ltd. being resident in
F4, makes an investment in indco through two wholly owned subsidiaries (K Ltd. and L Ltd.) located in F4.
Each subsidiary holds 9.95% shareholding in the Indian Company, the total adding to 19.9% of equity of lndco.
The subsidiaries sell the shares of Indco and claim exemption as each is holding less than 10% equity shares in
the Indian company. Can GAAR be invoked to deny treaty benefit ?
An Indian company, A Ltd. makes an investment of 1 crore in shares of a listed company on l January. After a
year, the prices go up and fair market value of shares becomes 11 crore. if A Ltd sells these shares, the long
term capitel gains of 10 crore would be exempt but it would be liable to tax under MAT@ the applicable rate.
A Ltd. forms partnership firm with another person with nominal partnership. It transfers its shares in the firm at
a cost price. No capital gain arises as per section 45 of the Act. After a year, the firm sells these shares and
realises the gains of 10 crore which is exempt from taxation and no MAT is payable. Subsequently. The firm is
dissolved and share of A Ltd In the partnership firm is transferred back along with profits, which is exempt from
tax under the Act. Can GAAR be invoked in this case ?
lndco incorporates a Subco in a NTJ (Low Tax Jurisdiction) with equity of US $100. Subco gives a loan of US
$ 100 to another Indian company (X Ltd) at the rate of 10% p.a. X Ltd. claims deduction of interest payable to
Subco from the profit of business. There is no other activity in Subco. Can GAAR be invoked in such a case ?
(i) X Ltd. is a banking institution in LTJ (Low Tax Jurisdiction),

(ii) There is a closely held company Subco in LTJ which is a wholly owned subsidiary of another closely held
Indian company Indco;
(iii) Subco has reserves and, if it provides a loan to lndco. It may be treated as deemed dividend under section
2(22)(e) of the Act.
(iv) Subco makes a term deposit with X bank Ltd. and X bank Ltd., on the basis of this security, provides a back
to back loan to lndco.
Say, lndia- LTJ tax treaty provides that interest payment to LTJ banking company is not taxable in lndia
Can this be examined under GAAR ?
(i) Y Ltd. is a company incorporated in country C1. It is a non-resident in India.

(ii) Z Ltd. Is a company resident in India.
(iii) A Ltd. is a company incorporated in country F1 and it is a 100% subsidiary of Y Ltd.
(iv) A Ltd. end Z Ltd. form a joint venture company X Ltd. in India after the date of commencement of GAAR
provisions. There is no other activity in A Ltd.
(v) The India-F1 tax treaty provides for non-taxation of capital gains in the source country and country F1
charges no capital gains tax in its domestic law.
(vi) A Ltd. is also designated as a permitted transferee of Y Ltd. Permitted transferee means that though shares
are held by A Ltd. all rights of voting, management. Right to sell etc., are vested in Y Ltd.
(vii) As per the joint venture agreement, 49% of X Ltd equity is allotted to A Ltd. And 51% is allotted to Z Ltd..
(viii) Thereafter, the shares of X Ltd. held by A Ltd. are sold to C Ltd., a company connected to the Z Ltd.
group.
As per the tax treaty with country F1, capital gains arising to A Ltd. are not taxable in India. Can GAAR be
invoked to deny the treaty benefit ?
A Ltd. is incorporated in country F1 as a wholly owned subsidiary of company Y Ltd. which is not a resident of
F1 or of India. The India-Fl tax treaty provides for non-taxation of capital gains in India (the source country)
and country F1 charges no capital gains tax in its domestic law. Some shares of X Ltd., an Indian company are
acquired by A Ltd in the year after date of coming into force of GAAR provisions. The entire funding for
investment by A Ltd. in X Ltd. was done by Y Ltd. These shares are subsequently disposed of by A Ltd after 5
years. This results in capital gains which A Ltd. claims as not being taxable in India by virtue of the India-F1
tax treaty. A Ltd. has not made any other transaction during this period. Can GAAR be invoked ?
Specify with reason, whether the following acts can be considered as (i) Tax planning; or (ii) Tax management:
or (iii) Tax evasion
(i) Mr P deposits 1,00,000 in PPF account so as to reduce his total income from 3,40,000 to 2,40,000.
(ii) SQL Ltd. maintains register of tax deduction at source effected by it to enable timely compliance.
(iii) An individual tax payer making tax saver deposit of 1,00,000 in a nationalised bank
(iv) A partnership firm obtaining declaration from lenders and depositors in Form NO. 15G/15H and forwarding
the same to income-tax authorities.
(v) A company installed an air-conditioner costing 75,000 at the residence of a director as per terms of his
appointment but treats it as fitted in quality control section in the factory. This is with the objective to treat it as
plant for the puipose of computing depreciation.
(vi) RR Ltd. issued a credit note for 80,000 as brokerage payable to Mr. Ramana who is the son of the managing
director of the company. The purpose is to increase the total income of Mr. Ramana from 4,00,000 to 4,80,000
and reduce the income of RR Ltd. correspondingly.
(vii) A company remitted provident fund contribution of both its own contribution and employees contribution
on monthly basis before due date.

F28 01 Scope of GAAR V.Imp
F28 03 Scope of GAAR
95. (1) Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be
declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising
therefrom may be determined subject to the provisions of this Chapter.
(2) This Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018.
Explanation.—For the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied
to any step in, or a part of, the arrangement as they are applicable to the arrangement.
96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to
obtain a tax benefit, and it—
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona
fide purposes.
(2) An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been
entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in,
or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the
whole arrangement is not to obtain a tax benefit.
97. (1) An arrangement shall be deemed to lack commercial substance, if—

(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from,
the form of its individual steps or a part; or
(b) it involves or includes—
(i) round trip financing;
(ii) an accommodating party;
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value, location,
source, ownership or control of funds which is the subject matter of such transaction; or
(c) it involves the location of an asset or of a transaction or of the place of residence of any party which is
without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of
this Chapter) for a party; or
(d) it does not have a significant effect upon the business risks or net cash flows of any party to the
arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the
provisions of this Chapter).
(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a
series of transactions—
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit
(but for the provisions of this Chapter),
without having any regard to—
(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to,
or received by, any party in connection with the arrangement;
(B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received;
or
(C) the means by, or manner in, or mode through, which funds involved in the round trip financing are
transferred or received.
(3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the
main purpose of the direct or indirect participation of that party in the arrangement, in whole or in
part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee
whether or not the party is a connected person in relation to any party to the arrangement.
(4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient
for determining whether an arrangement lacks commercial substance or not, namely:—
(i) the period or time for which the arrangement (including operations therein) exists;
(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;
(iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by
the arrangement.
98. (1) If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences,
in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty,
shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by
way of but not limited to the following, namely:—
(a) disregarding, combining or recharacterising any step in, or a part or whole of,
the impermissible avoidance arrangement;
(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;
(c) disregarding any accommodating party or treating any accommodating party and any other party as one
and the same person;
(d) deeming persons who are connected persons in relation to each other to be one and the same person for
the purposes of determining tax treatment of any amount;
(e) reallocating amongst the parties to the arrangement—
(i) any accrual, or receipt, of a capital nature or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
(f) treating—
(i) the place of residence of any party to the arrangement; or
(ii) the situs of an asset or of a transaction,
at a place other than the place of residence, location of the asset or location of the transaction as provided
under the arrangement; or
(g) considering or looking through any arrangement by disregarding any corporate structure.
(2) For the purposes of sub-section (1),—
(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised.
99. For the purposes of this Chapter, in determining whether a tax benefit exists,—
(i) the parties who are connected persons in relation to each other may be treated as one and the same
person;
(ii) any accommodating party may be disregarded;
(iii) the accommodating party and any other party may be treated as one and the same person;
(iv) the arrangement may be considered or looked through by disregarding any corporate structure.
100. The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of
tax liability.
101. The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such
conditions, as may be prescribed.51
102. In this Chapter, unless the context otherwise requires,—

(1) "arrangement" means any step in, or a part or whole of, any transaction, operation, scheme, agreement
or understanding, whether enforceable or not, and includes the alienation of any property in such
transaction, operation, scheme, agreement or understanding;
(2) "asset" includes property, or right, of any kind;
(3) "benefit" includes a payment of any kind whether in tangible or intangible form;
(4) "connected person" means any person who is connected directly or indirectly to another person and
includes,—
(a) any relative of the person, if such person is an individual;
(b) any director of the company or any relative of such director, if the person is a company;
(c) any partner or member of a firm or association of persons or body of individuals or any relative
of such partner or member, if the person is a firm or association of persons or body of individuals;
(d) any member of the Hindu undivided family or any relative of such member, if the person is a
Hindu undivided family;
(e) any individual who has a substantial interest in the business of the person or any relative of such
individual;
(f) a company, firm or an association of persons or a body of individuals, whether incorporated or
not, or a Hindu undivided family having a substantial interest in the business of the person or any
director, partner, or member of the company, firm or association of persons or body of individuals
or family, or any relative of such director, partner or member;
(g) a company, firm or association of persons or body of individuals, whether incorporated or not, or
a Hindu undivided family, whose director, partner, or member has a substantial interest in the
business of the person, or family or any relative of such director, partner or member;
(h) any other person who carries on a business, if—
(i) the person being an individual, or any relative of such person, has a substantial interest in the
business of that other person; or
(ii) the person being a company, firm, association of persons, body of individuals, whether
incorporated or not, or a Hindu undivided family, or any director, partner or member of such
company, firm or association of persons or body of individuals or family, or any relative of
such director, partner or member, has a substantial interest in the business of that other
person;
(5) "fund" includes—
(a) any cash;
(b) cash equivalents; and
(c) any right, or obligation, to receive or pay, the cash or cash equivalent;
(6) "party" includes a person or a permanent establishment which participates or takes part in an
arrangement;
(7) "relative" shall have the meaning assigned to it in the Explanation to clause (vi) of sub-section (2)
of section 56;
(8) a person shall be deemed to have a substantial interest in the business, if,—
(a) in a case where the business is carried on by a company, such person is, at any time during the
financial year, the beneficial owner of equity shares carrying twenty per cent or more, of the
voting power; or
(b) in any other case, such person is, at any time during the financial year, beneficially entitled to
twenty per cent or more, of the profits of such business;
(9) "step" includes a measure or an action, particularly one of a series taken in order to deal with or achieve
a particular thing or object in the arrangement;
(10) "tax benefit" includes,—
(a) a reduction or avoidance or deferral of tax or other amount payable under this Act; or
(b) an increase in a refund of tax or other amount under this Act; or
(c) a reduction or avoidance or deferral of tax or other amount that would be payable under this Act,
as a result of a tax treaty; or
(d) an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or
(e) a reduction in total income; or
(f) an increase in loss,
in the relevant previous year or any other previous year;
(11) "tax treaty" means an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section
90A.
C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-A . 1
Sub-Topics Sections
A Survey, Search and Powers 117 to 138
B Returns of Income 139 to 141
C Intimation and Orders 143 to 146
D Re-assessment 147 to 152
E Rectification of Mistakes 154, 155
F Powers of CIT 263 and 264
G Appeals to CIT and ITAT 246 to 269
Wishing You All the best for Exams

Question (ITA) (SLID 16)
The assessment of B, an individual, for the year was made under section 143(3) of the Income-tax Act, 1961 on
18.3. and the penalty was initiated. The assessment has become final and is not the subject-matter of an appeal
or revision. The Assessing Officer issued a show cause notice for levy of penalty to B on 25.3. B furnished a
reply to the said notice on 30.3. There was a change in incumbent and the Assessing Officer, who made the
assessment and issued the show cause notice, was succeeded by another. The successor-Assessing Officer, suo
moto, issued a notice under section 129 to B on 20.9. B did not respond to the said notice. The successor-
Assessing Officer passed an order on 24.10 levying penalty. Examine the validity of the order of penalty passed
with reference to the aspect of limitation.
Your Options are

A Successor officer is Justified in passing penalty orders.
B Successor officer is not Justified in passing penalty orders, since re-hearing was not given to
the assessee before passing the order.
C Successor officer is not Justified in passing penalty orders, since principles of natural justice
have been violated.
D Successor officer is not Justified in passing penalty orders, since successor officer has not
passed orders in favour of the assessee.

Question (ITA) (SLID 16A)
Board may issue instructions and directions to other income-tax authorities as it may deem fit u/s 119.
Your Options are

A Such direction and instructions are for proper administration of this act.
B Such direction and instructions are for increasing tax base of the country.
C Such direction and instructions are for increasing tax collection of the country.
D Such direction and instructions are for increasing tax payers of the country.
Your Options are

A Such direction and instructions are to be followed by Income tax authority
B Such direction and instructions are to be followed by Income tax authority and other persons
employed in execution of income tax act
C Such direction and instructions are to be followed by Income tax authority, assessee and
other persons employed in execution of income tax act
D Such direction and instructions are to be followed by Income tax authority, assessee, common
man and other persons employed in execution of income tax act
Your Options are

A Such direction and instructions are not binding on assessing officer.
B Such direction and instructions are not binding on assessing officer and CIT passing order
u/s 263.
C Such direction and instructions are not binding on assessing officer, common man and CIT
passing order u/s 263.
D Such direction and instructions are not binding on assessee.

Question (ITA) (SLID 16B)
In issuing the directions or orders referred to in u/s 120 the Board or other income-tax authority authorised by
it may have regard to any one or more of the following criteria, namely :—
(a) territorial area;
(b) persons or classes of persons;
(c) incomes or classes of income; and
(d) cases or classes of cases.
(e) Gender of the persons
(f) Age of the Persons
(g) Educational qualification of the persons
Your Options are

A a,b,c,d
B a,b,c,d,e,f
C a,b,c,d,e,f,g
D a,b,c
Question (ITA) (SLID 16C)
Where by virtue of any direction or order issued under section 120, the Assessing Officer has been vested with
jurisdiction over any area, within the limits of such area, he shall have jurisdiction—
(a) in respect of any person carrying on a business or profession, if the place at which he carries on his
business or profession is situate within the area, or where his business or profession is carried on in more
places than one, if the principal place of his business or profession is situate within the area, and
(b) in respect of any other person residing within the area.
(c) in respect of manufacturing concern where the factory is situated.
(d) in respect of Rental Income where the property is situated
Your Options are

A a,b
B a,b,c
C a,b,c,d
D a

Your Options are

A Where doubt about jurisdiction of the assessing officer arise, matter will be decided by
director general
B Where doubt about jurisdiction of the assessing officer arise, matter will be decided by CBDT
C Where doubt about jurisdiction of the assessing officer arise, matter will be decided by
Government
D Where doubt about jurisdiction of the assessing officer arise, matter will be decided by High
Court.
Question (ITA) (SLID 16D)

Director General can transfer the case from one officer to another officer u/s 127.
Your Options are

A Opportunity of being heard is to be given to the assessee.
B Opportunity of being heard is not to be given to the assessee if the assessee is first time tax
payer.
C Opportunity of being heard is not to be given to the assessee if tax liability is less then 10,000
D Opportunity of being heard is not to be given to the assessee age is less then 26 years
Your Options are

A The transfer of a may be made at any stage of the proceedings, and shall not render necessary
the re-issue of any notice already issued by the Assessing Officer from whom the case is
transferred.
B The transfer of a may be made at any stage of the proceedings, and shall render necessary
the re-issue notice already issued by the Assessing Officer from whom the case is transferred.
C The transfer of a may be made at any stage of the proceedings, and shall render necessary
the re-issue notice already issued by the Assessing Officer from whom the case is transferred
and also re-hearing is to be provided.
D Transfer of a case cannot be made without authorisation from central government.

116. There shall be the following classes of income-tax authorities for the purposes of this Act, namely :—
(a) the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of
1963),
(aa) Principal Directors General of Income-tax or Principal Chief Commissioners of Income-tax,
(b) Directors-General of Income-tax or Chief Commissioners of Income-tax,
(ba) Principal Directors of Income-tax or Principal Commissioners of Income-tax,
(c) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional
Commissioners of Income-tax (Appeals),
(cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax,
(d) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of
Income-tax (Appeals),
(e) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
(f) Income-tax Officers,
(g) Tax Recovery Officers,
(h) Inspectors of Income-tax.

117. (1) The Central Government may appoint such persons as it thinks fit to be income-tax authorities.
(2) Without prejudice to the provisions of sub-section (1), and subject to the rules and orders of the Central
Government regulating the conditions of service of persons in public services and posts, 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) Subject to the rules and orders of the Central Government regulating the conditions of service of persons in
public services and posts, 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.
118. The Board may, by notification in the Official Gazette, direct that any income- tax authority or
authorities specified in the notification shall be subordinate to such other income-tax authority or
authorities as may be specified in such notification.

119. (1) The Board may, from time to time, issue such orders, instructions and directions to other
income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and
all other persons employed in the execution of this Act shall observe and follow such orders,
instructions and directions of the Board :
Provided that no such orders, instructions or directions shall be issued—

(a) so as to require any income-tax authority to make a particular assessment or to
dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Commissioner (Appeals) in the exercise
of his appellate functions.
(2) Without prejudice to the generality of the foregoing power,—

(a) the Board may, if it considers it necessary or expedient so to do, for the purpose of proper and efficient
management of the work of assessment and collection of revenue, issue, from time to time (whether by
way of relaxation of any of the provisions of sections
115P, 115S,115WD, 115WE, 115WF, 115WG, 115WH, 115WJ, 115WK, 139, 143, 144, 147, 148, 154,
155, 158BFA, sub-section (1A) of section 201, sections
210, 211, 234A, 234B, 234C, 234E, 32[270A,] 271 33[, 271C, 271CA] and 273 or otherwise), general or
special orders in respect of any class of incomes or fringe benefits or class of cases, setting forth directions
or instructions (not being prejudicial to assessees) as to the guidelines, principles or procedures to be
followed by other income-tax authorities in the work relating to assessment or collection of revenue or the
initiation of proceedings for the imposition of penalties and any such order may, if the Board is of opinion
that it is necessary in the public interest so to do, be published and circulated in the prescribed
manner for general information;
(b) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case
or class of cases, by general or special order, authorise any income-tax authority, not being a
Commissioner (Appeals) to admit an application or claim for any exemption, deduction, refund or any
other relief under this Act after the expiry of the period specified by or under this Act for making such
application or claim and deal with the same on merits in accordance with law;
(c) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case
or class of cases, by general or special order for reasons to be specified therein, relax any requirement
contained in any of the provisions of Chapter IV or Chapter VI-A, where the assessee has failed to comply
with any requirement specified in such provision for claiming deduction thereunder, subject to the
following conditions, namely:—
(i) the default in complying with such requirement was due to circumstances beyond the control of
the assessee; and
(ii) the assessee has complied with such requirement before the completion of assessment in relation
to the previous year in which such deduction is claimed :
Provided that the Central Government shall cause every order issued under this clause to be laid before
each House of Parliament.

120. (1) Income-tax authorities shall exercise all or any of the powers and perform all or any of the
functions conferred on, or, as the case may be, assigned to such authorities by or under this Act in accordance
with such directions as the Board may issue for the exercise of the powers and performance of the functions by
all or any of those authorities.
Explanation.—For the removal of doubts, it is hereby declared that any income-tax authority, being an authority
higher in rank, may, if so directed by the Board, exercise the powers and perform the functions of the income-
tax authority lower in rank and any such direction issued by the Board shall be deemed to be a direction issued
under sub-section (1).
(2) The directions of the Board under sub-section (1) may authorise any other income-tax authority to issue
orders in writing for the exercise of the powers and performance of the functions by all or any of the
other income-tax authorities who are subordinate to it.
(3) In issuing the directions or orders referred to in sub-sections (1) and (2), the Board or other income-tax
authority authorised by it may have regard to any one or more of the following criteria, namely :—
(a) territorial area;
(b) persons or classes of persons;
(c) incomes or classes of income; and
(d) cases or classes of cases.
(4) Without prejudice to the provisions of sub-sections (1) and (2), 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;
(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 conferred on, or as the case may be, assigned to, the Assessing Officer by or under
this Act 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 any order is made under
this clause, references in any other provision of this Act, or in any rule made thereunder to the Assessing
Officer shall be deemed to be references to such Additional Commissioner or Additional Director or
Joint Commissioner or Joint Director by whom the powers and functions are to be exercised or
performed under such order, and any provision of this Act requiring approval or sanction of the Joint
Commissioner shall not apply.

(5) The directions and orders referred to in sub-sections (1) and (2) may, wherever considered necessary or
appropriate for the proper management of the work, require two or more Assessing Officers (whether or not
of the same class) to exercise and perform, concurrently, the powers and functions in respect of any area
or persons or classes of persons or incomes or classes of income or cases or classes of cases; and, where such
powers and functions are exercised and performed concurrently by the Assessing Officers of different classes,
any authority lower in rank amongst them shall exercise the powers and perform the functions as any higher
authority amongst them may direct, and, further, references in any other provision of this Act or in any rule
made thereunder to the Assessing Officer shall be deemed to be references to such higher authority and any
provision of this Act requiring approval or sanction of any such authority shall not apply.
(6) Notwithstanding anything contained in any direction or order issued under this section, or in section 124, the
Board may, by notification in the Official Gazette, 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.

124. (1) Where by virtue of any direction or order issued under sub-section (1) or sub-section (2) of section 120,
the Assessing Officer has been vested with jurisdiction over any area, within the limits of such area, he
shall have jurisdiction—
(a) in respect of any person carrying on a business or profession, if the place at which he carries on
his business or profession is situate within the area, or where his business or profession is carried on in
more places than one, if the principal place of his business or profession is situate within the
area, and
(b) in respect of any other person residing within the area.
(2) Where a question arises under this section as to whether an Assessing Officer has jurisdiction to
assess any person, the question shall be determined by the Principal Director General or Director General
or the Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or Commissioner;
or where the question is one relating to areas within the jurisdiction of different Principal Directors General or
Directors General or Principal Chief Commissioners or Chief Commissioners or Principal Commissioners or
Commissioners, by the Principal Directors General or Directors General or Principal Chief Commissioners or
Chief Commissioners or Principal Commissioners or Commissioners concerned or, if they are not in agreement,
by the Board or by such Principal Director General or Director General or Principal Chief Commissioner or
Chief Commissioner or Principal Commissioner or Commissioner as the Board may, by notification in the
Official Gazette, specify.
(3) No person shall be entitled to call in question the jurisdiction of an Assessing Officer—
(a) where he has made a return under sub-section (1) of section 115WD or under sub-section (1)
of section 139, after the expiry of one month from the date on which he was served with a notice under
sub-section (1) of section 142 or sub-section (2) of section 115WE or sub-section (2) of section 143 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 under sub-
section (2) of section 115WD or sub-section (1) of section 142 or under sub-section (1) of section
115WH or under section 148 for the making of the return or by the notice under the first proviso
to section 115WF or under the first proviso to section 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 under section 132 or section 132A, after the expiry of one month
from the date on which he was served with a notice under sub-section (1) of section 153A or sub-section
(2) of section 153C or after the completion of the assessment, whichever is earlier.
(4) Subject to the provisions of sub-section (3), 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 under sub-section (2) before the assessment is made.
(5) Notwithstanding anything contained in this section or in any direction or order issued under section 120,
every Assessing Officer shall have all the powers conferred by or under this Act on an Assessing Officer in
respect of the income accruing or arising or received within the area, if any, over which he has been vested with
jurisdiction by virtue of the directions or orders issued under sub-section (1) or sub-section (2) of section 120.

127. (1) The Principal Director General or Director General or Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner may, after giving the assessee a reasonable
opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons
for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or
without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without
concurrent jurisdiction) also subordinate to him.
(2) Where the Assessing Officer or Assessing Officers from whom the case is to be transferred and the Assessing
Officer or Assessing Officers to whom the case is to be transferred are not subordinate to the same
Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner,—
(a) where the Principal Directors General or Directors General or Principal Chief Commissioners or Chief
Commissioners or Principal Commissioners or Commissioners to whom such Assessing Officers are
subordinate are in agreement, then the Principal Director General or Director General or Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or Commissioner from whose
jurisdiction the case is to be transferred may, after giving the assessee a reasonable opportunity
of being heard in the matter, wherever it is possible to do so, and after recording his reasons for
doing so, pass the order;
(b) where the Principal Directors General or Directors General or Principal Chief Commissioners or Chief
Commissioners or Principal Commissioners or Commissioners aforesaid are not in agreement, the
order transferring the case may, similarly, be passed by the Board or any such Principal Director General
or Director General or Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner as the Board may, by notification in the Official Gazette, authorise
in this behalf.
(3) Nothing in sub-section (1) or sub-section (2) shall be deemed to require any such opportunity
to be given where the transfer is from any Assessing Officer or Assessing Officers (whether with
or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether
with or without concurrent jurisdiction) and the offices of all such officers are situated in the same
city, locality or place.
(4) The transfer of a case under sub-section (1) or sub-section (2) may be made at any stage of the
proceedings, and shall not render necessary the re-issue of any notice already issued by the Assessing
Officer or Assessing Officers from whom the case is transferred.
Explanation.—In section 120 and this section, the word "case", in relation to any person whose name is specified
in any order or direction issued thereunder, means all proceedings under this Act in respect of any year which
may be pending on the date of such order or direction or which may have been completed on or before such
date, and includes also all proceedings under this Act which may be commenced after the date of such order or
direction in respect of any year.

129. Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise
jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so
succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor
:
Provided that the assessee concerned may demand that before the proceeding is so continued the
previous proceeding or any part thereof be reopened or that before any order of assessment is passed against
him, he be reheard.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-B . 1
Question (power to call for documents, summons etc.) (SLID 14) (Revision / Home work)
The Director General of Income – Tax after getting the information that Mr. Mogambo is in possession of
unaccounted cash of 50 lacs, issued orders by invoking powers vested in him as per section 131(1A) of the Act,
for its seizure. Order for seizure of cash issued by the Director General of Income – Tax.
Your Options are

A Seizure of cash is justified since orders were issued by Director General
B Seizure of cash is justified 131(1A) permits the seizure of cash
C Seizure of cash is justified since it is believed that it is unaccounted cash
D None of above
Question (power to call for documents, summons etc.) (SLID 08) (Revision / Home work)
The assessee was carried on the business of purchase and sale of silver ornaments, utensils, etc. A search was
conducted by the Income-tax Department on the residential and business premises of the assessee. During the
search silver ornaments and utensils were seized. The assessee had explained that the said silver had been
purchased from R. Statement of R was recorded. The Assessing Officer accepted all the entries recorded in the
amanat book except the entries pertaining to R. The affidavit of R and the bank transaction made by him were
ignored. The assessee made a prayer under section 131 of the Act to summon R for cross-examination. The
prayer was not acceded to and the assessment order was passed by the officer.
Your Options are

A Order of AO is Justified since law does not provide for Cross examination of statements.
B Order of AO is Justified since additions have been made pursuant to search.
C Order of AO is Justified since he has followed all the principles of Natural Justice.
D None of above

Question (power to call for documents, summons etc.) (SLID 09)

The assessee-company was engaged in the business of selling consumer goods. The assessee was requested to
furnish the true and complete details of all payments made by it to its distributors in Kerala, during the period
of last 3 years, with the names and complete addresses of the respective payees and the amount paid in each
financial year, etc., and any other relevant details. This letter was issued in lieu of summoning the assessee under
section 131. The assessee was informed that the distributors of the company’s products in Kerala were in receipt
of remuneration (by whatever name called) from the company which had not been fully and properly offered
for income-tax assessment in their respective hands. For the purpose of making necessary enquiry and
investigation thereto, relevant details were called for, from the assessee. A formal summons was also enclosed.
It was further informed that the personal appearance of the managing director was not essential provided the
particulars called for were furnished. You are required to answer whether the action of the income tax authority
in issuing the summons are justified.

The Assessing Officer issued notices under section 133 to four banks requiring particulars relating to a customer
in a specific format duly verified in a prescribed manner. One of the banks refused to part with the information
on the ground that the letter did not specify about any proceeding pending against the said customer under the
Income-tax Act, 1961. Discuss the correctness of action of the bank in refusing to furnish the particulars as
required by the Assessing Officer.

131. (1) The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner
(Appeals), Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner
and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C shall, for the
purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure,
1908 (5 of 1908), when trying a suit in respect of the following matters, namely :—
(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.
(1A) If the Principal Director General or Director General or Principal Director or Director or Joint Director or
Assistant Director or Deputy Director, or the authorised officer referred to in sub-section (1) of section
132 before he takes action under clauses (i) to (v) of that sub-section, has reason to suspect that any income has
been concealed, or is likely to be concealed, by any person or class of persons, within his jurisdiction, then, for
the purposes of making any enquiry or investigation relating thereto, it shall be competent for him to exercise
the powers conferred under sub-section (1) on the income-tax authorities referred to in that sub-section,
notwithstanding that no proceedings with respect to such person or class of persons are pending
before him or any other income-tax authority.
(2) For the purpose of making an inquiry or investigation in respect of any person or class of persons in
relation to an agreement referred to in section 90 or section 90A, it shall be competent for any income-tax
authority not below the rank of Assistant Commissioner of Income-tax, as may be notified by the Board in this
behalf, to exercise the powers conferred under sub-section (1) on the income-tax authorities referred to in that
sub-section, notwithstanding that no proceedings with respect to such person or class of persons are pending
before it or any other income-tax authority.
(3) Subject to any rules made in this behalf, any authority referred to in sub-section (1) or sub-section (1A) or
sub-section (2) may impound and retain in its custody for such period as it thinks fit any books of account
or other documents produced before it in any proceeding under this Act :
Provided that 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 so doing, or
(b) retain in his custody any such books or documents for a period exceeding fifteen days (exclusive of
holidays) without obtaining the 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 therefor, as the case may be.

132A. (1) Where the Principal Director General or Director General or Principal Director or Director or the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, in
consequence of information in his possession, has reason to believe that—
(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act,
1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4)
of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act
was issued to produce, or cause to be produced, any books of account or other documents has omitted
or failed to produce, or cause to be produced, such books of account or other documents, as
required by such summons or notice and the said books of account or other documents have been taken
into custody by any officer or authority under any other law for the time being in
force, or
(b) any books of account or other documents will be useful for, or relevant to, any proceeding under
the Indian Income-tax Act, 1922 (11 of 1922), or under this Act and any person to whom a summons or
notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced,
such books of account or other documents on the return of such books of account or other documents
by any officer or authority by whom or which such books of account or other documents have been
taken into custody under any other law for the time being in force, or
(c) any assets represent either wholly or partly income or property which has not been, or would not
have been, disclosed for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act by
any person from whose possession or control such assets have been taken into custody by any officer
or authority under any other law for the time being in force,
then, the Principal Director General or Director General or Principal Director or Director or the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may authorise any
Additional Director, Additional Commissioner, Joint Director, Joint Commissioner, Assistant Director or
Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer (hereafter in this
section and in sub-section (2) of section 278D referred to as the requisitioning officer) to require the officer
or authority referred to in clause (a) or clause (b) or clause (c), as the case may be, to deliver such
books of account, other documents or assets to the requisitioning officer.
Explanation.—For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the
income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate
Tribunal.
(2) On a requisition being made under sub-section (1), the officer or authority referred to in clause (a) or clause
(b) or clause (c), as the case may be, of that sub-section shall deliver the books of account, other
documents or assets to the requisitioning officer either forthwith or when such officer or authority
is of the opinion that it is no longer necessary to retain the same in his or its custody.
(3) Where any books of account, other documents or assets have been delivered to the requisitioning officer, the
provisions of sub-sections (4A) to (14) (both inclusive) of section 132 and section 132B shall, so far as may be,
apply as if such books of account, other documents or assets had been seized under sub-section (1) of
section 132 by the requisitioning officer from the custody of the person referred to in clause (a) or clause (b) or
clause (c), as the case may be, of sub-section (1) of this section and as if for the words "the authorised officer"
occurring in any of the aforesaid sub-sections (4A) to (14), the words "the requisitioning officer" were
substituted.

133. The Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner
(Appeals) may, for the purposes of this Act,—
(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 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 one thousand
rupees, or such higher amount as may be prescribed, 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 to whom
he or the exchange has paid any sum in connection with the transfer, whether by way of sale,
exchange or otherwise, of assets, or 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 verified in the
manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint
Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters
as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint
Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or
proceeding under this Act :
Provided that the powers referred to in clause (6), 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:
Provided further that the power in respect of an inquiry, in a case where no proceeding is pending, shall not
be exercised by any income-tax authority below the rank of Principal Director or Director or Principal
Commissioner or Commissioner 45[, other than the Joint Director or Deputy Director or Assistant Director,]
without the prior approval of the Principal Director or Director or, as the case may be, the Principal
Commissioner or Commissioner:
Provided also that for the purposes of an agreement referred to in section 90 or section 90A, an income-tax
authority notified under sub-section (2) of section 131 may exercise all the powers conferred under this section,
notwithstanding that no proceedings are pending before it or any other income-tax authority.

133C. (1)] The prescribed income-tax authority may, for the purposes of verification of information in its
possession relating to any person, issue a notice to such person requiring him, on or before a date to be
specified therein, to furnish information or documents verified in the manner specified therein, which
may be useful for, or relevant to, any inquiry or proceeding under this Act.
(2) Where any information or document has been received in response to a notice issued under sub-section (1),
the prescribed income-tax authority may process such information or document and make available the
outcome of such processing to the Assessing Officer.
(3) The Board may make a scheme for centralised issuance of notice and for processing of information or
documents and making available the outcome of the processing to the Assessing Officer.
Explanation.—In this section, the term "proceeding" shall have the meaning assigned to it in clause (b) of
the Explanation to section 133A.
134. The Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner
(Appeals), or any person subordinate to him authorised in writing in this behalf by the Assessing Officer, the
Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), may inspect, and if
necessary, take copies, or cause copies to be taken, of any register of the members, debenture
holders or mortgagees of any company or of any entry in such register.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-C . 1

An Assessing Officer entered a hotel run by a person, in respect of whom he exercises jurisdiction, at 8 p.m. for
the purpose of collecting information, which may be useful for the purposes of the Act. The hotel is kept open
for business every day between 9 a.m. to 9 p.m. The hotelier claims that the Assessing Officer could not enter
the hotel after sunset. The Assessing Officer wants to take away with him the books of account kept at the hotel.
Examine the validity of the claim made by the hotelier and the proposed action of the Assessing Officer with
reference to the provisions of section 133B of the Income – tax Act, 1961.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-C . 1
133B. (1) Notwithstanding anything contained in any other provision of this Act, an 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—
(a) any building or place within the limits of the area assigned to such authority ; or
(b) any building or place occupied by any person in respect of whom he exercises jurisdiction,
at which a business or profession is carried on, whether such place be the principal place or not of such
business or profession, and require any proprietor, employee or any other person who may at that time
and place be attending in any manner to, or helping in, the carrying on of such business or profession to furnish
such information as may be prescribed.
(2) An income-tax authority may enter any place of business or profession referred to in sub-section (1)
only during the hours at which such place is open for the conduct of business or profession.
(3) For the removal of doubts, it is hereby declared that an income-tax authority acting under this section shall,
on no account, remove or cause to be removed from the building or place wherein he has entered, any
books of account or other documents or any cash, stock or other valuable article or thing.
Explanation.—In this section, "income-tax authority" means a Joint Commissioner, an Assistant Director or
Deputy Director or an Assessing Officer, and includes an Inspector of Income-tax who has been authorised by
the Assessing Officer to exercise the powers conferred under this section in relation to the area in respect of
which the Assessing Officer exercises jurisdiction or part thereof.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-D . 1
Question (SLID 02) (survey) (Revision / Home work)

An Income-tax authority in the course of exercising powers of survey under section 133A serves a summon on
the assessee and impounds the books of account and other documents found in the premises visited. Discuss the
legality of its action.
Your Options are

A Books can be Impounded for 10 days
B Books can be Impounded for 15 days
C Books can be Impounded for 30 days
D None of above
Question (SLID 10) (survey)

A survey under section 133A of the Income-tax Act, 1961 was conducted at the business premises of the
assessee. During the course of survey, the tax officials noticed some discrepancies in stock and cash in hand.
During the survey, the assessee surrendered an amount of Rs. 99,50,000 and offered it for the purposes of
taxation. The additional income offered included a sum of Rs. 45,00,000 on account of excess stock found
during the course of survey and offered by one of the partners of the assessee as additional income. The answer
by one of the partners of the assessee was he could not explain the difference and to buy peace of mind offering
additional income. However, subsequently, the assessee by letter withdrew the offer of additional income for
taxation on account of excess stock stating that the statement about stock was incorrect and that the discrepancy
had been reconciled as it was only a mistake. Assessing officer proposes to tax the additional income. Whether
the action is justified ?


The assessee companies manufactured dye-intermediates for their own and job work purposes. On the basis of
allegations that the companies were illegally diverting one of the raw materials AA, a controlled substance under
the Narcotic Drugs and Psychotropic Substances Act, 1985, for illegal use in manufacture of banned drugs,
search operations were carried out by the Central Narcotics Bureau and Narcotics Control Bureau at the premises
of the assessee companies. Consequently, survey actions under section 133A of the Income-tax Act, 1961 were
carried out. However, no discrepancies in stock of AA was found. The Assessing Officer held that the sales of
dye-intermediates MG-7, for the manufacture of which AA was used, to three parties were bogus and that AA
was sold in the grey market. Subsequently three parties re-traced the statements and were ignored by the officer
in making the additions of income.
Your Options are

A Officer has failed to apply the principles of Natural justice
B Officer has failed to apply the principles of Natural justice but the additions made were
justified.
C Neither A nor B
D None of above

Survey was conducted in premises of Mr. X, his books are lying with his CA. therefore the income tax authorities
proposes to conduct the survey of premises of CA. whether it is justified.
Your Options are

A Premises of CA cannot be surveyed
B Premises of CA can be surveyed
C Premises of CA can be surveyed but only to the extent of books of Mr. X
D None of above


During the course of survey operations under Section 133A, carried on 5th March, The Income-tax authority,
impounded the books of account and other documents inspected by him, relating to the assessee and retained
the same in his custody. Is the action of the officer justified under law ?
Your Options are

A Income tax authority can impound the books of account and other documents, and it can be
retained for 15 days.
B Income tax authority cannot impound the books of account and other documents
C Income tax authority can impound the books of account and other documents, and it can be
retained for 30 days.
D None of above
OR
The Assessing Officer within his jurisdiction surveyed a popular Cyber Cafe at 12’ o clock in night for
the purpose of collecting information which may be useful for the purpose of the Income-tax Act. The
Cyber Cafe is kept open for business every day between 2 P.M. and 2.A.M. The owner of the Cyber
Cafe claims that the Assessing Officer could not enter the café in late night. The Assessing Officer
wanted to take away with him the books of account kept at the Cyber Cafe. Examine the validity of the
claim made by the owner and the proposed action of the Assessing Officer.
Your Options are

A Action of the officer is Justified in Entering cyber café at night and
Officer can also impound the books of accounts.
B Action of the officer is not Justified in Entering cyber café at night and
Officer cannot impound the books of accounts.
C Action of the officer is Justified in Entering cyber café at night and
Officer cannot also impound the books of accounts.
D None of above

Question (SLID 10A) (survey) (Revision / Home work)
Survey of TDS matter can be under taken during these hours
Your Options are

A Any Business Hours during which place is open for business
B After Sun rise and before sun set
C During 9.00 a.m. to 5 P.m.
D During 10.00 a.m. to 6 P.m.
Question (SLID 10B) (survey) (Revision / Home work)
Survey of charitable organisation can be under taken during these hours
Your Options are

A Any working Hours during which place is open for charitable activity
D Survey of Charitable organisation is not permitted by law.
Question (SLID 10C) (survey) (Revision / Home work)
Survey of any function ceremony event can be undertaken.
Your Options are

A The statement is false
B The statement is true, however statement can be recorded only after Function ceremony or
an event
C The statement is true, however statement can be recorded at any time during the function
hours only
D The statement is true, however statement can be recorded only before Function ceremony or
an event

Question (SLID 10D) (survey) (Revision / Home work)
Search can be under taken during these hours
Your Options are

A Any Business Hours during which place is open for business
D At any time

133A. (1) Notwithstanding anything contained in any other provision of this Act, an income-tax authority may
enter—
(a) any place within the limits of the area assigned to him, or
(b) any place occupied by any person in respect of whom he exercises jurisdiction, or
(c) any place in respect of which he is authorised for the purposes of this section by such income-tax
authority, who is assigned the area within which such place is situated or who exercises jurisdiction in
respect of any person occupying such place,
at which a business or profession or an activity for charitable purpose is carried on, whether such place be the
principal place or not of such business or profession or of such activity for charitable purpose, and require any
proprietor, trustee, employee or any other person who may at that time and place be attending in
any manner to, or helping in, the carrying on of such business or profession or such activity for charitable
purpose—
(i) to afford him the necessary facility to inspect such books of account or other documents as he may
require and which may be available at such place,
(ii) to afford him the necessary facility to check or verify the cash, stock or other valuable article
or thing which may be found therein, and
(iii) 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.
Explanation.—For the purposes of this sub-section, a place where a business or profession or activity for
charitable purpose is carried on shall also include any other place, whether any business or profession or
activity for charitable purpose is carried on therein or not, in which the person carrying on the business or
profession or activity for charitable purpose states that any of his books of account or other
documents or any part of his cash or stock or other valuable article or thing relating to his
business or profession or activity for charitable purpose are or is kept.
(2) An income-tax authority may enter any place of business or profession referred to in sub-section (1) only
during the hours at which such place is open for the conduct of business or profession and, in the case
of any other place, only after sunrise and before sunset.

(2A) Without prejudice to the provisions of sub-section (1), an income-tax authority acting under this sub-
section may for the purpose of verifying that tax has been deducted or collected at source in accordance
with the provisions under sub-heading B of Chapter XVII or under sub-heading BB of Chapter XVII, as the case
may be, enter, after sunrise and before sunset, any office, or any other place where business or profession
is carried on, within the limits of the area assigned to him, or any place in respect of which he is authorised for
the purposes of this section by such income-tax authority who is assigned the area within which such place is
situated, where books of account or documents are kept and require the deductor or the collector or any other
person who may at that time and place be attending in any manner to such work,—
(i) to afford him the necessary facility to inspect such books of account or other documents as he may
require and which may be available at such place, and
(ii) to furnish such information as he may require in relation to such matter.
(3) An income-tax authority acting under this section may,—

(i) if he so deems necessary, place marks of identification on the books of account or other documents
inspected by him and make or cause to be made extracts or copies therefrom,
(ia) impound and retain in his custody for such period as he thinks fit any books of account or other
documents inspected by him:
Provided that such income-tax authority shall not—
(a) impound any books of account or other documents except after recording his reasons for so
doing; or
(b) retain in his custody any such books of account or other documents for a period exceeding
fifteen 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 therefor, as the case may be,
(ii) make an inventory of any cash, stock or other valuable article or thing checked or verified by
him,
(iii) record the statement of any person which may be useful for, or relevant to, any proceeding under
this Act :
Provided that no action under clause (ia) or clause (ii) shall be taken by an income-tax authority acting under
sub-section (2A).
(4) An income-tax authority acting under this section shall, on no account, remove or cause to be removed from
the place wherein he has entered, any cash, stock or other valuable article or thing.

(5) Where, having regard to the nature and scale of expenditure incurred by an assessee, in connection
with any function, ceremony or event, the income-tax authority is of the opinion that it is necessary or
expedient so to do, he may, at any time after such function, ceremony or event, require the assessee
by whom such expenditure has been incurred or any person who, in the opinion of the income-tax authority, is
likely to possess information as respects the expenditure incurred, 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 and may have
the statements of the assessee or any other person recorded and any statement so recorded may
thereafter be used in evidence in any proceeding under this Act.
(6) If a person under this section is required to afford facility to the income-tax authority to inspect books of
account or other documents or to check or verify any cash, stock or other valuable article or thing or to furnish
any information or to have his statement recorded either refuses or evades to do so, the income-tax authority
shall have all the powers under sub-section (1) of section 131 for enforcing compliance with the
requirement made :
Provided that no action under sub-section (1) shall be taken by an Assistant Director or a Deputy Director or
an Assessing Officer or a Tax Recovery Officer or an Inspector of Income-tax without obtaining the approval
of the Joint Director or the Joint Commissioner, as the case may be.
(a) "income-tax authority" means a Principal Commissioner or Commissioner, a Joint Commissioner, a
Principal Director or Director, a Joint Director, an Assistant Director or a Deputy Director or an
Assessing Officer, or a Tax Recovery Officer, and for the purposes of clause (i) of sub-section (1),
clause (i) of sub-section (3) and sub-section (5), includes an Inspector of Income-tax;
(b) "proceeding" means any proceeding under this Act in respect of any year which may be pending on the
date on which the powers under this section are exercised or which may have been completed on or
before such date and includes also all proceedings under this Act which may be commenced after such
date in respect of any year.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-E . 1
Question (SLID 03) (search) (Revision / Home work)

On 1.9, Prem & Sons have been searched in delhi. During the search, papers belonging to his close friend Mr.
Shyam in Mumbai indicating concealed income have been found. How should the Assessing Officer proceed in
such a situation under the Act ?
Your Options are

A Assessing officer should transfer the Papers as per 153C
B Assessing officer should transfer the Papers as per 161
C Assessing officer should do the assessment of Mr. Shyam u/s 153A
D None of above

(a) In the course of search on 25.03, assets were seized. State the procedure laid down to deal with such seized
assets under the Act.
(b) The Director of Income Tax received information that Mr. X has unaccounted cash exceeding Rs.50 lakhs.
Can the Director pass orders for seizure of the cash invoking his powers under section 131(1A)? Does the
Director have any other course open to him for the seizure of cash?
Your Options are, in relation to (a)

A Seized assets should be treated as per 133
B Seized assets should be treated as per 134
C Seized assets should be treated as per 132A rw 132B
D Seized assets should be treated as per 131
Your Options are, in relation to (b)

A Orders of director is not valid by invoking powers in 131(1A)
B Orders of director is valid by invoking powers in 131(1A)
C By any Income tax authority books cannot be impounded u/s 131(1A)
D None of above


In the course of search operations under section 132, a tax payer makes a declaration under section 132(4) on
the earning of income not disclosed. Can that Statement save the tax payer from a levy of penalty ?
Your Options are

A Penalty can be levied as per 270A
B Penalty can be levied as per 271
C Penalty can be levied as per 270A however assessee can apply for waiver of penalty u/s
270AA
D None of above

State whether the information regarding possession of unexplained assets and income received from the Central
Bureau of Investigation, a Government agency, can constitute “information” for action under section 132 of the
Act.
Your Options are

A Action u/s 132 is not valid
B Action u/s 132 is valid if CBI also grants supporting evidence for the same information
C Action u/s 132 is valid
D None of above

Question (SLID 07) (search)
The business premises of Ram Bharose Ltd. and the residence of two of its directors at Delhi were searched
under section 132 of the Act by the DDI, Delhi. The search was concluded on 9-8-PY and following were also
seized besides other papers and records:
I. Papers found in drawer of an accountant relating to Shri Krishna Ltd., Mumbai indicating details of
various business transactions. However, Ram Bharose Ltd. is not having any direct or indirect connection
of any nature with these transactions and Shri Krishna Ltd., Mumbai and its directors.
II. Jewellery worth Rs. 5,00,000 from the bedroom of one of the director, which was claimed by him to be
of his married daughter.
III. Papers recording certain transactions of income and expenses having direct nexus with the business of
the company for the period from 16-4-2011 to date of search. It was admitted by the director that the
transactions recorded in such papers have not been incorporated in the books.
You are required to answer on the basis of the aforesaid and the provisions of Act, following questions:
a) What action the DDI shall be taking in respect of the seized papers relating to Shri Krishna Ltd., Mumbai ?
b) Whether the contention raised by the director as to jewellery found from his bedroom will be acceptable ?
c) What presumption shall be drawn in respect of the papers which indicate transactions not recorded in the
books ?
d) Proceedings for how many years shall now be taken up and within which time limit the assessment thereof
be completed by the Assessing Officer ?
e) Can the company move an application for settlement of case as per chapter XIX-A of the Act ?

Question 6 (SLID 13) (search)

Mr. I is a informer to the income tax department. He has so for given 8 out of 10 successful information. His
average remuneration is 10% of taxes recovered. On 17th July he has information about Mr. Babanlal who has
secreted assets worth 12 crores. Mr. I has request for 15% remuneration to DDI & submitted the information
with expectation of higher remuneration. In the search it was revealed that
a) Cash of 25 lakhs lying with police department.

b) Investment in benami property at silvassa with 50 Lakhs. But his wife has admitted the same as un-
disclosed income belonging to her. His wife accepted that she was trading in gold over the year from
which the said income was generated.
c) Some Bank FD’s were 30 Lakhs found as was kept in state bank of India, Andheri branch.
d) Three fishing trawlers were found belonging to Babanlal, but because of volume & weight custody
could not be taken.
e) Mr. Babanlal possessed many documents regarding un-disclosed assets came to knowledge of
department.
f) Mr. Babanlal had one girlfriend Miss Mona, with whom some personal letters were communicated (love
letters) which also came to knowledge of income tax authorities during search operations.
g) Total value of income un-earthed was 20 crores in view of income tax authorities but assessment is
challenged by the assessee.
You are required to answer
1) What are the basis on which remuneration of informer decided.

2) ITA has requested cash from police department, whether justified.
3) Benami property at silvassa whether includable is the assessment of Mr. Babanlal
4) Documents / letters which were seized are not in the handwriting of assessee, what will be the
presumption there about.
5) Regarding Bank fixed deposit, ITA wants to search premises of Bank at andheri branch to know whether
there are more FD’s. Whether justified ?
6) ITA want to search Laptops of assessee as well also his auditors. Whether justified ?
7) What action ITA must take in respect to fishing trawlers and personal letters ?
8) After search was over it was observed a spelling mistake in search warrant whether it can make search
illegal, whether material obtained in search can be used for assessment.

132. (1) Where the Principal Director General or Director General or Principal Director or Director or the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or
Additional Director or Additional Commissioner or Joint Director or Joint Commissioner in consequence of
information in his possession, has reason to believe that—
(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922
(11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of
section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act was
issued to produce, or cause to be produced, any books of account or other documents has omitted
or failed to produce, or cause to be produced, such books of account or other documents as required
by such summons or notice, or
(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would
not, produce or cause to be produced, any books of account or other documents which will be
useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under
this Act, or
(c) any person is in possession of any money, bullion, jewellery or other valuable article or thing
and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly
income or property which has not been, or would not be, disclosed for the purposes of the Indian
Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed
income or property),
then,—
(A) the Principal Director General or Director General or Principal Director or Director or the Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case
may be, may authorise any Additional Director or Additional Commissioner or Joint Director, Joint
Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy
Commissioner or Income-tax Officer, or
(B) such Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner, as the
case may be, may authorise any Assistant Director or Deputy Director, Assistant Commissioner or
Deputy Commissioner or Income-tax Officer,
(the officer so authorised in all cases being hereinafter referred to as the authorised officer) to—
(i) 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;
(ii) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the
powers conferred by clause (i) where the keys thereof are not available;
(iia) 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 such books of account, other documents, money, bullion, jewellery or other valuable article
or thing;
(iib) require any person who is found to be in possession or control of any books of account or other
documents maintained in the form of electronic record as defined in clause (t) of sub-section (1) of

section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorised officer the
necessary facility to inspect such books of account or other documents;
(iii) seize any such books of account, other documents, money, bullion, jewellery or other
valuable article or thing found as a result of such search:
Provided that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business,
found as a result of such search shall not be seized but the authorised officer shall make a note
or inventory of such stock-in-trade of the business;
(iv) place marks of identification on any books of account or other documents or make or cause to be
made extracts or copies therefrom;
(v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or
thing :
Provided that where any building, place, vessel, vehicle or aircraft referred to in clause (i) is within the area of
jurisdiction of any Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, but such Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner has no jurisdiction over the person referred to in clause (a) or clause (b) or clause (c), then,
notwithstanding anything contained in section 120, it shall be competent for him to exercise the powers under
this sub-section in all cases where he has reason to believe that any delay in getting the authorisation from the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner having
jurisdiction over such person may be prejudicial to the interests of the revenue :
Provided further that 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 its volume, weight or other physical characteristics or
due to its being of a dangerous nature, the authorised officer may serve an order on the owner or the person
who is in immediate possession or control thereof that he shall not remove, part with or otherwise
deal with it, except with the previous permission of such authorised officer and such action of the authorised
officer shall be deemed to be seizure of such valuable article or thing under clause (iii):
Provided also that nothing contained in the second proviso shall apply in case of any valuable article or thing, being
stock-in-trade of the business:
Provided also that no authorisation shall be issued by the Additional Director or Additional Commissioner or
Joint Director or Joint Commissioner on or after the 1st day of October, 2009 unless he has been empowered by
the Board to do so.
Explanation.—For the removal of doubts, it is hereby declared that the reason to believe, as
recorded by the income-tax authority under this sub-section, shall not be disclosed to any
person or any authority or the Appellate Tribunal.

(1A) Where any Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, in consequence of information in his possession, has reason to suspect that any books of account,
other documents, money, bullion, jewellery or other valuable article or thing in respect of which an officer has
been authorised by the Principal Director General or Director General or Principal Director or Director or any
other Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or
Additional Director or Additional Commissioner or Joint Director or Joint Commissioner to take action under
clauses (i) to (v) of sub-section (1) are or is kept in any building, place, vessel, vehicle or aircraft not mentioned
in the authorisation under sub-section (1), such Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner may, notwithstanding anything contained in section 120, authorise
the said officer to take action under any of the clauses aforesaid in respect of such building, place, vessel, vehicle
or aircraft.
Explanation.—For the removal of doubts, it is hereby declared that the reason to suspect, as recorded by the
income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate
Tribunal.
(2) The authorised officer may requisition the services of any police officer or of any officer of the Central
Government, or of both, to assist him for all or any of the purposes specified in sub-section (1) or sub-section
(1A) and it shall be the duty of every such officer to comply with such requisition.
(3) The authorised officer may, where it is not practicable to seize any such books of account, other
documents, money, bullion, jewellery or other valuable article or thing, for reasons other than those
mentioned in the second proviso to sub-section (1), serve an order on the owner or the person who
is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with
it except with the previous permission of such officer and such officer may take such steps as may be necessary
for ensuring compliance with this sub-section.
Explanation.—For the removal of doubts, it is hereby declared that serving of an order as aforesaid under this
sub-section shall not be deemed to be seizure of such books of account, other documents, money,
bullion, jewellery or other valuable article or thing under clause (iii) of sub-section (1).
(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 control 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 the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.
Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this
sub-section 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 the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.

(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 a search, it may be presumed—
(i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing
belong or belongs to such person;
(ii) that the contents of such books of account and other documents are true ; and
(iii) that 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 or which may reasonably be assumed to
have been signed by, or 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, that it was duly stamped and
executed or attested by the person by whom it purports to have been so executed or attested.
(5) [***]
(6) [***]
(7) [***]
(8) The books of account or other documents seized under sub-section (1) or sub-section (1A) shall not be
retained by the authorised officer for a period exceeding thirty days from the date of the order of
assessment under section 153A or clause (c) of section 158BC unless the reasons for retaining the same are
recorded by him in writing and the approval of the Principal Chief Commissioner or Chief Commissioner,
Principal Commissioner or Commissioner, Principal Director General or Director General or Principal Director
or Director for such retention is obtained :
Provided that the Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or
Commissioner, Principal Director General or Director General or Principal Director or Director shall not
authorise the retention of the books of account and other documents for a period exceeding thirty days
after all the proceedings under the Indian Income-tax Act, 1922 (11 of 1922), or this Act in respect of the years
for which the books of account or other documents are relevant are completed.
(8A) An order under sub-section (3) shall not be in force for a period exceeding sixty days from the date
of the order.
(9) The person from whose custody any books of account or other documents are seized under sub-section (1)
or sub-section (1A) may make copies thereof, or take extracts therefrom, in the presence of the authorised officer
or any other person empowered by him in this behalf, at such place and time as the authorised officer may
appoint in this behalf.

(9A) Where the authorised officer has no jurisdiction over the person referred to in clause (a) or clause (b) or
clause (c) of sub-section (1), the books of account or other documents, or any money, bullion, jewellery or other
valuable article or thing (hereafter in this section and insections 132A and 132B referred to as the assets) seized
under that sub-section shall be handed over by the authorised officer to the Assessing Officer having
jurisdiction over such person within a period of sixty days from the date on which the last of the
authorisations for search was executed and thereupon the powers exercisable by the authorised officer under
sub-section (8) or sub-section (9) shall be exercisable by such Assessing Officer.
39
[(9B) Where, during the course of the search or seizure or within a period of sixty days from the date on which
the last of the authorisations for search was executed, the authorised officer, for reasons to be recorded in writing,
is satisfied that for the purpose of protecting the interest of revenue, it is necessary so to do, he may with the
previous approval of the Principal Director General or Director General or the Principal Director or Director,
by order in writing, attach provisionally any property belonging to the assessee, and for the said purposes, the
provisions of the Second Schedule shall, mutatis mutandis, apply.
(9C) Every provisional attachment made under sub-section (9B) shall cease to have effect after the expiry of
a period of six months from the date of the order referred to in sub-section (9B).
(9D) The authorised officer may, during the course of the search or seizure or within a period of sixty days from
the date on which the last of the authorisations for search was executed, make a reference to a Valuation
Officer referred to in section 142A, who shall estimate the fair market value of the property in the manner
provided under that section and submit a report of the estimate to the said officer within a period of sixty days
from the date of receipt of such reference.]
(10) If a person legally entitled to the books of account or other documents seized under sub-section (1) or
sub-section (1A) objects for any reason to the approval given by the Principal Chief Commissioner or Chief
Commissioner, Principal Commissioner or Commissioner, Principal Director General or Director General or
Principal Director or Director under sub-section (8), he may make an application to the Board stating therein
the reasons for such objection and requesting for the return of the books of account or other documents and the
Board may, after giving the applicant an opportunity of being heard, pass such orders as it thinks fit.

(11) [***]
(11A) [***]
(12) [***]
(13) The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to searches and seizure shall
apply, so far as may be, to searches and seizure under sub-section (1) or sub-section (1A).
(14) The Board may make rules in relation to any search or seizure under this section ; in particular, and without
prejudice to the generality of the foregoing power, such rules may provide for the procedure to be followed by
the authorised officer—
(i) for obtaining ingress into any building, place, vessel, vehicle or aircraft to be searched where free ingress
thereto is not available ;
(ii) for ensuring safe custody of any books of account or other documents or assets seized.
41
[Explanation 1.—For the purposes of sub-sections (9A), (9B) and (9D), with respect to "execution of an
authorisation for search", the provisions of sub-section (2) of section 153B shall apply.]
Explanation 2.—In this section, the word "proceeding" means any proceeding in respect of any year, whether
under the Indian Income-tax Act, 1922 (11 of 1922), or this Act, which may be pending on the date on which a
search is authorised under this section or which may have been completed on or before such date and includes
also all proceedings under this Act which may be commenced after such date in respect of any year.

153A. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section
151 and section 153, in the case of a person where a search is initiated under section 132 or books of
account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003,
the Assessing Officer shall—
(a) issue notice to such person requiring him to furnish within such period, as may be specified in
the notice, the return of income in respect of each assessment year falling within six assessment
years [and for the relevant assessment year or years] referred to in clause (b), in the prescribed form
and verified in the prescribed manner and setting forth such other particulars as may be prescribed and
the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return
required to be furnished under section 139;
(b) assess or reassess the total income of six assessment years immediately preceding the
assessment year relevant to the previous year in which such search is conducted or requisition is
made 9[and for the relevant assessment year or years] :
Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year
falling within such six assessment years 9[and for the relevant assessment year or years] :
Provided further that assessment or reassessment, if any, relating to any assessment year falling within
the period of six assessment years 9[and for the relevant assessment year or years] referred to in this sub-section
pending on the date of initiation of the search under section 132 or making of requisition under section 132A,
as the case may be, shall abate :
Provided also that the Central Government may by rules10 made by it and published in the Official Gazette
(except in cases where any assessment or reassessment has abated under the second proviso), specify the class
or classes of cases in which the Assessing Officer shall not be required to issue notice for assessing or reassessing
the total income for six assessment years immediately preceding the assessment year relevant to the previous
year in which search is conducted or requisition is made 11[and for the relevant assessment year or years]:
Provided also that no notice for assessment or reassessment shall be issued by the Assessing Officer for
the relevant assessment year or years unless—
(a) the Assessing Officer has in his possession books of account or other documents or evidence which
reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is
likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in
the relevant assessment years;
(b) the income referred to in clause (a) or part thereof has escaped assessment for such year or years;
and
(c) the search under section 132 is initiated or requisition under section 132A is made on or after the 1st
day of April, 2017.
Explanation 1.—For the purposes of this sub-section, the expression "relevant assessment year" shall mean
an assessment year preceding the assessment year relevant to the previous year in which search is conducted or
requisition is made which falls beyond six assessment years but not later than ten assessment years
from the end of the assessment year relevant to the previous year in which search is conducted or requisition is
made.
Explanation 2.—For the purposes of the fourth proviso, "asset" shall include immovable property being land or
building or both, shares and securities, loans and advances, deposits in bank account.]

(2) If any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been
annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1)
or section 153, the assessment or reassessment relating to any assessment year which has abated under the
second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such
annulment by the Principal Commissioner or Commissioner:
Provided that such revival shall cease to have effect, if such order of annulment is set aside.
Explanation.—For the removal of doubts, it is hereby declared that,—
(i) save as otherwise provided in this section, section 153B and section 153C, all other provisions of this
Act shall apply to the assessment made under this section;
(ii) in an assessment or reassessment made in respect of an assessment year under this section, the tax shall
be chargeable at the rate or rates as applicable to such assessment year.

153B. (1) Notwithstanding anything contained in section 153, the Assessing Officer shall make an order of
assessment or reassessment,—
(a) in respect of each assessment year falling within six assessment years and for the relevant
assessment year or years] referred to in clause (b) of sub-section (1) of section 153A, within a period of
twenty-one months from the end of the financial year in which the last of the authorisations for
search under section 132 or for requisition under section 132A was executed;
(b) in respect of the assessment year relevant to the previous year in which search is conducted under section
132 or requisition is made under section 132A, within a period of twenty-one months from the
end of the financial year in which the last of the authorisations for search under section 132 or for
requisition under section 132A was executed:
Provided that in case of other person referred to in section 153C, the period of limitation for making the
assessment or reassessment shall be the period as referred to in clause (a) or clause (b) of this sub-section or
nine months from the end of the financial year in which books of account or documents or
assets seized or requisitioned are handed over under section 153C to the Assessing Officer having
jurisdiction over such other person, whichever is later:
Provided further that in the case where the last of the authorisations for search under section 132 or for
requisition under section 132A was executed during the financial year commencing on the 1st day of April,
2018,—
(i) the provisions of clause (a) or clause (b) of this sub-section shall have effect, as if for the words "twenty-
one months", the words "eighteen months" had been substituted;
(ii) the period of limitation for making the assessment or reassessment in case of other person referred to
in section 153C, shall be the period of eighteen months from the end of the financial year in which
the last of the authorisations for search under section 132 or for requisition under section 132A was
executed or twelve months from the end of the financial year in which books of account or
documents or assets seized or requisitioned are handed over under section 153C to the Assessing
Officer having jurisdiction over such other person, whichever is later:
Provided also that in the case where the last of the authorisations for search under section 132 or for requisition
under section 132A was executed during the financial year commencing on or after the 1st day of April, 2019,—
(i) the provisions of clause (a) or clause (b) of this sub-section shall have effect, as if for the words "twenty-
one months", the words "twelve months" had been substituted;
(ii) the period of limitation for making the assessment or reassessment in case of other person referred to
in section 153C, shall be the period of twelve months from the end of the financial year in which
the last of the authorisations for search under section 132 or for requisition under section 132A was
executed or twelve months from the end of the financial year in which books of account or
documents or assets seized or requisitioned are handed over under section 153C to the Assessing
Officer having jurisdiction over such other person, whichever is later:

Provided also that in case where the last of the authorisations for search under section 132 or for requisition
under section 132A was executed and during the course of the proceedings for the assessment or reassessment
of total income, a reference under sub-section (1) of section 92CA is made, the period available for making
an order of assessment or reassessment shall be extended by twelve months:
Provided also that in case where during the course of the proceedings for the assessment or reassessment of
total income in case of other person referred to in section 153C, a reference under sub-section (1) of section
92CA is made, the period available for making an order of assessment or reassessment in case of such other
person shall be extended by twelve months.]
(2) The authorisation referred to in clause (a) and clause (b) of sub-section (1) shall be deemed to have been
executed,—
(a) in the case of search, on the conclusion of search as recorded in the last panchnama drawn in relation
to any person in whose case the warrant of authorisation has been issued; or
(b) in the case of requisition under section 132A, on the actual receipt of the books of account or other
documents or assets by the Authorised Officer.
(3) The provisions of this section, as they stood immediately before the commencement of the Finance Act,
2016, shall apply to and in relation to any order of assessment or reassessment made before the 1st day of June,
2016:
Provided that where a notice under section 153A or section 153C has been issued prior to the 1st day of June,
2016 and the assessment has not been completed by such date due to exclusion of time referred to in
the Explanation, such assessment shall be completed in accordance with the provisions of this section as it stood
immediately before its substitution by the Finance Act, 2016 (28 of 2016).
Explanation.—In computing the period of limitation under this section—

(i) the period during which the assessment proceeding is stayed by an order or injunction of any court; or
(ii) the period commencing from the date on which the Assessing Officer directs the assessee to get his
accounts audited under sub-section (2A) of section 142 and—
(a) ending with the last date on which the assessee is required to furnish a report of such audit under
that sub-section; or
(b) where such direction is challenged before a court, ending with the date on which the order setting
aside such direction is received by the Principal Commissioner or Commissioner; or
(iii) the period commencing from the date on which the Assessing Officer makes a reference to the Valuation
Officer under sub-section (1) of section 142A and ending with the date on which the report of the
Valuation Officer is received by the Assessing Officer; or
(iv) the time taken in re-opening the whole or any part of the proceeding or in giving an opportunity to the
assessee of being re-heard under the proviso to section 129; or
(v) in a case where an application made before the Income-tax Settlement Commission is rejected by it or
is not allowed to be proceeded with by it, the period commencing from the date on which an application
is made before the Settlement Commission under section 245Cand ending with the date on which the

order under sub-section (1) of section 245D is received by the Principal Commissioner or Commissioner
under sub-section (2) of that section; or
(vi) the period commencing from the date on which an application is made before the Authority for Advance
Rulings under sub-section (1) of section 245Q and ending with the date on which the order rejecting the
application is received by the Principal Commissioner or Commissioner under sub-section (3) of section
245R; or
(vii) the period commencing from the date on which an application is made before the Authority for Advance
Rulings under sub-section (1) of section 245Q and ending with the date on which the advance ruling
pronounced by it is received by the Principal Commissioner or Commissioner under sub-section (7)
of section 245R; or
(viii) the period commencing from the date of annulment of a proceeding or order of assessment or
reassessment referred to in sub-section (2) of section 153A, till the date of the receipt of the order setting
aside the order of such annulment, by the Principal Commissioner or Commissioner; or
(ix) the period commencing from the date on which a reference or first of the references for exchange of
information is made by an authority competent under an agreement referred to in section 90 or section
90A and ending with the date on which the information requested is last received by the Principal
Commissioner or Commissioner or a period of one year, whichever is less; or
(x) the period commencing from the date on which a reference for declaration of an arrangement to be an
impermissible avoidance arrangement is received by the Principal Commissioner or Commissioner
under sub-section (1) of section 144BA and ending on the date on which a direction under sub-section
(3) or sub-section (6) or an order under sub-section (5) of the said section is received by the Assessing
Officer,
shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period, the period of limitation referred
to in clause (a) or clause (b) of this sub-section available to the Assessing Officer for making an order of
assessment or reassessment, as the case may be, is less than sixty days, such remaining period shall be
extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly:
Provided further that where the period available to the Transfer Pricing Officer is extended to sixty days in
accordance with the proviso to sub-section (3A) of section 92CA and the period of limitation available to the
Assessing Officer for making an order of assessment or reassessment, as the case may be, is less than sixty days,
such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to
be extended accordingly:
16
[Provided also that where a proceeding before the Settlement Commission abates under section 245HA, the
period of limitation available under this section to the Assessing Officer for making an order of assessment or
reassessment, as the case may be, shall, after the exclusion of the period under sub-section (4) of section 245HA,
be not less than one year; and where such period of limitation is less than one year, it shall be deemed to have
been extended to one year.]

153C. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section
151 and section 153, where the Assessing Officer is satisfied that,—
(a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or
(b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information
contained therein, relates to,
a person other than the person referred to in section 153A, then, the books of account or documents or
assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such
other person and that Assessing Officer shall proceed against each such other person and issue notice and assess
or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing
Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on
the determination of the total income of such other person 17[for six assessment years immediately
preceding the assessment year relevant to the previous year in which search is conducted or requisition is
made and] for the relevant assessment year or years referred to in sub-section (1) of section 153A :
Provided that in case of such other person, the reference to the date of initiation of the search under section
132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall
be construed as reference to the date of receiving the books of account or documents or assets seized or
requisitioned by the Assessing Officer having jurisdiction over such other person :
Provided further that the Central Government may by rules18 made by it and published in the Official Gazette,
specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be
required to issue notice for assessing or reassessing the total income for six assessment years immediately
preceding the assessment year relevant to the previous year in which search is conducted or requisition is
made 19[and for the relevant assessment year or years as referred to in sub-section (1) of section 153A] except
in cases where any assessment or reassessment has abated.
(2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has
or have been received by the Assessing Officer having jurisdiction over such other person after the due date for
furnishing the return of income for the assessment year relevant to the previous year in which search is conducted
under section 132 or requisition is made under section 132A and in respect of such assessment year—
(a) no return of income has been furnished by such other person and no notice under sub-section (1)
of section 142 has been issued to him, or
(b) a return of income has been furnished by such other person but no notice under sub-section (2) of section
143 has been served and limitation of serving the notice under sub-section (2) of section 143 has
expired, or
(c) assessment or reassessment, if any, has been made,
before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing
Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or
reassess total income of such other person of such assessment year in the manner provided in section 153A.

C.A. Kalpesh Sanghavi Powers of ITA - P a g e | F31-F . 1
Question 1 (SLID 18) (search) (Revision / Home work)

Cash of 25 lacs was seized on 12.9 in a search conducted as per section 132 of the Act. The assessee moved an
application on 27.10 to release such cash after explaining the sources thereof, which was turned down by the
department. The assessee seeks your opinion on, the following issues:
a) Can the department withhold the explained money?
b) If yes, then to what extent and upto what period?
Your Options are for (a)

A Assessee application is within the time and thus department cannot withheld the money
B Assessee application is not within the time and thus department can withheld the money
C Assessee application is within the time however withholding of monies decision is purely on
the merits of the explanation in the application
D Assessee application is within the time limit and thus department has no authority to withheld
the money.
Your Options are for (b)

A Money seized should be released in 4 months if explanation is satisfactory
B Money seized should be released in 120 days if explanation is satisfactory
C Money seized should be released in 90 days if explanation is satisfactory
D Money seized should be released in 30 days if explanation is satisfactory

Question 2 (SLID 19) (search) (Revision / Home work)

A search as per section 132 of the Act was conducted on 02-01-PYand cash Rs. 40 lakhs cash was seized. The
assesse moved an application on 30-01-PY to release such cash with explanation of the nature and sources
therof, which was turned down by the department.
Your Options are

A Seized Money will not be released
B Seized Money will be released in 120 days from the date on which the last of the
authorisations for search
C Seized Money will be released in 120 days from the date of application
D Seized Money will be released in 120 days from the end of the month of search

132B. (1) The assets seized under section 132 or requisitioned under section 132A may be dealt with
in the following manner, namely:—
(i) the amount of any existing liability under this Act, the Wealth-tax Act, 1957 (27 of 1957), the
Expenditure-tax Act, 1987 (35 of 1987), the Gift-tax Act, 1958 (18 of 1958) and the Interest-tax Act,
1974 (45 of 1974), and the amount of the liability determined on completion of the assessment
under section 153A and the assessment of the year relevant to the previous year in which search is
initiated or requisition is made, or the amount of liability determined on completion of the assessment
under Chapter XIV-B for the block period, as the case may be (including any penalty levied or interest
payable in connection with such assessment) and 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 under sub-section (1) of section 245C, may be recovered out of such assets :
Provided that where the person concerned makes an application to the Assessing Officer within
thirty days from the end of the month in which the asset was seized, for release of asset and
the nature and source of acquisition of any such asset is explained to the satisfaction of the Assessing
Officer, the amount of any existing liability referred to in this clause may be recovered out of such asset
and the remaining portion, if any, of the asset may be released, with the prior approval of the Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, to the person
from whose custody the assets were seized:
Provided further that such asset or any portion thereof as is referred to in the first proviso shall be
released within a period of one hundred and twenty days from the date on which the last
of the authorisations for search under section 132 or for requisition under section 132A, as
the case may be, was executed;
(ii) if the assets consist solely of money, or partly of money and partly of other assets, the Assessing
Officer may apply such money in the discharge of the liabilities referred to in clause (i) and the assessee
shall be discharged of such liability to the extent of the money so applied;
(iii) the assets other than money may also be applied for the discharge of any such liability referred
to in clause (i) as remains undischarged and for this purpose such assets shall be deemed to be under
distraint as if such distraint was effected by the Assessing Officer or, as the case may be, the Tax
Recovery Officer under authorisation from the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner under sub-section (5) of section 226 and the Assessing
Officer or, as the case may be, the Tax Recovery Officer may recover the amount of such liabilities by
the sale of such assets and such sale shall be effected in the manner laid down in the Third Schedule.

(2) Nothing contained in sub-section (1) shall preclude the recovery of the amount of liabilities aforesaid by any
other mode laid down in this Act.
(3) Any assets or proceeds thereof which remain after the liabilities referred to in clause (i) of sub-section (1)
are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized.
(4) (a) The Central Government shall pay simple interest at the rate of one-half per cent for every month
or part of a month on the amount by which the aggregate amount of money seized under section 132 or
requisitioned under section 132A, as reduced by the amount of money, if any, released under the first proviso
to clause (i) of sub-section (1), and of the proceeds, if any, of the assets sold towards the discharge of the existing
liability referred to in clause (i) of sub-section (1), exceeds the aggregate of the amount required to meet the
liabilities referred to in clause (i) of sub-section (1) of this section.
(b) Such interest shall run from the date immediately following the expiry of the period of one hundred and
twenty days from the date on which the last of the authorisations for search under section 132 or requisition
under section 132A was executed to the date of completion of the assessment under section 153A or under
Chapter XIV-B.
Explanation 1.—In this section,—
(i) "block period" shall have the meaning assigned to it in clause (a) of section 158B;
(ii) "execution of an authorisation for search or requisition" shall have the same meaning as assigned to it
in Explanation 2 to section 158BE.
Explanation 2.—For the removal of doubts, it is hereby declared that the "existing liability" does not include
advance tax payable in accordance with the provisions of Part C of Chapter XVII.


F31 16 Income tax authority – Transfer V.Imp
F31 17 Income tax authority – Powers
F31 15 Collect info / survey time
F31 01 Collect info / survey time V.Imp
F31 07 Search V.Imp
F31 18 Application of seized assets V.Imp

C.A. Kalpesh Sanghavi Types of Return of Income - P a g e | F32 . 1

C.A. Kalpesh Sanghavi Intimation and orders - P a g e | F33 . 1

Can an assessee claim a particular deduction, which he has failed to claim in his original return of income,
otherwise than by filing a revised return ? Discuss.

A Assessee can claim such deduction, by considering the return as defective
B Assessee can claim such deduction, by rectifying the return of income
C Assessee can claim such deduction, by referring to CIT
D Assessee cannot claim such deduction.

“Proceedings cannot be initiated under the Act, unless a proper notice to the effect has been served upon.” In
this context answer:
(i) What are the prescribed modes of service of such notice?
(ii) On whom should be notice be addressed and served upon in the cases where the assessee is a
company, a dissolved firm, a deceases person and a partitioned HUF.
Question (ID 03)

An assessee receives an intimation under section 143(1)(a) from the Assessing Officer, determining his income
at a figure higher than the income returned by him. What is the remedy available to him, if he finds that the
adjustments made by the Assessing Officer are not justified ?
OR
Also comment on the action of the Assessing Officer in the following cases, relating to the assessment:
1. He makes adjustments to the total income returned by an assessee on the basis of the past records.
2. After sending an intimation to the assessee under section 143(1)(a), he takes up the case for scrutiny by
issuing of a notice under section 143(2), and finds that the assessment would result in a refund. He
declines to grant refund.
3. An assessee claims a sum of Rs. 1 lakh paid towards sales tax after the close of the accounting year but
before filing the return, in the statement filed along with the return. The Assessing Officer refuses to
allow the claim on the ground that no proof was attached in regard to the payment.
4. A return of the income for year is filed beyond the time limit prescribed under section 139 for the
category of the assessee. An amount of Rs. 2 lakhs is the depreciation carried forward from 3 year back
which the Assessing Officer has refused to adjust in the assessment made under section 143(1) in the
current year.


Can the Assessing Officer complete the assessment under Section 144 of the Income-tax Act, 1961 even though
there is no failure on the part of the assessee under Section 139(1), (4), (5), 142(1), 142(2A) or 143(2) of the
Act ? If so, under what situation ?
Your Options are

A Assessment u/s 144 cannot be done, since all compliance of 139 have been done
B Assessment u/s 144 cannot be done, since there is no failure on part of assessee to disclose
the material facts truly and fully
C Assessment u/s 144 cannot be done, since it is a case of scrutiny assessment
D Assessment u/s 144 can be done, if 145 is not complied with correctly.
Question (ID 06)

A company submitted the return of income for assessment year on 10th July, AY. The Assessing Officer served
a notice u/s 143(2) on the company on 14th August, AY in order to make assessment under section 143(3).
Thereafter, on 1st September, AY, the Assessing Officer issued an intimation under section 143(1). Such
intimation shows a demand for Rs.10,500 towards tax and interest. The company argues that the issue of
intimation under section 143(1) is bad in law. Discuss.
Question (ID 08) (Returns of Income)

An order under section 143(3) of the Income-tax Act, 1961 for the assessment year is received. On perusal of
the order, the following two points are noticed.
(a) Credit of Rs. 12,500 for T.D.S. was not given even though duplicate copy of Form 16A was
submitted with the return of income.
(b) Unpaid sales tax liability of Rs. 23,600 on 31-3-PY was actually paid on 28-9-AY before
submitting the return of income. This amount is disallowed.


XYZ Polyfibres, a partnership firm, has earned a gross total income of Rs. 300 lakh for the year. There are no
international transactions.
The above includes a profit of Rs. 220 lakh from an industrial undertaking having a turnover of Rs. 80 crore.
This is the fifth year and deduction under section 80-IB is available to the extent of Rs. 200 lakh.
There are some grey areas in the taxation workings an hence the assessee is contemplating to file the return of
income on December 7 AY, after seeking clarifications from tax experts. Advise the assessee-company by
working out the total income and tax payable, where the return is filed on October 31, AY and when the same
is filed on December 7, AY.
What is the practical solution as regards obtaining clarifications, which might or might not have an impact on
the total income ?
During the course of assessment assessing officer have the following powers
a) Powers of special audit
b) Power to require the assessee to produce books of accounts and other documents up to 6 years prior to
previous year
c) Power to make any further inquiry
d) Power to require assessee to furnish Return of income
e) Power to require assessee to produce books of accounts of garnishee
Your Options are

A a,b,c,d,e
B a,c,d
C a,b,c,d
D b,c,d,e

Following are powers and provisions relating to special audit
a) It can be direct at any stage of the proceedings

b) It can be directed 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 the interests of the revenue.
c) Previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner is not required
d) Fees of audit to be paid by assessee
e) audit report to be obtained in 210 days
Your Options are

A a,b,c,d,e
B a,c,d
C a,b,d
D b,c,d,e


F33 05 Best Judgement
F33 06 Scrutiny and Intimation V.Imp
F33 07 Tax liability

142. (1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person
who has made a return under section 115WD or section 139 or in whose case the time allowed under sub-section
(1) of section 139 for furnishing the return has expired a notice requiring him, on a date to be therein
specified,—
(i) where such person has not made a return within the time allowed under sub-section (1) of section
139 or before the end of the relevant assessment year, to furnish a return of his income or the income
of any other person in respect of which he is assessable under this Act, in the prescribed form and
verified in the prescribed manner87 and setting forth such other particulars as may be prescribed, or :
Provided that where any notice has been served under this sub-section for the purposes of this clause
after the end of the relevant assessment year commencing on or after the 1st day of April, 1990 to a
person who has not made a return within the time allowed under sub-section (1) of section 139 or before
the end of the relevant assessment year, any such notice issued to him shall be deemed to have been
served in accordance with the provisions of this sub-section,
(ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may
require, or
(iii) to furnish in writing and verified in the prescribed manner information in such form and on such
points or matters (including a statement of all assets and liabilities of the assessee, whether included in
the accounts or not) as the Assessing Officer may require :
Provided that—
(a) the previous approval of the Joint Commissioner shall be obtained before requiring the assessee to
furnish a statement of all assets and liabilities not included in the accounts;
(b) the Assessing Officer shall not require the production of any accounts relating to a period more
than three years prior to the previous year.
(2) For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing
Officer may make such inquiry as he considers necessary.
(2A) If, at any stage of the proceedings before him, the Assessing Officer, 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 the
interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval
of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,
direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below
sub-section (2) of section 288, nominated by the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed
form89-90 duly signed and verified by such accountant and setting forth such particulars as may be prescribed
and such other particulars as the Assessing Officer may require :

Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the
assessee has been given a reasonable opportunity of being heard.
(2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee
have been audited under any other law for the time being in force or otherwise.
(2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within
such period as may be specified by the Assessing Officer :
Provided that the Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and
for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit;
so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in
any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A)
is received by the assessee.
(2D) The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the
accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default
of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVII-D for the
recovery of arrears of tax :
Provided that where any direction for audit under sub-section (2A) is issued by the Assessing Officer on or
after the 1st day of June, 2007, the expenses of, and incidental to, such audit (including the remuneration of the
Accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner in accordance with such guidelines as may be prescribed91 and the expenses so
determined shall be paid by the Central Government.
(3) The assessee shall, except where the assessment is made under section 144, be given an opportunity of
being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any
audit under sub-section (2A) and proposed to be utilised for the purposes of the assessment.
(4) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws
(Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year
commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the
other provisions of this Act shall be construed as references to those provisions as for the time being in force
and applicable to the relevant assessment year.

142A. (1) The Assessing Officer may, for the purposes of assessment or reassessment, make a reference to
a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and
submit a copy of report to him.
(2) The Assessing Officer may make a reference to the Valuation Officer under sub-section (1) whether or
not he is satisfied about the correctness or completeness of the accounts of the assessee.
(3) The Valuation Officer, on a reference made under sub-section (1), shall, for the purpose of estimating the
value of the asset, property or investment, have all the powers that he has under section 38A of the Wealth-tax
Act, 1957 (27 of 1957).
(4) The Valuation Officer shall, estimate the value of the asset, property or investment after taking into
account such evidence as the assessee may produce and any other evidence in his possession gathered, after
giving an opportunity of being heard to the assessee.
(5) The Valuation Officer may estimate the value of the asset, property or investment to the best of his
judgment, if the assessee does not co-operate or comply with his directions.
(6) The Valuation Officer shall send a copy of the report of the estimate made under sub-section (4) or
sub-section (5), as the case may be, to the Assessing Officer and the assessee, within a period of six
months from the end of the month in which a reference is made under sub-section (1).
(7) The Assessing Officer may, on receipt of the report from the Valuation Officer, and after giving the
assessee an opportunity of being heard, take into account such report in making the assessment or
reassessment.
Explanation.—In this section, "Valuation Officer" has the same meaning as in clause (r) of section 2 of the
Wealth-tax Act, 1957 (27 of 1957).

143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1)
of section 142, such return shall be processed in the following manner, namely:—
(a) the total income or loss shall be computed after making the following adjustments, namely:—
(i) any arithmetical error in the return; 92[***]
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
93
[(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed
was furnished beyond the due date specified under sub-section (1) of section 139;
(iv) disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return;
(v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-
ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section
(1) of section 139; or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included
in computing the total income in the return:
Provided that no such adjustments shall be made unless an intimation is given to the assessee of
such adjustments either in writing or in electronic mode:
Provided further that 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 thirty days of the issue
of such intimation, such adjustments shall be made:]
Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return
furnished for the assessment year commencing on or after the 1st day of April, 2018;
(b) the tax , interest and fee, if any, shall be computed on the basis of the total income computed under
clause (a);
(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, computed under clause (b) by any tax deducted at source, any tax
collected at source, any advance tax paid, any relief allowable under an agreement under section
90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of
Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax 96[, 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 under clause (c); and
(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be
granted to the assessee:

Provided that 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 , interest or fee is payable by, or no refund is due to, him:
Provided further that no intimation under this sub-section shall be sent after the expiry of one year
from the end of the financial year in which the return is made.
(a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an
entry, in the return,—
(i) of an item, which is inconsistent with another entry of the same or some other item in such return;
(ii) in respect of which the information required to be furnished under this Act to substantiate such
entry has not been so furnished; or
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have
been expressed as monetary amount or percentage or ratio or fraction;
(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no
sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has
been made under clause (a).
(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for
centralised processing of returns with a view to expeditiously determining the tax payable by, or the
refund due to, the assessee as required under the said sub-section.
(1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-
section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the
provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions,
modifications and adaptations as may be specified in that notification; so, however, that no direction shall be
issued after the 31st day of March, 2012.
(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A),
shall, as soon as may be after the notification is issued, be laid before each House of Parliament.
97
[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary,
where a notice has been issued to the assessee under sub-section (2):
Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year
commencing on or after the 1st day of April, 2017.]

(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1)
of section 142, the Assessing Officer or the prescribed income-tax authority as the case may be, if, considers it
necessary or expedient to ensure that the assessee has not understated the income or has not computed
excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring
him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or
cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of
the return:
Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months
from the end of the financial year in which the return is furnished.]
(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after
hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may
require on specified points, and after taking into account all relevant material which he has gathered, the
Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the
assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such
assessment:
Provided that in the case of a—
(a) research association referred to in clause (21) of section 10;
(b) news agency referred to in clause (22B) of section 10;
(c) association or institution referred to in clause (23A) of section 10;
(d) institution referred to in clause (23B) of section 10;
(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any
university or other educational institution referred to in sub-clause (vi) or any hospital or other medical
institution referred to in sub-clause (via) of clause (23C) of section 10,
which is required to furnish the return of income under sub-section (4C) of section 139, no order making an
assessment of the total income or loss of such research association, news agency, association or institution or
fund or trust or university or other educational institution or any hospital or other medical institution, shall be
made by the Assessing Officer, without giving effect to the provisions of section 10, unless—
(i) the Assessing Officer has intimated the Central Government or the prescribed authority the
contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-
clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) ofsection 10, as the
case may be, by such research association, news agency, association or institution or fund or trust or
university or other educational institution or any hospital or other medical institution, where in his view
such contravention has taken place; and
(ii) the approval granted to such research association or other association or fund or trust or
institution or university or other educational institution or hospital or other medical institution has been
withdrawn or notification issued in respect of such news agency or fund or trust or
institution has been rescinded :

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or
other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried
out in accordance with all or any of the conditions subject to which such university, college or other institution
was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal
to the concerned university, college or other institution, recommend to the Central Government to withdraw the
approval and that Government may by order, withdraw the approval and forward a copy of the order to the
concerned university, college or other institution and the Assessing Officer:
Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be
given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution
for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case
of such person in such previous year, whether or not the approval granted to such trust or institution or
notification issued in respect of such trust or institution has been withdrawn or rescinded.
(3A) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes
of making assessment of total income or loss of the assessee under sub-section (3) so as to impart greater
efficiency, transparency and accountability by—
(a) eliminating the interface between the Assessing Officer and the assessee in the course of
proceedings to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional specialisation;
(c) introducing a team-based assessment with dynamic jurisdiction.
(3B) The Central Government may, for the purpose of giving effect to the scheme made under sub-section (3A),
by notification in the Official Gazette, direct that any of the provisions of this Act relating to assessment of total
income or loss shall not apply or shall apply with such exceptions, modifications and adaptations as may be
specified in the notification:
Provided that no direction shall be issued after the 31st day of March, 2020.
(3C) Every notification issued under sub-section (3A) and sub-section (3B) shall, as soon as may be after the
notification is issued, be laid before each House of Parliament.]
(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—
(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards
such regular assessment ;
(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the
amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed
to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

144. (1) If any person—

(a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a
revised return under sub-section (4) or sub-section (5) of that section, or
(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to
comply with a direction issued under sub-section (2A) of that section, or
(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2)
of section 143,
the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered,
shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or
loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment
:
Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the
assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be
completed to the best of his judgment :
Provided further that it shall not be necessary to give such opportunity in a case where a notice under
sub-section (1) of section 142 has been issued prior to the making of an assessment under this
section.
(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws
(Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year
commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the
other provisions of this Act shall be construed as references to those provisions as for the time being in force
and applicable to the relevant assessment year.

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other
sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time income computation and
disclosure standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or comp-leteness of the
accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly
followed by the assessee, or income has not been computed in accordance with the standards notified under sub-
section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

145A. For the purpose of determining the income chargeable under the head "Profits and gains of business or
profession",—
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed
in accordance with the income computation and disclosure standards notified under sub-section (2)
of section 145;
(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to
include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred
by the assessee to bring the goods or services to the place of its location and condition as on the date
of valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be valued at actual cost
initially recognised in accordance with the income computation and disclosure
standards notified under sub-section (2) of section 145;
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of
actual cost or net realisable value in accordance with the income computation and disclosure
standards notified under sub-section (2) of section 145:
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be
valued in accordance with the income computation and disclosure standards notified under sub-section (2)
of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:
Provided further that the comparison of actual cost and net realisable value of securities shall be made
category-wise.
Explanation 1.—For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any
law for the time being in force, shall include all such payment notwithstanding any right arising as a
consequence to such payment.
(a) "public financial institution" shall have the meaning assigned to it in clause (72) of section 2 of the
Companies Act, 2013 (18 of 2013);
(b) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to
clause (5) of section 43;
(c) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia)
of sub-section (1) of section 36.

145B. (1) Notwithstanding anything to the contrary contained in section 145, the interest received by an
assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be
the income of the previous year in which it is received.
(2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realisation is achieved.
(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income
of the previous year in which it is received, if not charged to income-tax in any earlier previous
year.

153. (1) No order of assessment shall be made under section 143 or section 144 at any time after the expiry of
twenty-one months from the end of the assessment year in which the income was first assessable:
Provided that in respect of an order of assessment relating to the assessment year commencing on the 1st day
of April, 2018, the provisions of this sub-section shall have effect, as if for the words "twenty-one months", the
words "eighteen months" had been substituted:
Provided further that in respect of an order of assessment relating to the assessment year commencing on or
after the 1st day of April, 2019, the provisions of this sub-section shall have effect, as if for the words "twenty-
one months", the words "twelve months" had been substituted.
(2) No order of assessment, reassessment or recomputation shall be made under section 147 after the expiry
of nine months from the end of the financial year in which the notice under section 148 was served:
[Provided that where the notice under section 148 is served on or after the 1st day of April, 2019, the provisions
of this sub-section shall have effect, as if for the words "nine months", the words "twelve months" had been
substituted.]
(3) Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment in pursuance
of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment, may be
made at any time before the expiry of nine months from the end of the financial year in which the order
under section 254 is received by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner or, as the case may be, the order under section 263 or section 264 is passed by
the Principal Commissioner or Commissioner:
[Provided that where the order under section 254 is received by the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner or, as the case may be, the order under section
263 or section 264 is passed by the Principal Commissioner or Commissioner on or after the 1st day of April,
2019, the provisions of this sub-section shall have effect, as if for the words "nine months", the words "twelve
months" had been substituted.]
(4) Notwithstanding anything contained in sub-sections (1), (2) and (3), where a reference under sub-section
(1) of section 92CA is made during the course of the proceeding for the assessment or reassessment, the period
available for completion of assessment or reassessment, as the case may be, under the said sub-sections (1), (2)
and (3) shall be extended by twelve months.

(5) Where effect to an order under section 250 or section 254 or section 260 or section 262 or section
263 or section 264 is to be given by the Assessing Officer, wholly or partly, otherwise than by making a fresh
assessment or reassessment, such effect shall be given within a period of three months from the end of the
month in which order under section 250 or section 254 or section 260 or section 262 is received by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case
may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner:
Provided that where it is not possible for the Assessing Officer to give effect to such order within the
aforesaid period, for reasons beyond his control, the Principal Commissioner or Commissioner on receipt of
such request in writing from the Assessing Officer, if satisfied, may allow an additional period of six
months to give effect to the order:
Provided further that where an order under section 250 or section 254 or section 260 or section 262 or section
263 or section 264 requires verification of any issue by way of submission of any document by the assessee or
any other person or where an opportunity of being heard is to be provided to the assessee, the order
giving effect to the said order under section 250 or section 254 or section 260 or section 262 or section
263 or section 264 shall be made within the time specified in sub-section (3).]
(6) Nothing contained in sub-sections (1) and (2) shall apply to the following classes of assessments,
reassessments and recomputation which may, subject to the provisions of sub-sections (3) and (5), be
completed—
(i) where the assessment, reassessment or recomputation is made on the assessee or any person in
consequence of or to give effect to any finding or direction contained in an order under section
250, section 254, section 260, section 262, section 263, or section 264 or in an order of any court in a
proceeding otherwise than by way of appeal or reference under this Act, on or before the expiry of
twelve months from the end of the month in which such order is received or passed by the
Principal Commissioner or Commissioner, as the case may be; or
(ii) where, in the case of a firm, an assessment is made on a partner of the firm in consequence of
an assessment made on the firm under section 147, on or before the expiry of twelve months from
the end of the month in which the assessment order in the case of the firm is passed.

(7) Where effect to any order, finding or direction referred to in sub-section (5) or sub-section (6) is to be given
by the Assessing Officer, within the time specified in the said sub-sections, and such order has been received or
passed, as the case may be, by the income-tax authority specified therein before the 1st day of June, 2016, the
Assessing Officer shall give effect to such order, finding or direction, or assess, reassess or recompute the
income of the assessee, on or before the 31st day of March, 2017.
(8) Notwithstanding anything contained in the foregoing provisions of this section, sub-section (2) of section
153A or sub-section (1) of section 153B, the order of assessment or reassessment, relating to any assessment
year, which stands revived under sub-section (2) of section 153A, shall be made within a period of one year
from the end of the month of such revival or within the period specified in this section or sub-section (1)
of section 153B, whichever is later.
(9) The provisions of this section as they stood immediately before the commencement of the Finance Act, 2016,
shall apply to and in relation to any order of assessment, reassessment or recomputation made before the 1st day
of June, 2016:
7a
[Provided that where a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or section
148 has been issued prior to the 1st day of June, 2016 and the assessment or reassessment has not been completed
by such date due to exclusion of time referred to in Explanation 1, such assessment or reassessment shall be
completed in accordance with the provisions of this section as it stood immediately before its substitution by the
Finance Act, 2016 (28 of 2016).]
Explanation 1.—For the purposes of this section, in computing the period of limitation—
(i) the 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 section 129; or
(ii) the period during which the assessment proceeding is stayed by an order or injunction of any court; or
(iii) the period commencing from the date on which the Assessing Officer intimates the Central Government
or the prescribed authority, the contravention of the provisions of clause (21) or clause (22B) or clause
(23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause
(23C) of section 10, under clause (i) of the proviso to sub-section (3) of section 143 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; or
(iv) the period commencing from the date on which the Assessing Officer directs the assessee to get his
accounts audited under sub-section (2A) of section 142 and—
(a) ending with the last date on which the assessee is required to furnish a report of such audit under
that sub-section; or
(b) where such direction is challenged before a court, ending with the date on which the order setting
aside such direction is received by the Principal Commissioner or Commissioner; or
(v) the period commencing from the date on which the Assessing Officer makes a reference to the Valuation
Officer under sub-section (1) of section 142A and ending with the date on which the report of the
Valuation Officer is received by the Assessing Officer; or
(vi) the period (not exceeding sixty days) commencing from the date on which the Assessing Officer
received the declaration under sub-section (1) of section 158A and ending with the date on which the
order under sub-section (3) of that section is made by him; or

(vii) in a case where an application made before the Income-tax Settlement Commission is rejected by it or
is not allowed to be proceeded with by it, the period commencing from the date on which an application
is made before the Settlement Commission under section 245C and ending with the date on which the
order under sub-section (1) of section 245D is received by the Principal Commissioner or
Commissioner under sub-section (2) of that section; or
(viii) the period commencing from the date on which an application is made before the Authority for Advance
Rulings under sub-section (1) of section 245Q and ending with the date on which the order rejecting the
application is received by the Principal Commissioner or Commissioner under sub-section (3) of section
245R; or
(ix) the period commencing from the date on which an application is made before the Authority for Advance
Rulings under sub-section (1) of section 245Q and ending with the date on which the advance ruling
pronounced by it is received by the Principal Commissioner or Commissioner under sub-section (7)
of section 245R; or
(x) the period commencing from the date on which a reference or first of the references for exchange of
information is made by an authority competent under an agreement referred to in section 90 or section
90A and ending with the date on which the information requested is last received by the Principal
Commissioner or Commissioner or a period of one year, whichever is less; or
(xi) the period commencing from the date on which a reference for declaration of an arrangement to be an
impermissible avoidance arrangement is received by the Principal Commissioner or Commissioner
under sub-section (1) of section 144BA and ending on the date on which a direction under sub-section
(3) or sub-section (6) or an order under sub-section (5) of the said section is received by the Assessing
Officer,
shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period, the period of limitation referred to
in sub-sections (1), (2), (3) and sub-section (8) available to the Assessing Officer for making an order of
assessment, reassessment or recomputation, as the case may be, is less than sixty days, such remaining period
shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended
accordingly:
Provided further that where the period available to the Transfer Pricing Officer is extended to sixty days
in accordance with the proviso to sub-section (3A) of section 92CA and the period of limitation available to the
Assessing Officer for making an order of assessment, reassessment or recomputation, as the case may be, is less
than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation
shall be deemed to be extended accordingly:
Provided also that where a proceeding before the Settlement Commission abates under section 245HA, the
period of limitation available under this section to the Assessing Officer for making an order of assessment,
reassessment or recomputation, as the case may be, shall, after the exclusion of the period under sub-section (4)
of section 245HA, be not less than one year; and where such period of limitation is less than one year, it shall
be deemed to have been extended to one year; and for the purposes of determining the period of limitation
under sections 149, 8[***] 154, 155 and 158BE and for the purposes of payment of interest under section 244A,
this proviso shall also apply accordingly.
Explanation 2.—For the purposes of this section, where, by an order referred to in clause (i) of sub-section
(6),—

(a) any income is excluded from the total income of the assessee for an assessment year, then, an assessment
of such income for another assessment year shall, for the purposes of section 150 and this section, be
deemed to be one made in consequence of or to give effect to any finding or direction contained in the
said order; or
(b) any income is excluded from the total income of one person and held to be the income of another person,
then, an assessment of such income on such other person shall, for the purposes of section 150 and this
section, be deemed to be one made in consequence of or to give effect to any finding or direction
contained in the said order, if such other person was given an opportunity of being heard before the said
order was passed.

C.A. Kalpesh Sanghavi Re-assessment Procedure - P a g e | F34 . 1

X Ltd. has leased out a house property owned by it to the customs authorities at a monthly rent of Rs. 40,000.
The lease expired on December 31, 1989. X Ltd. gave notice for vacating the premises or alternatively for an
increase in the rent of Rs. 60,000 per month with effect from January 1, 1990. The customs authorities continued
to occupy the premises and did not agree to increase the rent. The dispute as to the fixation of rent was referred
to arbitration in November 1990. The arbitration proceeding continued for about 2 years and finally an award
was delivered in January 1993 fixing the rent at Rs. 60,000 per month with retrospective effect from January 1,
1990. The customs authorities disputed the award in the Delhi High Court and ultimately a decree was passed
by the Delhi High Court in July 1993 in terms of the award. Thereupon, the customs authorities paid in August
1993 the additional arrear rent of Rs. 20,000 per month for the year 1992-93. In their income-tax returns in
respect of the assessment years 1991-92, 1992-93 and 1993-94 X Ltd. had continued to declare its rental income
at the old rate of Rs. 40,000 per month and had also indicated by a footnote the fact that its claim for increase in
rent from Rs. 40,000 to Rs. 60,000 with effect from January 1, 1990 was disputed by the tenant and the matter
was pending before the arbitrator/High Court. The Income-tax Officer on consideration of the aforesaid note
completed the assessment of X Ltd., in respect of the assessment years 1991-92 and 1992-93 on November 30,
1993 under section 143(3) on the basis of the old rent of Rs. 40,000 per month as was being received “under
protest” by X Ltd. In December 1993, the Income-tax Officer became aware of the decree passed by the Delhi
High Court in terms of the award fixing the rent of Rs. 60,000 per month with effect from January 1, 1990.
Advise whether the income-tax Officer should take action for assessing the additional rent of Rs. 20,000 per
month now paid in August 1993;
a. by resort to the reassessment proceeding under section 147;
b. by resort to the rectification proceedings under section 154;
c. by initiating proceedings for revision under section 263; or
d. by assessing the entire arrear rent as income for the assessment year 1994-95 on the basis of
receipt, as the company follows cash system of accounting.
Question 2 (ID 02)

During the course of assessment proceedings, the assessee has, inter alia, filed copies of the loan accounts with
confirmation letters. On that basis, genuineness of the loans was accepted without making any further enquiry
and the assessments were completed under section 143(3). Thereafter, the premises of one S were searched by
the department. Certain books and documents were seized. One such book was a diary in which the name of the
assessee was noted S stated that the transactions noted by him in the aforesaid diary were bogus and that he was
arranging havalas only for his clients. On the basis of the aforesaid information, the Assessing Officer formed
reason to believe that certain loans taken by the assessee were not genuine and the assessee’s income for the
years in question had escaped assessment. He, therefore, initiates reassessment proceedings under section 147.
Discuss whether the action of the Assessing Officer is justified.

Question 3 (ID 03)

An assessment was completed in accordance with directions contained in a circular issued by the Central Board
of Direct Taxes. Subsequently the Supreme Court held the circular to be invalid. Can the completed assessment
be reopened ?
OR
The assessment was completed by the assessing officer. After that, a circular was issued by CBDT
U/s.119. On the basis of that the A.O. initiated the assessment proceedings U/s.147 due to, concealment
of income noticed. In the reassessment proceedings, the A.O. inter alia, made use of the provisions of
the circular issued post assessment The assessee objected to this claiming that the said circular has no
force. Discuss.

R Bros., an AOP, had submitted its return of income on 31-7-AY showing an income of Rs. 47,200. No
assessment was made on the return. Two of the members of the AOP had been assessed in respect of the share
income from the AOP. In August of AY , the audit party points out of the Assessing Officer that R Bros. have
claimed excessive depreciation of Rs. 3,000. The Assessing Officer has issued under section 148 on R Bros.
seeking to assess the income of the AOP. Can this be done ?
Your Options are

A Finding of audit party of Excessive depreciation is reasons enough for notice u/s 148
B Finding of audit party of Excessive depreciation is not reasons enough for notice u/s 148
since it is just a audit measure and it does not have any implication on assessment
C Notice u/s 148 is not valid
D None of the above

Question 5 (ID 05)

1. An assessment was made on R originally in the status of a non-resident. In the re-assessment made under
section 147, he is assessed as resident and ordinarily resident on the ground that the correct status was
not disclosed in the return of income filed originally. Is the change of status valid in a re-ssessment ?
2. A non-resident individual was assessed originally on income arising in India on 8-3-2019 in respect of
assessment year 2018-19. The Assessing Officer discovered an omission in the assessment and issued
notice to the statutory agent on 10-12-2023 for re-assessment of the omitted income under section 147.
Assuming that the statutory agent has been given notice of his appointment and has been heard u/s 163,
how will he contest the validity of the re-assessment ?
3. An assessee filed a return showing, inter alia, a sum of Rs. 25,000 as capital receipt and hence not liable
to tax. The Assessing Officer accepted the claim of the assessee and made the assessment on the income
disclosed. Subsequently, a successor to the Assessing Officer came across a judgement of the high Court
under which the amount claimed as exempt was held to be liable to tax, under identical circumstances.
The assessment was re-opened under section 147. The assessee wants you to contend that the notice
under section 147 is not valid. What is your opinion? (Revision / Home work)
Your Options are for (3)

A 147 assessment due to finding of high court is valid
B 147 assessment due to finding of high court is not valid but of supreme court is valid
C 147 assessment due to finding of high court is not valid
D None of the above

Question 6 (ID 06)

Discuss the validity of the proceedings in the following cases.
(i) An Assessing Officer made an order of assessment on R determining the total income at Rs. 3,75,000
by an order just 4 days before last date of making order in respect of year. This was served on the
assesse after the 15 days of order. A tax of Rs. 1,87,500 was determined subsequently and a demand
notice was served on the assesse after 25 days.
(ii) R Ltd. effected purchases of stock-in-trade of the value of Rs. 2,50,000 from G and Company during
the year. Vouchers in support of the purchases were produced before the Assessing Officer, who
accepted the claim. Subsequently, the Assessing Officer, received specific information that the said
purchases were not genuine and G and Company had denied the transaction. The Assessing Officer
thereafter re-opened the assessment under section 147 in the 5th year after assessment year. R. Ltd.
challenges the validity of the re-assessment on the ground that it had disclosed all the primary facts
and the Assessing Officer ought to have verified the genuineness of the claim at the time of the
original assessment. (Revision / Home work)
Your Options are for (ii)

A Submission of vouchers, books and documents is a Full and True disclosure however action
of officer invoking 147 is Justified.
B Submission of vouchers, books and documents was a correct scrutiny procedure and thus
action of officer invoking 147 is Justified.
C Submission of vouchers, books and documents does not amount to Full and True disclosure
and thus action of officer invoking 147 is Justified.
D None of the above

Question 7 (ID 07)

Examine the validity of the following:
1. An assessee was treated as an agent of a non-resident in respect of year for which no return was filed
suo moto. A notice under section 148 was, therefore, issued to him after 6 years from assessment year
calling upon him to file a return of income. The assessee raised an objection stating that the proceedings
were not valid. (Revision / Home work)
2. A firm consisting of partners R and G files a return of income in respect of the year showing a total
income of Rs. 86,000. The Assessing Officer is, however, of the opinion that the business of the firm
belongs to R as proprietor and makes and assessment on him. In the appeal filed by R the appellate
authority holds that the firm is genuine and, therefore, allows the appeal. The Assessing Officer issues a
notice under section 148 and to the firm to assess the income which has escaped assessment.
3. A firm was assessed under section 143(3) on a total income of Rs. 1,00,000 in respect of assessment year
2003-04 on 20-4-2004. The assessment was reopened to re-assess an income of Rs. 49,000 which had
escaped assessment by issue of a notice under section 148 on 15-1-2006 and the re-assessment was
completed on 20-3-2006. The assessment of the partner, whose case had also been reopened along with
that of the firm, was made on 15-3-2007, in order to give effect to higher share of remuneration,
consequent on reassessment of the firm.
Your Options are for (1)

A Notice on agent of non resident is barred by time.
B Notice on agent of non resident is not barred by time.
C Notice on agent is barred by time but still a valid notice.
D None of the above

Question 8 (ID 08)

Ms. X, an Indian resident, owns for the financial year, a house property in London purchased in July 2004; a
shop in Sydney purchased in June 2006 and space in a commercial complex in New York purchased in April
2012. She is also having authority to operate the bank account maintained with Citibank London of a company
owned by her daughter and son-in-law since July 2013.
She has been served in July 2015 with the notices issued under section 148 for assessment years 2003-04 to
2014-15. She wants to challenge the action of the Assessing Officer for issuing notices under section 148 for
multiple years, seeks your opinion. Advise her suitably.
Question 9 (ID 09) (Home Work)

Dravid (P) Ltd.is engaged in manufacture of electrical items. It received deposit from the distributors and
supplied goods in the market through the distributors.it could not locate some distributors with whom there was
no transaction for the past 5 years or so. The income-tax assessment was completed under section 143(3) but
the issue of unclaimed deposits of distributors was never discussed. The Assessing Officer issued a notice under
section 148 after 4 years from the end of the relevant assessment year but without quantifying the amount of
income which had escaped assessment. The assesse challenged the matter in appeal by contending that the
Assessing Officer without being definite of the quantum of income escaping assessment could not have initiated
reassessment proceedings. Decide the validity of the contention of the assesse.

147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment
for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income
and also any other income chargeable to tax which has escaped assessment and which comes to his notice
subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation
allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this
section and in sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for
the relevant assessment year, no action shall be taken under this section after the expiry of four
years from the end of the relevant assessment year, unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the failure on the part of the assessee to make a
return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section
148 or to disclose fully and truly all material facts necessary for his assessment, for that
assessment year:
Provided further that nothing contained in the first proviso shall apply in a case 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:
Provided also that the Assessing Officer may assess or reassess such income, other than the income involving
matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has
escaped assessment.
Explanation 1.—Production before the Assessing Officer of account books 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.
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income
chargeable to tax has escaped assessment, namely :—
(a) where no return of income has been furnished by the assessee although his total income or the total
income of any other person in respect of which he is assessable under this Act during the previous year
exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is
noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive
loss, deduction, allowance or relief in the return ;
(ba) where the assessee has failed to furnish a report in respect of any international transaction which he was
so required under section 92E;
(c) where an assessment has been made, but—
(i) income chargeable to tax has been underassessed ; or

(ii) such income has been assessed at too low a rate ; or
(iii) such income has been made the subject of excessive relief under this Act ; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been
computed;
4
[(ca) where a return of income has not been furnished by the assessee or a return of income has been furnished
by him and on the basis of information or document received from the prescribed income-tax authority,
under sub-section (2) of section 133C, it is noticed by the Assessing Officer that the income of the
assessee exceeds the maximum amount not chargeable to tax, or as the case may be, the assessee has
understated the income or has claimed excessive loss, deduction, allowance or relief in the return;]
(d) where a person is found to have any asset (including financial interest in any entity) located outside
India.
Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may
assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to
his notice subsequently in the course of the proceedings under this section, notwithstanding that the
reasons for such issue have not been included in the reasons recorded under sub-section (2)
of section 148.
Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section, as amended
by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of
April, 2012.

148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer
shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in
the notice, a return of his income or the income of any other person in respect of which he is assessable under
this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and
verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions
of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished
under section 139 :
Provided that in a case—
(a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and
ending on the 30th day of September, 2005 in response to a notice served under this section, and
(b) subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve
months specified in the proviso to sub-section (2) of section 143, as it stood immediately before the
amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time
limit for making the assessment, re-assessment or recomputation as specified in sub-section (2)
of section 153, every such notice referred to in this clause shall be deemed to be a valid notice:
Provided further that in a case—
(a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and
ending on the 30th day of September, 2005, in response to a notice served under this section, and
(b) subsequently a notice has been served under clause (ii) of sub-section (2) of section 143 after the expiry
of twelve months specified in the proviso to clause (ii) of sub-section (2) of section 143, but before the
expiry of the time limit for making the assessment, reassessment or recomputation as specified in sub-
section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid
notice.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the
second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in
response to a notice served under this section.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.

149. (1) No notice under section 148 shall be issued for the relevant assessment year,—
(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause
(b) or clause (c);
(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment
year unless the income chargeable to tax which has escaped assessment amounts to or is likely to
amount to one lakh rupees or more for that year;
(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment
year unless the income in relation to any asset (including financial interest in any entity) located
outside India, chargeable to tax, has escaped assessment.
Explanation.—In determining income chargeable to tax which has escaped assessment for the purposes of this
sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that
section.
(2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151.
(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-
resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the
notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the
expiry of a period of six years from the end of the relevant assessment year.
Explanation.—For the removal of doubts, it is hereby clarified that the provisions of sub-sections (1) and (3),
as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before
the 1st day of April, 2012.

150. (1) Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any
time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give
effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act
by way of appeal, reference or revision or by a Court in any proceeding under any other law.
(2) The provisions of sub-section (1) shall not apply in any case where any such assessment, reassessment or
recomputation as is referred to in that sub-section 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 any other provision
limiting the time within which any action for assessment, reassessment or recomputation may be taken.
151. (1) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of
four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the
Assessing Officer, that it is a fit case for the issue of such notice.
(2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an
Assessing Officer, who is below the rank of Joint Commissioner, unless the Joint Commissioner is
satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.
(3) For the purposes of sub-section (1) and sub-section (2), the Principal Chief Commissioner or the Chief
Commissioner or the Principal Commissioner or the Commissioner or the Joint Commissioner, as the case may
be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice
under section 148, need not issue such notice himself.

152. (1) In an assessment, reassessment or recomputation made under section 147, the tax shall be chargeable
at the rate or rates at which it would have been charged had the income not escaped assessment.
(2) Where an assessment is reopened under section 147, the assessee may, if he has not impugned any part of
the original assessment order for that year either under sections 246 to 248 or under section 264, claim that
the proceedings under section 147 shall be dropped on his showing that he had been assessed on an amount
or to a sum not lower than what he would be rightly liable for even if the income alleged to have
escaped assessment had been taken into account, or the assessment or computation had been properly
made :
Provided that in so doing he shall not be entitled to reopen matters concluded by an order under section
154, 155, 260, 262 or 263.

C.A. Kalpesh Sanghavi Rectification of Mistakes - P a g e | F35 . 1
Question 1 (ID 02)

(a) In an order of assessment, the assessee noticed a mistake for which application u/s 154 was moved and the
order was rectified. Subsequently, the assessee moved further application for rectification u/s 154 which
was rejected by the Assessing Officer on the ground that the order once rectified cannot be rectified again.
Is the contention of the Assessing Officer correct ?
(b) The return for was filed on time as per Section 139(1). The assessee during the course of assessment
proceedings u/s 143(2), noticed certain omissions and therefore filed a revised return 3 months after the end
of assessment year. The Assessing Officer ignoring the revised return so filed framed the order. Is the action
of Assessing Officer correct ?

A Action of the officer is not Valid, since he has ignored the revised return.
B Action of the officer is not Valid, since the original return was filed on time.
C Action of the officer is Valid
D None of the above
Question 2 (ID 03)

EIH Private Ltd’s assessment for year was completed under Section 143(3) on last due date of passing order.
The company went in appeal on the same day of passing order to the Commissioner (Appeals) and the appeal
was decided on 16th August after 4 years, and the appeal effect was duly given by the Assessing Officer on 25th
August,. Thereafter, on 1st September, the Assessing Officer noticed a mistake in calculation of depreciation on
a particular block of assets, which reduced the income by Rs.1.10 lakh. The assessing officer issued notice under
section 154 for the purpose of rectifying the mistake. Is such rectification permissible ?

154. (1) With a view to rectifying any mistake apparent from the record an income-tax authority referred
to in section 116 may,—
(a) amend any order passed by it under the provisions of this Act ;
(b) amend any intimation or deemed intimation under sub-section (1) of section 143;
(c) amend any intimation under sub-section (1) of section 200A;
(d) amend any intimation under sub-section (1) of section 206CB.
(1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision
relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything
contained in any law for the time being in force, amend the order under that sub-section in relation to any
matter other than the matter which has been so considered and decided.
(2) Subject to the other provisions of this section, the authority concerned—
(a) may make an amendment under sub-section (1) of its own motion, and
(b) shall make such amendment for rectifying any such mistake which has been brought to its notice by
the assessee or by the deductor or by the collector, and where the authority concerned is the
Commissioner (Appeals), by the Assessing Officer also.
(3) An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise
increasing the liability of the assessee or the deductor or the collector, shall not be made under this section unless
the authority concerned has given notice to the assessee or the deductor or the collector of its intention so to
do and has allowed the assessee or the deductor or the collector a reasonable opportunity of being heard.
(4) Where an amendment is made under this section, an order shall be passed in writing by the income-tax
authority concerned.
(5) Where any such amendment has the effect of reducing the assessment or otherwise reducing the liability of
the assessee or the deductor or the collector, the Assessing Officer shall make any refund which may be due
to such assessee or the deductor or the collector.

(6) Where any such amendment has the effect of enhancing the assessment or reducing a refund already made
or otherwise increasing the liability of the assessee or the deductor or the collector, the Assessing Officer shall
serve on the assessee or the deductor or the collector, as the case may be a notice of demand in the prescribed
form specifying the sum payable, and such notice of demand shall be deemed to be issued under section 156 and
the provisions of this Act shall apply accordingly.
(7) Save as otherwise provided in section 155 or sub-section (4) of section 186 no amendment under this
section shall be made after the expiry of four years from the end of the financial year in which the order
sought to be amended was passed.
(8) Without prejudice to the provisions of sub-section (7), where an application for amendment under this
section is made by the assessee or by the deductor or by the collector on or after the 1st day of June,
2001 to an income-tax authority referred to in sub-section (1), the authority shall pass an order, within a period
of six months from the end of the month in which the application is received by it,—
(a) making the amendment; or
(b) refusing to allow the claim.

155. (1) Where, in respect of any completed assessment of a partner in a firm for the assessment year
commencing on the 1st day of April, 1992, or any earlier assessment year, it is found—
(a) on the assessment or reassessment of the firm, or
(b) on any reduction or enhancement made in the income of the firm under this section, section 154, section
250, section 254, section 260, section 262, section 263 or section 264, or
(c) on any order passed under sub-section (4) of section 245D on the application made by the firm,
that the share of the partner in the income of the firm has not been included in the assessment of the partner or,
if included, is not correct, the Assessing Officer may amend the order of assessment of the partner with a view
to the inclusion of the share in the assessment or the correction thereof, as the case may be; and the provisions
of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that
section being reckoned from the end of the financial year in which the final order was passed in the case of the
firm.
(1A) Where in respect of any completed assessment of a firm it is found—
(a) on the assessment or reassessment of the firm, or
(b) on any reduction or enhancement made in the income of the firm under this section, section 154, section
250, section 254, section 260, section 262, section 263 or section 264, or
(c) on any order passed under sub-section (4) of section 245D on the application made by the firm,
that any remuneration to any partner is not deductible under clause (b) of section 40, the Assessing Officer may
amend the order of assessment of the partner with a view to adjusting the income of the partner to the extent of
the amount not so deductible ; and the provisions of section 154 shall, so far as may be, apply thereto, the period
of four years specified in sub-section (7) of that section being reckoned from the end of the financial year in
which the final order was passed in the case of the firm.
(2) Where in respect of any completed assessment of a member of an association of persons or of a body of
individuals it is found—
(a) on the assessment or reassessment of the association or body, or
(b) on any reduction or enhancement made in the income of the association or body under this
section, section 154, section 250, section 254, section 260, section 262, section 263 or section 264, or
(c) on any order passed under sub-section (4) of section 245D on the application made by the association
or body,
that the share of the member in the income of the association or body, as the case may be, has not been included
in the assessment of the member or, if included, is not correct, the Assessing Officer may amend the order of
assessment of the member with a view to the inclusion of the share in the assessment or the correction thereof,
as the case may be ; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four
years specified in sub-section (7) of that section being reckoned from the end of the financial year in which the
final order was passed in the case of the association or body, as the case may be.
(3) [***]
(4) Where as a result of proceedings initiated under section 147, a loss or depreciation has been recomputed and
in consequence thereof it is necessary to recompute the total income of the assessee for the succeeding year or
years to which the loss or depreciation allowance has been carried forward and set off under the provisions of
sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (1) or sub-section (3) of section 74,
or sub-section (3) of section 74A, the Assessing Officer may proceed to recompute the total income in respect

of such year or years and make the necessary amendment ; and the provisions of section 154 shall, so far as may
be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the
end of the financial year in which the order was passed under section 147.
(4A) Where an allowance by way of investment allowance has been made wholly or partly to an assessee in
respect of a ship or an aircraft or any machinery or plant in any assessment year under section 32A and
subsequently—
(a) at any time before the expiry of eight years from the end of the previous year in which the ship or aircraft
was acquired or the machinery or plant was installed, the ship, aircraft, machinery or plant is sold or
otherwise transferred by the assessee to any person other than the Government, a local authority, a
corporation established by a Central, State or Provincial Act or a 20Government company as defined in
section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or
succession referred to in sub-section (6) or sub-section (7) of section 32A ; or
(b) at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft
was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited
to the reserve account under sub-section (4) of section 32A for the purposes of acquiring a new ship or
a new aircraft or new machinery or plant (other than machinery or plant of the nature referred to in
clauses (a), (b) and (d) of the second proviso to sub-section (1) of section 32A) for the purposes of the
business of the undertaking ; or
(c) at any time before the expiry of ten years referred to in clause (b) the assessee utilises the amount
credited to the reserve account under sub-section (4) of section 32A—
(i) for distribution by way of dividends or profits ; or
(ii) for remittance outside India as profits or for the creation of any asset outside India ; or
(iii) for any other purpose which is not a purpose of the business of the undertaking,
the investment allowance originally allowed shall be deemed to have been wrongly allowed, and the Assessing
Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the
relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as
may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned,—
(i) in a case referred to in clause (a), from the end of the previous year in which the sale or other transfer
took place ;
(ii) in a case referred to in clause (b), from the end of the ten years referred to in that clause ;
(iii) in a case referred to in clause (c), from the end of the previous year in which the amount was utilised.
Explanation.—For the purposes of clause (b), "new ship" or "new aircraft" or "new machinery or plant" shall
have the same meanings as in the Explanation below sub-section (2) of section 32A.
(5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect
of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under section
33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), and subsequently—
(i) at any time before the expiry of eight years from the end of the previous year in which the ship was
acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise
transferred by the assessee to any person other than the Government, a local authority, a corporation
established by a Central, State or Provincial Act or a 21Government company as defined in section 617
of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred
to in sub-section (3) or sub-section (4) ofsection 33 ; or

(ii) at any time before the expiry of the eight years referred to in sub-section (3) of section 34, the assessee
utilises the amount credited to the reserve account under clause (a) of that sub-section—
(a) for distribution by way of dividends or profits ; or
(b) for remittance outside India as profits or for the creation of any asset outside India ; or
(c) for any other purpose which is not a purpose of the business of the undertaking,
the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Assessing
relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as
may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from
the end of the previous year in which the sale or transfer took place or the money was so utilised.
(5A) Where an allowance by way of development allowance has been made wholly or partly to an assessee in
respect of the cost of planting in any area in any assessment year under section 33A and subsequently—
(i) at any time before the expiry of eight years from the end of the previous year in which such allowance
was made, the land is sold or otherwise transferred by the assessee to any person other than the
Government, a local authority, a corporation established by a Central, State or Provincial Act or a
Government company22 as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in
connection with any amalgamation or succession referred to in sub-section (5) or sub-section (6)
of section 33A ; or
(ii) at any time before the expiry of the eight years referred to in sub-section (3) of section 33A, the assessee
utilises the amount credited to the reserve account under clause (ii) of that sub-section—
(a) for distribution by way of dividends or profits ; or
(b) for remittance outside India as profits or for the creation of any asset outside India ; or
(c) for any other purpose which is not a purpose of the business of the undertaking ;
the development allowance originally allowed shall be deemed to have been wrongly allowed, and the Assessing
relevant previous year and make the necessary amendment ; and the provisions of section 154 shall, so far as
may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from
the end of the previous year in which the sale or transfer took place or the money was so utilised.
Explanation.—For the purposes of this sub-section, where an assessee having any leasehold or other right of
occupancy in any land transfers such right, he shall be deemed to have sold or otherwise transferred such land.
(5B) Where any deduction in respect of any expenditure on scientific research has been made in any
assessment year under sub-section (2B) of section 35 and the assessee fails to furnish a certificate of completion
of the programme obtained from the prescribed authority within one year of the period allowed for its completion
by such authority, the deduction originally made in excess of the expenditure actually incurred shall be
deemed to have been wrongly made, and the Assessing Officer may, notwithstanding anything contained in
this Act, recompute the total income of the assessee for the relevant previous year and make the necessary
amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years
specified in sub-section (7) of that section being reckoned from the end of the previous year in which
the period allowed for the completion of the programme by the prescribed authority expired.
(6) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1992.]
(7) Where as a result of any proceeding under this Act, in the assessment for any year of a company in whose
case an order under section 104 has been made for that year, it is necessary to recompute the distributable income
of that company, the Assessing Officer may proceed to recompute the distributable income and determine the

tax payable on the basis of such recomputation and make the necessary amendment ; and the provisions
of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that
section being reckoned from the end of the financial year in which the final order was passed in the case of the
company in respect of that proceeding.
(7A) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1992.]
(7B) Where in the assessment for any year, the capital gain arising from the transfer of a capital asset is not
charged under section 45 by virtue of the provisions of clause (iv) or, as the case may be, clause (v) of section
47, but is deemed under section 47A to be income chargeable under the head "Capital gains" of the previous
year in which the transfer took place by reason of—
(i) such capital asset being converted by the transferee company into, or being treated by it, as stock-in-
trade of its business ; or
(ii) the parent company or its nominees or, as the case may be, the holding company ceasing to hold the
whole of the share capital of the subsidiary company,
at any time before the expiry of the period of eight years from the date of such transfer, the Assessing Officer
may, notwithstanding anything contained in this Act, recompute the total income of the transferor company for
the relevant previous year and make the necessary amendment ; and the provisions of section 154 shall, so far
as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned
from the end of the previous year in which the capital asset was so converted or treated or in which the parent
company or its nominees or, as the case may be, the holding company ceased to hold the whole of the share
capital of the subsidiary company.
(10A) Where in the assessment for any year, a capital gain arising from the transfer of a long-term capital asset,
is charged to tax and within a period of six months after the date of such transfer, the assessee has made any
investment or deposit in any specified asset within the meaning of Explanation 1 to sub-section (1) of section
54E, the Assessing Officer shall amend the order of assessment so as to exclude the amount of the capital gain
not chargeable to tax under the provisions of sub-section (1) of section 54E ; and the provisions of section
154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section
being reckoned from the end of the financial year in which the assessment was made.
(10B) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1992.]
(10C) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1992.]
(11) Where in the assessment for any year, a capital gain arising from the transfer of any original asset as is
referred to in section 54H is charged to tax and within the period extended under that section the assessee
acquires the new asset referred to in that section or, as the case may be, deposits or invests the amount of such
capital gain within the period so extended, the Assessing Officer shall amend the order of assessment so as to
exclude the amount of the capital gain not chargeable to tax under any of the sections referred to in section 54H;
and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-
section (7) of section 154 being reckoned from the end of the previous year in which the compensation was
received by the assessee.

(11A) Where in the assessment for any year, the deduction under section 10A or section 10B or section
10BA has not been allowed on the ground that such income has not been received in convertible foreign
exchange in India, or having been received in convertible foreign exchange outside India, or having been
converted into convertible foreign exchange outside India, has not been brought into India, by or on behalf of
the assessee with the approval of the Reserve Bank of India or such other authority as is authorised under any
law for the time being in force for regulating payments and dealings in foreign exchange and subsequently such
income or part thereof has been or is received in, or brought into, India in the manner aforesaid, the Assessing
Officer shall amend the order of assessment so as to allow deduction under section 10A or section
10B or section 10BA, as the case may be, in respect of such income or part thereof as is so received in, or
brought into, India, and the provisions of section 154 shall, so far as may be, apply thereto, and the period of
four years shall be reckoned from the end of the previous year in which such income is so received in, or brought
into, India.
(12) Where in the assessment for any year commencing before the 1st day of April, 1988, the deduction
under section 80-O in respect of any income, being the whole or any part of income by way of royalty,
commission, fees or any similar payment as is referred to in that section, has not been allowed on the ground
that such income has not been received in convertible foreign exchange in India, or having been received in
convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside
India, has not been brought into India, by or on behalf of the assessee in accordance with any law for the time
being in force for regulating payments and dealings in foreign exchange and subsequently such income or part
thereof has been or is received in, or brought into, India in the manner aforesaid, the Assessing Officer shall
amend the order of assessment so as to allow deduction under section 80-O in respect of such income or part
thereof as is so received in, or brought into, India; and the provisions of section 154 shall, so far as may be,
apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end
of the previous year in which such income is so received in, or brought into, India; so, however, that the period
from the 1st day of April, 1988 to the 30th day of September, 1991 shall be excluded in computing the period
of four years.
(13) Where in the assessment for any year, the deduction under section 80HHB or section 80HHC or section
80HHD or section 80HHE or section 80-O or section 80R or section 80RR or section 80RRA has not been
allowed on the ground that such income has not been received in convertible foreign exchange in India, or
having been received in convertible foreign exchange outside India, or having been converted into convertible
foreign exchange outside India, has not been brought into India, by or on behalf of the assessee with the approval
of the Reserve Bank of India or such other authority as is authorised under any law for the time being in force
for regulating payments and dealings in foreign exchange and subsequently such income or part thereof has
been or is received in, or brought into, India in the manner aforesaid, the Assessing Officer shall amend the
order of assessment so as to allow deduction under section 80HHB or section 80HHC or section
80HHD or section 80HHE or section 80-O or section 80R or section 80RR or section 80RRA, as the case may
be, in respect of such income or part thereof as is so received in, or brought into, India; and the provisions
of section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end
of the previous year in which such income is so received in, or brought into, India.
(14) Where in the assessment for any previous year or in any intimation or deemed intimation under sub-section
(1) of section 143 for any previous year, credit for tax deducted or collected in accordance with the provisions
of section 199 or, as the case may be, section 206C has not been given on the ground that the certificate furnished
under section 203 or section 206C was not filed with the return and subsequently such certificate is produced
before the Assessing Officer within two years from the end of the assessment year in which such income is
assessable, the Assessing Officer shall amend the order of assessment or any intimation or deemed intimation
under sub-section (1) of section 143, as the case may be, and the provisions of section 154 shall, so far as may
be, apply thereto :
Provided that nothing contained in this sub-section shall apply unless the income from which the tax has been
deducted or income on which the tax has been collected has been disclosed in the return of income filed by the
assessee for the relevant assessment year.
23
[(14A) Where in the assessment for any previous year or in any intimation or deemed intimation under sub-
section (1) of section 143 for any previous year, credit for income-tax paid in any country outside India or a
specified territory outside India referred to in section 90, section 90A or section 91 has not been given on the
ground that the payment of such tax was under dispute, and if subsequently such dispute is settled; and the
assessee, within six months from the end of the month in which the dispute is settled, furnishes to the Assessing
Officer evidence of settlement of dispute and evidence of payment of such tax along with an undertaking that no
credit in respect of such amount has directly or indirectly been claimed or shall be claimed for any other
assessment year, the Assessing Officer shall amend the order of assessment or any intimation or deemed
intimation under sub-section (1) of section 143, as the case may be, and the provisions of section 154 shall, so
far as may be, apply thereto:
Provided that the credit of tax which was under dispute shall be allowed for the year in which such income is
offered to tax or assessed to tax in India.]
(15) Where in the assessment for any year, a capital gain arising from the transfer of a capital asset, being
land or building or both, is computed by taking the full value of the consideration received or accruing as a result
of the transfer to be the value adopted or assessed by any authority of a State Government for the purpose of
payment of stamp duty in accordance with sub-section (1) of section 50C, and subsequently such value is
revised in any appeal or revision or reference referred to in clause (b) of sub-section (2) of that section, the
Assessing Officer shall amend the order of assessment so as to compute the capital gain by taking the full
value of the consideration to be the value as so revised in such appeal or revision or reference; and the provisions
of section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end
of the previous year in which the order revising the value was passed in that appeal or revision or reference.
(16) Where in the assessment for any year, a capital gain arising from the transfer of a capital asset, being a
transfer by way of compulsory acquisition under any law, or a transfer, the consideration for which was
determined or approved by the Central Government or the Reserve Bank of India, is computed by taking the
compensation or consideration as referred to in clause (a) or, as the case may be, the compensation or
consideration enhanced or further enhanced as referred to in clause (b) of sub-section (5) of section 45, to be the
full value of consideration deemed to be received or accruing as a result of the transfer of the asset and
subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, the
Assessing Officer shall amend the order of assessment so as to compute the capital gain by taking the
compensation or consideration as so reduced by the court, Tribunal or any other authority to be the full value of
consideration; and the provisions of section 154 shall, so far as may be, apply thereto, and the period of four
years shall be reckoned from the end of the previous year in which the order reducing the compensation was
passed by the court, Tribunal or other authority.
(17) Where a deduction has been allowed to an assessee in any assessment year under section 80RRB in respect
of any patent, and subsequently by an order of the Controller or the High Court under the Patents Act, 1970 (39
of 1970),—
(i) the patent was revoked, or
(ii) the name of the assessee was excluded from the patents register as patentee in respect of that patent,
the deduction from the income by way of royalty attributable to the period during which the patent had been
revoked or the period for which the assessee's name was excluded as patentee in respect of that patent, shall be
deemed to have been wrongly allowed and the Assessing Officer may, notwithstanding anything contained in
this Act, recompute the total income of the assessee for the relevant previous year and make necessary

amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years
specified in sub-section (7) of that section being reckoned from the end of the previous year in which such order
of the Controller referred to in clause (b) of sub-section (1), or the High Court referred to in clause (i) of sub-
section (1) of section 2, of the Patents Act, 1970 (39 of 1970), as the case may be, was passed.
(a) "additional compensation" shall have the meaning assigned to it in clause (1) of the Explanation to sub-
section (2) of section 54;
(b) "additional consideration", in relation to the transfer of any capital asset the consideration for which
was determined or approved by the Central Government or the Reserve Bank of India, means the
difference between the amount of consideration for such transfer as enhanced by any court, tribunal or
other authority and the amount of consideration which would have been payable if such enhancement
had not been made.

C.A. Kalpesh Sanghavi Powers of CIT - P a g e | F36 . 1

Case A : In the assessment made on a firm, the Assessing Officer made two specific additions, namely (i)
Unexplained Cash Credit of Rs. 1 Lakh and (ii) Disallowance u/s 43B. The assessee filed an appeal
before the CIT (Appeals) contesting the addition of cash credit and being unsuccessful, filed a further
appeal before the Appellate Tribunal. In respect of the disallowance u/s 43B, it did not file any appeal,
but made a revision petition u/s 264, to the CIT who dismissed it on the ground that the assessment
was not subject matter of an appeal to the Appellate Tribunal. The assessee relied on a Board’s circular
under which the CIT was empowered to accept such a petition. Discuss the correctness of the view
taken by the CIT.
Case B : The Commissioner of Income Tax can revise an order during the pendency of an appeal before the
First Appellate Authority.
Case C : An assessee is aggrieved by the order of the Assessing Officer and requests you to contest the same by
filing an appeal before the Commissioner of Income-tax (Appeals) as well as by filing a revision
petition before the Commissioner u/s 264 of the Act. Can the assessee invoke both the remedies
against the order of the Assessing Officer simultaneously?
Case D : An appeal was preferred by the assessee to the CIT (Appeals) against the order of assessment made by
the Assessing Officer. The appeal was allowed by the CIT (Appeals). The assessee later found that
he was entitled to a certain deduction, which was neither claimed by him nor allowed by the Assessing
Officer in the course of assessment. The issue of deduction was not raised by the assessee in the
appeal before the CIT (Appeals) and was not considered by the CIT (Appeals). Examine the power
of the CIT to revise under section 264 the order of assessment in order to allow such deduction on an
application by the assessee.

Question (ID 03)

An order of assessment was made by a Deputy Commissioner of Income Tax on 20.3.2018, disallowing, among
others, the following claims of an assessee :
1. Technical Fees paid to a Non-resident Company 8,40,000
2. Salary paid to a technician 1,60,000
3. Travelling expenses incurred on the travel of the wife of the Manager 2,00,000
4. Salary paid to an employee – found to be in excess u/s 40A(2) of the Act 1,80,000
The assessee filed an appeal to the Commissioner of Income Tax (Appeals) against disallowances mentioned
against items (i), (ii) and (iii) above.
In the course of the appeal proceedings, it was ascertained that the assessee had paid totally Rs. 16,80,000 as
technical fees under a collaboration agreement, but the Assessing Officer after examining the evidence
produced, decided that 50% of the payment was capital expenditure. The assessee, in appeal, claimed that the
interpretation placed by the Assessing Officer on the agreement was wrong and that the entire payment must be
allowed as a deduction. Commissioner (Appeals) accepted this argument and deleted the addition of Rs.
8,40,000 made by the Assessing Officer. He also allowed in full the claim against item no. (ii) and upheld the
disallowance of the claim against item No. (iii) above.
Commissioner of Income Tax issued a notice u/s 263 on 20.04.2020 of the Income Tax Act proposing to review
the order of the assessment made by DCIT., in regard to the claim of technical fees. He felt that the Assessing
Officer must have concluded that the entire payment of technical fees was capital expenditure and to that extent,
therefore, the order of assessment was prejudicial to the revenue.
Was the CIT justified in this action? Give reasons for your answer.


The assessment of Ashok for Asst Year 2007-08 was completed u/s 143(3) on 15.1.2009. The CIT acting u/s
263 directed the Assessing Officer to add certain amount appearing in the Balance Sheet in Total Income of
Ashok. Ashok did not challenge the order of the CIT u/s 263 by filing appeal to the Tribunal. The Assessing
Officer passed a fresh assessment order on 1.10.2009 including the said amount in Total Income of Ashok
pursuant to the order of the CIT.
Ashok disputed the fresh Assessment Order in appeal to CIT (Appeals) u/s 246A. The CIT (Appeals) dismissed
the appeal on the ground that the Assessing Officer only complied with direction of the CIT u/s 263, which was
not disputed by Ashok in appeal to Tribunal. Examine the correctness of the stand taken by the CIT (Appeals).
Your Options are,

A Fresh Assessment order is Time Barred
B Fresh Assessment order is not Time Barred
C Fresh Assessment order is Time Barred but still they are valid orders
D None of the above
Your Options are,

A Appeal against Fresh Assessment order is Valid
B Appeal against Fresh Assessment order is Not Valid
C Appeal against Fresh Assessment order Valid because it is one type of order that can be
appealed
D None of the above


An assessee disclosed, Inter alia, the value of a property sold by him for an apparent consideration of Rs. 5 lakhs
and the resultant capital gains at Rs. 1 lakh. This was accepted by the Assessing Officer u/s 143(3) without
making any enquiry with the parties to the transaction. The Commissioner of Income Tax acting u/s 263, set
aside the assessment with a direction to enquire into the correct sale value in order to arrive at the capital gains
chargeable to tax. Discuss the principle under which jurisdiction u/s 263 can be assumed by the CIT in the
circumstances of the case.
Your Options are,

A Jurisdiction of CIT is Correct since orders passed by officer was erroneous
B Jurisdiction of CIT is Not Correct since orders passed by officer was not infructuous
C Jurisdiction of CIT is Not Correct since orders passed by officer was after following scrutiny
assessment
D None of the above
Question (ID 06)

The return of Income filed by Mr. Kishore has been accepted under the provisions of Sec 143(1) of the Income
Tax Act. Can the Commissioner of Income Tax interfere under his revisional powers and modify the assessment
it –
(a) In a case where intimation is served u/s 143(1),
(b) In a case where no intimation is served.
Question (ID 07)

Assessment was completed as per section 143(3) considering the various claims so made by the assessee on.
Subsequently, this was reopened u/s 147 after 3 years on certain issues, but excluding the claim of the assessee
as to “Lease Equalization Fund”. The order of reassessment was passed. The Commissioner within the powers
vested u/s 263 passed an order rejecting the claim of assessee as to “Lease Equalization Fund”. The assessee
challenges that the action of the CIT is not sustainable.

The assessment of Shah Ltd for the assessment year 1997-98 was completed under section 143(3) on 30.6.99.
There was an audit objection that interest on borrowals ought to have been disallowed partly as there was
diversion of borrowed funds to sister concerns without charge of interest. Shah Ltd did not accept the audit
objection. On these facts.
(a) What are the options open to revenue to deal with audit objection.
(b) Can the assessment be re-opened.


An assessee is aggrieved by the order of the Assessing Officer and requests you to contest the same by filing an
appeal before the Commissioner of Income-tax (Appeals) as well as by filing a revision petition before the
Commissioner under section 264 of the Act. Can the assessee invoke both the remedies against the order of the
Assessing Officer simultaneously.
Your Options are,

A Matters / Points not considered by CIT (A) can be considered by CIT u/s 264
B Matters / Points not considered by CIT (A) cannot be considered by CIT u/s 264
C CIT (A) and Application u/s 264 cannot be allowed simultaneously for the same assessment
year.
D None of the above

(a) J filed a return of income, in due time disclosing a total income of Rs.4 lakhs. The taxes due on the income
were covered by taxes deducted at source, advance tax and self-assessment tax. The return was taken for
scrutiny by the assessing officer, who made large additions to the income disclosed by J. On appeal, the
High Court set aside the order of assessment and directed a fresh assessment to be made after hearing the
parties. The court order had become final since neither party had preferred an appeal against it. The
assessing officer did not make any fresh assessment with the result that the assessment became barred by
time. J has filed a petition that since no assessment of his income had been made by the assessing officer,
the entire taxes paid, including the pre-assessment payments, must be refunded to him. Is he justified in
making this claim ? Discuss.
(b) An assessment was completed by the Assessing Officer under section 143(3) on the basis of return submitted
and other information furnished by the assessee. The Assessing Officer accepted the cost of the land after
waiting for a reasonable period for report of the valuation officer to whom a reference was made.
Subsequent to receiving the report from the valuer, it revealed that there was a variation by about Rs.3.00
lacs. On the basis of this valuation report, the Commissioner issued notice under section 263 to set aside
the completed assessment. Justify the action of the Commissioner.
(c) M filed return of income for claiming a refund of Rs.45,000. The said refund was granted and paid to the
assessee on 1st March, AY after processing the return under section 143(1). Later on, the case was taken
up for regular assessment by issue of notice under section 143(2) and the said assessment was completed
on 16th August, resulting in demand of Rs. 2500. Is the assessee liable to pay interest on the amount of
refund already granted to him and if so, what is the amount of such interest ?
(d) A search was initiated in the premises of an assessee on 11th November, and it was concluded on 14th
November. What is the period of limitation for issue of notice for making assessment of preceding six
assessment years ? In case assessment under Section 143(3) for one year back and appeal before CIT(A)
for assessment year 4 years back are pending on 11th November, what would be the fate of such pending
assessment and appeal ?

Question (ID 12)

An assessee who had been served with an order of assessment passed under section 143(3) on 1.1.2015 had filed
an application against this order before the CIT as per section 264 on 11.1.2015. However, the CIT refused to
entertain the application on the pretext of premature application. Assessee seeks your opinion.
Question (ID 13)

The Commissioner of Income-tax issued notice to revise the order passed by an Assessing Officer under section
143. During the pendency of proceedings before the Commissioner, on the basis of material gathered during
survey under section 133A after issue of the first notice, the Commissioner of Income-tax issued a second notice,
the contents of which were different from the contents of the first notice. State with reasoning whether the action
of the Commissioner is justified as to the second notice.

AUM Enterprises, a partnership firm, filed its return of income for the A.Y. 2015-16 on 30-07-2015. The
assessment u/s 143(3) was completed on 15th June, 2016 and the A.O. made two additions to the income of
assesse, namely.
(1) Addition of Rs. 8 lakhs for unexplained cash credit u/s 68 and
(2) Addition of Rs. 3 lakh u/s 40(a)(ia) due to non-furnishing of the evidence of TDS payment.
The assesse, being aggrieved, contested the addition of Rs. 8 lakhs u/s 68 and appeal to the CIT(A). The appeal
was decided on 5th January, 2017 against the assesse.
Now, the assessee seeks your advice as to ‘whether it should apply for revision to CIT U/S 264 or for rectification
u/s 154 to the A.O. as regards disallowance u/s 40(a)(ia) Advise. (4 marks)
Your Options are,

A Application can be made u/s 264
B Application can be made u/s 147
C Application can be made u/s 154
D None of the above


The Assessing Officer has made two additions in the assessment of Rohit & Co. (sole proprietorship firm):
(1) Disallowance under section 43B of Rs. 10 lakhs
(2) Unexplained cash credits of Rs. 80 lakhs.
The firm filed an appeal before CIT (A) with respect to the second addition only. The CIT(A) confirmed the
addition. Further, the assessee has filed an appeal to the Appellate Tribunal w.r.t. addition of unexplained cash
credit against the order of CIT(A). The Appellate Tribunal has also confirmed the addition. He then preferred
the revision petition before Principal CIT under section 264 for disallowance under section 43B.The petition
has been rejected on the ground that the assessment was subject matter of an appeal before the Appellate
Tribunal. Is the petition maintainable? (4 marks)
Your Options are,

A Dis-allowance of 43B can be Challenged u/s 264
B Dis-allowance of 43B cannot be Challenged u/s 264
C Dis-allowance of 43B can be Challenged u/s 147
D None of the above


F34 03 Scope of 147
F34 05(2) Agent of NR V.Imp
F34 07(3) Partner and Firm V.Imp
F34 08 Foreign assets
F35 03 Two points in one order V.Imp

F36 12 Two points in one order and 264 V.Imp

263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any
proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is
erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee
an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass
such order thereon as the circumstances of the case justify, including an order enhancing or modifying the
assessment, or cancelling the assessment and directing a fresh assessment.
Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include—
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner
or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner
under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance
of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or
directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or
Principal Director General or Director General or Principal Commissioner or Commissioner
authorised by the Board in this behalf under section 120;
(b) "record" shall include and shall be deemed always to have included all records relating to any
proceeding under this Act available at the time of examination by the Principal Commissioner or
Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject
matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal
Commissioner or] Commissioner under this sub-section shall extend and shall be deemed always to
have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing
Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if,
in the opinion of the Principal Commissioner or Commissioner,—
(a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by
the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the
assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or
any other person.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial
year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed
at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or
direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme
Court.
Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving
an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any
proceeding under this section is stayed by an order or injunction of any court shall be excluded.

264. (1) In the case of any order other than an order to which section 263 applies passed by an authority
subordinate to him, the Principal Commissioner or Commissioner may, either of his own motion or on an
application by the assessee for revision, call for the record of any proceeding under this Act in
which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject
to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the
assessee, as he thinks fit.
(2) The Principal Commissioner or Commissioner shall not of his own motion revise any order under this
section if the order has been made more than one year previously.
(3) In the case of an application for revision under this section by the assessee, the application must be made
within one year from the date on which the order in question was communicated to him or the date on
which he otherwise came to know of it, whichever is earlier :
Provided that the Principal Commissioner or Commissioner may, if he is satisfied that the assessee was
prevented by sufficient cause from making the application within that period, admit an application made
after the expiry of that period.
(4) The Principal Commissioner or Commissioner shall not revise any order under this section in the
following cases—
(a) where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the
Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which
such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals)
or to the Appellate Tribunal, the assessee has not waived his right of appeal; or
(b) where the order is pending on an appeal before the Deputy Commissioner (Appeals); or
(c) where the order has been made the subject of an appeal to the Commissioner (Appeals) or to the
Appellate Tribunal.
(5) Every application by an assessee for revision under this section shall be accompanied by a fee of five
hundred rupees.
(6) On every application by an assessee for revision under this sub-section, made on or after the 1st day of
October, 1998, an order shall be passed within one year from the end of the financial year in which such
application is made by the assessee for revision.
Explanation.—In computing the period of limitation for the purposes of this sub-section, the time taken in giving
an opportunity to the assessee to be re-heard under the proviso to section 129 and any period during which any
proceeding under this section is stayed by an order or injunction of any court shall be excluded.
(7) Notwithstanding anything contained in sub-section (6), an order in revision under sub-section (6) may be
passed at any time in consequence of or to give effect to any finding or direction contained in an order of the
Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
Explanation 1.—An order by the Principal Commissioner or Commissioner declining to interfere shall, for the
purposes of this section, be deemed not to be an order prejudicial to the assessee.
Explanation 2.—For the purposes of this section, the Deputy Commissioner (Appeals) shall be deemed to be an
authority subordinate to the Principal Commissioner or Commissioner.

C.A. Kalpesh Sanghavi Appeals to CIT - P a g e | F37 . 1
Question 01 (ID 01) (Appeals to CIT) (Revision / Home work)

Is Commissioner (Appeals) empowered to consider an appeal filed by an assessee challenging the order of
assessment in respect of which the proceedings before the Settlement Commission abates?
Your Options are,

A CIT (A) does not have the powers
B CIT (A) does have the powers u/s 251
C CIT (A) does have the powers u/s 250
D None of the above

Discuss the correctness or otherwise of the following propositions in the context of the Income-tax Act, 1961 :
The powers of the Commissioner of Income-tax (Appeals) to enhance the assessment are plenary and quite wide.

Discuss the following propositions:
(i) The Commissioner of Income-tax can revise an order during the pendency of an appeal before the First
Appellate Authority.
(ii) The Commissioner of Appeals cannot admit an appeal filed beyond 30 days from the date of receipt of order
by an Assessee.

Assessment of Bhajan Ltd. was completed U/s. 143(3) with an addition of 15 lakhs to the returned income. The
assessee-company preferred appeal before the Commissioner (Appeals) which is pending now. In this backdrop,
answer the following:
(i) Based on fresh information that there was escapement of income for the same assessment year, can the
Assessing Officer initiate reassessment proceedings when the appeal is pending before Commissioner (Appeals)
?
(ii) Can the Assessing Officer pass an order U/s. 154 for rectification of mistake in respect of issues not being
subject matter of appeal ?
(iii) Can the assessee-company seek revision U/s. 264 in respect of matters other than those preferred in appeal?
(iv) Can the Commissioner make a revision U/s. 263 both in respect of matters covered in appeal and other
matters?

Question 01 (ID 06) (Additional evidence / grounds) (Revision / Home work)

Commissioner (Appeals) has no power to decide a matter that was not raised before him.
Your Options are,

A Statement is not correct
B Statement is Partially not correct
C Statement is correct
D Statement is Partially correct
Question 02 (ID 07) (Additional evidence / grounds)

If an assessee fails to make a claim for any deduction in the return of income, he loses his opportunity for
claiming such deduction at the assessment stage or subsequent stage. Do you agree with the proposition?

State the circumstances where the appellant shall be entitled to produce additional evidence, oral or
documentary, before the Commissioner of Income-tax (Appeals) other than the evidence produced during the
proceedings before the Assessing Officer. OR Explain rule 46A.

SVS Propcon did not make a claim of 20 lacs in the return of income which was disallowed in the previous
assessment year under section 43B. However, the said claim was also not considered by the Assessing Officer
during assessment proceedings on the ground that no revised return was filed. Can the assessee now make such
claim before the appellate authority ?

S, an individual, filed his return of income for the year erroneously offering for taxation, interest received from
notified Relief Bonds exempt under section 10(15), in the said return. The Assessing Officer completed the
assessment under section 143(3) on 20.4.N1 accepting the income returned by S. S had furnished complete
particulars relating to the interest income in the return of income. S approaches you for advice regarding the
steps to be taken to secure exemption of the income. Advice S about the various remedies available under the
Income-tax Act, 1961 for the redressal of his grievance.

CHAPTER XX
APPEALS AND REVISION
A.—Appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals)
246A. (1) Any assessee or any deductor or any collector aggrieved by any of the following orders (whether
made before or after the appointed day) may appeal to the Commissioner (Appeals) against—
(a) an order passed by a Joint Commissioner under clause (ii) of sub-section (3) of section 115VP or an
order against the assessee where the assessee denies his liability to be assessed under this Act or an
intimation under sub-section (1) or sub-section (1B) of section 143 or sub-section (1) of section 200A or
sub-section (1) of section 206CB, where the assessee or the deductor or the collector objects to the
making of adjustments, or any order of assessment under sub-section (3) of section 143 except an order
passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section
(12) of section 144BA or section 144, to the income assessed, or to the amount of tax determined, or to
the amount of loss computed, or to the status under which he is assessed;
(aa) an order of assessment under sub-section (3) of section 115WE or section 115WF, where the assessee,
being an employer objects to the value of fringe benefits assessed;
(ab) an order of assessment or reassessment under section 115WG;
(b) an order of assessment, reassessment or recomputation under section 147 except an order passed in
pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section (12)
of section 144BA or section 150;
(ba) an order of assessment or reassessment under section 153A except an order passed in pursuance of
directions of the Dispute Resolution Panel or an order referred to in sub-section (12) of section 144BA;
(bb) an order of assessment or reassessment under sub-section (3) of section 92CD;
(c) an order made under section 154 or section 155 having the effect of enhancing the assessment or
reducing a refund or an order refusing to allow the claim made by the assessee under either of the said
sections except an order referred to in sub-section (12) of section 144BA;
(d) an order made under section 163 treating the assessee as the agent of a non-resident;
(e) an order made under sub-section (2) or sub-section (3) of section 170;
(f) an order made under section 171;
(g) an order made under clause (b) of sub-section (1) or under sub-section (2) or sub-section (3) or sub-
section (5) of section 185 in respect of an assessment for the assessment year commencing on or before
the 1st day of April, 1992;
(h) an order cancelling the registration of a firm under sub-section (1) or under sub-section (2) of section
186 in respect of any assessment for the assessment year commencing on or before the 1st day of April,
1992 or any earlier assessment year;
(ha) an order made under section 201;
(hb) an order made under sub-section (6A) of section 206C;
(i) an order made under section 237;
(j) an order imposing a penalty under—

(A) section 221; or
(B) section 271, section 271A, section 271AAA, section 271AAB, section 271F, section
271FB, section 272AA or section 272BB;
(C) section 272, section 272B or section 273, as they stood immediately before the 1st day of April,
1989, in respect of an assessment for the assessment year commencing on the 1st day of April,
1988, or any earlier assessment years;
(ja) an order of imposing or enhancing penalty under sub-section (1A) of section 275;
(k) an order of assessment made by an Assessing Officer under clause (c) of section 158BC, in respect of
search initiated under section 132 or books of account, other documents or any assets requisitioned
under section 132A on or after the 1st day of January, 1997;
(l) an order imposing a penalty under sub-section (2) of section 158BFA;
(m) an order imposing a penalty under section 271B or section 271BB;
(n) an order made by a Deputy Commissioner imposing a penalty under section 271C, section
271CA, section 271D or section 271E;
(o) an order made by a Deputy Commissioner or a Deputy Director imposing a penalty under section 272A;
(p) an order made by a Deputy Commissioner imposing a penalty under section 272AA;
(q) an order imposing a penalty under Chapter XXI;
(r) an order made by an Assessing Officer other than a Deputy Commissioner under the provisions of this
Act in the case of such person or class of persons, as the Board may, having regard to the nature of the
cases, the complexities involved and other relevant considerations, direct.
Explanation.—For the purposes of this sub-section, where on or after the 1st day of October, 1998, the post of
Deputy Commissioner has been redesignated as Joint Commissioner and the post of Deputy Director has been
redesignated as Joint Director, the references in this sub-section for "Deputy Commissioner" and "Deputy
Director" shall be substituted by "Joint Commissioner" and "Joint Director" respectively.
(1A) Every appeal filed by an assessee in default against an order under section 201 on or after the 1st day of
October, 1998 but before the 1st day of June, 2000 shall be deemed to have been filed under this section.
(1B) Every appeal filed by an assessee in default against an order under sub-section (6A) of section 206C on or
after the 1st day of April, 2007 but before the 1st day of June, 2007 shall be deemed to have been filed under
this section.
(2) Notwithstanding anything contained in sub-section (1) of section 246, every appeal under this Act which is
pending immediately before the appointed day, before the Deputy Commissioner (Appeals) and any matter
arising out of or connected with such appeals and which is so pending shall stand transferred on that date to the
Commissioner (Appeals) and the Commissioner (Appeals) may proceed with such appeal or matter from the
stage at which it was on that day :
Provided that the appellant may demand that before proceeding further with the appeal or matter, the previous
proceeding or any part thereof be reopened or that he be re-heard.
Explanation.—For the purposes of this section, "appointed day" means the day appointed by the Central
Government by notification in the Official Gazette.

248. Where under an agreement or other arrangement, the tax deductible on any income, other than interest,
under section 195 is to be borne by the person by whom the income is payable, and such person having paid
such tax to the credit of the Central Government, claims that no tax was required to be deducted on such
income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on
such income.
249. (1) Every appeal under this Chapter shall be in the prescribed form99 and shall be verified in the
prescribed manner and shall, in case of an appeal made to the Commissioner (Appeals) on or after the 1st day
of October, 1998, irrespective of the date of initiation of the assessment proceedings relating thereto be
accompanied by a fee of,—
(i) where the total income of the assessee as computed by the Assessing Officer in the case to which the
appeal relates is one hundred thousand rupees or less, two hundred fifty rupees;
(ii) where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates is
more than one hundred thousand rupees but not more than two hundred thousand rupees,
five hundred rupees;
(iii) where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates
is more than two hundred thousand rupees, one thousand rupees;
(iv) where the subject matter of an appeal is not covered under clauses (i), (ii) and (iii), two hundred fifty
rupees.
(2) The appeal shall be presented within thirty days of the following date, that is to say,—
(a) where the appeal is under section 248, the date of payment of the tax, or
(b) where the appeal relates to any assessment or penalty, the date of service of the notice of demand relating
to the assessment or penalty:
Provided that, where an application has been made under section 146 for reopening an assessment, the
period from the date on which the application is made to the date on which the order passed on the
application is served on the assessee shall be 1[excluded :]
2
[Provided further that where an application has been made under sub-section (1) of section 270AA,
the period beginning from the date on which the application is made, to the date on which the order
rejecting the application is served on the assessee, shall be excluded, or]
(c) in any other case, the date on which intimation of the order sought to be appealed against is served.
(2A) Notwithstanding anything contained in sub-section (2), where an order has been made under section 201 on
or after the 1st day of October, 1998 but before the 1st day of June, 2000 and the assessee in default has not
presented any appeal within the time specified in that sub-section, he may present such appeal before the 1st
day of July, 2000.
(3) The Commissioner (Appeals) may admit an appeal after the expiration of the said period if he is satisfied
that the appellant had sufficient cause for not presenting it within that period.
(4) No appeal under this Chapter shall be admitted unless at the time of filing of the appeal,—
(a) where a return has been filed by the assessee, the assessee has paid the tax due on the income returned
by him; or
(b) where no return has been filed by the assessee, the assessee has paid an amount equal to the amount of
advance tax which was payable by him:
Provided that, in a case falling under clause (b) and on an application made by the appellant in this behalf, the
Commissioner (Appeals) may, for any good and sufficient reason to be recorded in writing, exempt him from
the operation of the provisions of that clause.

250. (1) The Commissioner (Appeals) shall fix a day and place for the hearing of the appeal, and shall give
notice of the same to the appellant and to the Assessing Officer against whose order the appeal is preferred.
(2) The following shall have the right to be heard at the hearing of the appeal—
(a) the appellant, either in person or by an authorised representative;
(b) the Assessing Officer, either in person or by a representative.
(3) The Commissioner (Appeals) shall have the power to adjourn the hearing of the appeal from time to time.
(4) The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks
fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the
Commissioner (Appeals).
(5) The Commissioner (Appeals) may, at the hearing of an appeal, allow the appellant to go into any ground
of appeal not specified in the grounds of appeal, if the Commissioner (Appeals) is satisfied that the
omission of that ground from the form of appeal was not wilful or unreasonable.
(6) The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and shall state the
points for determination, the decision thereon and the reason for the decision.
(6A) In every appeal, the Commissioner (Appeals), where it is possible, may hear and decide such appeal
within a period of one year from the end of the financial year in which such appeal is filed before him
under sub-section (1) of section 246A.
(7) On the disposal of the appeal, the Commissioner (Appeals) shall communicate the order passed by him
to the assessee and to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner.

251. (1) 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;
(aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement
Commission abates under section 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;
(b) 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;
(c) in any other case, he may pass such orders in the appeal as he thinks fit.
(2) 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.
Explanation.—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.

46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as
the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the
evidence produced by him during the course of proceedings before the [Assessing Officer], except in the
following circumstances, namely :—
(a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or
(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called
upon to produce by the [Assessing Officer] ; or
(c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any
evidence which is relevant to any ground of appeal ; or
(d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity
to the appellant to adduce evidence relevant to any ground of appeal.
(2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as
the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission.
(3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not
take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been
allowed a reasonable opportunity—
(a) to examine the evidence or document or to cross-examine the witness produced by the appellant,
or
(b) to produce any evidence or document or any witness in rebuttal of the additional evidence
produced by the appellant.
(4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case
may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any
witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of
the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause
(a) of sub-section (1) of section 251 or the imposition of penalty under section 271.

C.A. Kalpesh Sanghavi Appeals to ITAT - P a g e | F38-A . 1
Question (ID 11) (Appeals to ITAT / HC) (Revision / Home work)

Discuss the correctness or otherwise of the following statements with reference to the provisions of the Income-
tax Act, 1961:
(i) An appeal before Income-tax Appellate Tribunal cannot be decided in the event of difference of opinion
between the Judicial Member and the Accountant Member on a particular ground.
(ii) A High Court does not have an inherent power to review an earlier order passed by it on merits.
Question (ID 12) (Appeals to ITAT / HC)

Write a brief note on filing of memorandum of cross-objections before the Income-tax Appellate Tribunal.

An Income-tax authority did not file an appeal to the Income-Tax Appellate Tribunal against an order of the
Commissioner (Appeals) decided against the Income-tax department on a particular issue in case of one
assessee, Alpi for assessment year 2013-14 on the ground that the tax effect of such dispute was less than the
monetary limit prescribed by CBDT. In assessment year 2014-15, similar issue arose in the assessments of Alpi
and her sister Palki, which was decided by the Commissioner (Appeals) against the Department. Can the
Income-tax department move an appeal to the Tribunal in respect of A.Y. 2014-15 against the orders of the
Commissioner (Appeals) for AIpi and her sister Palki ?

Discuss the correctness or otherwise of the following propositions in the context of the Income-tax Act, 1961:
(a) At the time of hearing of rectification application, the Income-tax Appellate Tribunal can re-appreciate the
evidence produced during the proceedings of the appeal hearing.
(b) The High Court cannot interfere with the factual finding recorded by the lower authorities and the Tribunal,
without any valid reasons. OR writer short note on fact finding authority.

An assessee, who is aggrieved by all or any of the following orders, is desirous to know the available remedial
recourse and the time limit against each under the Income-tax Act, 1961:
(I) passed under section 143(3) by the Assessing Officer.
(ii) passed under section 263 by the Commissioner of Income-tax.
(iii) passed under section 272A by the Director General.
(iv) passed under section 254 by the ITAT.


Discuss the correctness or otherwise of the following with reference to the provisions of the Income-tax Act,
1961.
(i) The Income-tax Appellate Tribunal cannot amend its orders.
(ii) A case before the Appellate Tribunal cannot be dealt when there is a difference of opinion amongst the
members of the Bench.
(iii) An appeal shall lie to the High court against the order of the Tribunal.

What do you mean by substantial question of law ?
Your Options are,

A Question of law is a debatable point on Evidence presented under law
B Question of law is a debatable point on provisions of law
C Question of law is a controversy
D None of above
Question (ID 17) (Additional evidence / grounds) (Revision / Home work)

Does the Income-tax Appellate Tribunal have the following powers?
(i) Power to allow the assessee to urge any ground of appeal which was not raised by him before the
Commissioner (Appeals);
(ii) Power to recall its own order.
(i) Your Options are,

A Additional grounds cannot be allowed by the tribunal due to mistake of assessee
B Additional grounds cannot be allowed by the tribunal due to mistake of officer
C Additional grounds can be allowed by the tribunal where assessee has sufficient cause
D None of above
(ii) Your Options are,

A Tribunal can re-call orders but cannot review the orders
B Tribunal can re-call orders and review the orders
C Tribunal can re-call orders and rectify it
D None of above


Can a rectification order under section 254 of the Income-tax Act, 1961 be passed by the Income-tax Appellate
Tribunal beyond four years from the date of the order sought to be revised?
Your Options are,

A Rectification can be done suo-moto in 6 months from end of month in which order was
passed
B Rectification can be done suo-moto in 48 months from end of month in which order was
passed
C Rectification can be done upon an application made by assessee or officer in 48 months from
end of month in which order was passed
D None of above

Discuss the following propositions The Income Tax Appellate Tribunal cannot admit additional evidence during
the hearing of the appeal and explain necessary ITAT rules.
Your Options are,
A Tribunal can admit additional evidence
B Tribunal cannot admit additional evidence presented by officer
C Tribunal cannot admit additional evidence presented by assessee
D None of above
Question (ID 20) (Power to stay) (Revision / Home work)

Examine the correctness of the following statement : The Appellate Tribunal is empowered to grant indefinite
stay for the demand disputed in appeals before it.
Your Options are,

A Tribunal has power to stay matter for period of 180 and can be extended up to 365 days
B Tribunal has power to grant indefinite stay
C Tribunal has power to stay matter for 365 days
D Tribunal has power to stay matter for 2 years

Question (ID 21) (Power to stay)

A petition for stay of demand was filed before ITAT by XYZ Ltd. in respect of a disputed demand for which
appeal was pending before it, on which stay was granted by the ITAT vide order dated 1.1.2018. The bench
could not function thereafter till 1.2.2019 and therefore, the disputed matter could not be disposed off The
Assessing Officer attached the bank account on 16.2.2019 and recovered the amount of 15 lacs against the arrear
demand of 25 lacs. The assessee requested the Assessing Officer to refund back the amount as it holds stay over
it. The Assessing Officer rejected the contention of the assessee. Now the assessee seeks your opinion.


F37 23 More then one point in order V.Imp
F37 08 Additional evidence V.Imp
F38 12 MOCO
F38 21 Power to stay V.Imp

252. (1) The Central Government shall constitute an Appellate Tribunal consisting of as many judicial and
accountant members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate
Tribunal by this Act.
(2) A judicial member shall be a person who has for at least ten years held a judicial office in the territory of
India or who has been a member of the Indian Legal Service and has held a post in Grade II of that Service or
any equivalent or higher post for at least three years or who has been an advocate for at least ten years.
(i) in computing the period during which a person has held judicial office in the territory of India, there
shall be included any period, after he has held any judicial office, during which the person has been an
advocate or has held the office of a member of a Tribunal or any post, under the Union or a State,
requiring special knowledge of law;
(ii) in computing the period during which a person has been an advocate, there shall be included any period
during which the person has held judicial office or the office of a member of a Tribunal or any post,
under the Union or a State, requiring special knowledge of law after he became an advocate.
(2A) An accountant member shall be a person who has for at least ten years been in the practice of accountancy
as a chartered accountant under the Chartered Accountants Act, 1949 (38 of 1949), or as a registered accountant
under any law formerly in force or partly as a registered accountant and partly as a chartered accountant, or who
has been a member of the Indian Income-tax Service, Group A and has held the post of Additional Commissioner
of Income-tax or any equivalent or higher post for at least three years.
(3) The Central Government shall appoint—
(a) a person who is a sitting or retired Judge of a High Court and who has completed not less than seven
years of service as a Judge in a High Court; or
(b) 4[***] one of the Vice-Presidents of the Appellate Tribunal,
to be the President thereof.
(4) The Central Government may appoint one or more members of the Appellate Tribunal to be the Vice-
President or, as the case may be, Vice-Presidents thereof.
(4A) 5[***]
(5) The 6[***] Vice-President shall exercise such of the powers and perform such of the functions of the
President as may be delegated to him by the President by a general or special order in writing.

252A. Notwithstanding anything contained in this Act, the qualifications, appointment, term of office, salaries
and allowances, resignation, removal and the other terms and conditions of service of the President, Vice-
President and other Members of the Appellate Tribunal appointed after the commencement of Part XIV of
Chapter VI of the Finance Act, 2017, shall be governed by the provisions of section 184 of that Act:
Provided that the President, Vice-President and Member appointed before the commencement of Part XIV of
Chapter VI of the Finance Act, 2017, shall continue to be governed by the provisions of this Act, and the rules
made thereunder as if the provisions of section 184 of the Finance Act, 2017 had not come into force.]
253. (1) Any assessee aggrieved by any of the following orders may appeal to the Appellate Tribunal against
such order—
(a) an order passed by a Deputy Commissioner (Appeals) before the 1st day of October, 1998 or, as
the case may be, a Commissioner (Appeals) under section 154, section 250, 9[section 270A,] section
271, section 271A 10[, section 271J] or section 272A; or
(b) an order passed by an Assessing Officer under clause (c) of section 158BC, in respect of search
initiated under section 132 or books of account, other documents or any assets requisitioned
under section 132A, after the 30th day of June, 1995, but before the 1st day of January, 1997; or
(ba) an order passed by an Assessing Officer under sub-section (1) of section 115VZC; or
(c) an order passed by a Principal Commissioner or Commissioner under section 12AA or under
clause (vi) of sub-section (5) of section 80G or under section 263 11[or under section 270A] or
under section 271 or under section 272A or an order passed by him under section 154amending his
order under section 263 or an order passed by a Principal Chief Commissioner or Chief Commissioner
or a Principal Director General or Director General or a Principal Director or Director under section
272A; or
(d) an order passed by an Assessing Officer under sub-section (3), of section 143 or section 147 or section
153A or section 153C in pursuance of the directions of the Dispute Resolution Panel or an order
passed under section 154 in respect of such order;
(e) an order passed by an Assessing Officer under sub-section (3) of section 143 or section 147 or section
153A or section 153C with the approval of the Principal Commissioner or Commissioner as
referred to in sub-section (12) of section 144BA or an order passed under section 154 or section 155 in
respect of such order;
(f) an order passed by the prescribed authority under 12[sub-clause (iv) or sub-clause (v) or] sub-clause
(vi) or sub-clause (via) of clause (23C) of section 10.
(2) The Principal Commissioner or Commissioner may, if he objects to any order passed by a Deputy
Commissioner (Appeals) before the 1st day of October, 1998 or, as the case may be, a Commissioner (Appeals)
under section 154 or section 250, direct the Assessing Officer to appeal to the Appellate Tribunal against the
order.
(2A) 13[***]
(3) Every appeal under sub-section (1) or sub-section (2) shall be filed within sixty days of the date on which
the order sought to be appealed against is communicated to the assessee or to the Principal Commissioner or
Commissioner, as the case may be :

Provided that in respect of any appeal under clause (b) of sub-section (1), this sub-section shall have effect as
if for the words "sixty days", the words "thirty days" had been substituted.
(3A) 14[***]
15
[(4) The 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 preferred under sub-section (1) or sub-section (2) by the other
party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty
days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner, against any part of the order of the Commissioner (Appeals), and such memorandum shall
be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub-
section (3).]
(5) The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross-objections after
the expiry of the relevant period referred to in sub-section (3) or sub-section (4), if it is satisfied that there
was sufficient cause for not presenting it within that period.
(6) An appeal to the Appellate Tribunal shall be in the prescribed form and shall be verified in the prescribed
manner and shall, in the case of an appeal made, on or after the 1st day of October, 1998, irrespective of the date
of initiation of the assessment proceedings relating thereto, be accompanied by a fee of,—
(a) where the total income of the assessee as computed by the Assessing Officer, in the case to which the
appeal relates, is one hundred thousand rupees or less, five hundred rupees,
(b) where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates is
more than one hundred thousand rupees but not more than two hundred thousand rupees,
one thousand five hundred rupees,
(c) where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates is
more than two hundred thousand rupees, one per cent of the assessed income, subject to a
maximum of ten thousand rupees,
(d) where the subject matter of an appeal relates to any matter, other than those specified in clauses (a), (b)
and (c), five hundred rupees:
Provided that no fee shall be payable in the case of an appeal referred to in sub-section (2), or, sub-section (2A)
as it stood before its amendment by the Finance Act, 2016, or, a memorandum of cross objections referred to in
sub-section (4).
(7) An application for stay of demand shall be accompanied by a fee of five hundred rupees.

254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard,
pass such orders thereon as it thinks fit.
(1A) [***]
(2) The Appellate Tribunal may, at any time within six months from the end of the month in which the order
was passed], with a view to rectifying any mistake apparent from the record, amend any order passed by
it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the
assessee or the Assessing Officer :
Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise
increasing the liability of the assessee, shall not be made under this sub-section unless the Appellate Tribunal
has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable
opportunity of being heard :
Provided further that any application filed by the assessee in this sub-section on or after the 1st day of
October, 1998, shall be accompanied by a fee of fifty rupees.
(2A) In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within
a period of four years from the end of the financial year in which such appeal is filed under sub-section
(1) or sub-section (2) 18[***] of section 253 :
Provided that the Appellate Tribunal may, after considering the merits of the application made by the assessee,
pass an order of stay in any proceedings relating to an appeal filed under sub-section (1) of section 253, for
a period not exceeding one hundred and eighty days from the date of such order and the Appellate Tribunal
shall dispose of the appeal within the said period of stay specified in that order:
Provided further that where such appeal is not so disposed of within the said period of stay as specified in
the order of stay, the Appellate Tribunal may, on an application made in this behalf by the assessee and
on being satisfied that the delay in disposing of the appeal is not attributable to the assessee, extend the
period of stay, or pass an order of stay for a further period or periods as it thinks fit; so, however, that the
aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any
case, exceed three hundred and sixty-five days and the Appellate Tribunal shall dispose of the appeal
within the period or periods of stay so extended or allowed:
Provided also that if such appeal is not so disposed of within the period allowed under the first proviso or
the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three
hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period
or periods, even if the delay in disposing of the appeal is not attributable to the assessee.
(2B) The cost of any appeal to the Appellate Tribunal shall be at the discretion of that Tribunal.
(3) The Appellate Tribunal shall send a copy of any orders passed under this section to the assessee
and to the Principal Commissioner or Commissioner.
(4) Save as provided in section 256 or section 260A, orders passed by the Appellate Tribunal on appeal shall
be final.

255. (1) The powers and functions of the Appellate Tribunal may be exercised and discharged by Benches
constituted by the President of the Appellate Tribunal from among the members thereof.
(2) Subject to the provisions contained in sub-section (3), a Bench shall consist of one judicial member and
one accountant member.
(3) The President or any other member of the Appellate Tribunal authorised in this behalf by the Central
Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a
member and which pertains to an assessee whose total income as computed by the Assessing Officer in the case
does not exceed fifty lakh rupees, and the President may, for the disposal of any particular case, constitute a
Special Bench consisting of three or more members, one of whom shall necessarily be a judicial
member and one an accountant member.
(4) If the members of a Bench differ in opinion on any point, the point shall be decided according to the
opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the
point or points on which they differ, and the case shall be referred by the President of the Appellate
Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and
such point or points shall be decided according to the opinion of the majority of the members of the Appellate
Tribunal who have heard the case, including those who first heard it.
(5) Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own
procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the
discharge of its functions, including the places at which the Benches shall hold their sittings.
(6) The Appellate Tribunal shall, for the purpose of discharging its functions, have all the powers which are
vested in the income-tax authorities referred to in section 131, and any proceeding before the Appellate
Tribunal shall be deemed to be a judicial proceeding within the meaning ofsections 193 and 228 and for the
purpose of section 196 of the Indian Penal Code (45 of 1860), and the Appellate Tribunal shall be deemed to be
a civil court for all the purposes of section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898 (5
of 1898).

Rule 29.
The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary
before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be
examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or , if the
income-tax authorities have decided the case without giving sufficient opportunity to the assessee to
adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be
recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or
may allow such evidence to be adduced.

C.A. Kalpesh Sanghavi Appeals to Courts - P a g e | F38-B . 1
Question (SLID 01) (courts) (Revision / Home work)
High court will allow only the questions relating to _________.
Your Options are

A Law
B Facts
C Income Tax law
D Tax liability more then 10,000

260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal
before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case
involves a substantial question of law.
(2) The Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or Commissioner
or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court
and such appeal under this sub-section shall be—
(a) filed within one hundred and twenty days from the date on which the order appealed against
is received by the assessee or the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner;
(b) [***]
(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law
involved.
(2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days
referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the
same within that period.
(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall
formulate that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing
of the appeal, be allowed to argue that the case does not involve such question :
Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear,
for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is
satisfied that the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon
containing the grounds on which such decision is founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of
law as is referred to in sub-section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908),
relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section.

260B. (1) When an appeal has been filed before the High Court under section 260A, it shall be heard by a bench
of not less than two Judges of the High Court, and shall be decided in accordance with the opinion of such
Judges or of the majority, if any, of such Judges.
(2) Where there is no such majority, the Judges shall state the point of law upon which they differ and
the case shall then be heard upon that point only by one or more of the other Judges of the High Court and
such point shall be decided according to the opinion of the majority of the Judges who have heard the case
including those who first heard it.
261. An appeal shall lie to the Supreme Court from any judgment of the High Court delivered before the
establishment of the National Tax Tribunal] on a reference made under section 256 against an order made
under section 254 before the 1st day of October, 1998 or an appeal made to High Court in respect of an order
passed under section 254 on or after that date in any case which the High Court certifies to be a fit one for appeal
to the Supreme Court.

C.A. Kalpesh Sanghavi Time Limits and other MCQs - P a g e | F39-A . 1
MCQ - BA - 01
For the purpose of making assessment u/s 174(1) _______________ notice should be given to assessee
Your Options are,

A not being less than 7 days
B not being less than 15 days
C not being less than 21 days
D not being less than 30 days
MCQ - BA - 02
Tax payable in a notice of demand under section 156 shall be paid within _________ days of the service of the
notice at the place and to the person mentioned in the notice
Your Options are,

A 30
B 45
C 60
D 90

MCQ - BB - 01
Time Limit for rejecting the application made to settlement commission.
Your Options are,

A 7 days from the date of the application
B 3 days from the date of the application
C 21 days from the date of the application
D 14 days from the date of the application
MCQ - BB - 02
Time Limit for issue of notice by settlement commission to assessee for allowing or rejecting the application.
Your Options are,

MCQ - BB - 03
Time Limit for calling report from commissioner by settlement commission after the application is allowed.
Your Options are,


MCQ - BB - 04
Time Limit for commissioner to submit the report to settlement commission u/s 245D(2B)
Your Options are,

A 30 days from the date of the receipt of communication
B 30 days from the date of the receipt of notice
D 30 days from the date of the allowing application
MCQ - BB - 05
Time Limit for settlement commission to invalidate the application made by the assessee.
Your Options are,

A 15 days from the date of the receipt of report of commissioner
B 15 days from the date of the receipt of order
C 30 days from the date of the receipt of report of commissioner
D 30 days from the date of the receipt of order
MCQ - BB - 06
Within how many days the assessee should pay the tax otherwise will be liable for interest.
Your Options are,

A 30 days from the date of the receipt copy of order of settlement commission
B 35 days from the date of the receipt copy of order of settlement commission
C 40 days from the date of the receipt copy of order of settlement commission
D 25 days from the date of the receipt copy of order of settlement commission
MCQ - BB - 07
Time limit for passing the orders of settlement commission
Your Options are,

A 18 months from the end of the month in which the application was made
B 18 months from the end of the month in which the application was allowed
C 18 months from the date on which the application was allowed
D 18 months from the date on which the application was made

MCQ - BB - 08
Time limit for passing the orders of settlement commission
Your Options are,

A 18 months from the end of the month in which the application was made
B 12 months from the end of the month in which the application was allowed
C 24 months from the date on which the application was allowed
D 9 months from the date on which the application was made
MCQ - BB - 09
Rate of interest charged by settlement commission in case of late payment of tax.
Your Options are,

A Where any tax payable is not paid by the assessee within 30 days of the receipt of a copy of
the order by him, then, the assessee shall be liable to pay simple interest at one and one-
fourth per cent for every month or part of a month.
B Where any tax payable is not paid by the assessee within 35 days of the receipt of a copy of
the order by him, then, the assessee shall be liable to pay simple interest at one and one-half
per cent for every month or part of a month.
C Where any tax payable is not paid by the assessee within 60 days of the receipt of a copy of
the order by him, then, the assessee shall be liable to pay simple interest at one and one-half
per cent for every month or part of a month.
D Where any tax payable is not paid by the assessee within 35 days of the receipt of a copy of
the order by him, then, the assessee shall be liable to pay simple interest at one and one-
fourth per cent for every month or part of a month.
MCQ - BB - 10
Can settlement commission rectify its orders ?
Your Options are,

A six months from the end of the month in which the order was passed;
B six months from the end of the year in which the order was passed;
C nine months from the end of the month in which the order was served;
D Rectification of orders is not allowed

MCQ - BB - 11
Time limit for Income tax authority to pass the orders when the proceeding before settlement commission have
become void.
Your Options are,

A Income tax authority shall complete such proceedings at any time before the expiry of two
years from the end of the financial year in which the settlement became void
B Income tax authority shall complete such proceedings at any time before the expiry of one
years from the end of the financial year in which the settlement became void
C Income tax authority shall complete such proceedings at any time before the expiry of
eighteen months from the end of the financial year in which the settlement became void
D Income tax authority shall complete such proceedings at any time before the expiry of twenty
four months from the end of the financial year in which the settlement became void
MCQ - BB - 12
Time limit for assessee to make application to settlement commission where search was carried out in the
premises of assessee.
Your Options are,

A 7 days of executing search
B 14 days of executing search
C 7 days of issue of notice u/s 153A
D After the issue of notice u/s 153A but before passing the orders.
MCQ - BB - 13
How much is the minimum amount of tax to be eligible for making application to settlement commission
Your Options are,

A Additional amount of income-tax payable on the income disclosed in the application exceeds
five lakh rupees
B Additional amount of income-tax payable on the income disclosed in the application exceeds
twenty lakh rupees
C Additional amount of income-tax payable on the income disclosed in the application exceeds
ten lakh rupees
D Additional amount of income-tax payable on the income disclosed in the application exceeds
fifty lakh rupees

MCQ - BB - 14
How much is the minimum amount of tax to be eligible for making application to settlement commission where
search was conducted in premises of the assessee.
Your Options are,

A Additional amount of income-tax payable on the income disclosed in the application exceeds
five lakh rupees
B Additional amount of income-tax payable on the income disclosed in the application exceeds
twenty lakh rupees
C Additional amount of income-tax payable on the income disclosed in the application exceeds
ten lakh rupees
D Additional amount of income-tax payable on the income disclosed in the application exceeds
fifty lakh rupees
MCQ - BB - 15
Amount of fees payable for making application to settlement commission.
Your Options are,

A Prescribed amount of fees.
B 10,000 INR
C 20,000 INR
D No fees is payable for making application.
MCQ - BB - 16
Application before settlement commission can be withdrawn in so many number of days.
Your Options are,

A 7 days of making application
B 14 days of making application
C 21 days of making application
D Application cannot be withdrawn in any case.

MCQ - BB - 17
After making application to settlement commission within how many days assessee should intimate to assessing
officer.
Your Options are,

A 7 days of making application
B 3 days of making application
C 5 days of making application
D on the date on which he makes an application

MCQ - CA - 01
Income tax authority may impound and retain in its custody for such period as it thinks fit any books of account
or other documents produced before it u/s 131
Your Options are,

A 15 days (exclusive of holidays)
B 15 days (inclusive of holidays)
C 30 days (exclusive of holidays)
D 30 days (inclusive of holidays)
MCQ - CA - 02
Income tax authority may impound and retain in its custody for such period as it thinks fit any cash, bullion
jewellery, valuable article or a thing u/s 131
Your Options are,

D None of above
MCQ - CA - 03
or other documents produced before it u/s 133B
Your Options are,

D None of above

MCQ - CA - 04
or other documents produced before it u/s 133A
Your Options are,

D None of above
MCQ - CA - 05
Income tax authority may enter the premises u/s 133A with view to verify TDS matters
Your Options are,

A After sunrise and before sunset
B 9.00 am to 5 pm
C During the hours place is open for business
D Any time except holidays
MCQ - CA - 06
Income tax authority may enter the premises u/s 133A with view to verify details of charitable organisation
Your Options are,

B 9.00 am to 5 pm
MCQ - CA - 07
Income tax authority may enter the premises u/s 133A with view to verify details of business doing entity
Your Options are,

B 9.00 am to 5 pm

MCQ - CA - 08
Income tax authority may enter the premises u/s 133A with view to verify scale of expense of a function,
ceremony or an event.
Your Options are,

B 9.00 am to 5 pm
D Any time during function ceremony or an event
MCQ - CA - 09
Income tax authority may enter the premises u/s 133B with view to collect information.
Your Options are,

B 9.00 am to 5 pm
D Any time during function ceremony or an event
MCQ - CA - 10
Income tax authority may enter the premises u/s 132.
Your Options are,

B 9.00 am to 5 pm
D Any time
MCQ - CA - 11
Order of 132(3) shall be operative and valid for the period of.
Your Options are,

A 30 Days
B 60 Days
C 90 Days
D 15 Days

MCQ - CA - 12
Books of account or other documents seized u/s 132 shall not be retained by the authorised officer for a period
exceeding ______________ from the date of the order of assessment under section 153A.
Your Options are,

A 30 Days
B 60 Days
C 90 Days
D 15 Days
MCQ - CA - 13
Where, during the course of the search or seizure or within a period of _______________ from the date on
which the last of the authorisations for search was executed, the authorised officer may by order in writing,
attach provisionally any property belonging to the assessee.
Your Options are,

A 30 Days
B 60 Days
C 90 Days
D 15 Days
MCQ - CA - 14
Where the authorised officer has no jurisdiction over the person referred in 132 (1), valuable article or a thing
shall be handed over by the authorised officer to the Assessing Officer having jurisdiction over such person
within a period of _____________ from the date on which the last of the authorisations for search.
Your Options are,

A 30 Days
B 60 Days
C 90 Days
D 15 Days

MCQ - CA - 15
Orders of provisional attachment u/s 132(9B) shall be operative for ____________.
Your Options are,

A 5 months
B 6 months
C 3 months
D 9 months
MCQ - CA - 16
Application u/s 132B for release of seized assets is to be made within the period of __________
Your Options are,

A 30 days from the end of the month in which the asset was seized,
B 30 days from the date when asset was seized,
C 60 days from the end of the month in which the asset was seized,
D 60 days from the date when asset was seized,
MCQ - CA - 17
Pursuant to application u/s 132B assets may be released within the period of ________
Your Options are,

A 120 days from the date on which the last of the authorisations for search was executed
B 120 days from the date on which application for release was made
C 60 days from the date on which the last of the authorisations for search was executed
D 30 days from the date on which application for release was made

MCQ - CB - 01
What is due date of filing return for working partner of a firm whose accounts are required to be audited under
Income Act or under any other law for the time being in force
Your Options are,

A 30th September
B 30th July
C 31st October
D 31st December

MCQ - CC - 01
Time limit for sending intimation u/s 143(1).
Your Options are,

A 1 year from the end of the financial year in which the return is made.
B 1 year from the end of assessment year.
C 1 year from the end of the financial year in which the notice of 143(2) was issued.
D 1 year from the end of the financial year in which the notice of 148 was issued.
MCQ - CC - 02
Time limit for sending intimation u/s 143(1) where there is no refund or no demand.
Your Options are,

A 1 year from the end of the financial year in which the return is made.
B 1 year from the end of assessment year.
C 1 year from the end of the financial year in which the notice of 143(2) was issued.
D acknowledgement of the return shall be deemed to be the intimation

MCQ - CC - 03
Time limit for issuing notice u/s 143(2).
Your Options are,

A 6 months from the end of the financial year in which the return is furnished.
B 6 months from the end of the assessment year in which the return is furnished.
C 6 months from the end of the calendar year in which the return is furnished.
D 6 months from the end of the month in which the return is furnished.
MCQ - CC - 04
Overall maximum Time limit for getting special audit report of 142(2A)
Your Options are,

A 180 days from the date on which the direction under 142(2A) is received by the assessee
B 240 days from the date on which the direction under 142(2A) is received by the assessee
C 120 days from the date on which the direction under 142(2A) is received by the assessee
D 900 days from the date on which the direction under 142(2A) is received by the assessee
MCQ - CC - 05
Time limit for passing order u/s 143(3).
Your Options are,

A 12 months from the end of the assessment year
B 10 months from the end of the assessment year
C 9 months from the end of the assessment year
D 6 months from the end of the assessment year
MCQ - CC - 06
Time limit for passing order u/s 144.
Your Options are,

A 12 months from the end of the assessment year
B 10 months from the end of the assessment year
C 9 months from the end of the assessment year
D 6 months from the end of the assessment year

MCQ - CC - 07
Time limit for fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting
aside or cancelling an assessment.
Your Options are,

A 9 months from the end of the financial year in which the order under section 255 is received
by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner or, as the case may be, the order under section 263 or section 264 is passed
by the Principal Commissioner or Commissioner:
B 12 months from the end of the financial year in which the order under section 254 is received
C 12 months from the end of the financial year in which the order under section 254 is received
D 9 months from the end of the financial year in which the order under section 254 is received

MCQ - CC - 08
Where effect to an order under section 250 or section 254 or section 260 or section 262 or section 263 or section
264 is to be given by the Assessing Officer, wholly or partly, otherwise than by making a fresh assessment or
reassessment, what is the time limit ?
Your Options are,

A such effect shall be given within a period of 3 months from the end of the month in which
order under section 250 or section 254 or section 260 or section 262 is received by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, as the case may be, the order under section 263 or section 264 is passed by
the Principal Commissioner or Commissioner
B such effect shall be given within a period of 6 months from the end of the month in which
C such effect shall be given within a period of 9 months from the end of the month in which
D such effect shall be given within a period of 12 months from the end of the month in which

MCQ - CC - 09
Where effect to an order under section 250 or section 254 or section 260 or section 262 or section 263 or section
264 is to be given by the Assessing Officer, wholly or partly, otherwise than by making a fresh assessment or
reassessment, how much is the extension of time maximum can be given ?
Your Options are,

A where it is not possible for the Assessing Officer to give effect to such order within the
aforesaid period, for reasons beyond his control, the Principal Commissioner or
Commissioner on receipt of such request in writing from the Assessing Officer, if satisfied,
may allow an additional period of 9 months to give effect to the order
B where it is not possible for the Assessing Officer to give effect to such order within the
Commissioner on receipt of such request in writing from the assessee, if satisfied, may allow
an additional period of 6 months to give effect to the order
C where it is not possible for the Assessing Officer to give effect to such order within the
D where it is not possible for the Assessing Officer to give effect to such order within the

MCQ - CC - 10
Where, in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment
made on the firm under section 147, what is the time limit ?
Your Options are,

A 9 months from the end of the month in which the assessment order in the case of the firm is
passed
B 9 months from the end of the month in which the assessment order in the case of the firm is
passed
C 15 months from the end of the month in which the assessment order in the case of the firm is
passed
D 12 months from the end of the month in which the assessment order in the case of the firm is
passed
MCQ - CC - 11
During the course of the a scrutiny assessment 17 days have been taken by assessee to obtain the report of a
special audit. Audit report submitted to officer on 12-March-22 for the AY 20-21. Assessing officer must
complete the assessment up to _____________ date
Your Options are,

A 11-May-22
B 30-March-22
C 31-May-22
D 17-April-22
Hint :
60 days from expiry 12-March-22 i.e. 11-May-22
OR
excluding 17 days from normal time limit of 31-Mar-22 i.e. 17th April 22
whichever is later.

MCQ - CD - 01
Time limit for issuing notice u/s 148 where the originally the intimation was send to assessee. Where bogus
loan came to the knowledge of the officer amount 75,000.
Your Options are,

A 4 years from the end of the relevant assessment year
B 6 years from the end of the relevant assessment year
C 16 years from the end of the relevant assessment year
D 2 years from the end of the relevant assessment year
MCQ - CD - 02
Time limit for issuing notice u/s 148 where the originally the intimation was send to assessee. Where bogus
loan came to the knowledge of the officer amount 3,75,000.
Your Options are,

MCQ - CD - 03
Time limit for issuing notice u/s 148 where the originally no intimation or orders were passed. Where bogus
loan came to the knowledge of the officer amount 75,000.
Your Options are,


MCQ - CD - 04
Time limit for issuing notice u/s 148 where the no intimation or orders were passed. Where bogus loan came
to the knowledge of the officer amount 3,75,000.
Your Options are,

MCQ - CD - 05
Time limit for issuing notice u/s 148 where the originally the order u/s 143(3) was passed. Where bogus loan
came to the knowledge of the officer amount 75,000.
Your Options are,

MCQ - CD - 06
Time limit for issuing notice u/s 148 where the originally the order u/s 143(3) was passed. Where bogus loan
came to the knowledge of the officer amount 3,75,000.
Your Options are,


MCQ - CD - 07
Time limit for issuing notice u/s 148 where the originally the order u/s 143(3) was passed. Where income
escaping came to the knowledge of the officer amount 75,000. However income escaped for the reason not
because of failure on part of the assessee to disclose material facts truly and fully.
Your Options are,

MCQ - CD - 08
Time limit for issuing notice u/s 148 where the originally the order u/s 143(3) was passed. Where income
escaping came to the knowledge of the officer amount 5,75,000. However income escaped for the reason not
because of failure on part of the assessee to disclose material facts truly and fully.
Your Options are,

MCQ - CD - 09
Time limit for issuing notice u/s 148 where the originally the intimation was send to assessee. Where income in
relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has
escaped assessment.
Your Options are,


MCQ - CD - 10
Time limit for issuing notice u/s 148 where the originally the order was passed u/s 143(3).
Where income in relation to any asset (including financial interest in any entity) located outside India, chargeable
to tax, has escaped assessment.
Your Options are,

MCQ - CD - 11
Time limit for issuing notice u/s 148 on agent of non-resident where the originally the intimation was send to
an assessee a non-resident.
Your Options are,

MCQ - CD - 12
Time limit for issuing notice u/s 148 on agent of non-resident where the originally the orders were passed u/s
143(3) was send to an assessee a non-resident.
Your Options are,


MCQ - CD - 13
Time limit for passing order u/s 147.
Your Options are,

A 9 months from the end of the financial year in which the notice under section 148 was served
B 12 months from the end of the assessment year in which the notice under section 148 was
issued
C 12 months from the end of the financial year in which the notice under section 148 was
served
D 9 months from the end of the assessment year in which the notice under section 148 was
issued

MCQ - CE - 01
Time limit for passing orders of rectification u/s 154
Your Options are,

A 4 years from the end of the financial year in which the order sought to be amended was passed
B 2 years from the end of the financial year in which the order sought to be amended was served
C 6 years from the end of the financial year in which the order sought to be amended was passed
D 4 years from the end of the financial year in which the order sought to be amended was served
MCQ - CE - 02
Time limit for passing orders of rectification u/s 154 where application for seeking rectification has been made
by the assessee.
Your Options are,

A 6 months from the end of the year in which the application is received by it
B 9 months from the end of the month in which the application is received by it
C 12 months from the end of the month in which the application is received by it
D 6 months from the end of the month in which the application is received by it
MCQ - CE - 03
Amount of fees to be paid for making the application u/s 154
Your Options are,

A 500 INR
B 1000 INR
C 1500 INR
D Nil

MCQ - CF - 01
What is time limit for CIT to revise the order u/s 263.
Your Options are,

A 2 years from the end of the financial year in which the order sought to be revised was passed
B 6 years from the end of the financial year in which the order sought to be revised was passed
C 3 years from the end of the financial year in which the order sought to be revised was passed
D 4 years from the end of the financial year in which the order sought to be revised was passed
MCQ - CF - 02
What is time limit for CIT to pass a suo-moto order u/s 264.
Your Options are,

A CIT shall not of his own motion revise any order if the order has been made more than two
year previously.
B CIT shall not of his own motion revise any order if the order has been made more than 6
months previously.
C CIT shall not of his own motion revise any order if the order has been made more than one
year previously.
D CIT shall not of his own motion revise any order if the order has been made more than one
month previously.

MCQ - CF - 03
What is the time limit within which assessee can make application u/s 264.
Your Options are,

A application must be made within one year from the date on which the order in question was
communicated to him or the date on which he otherwise came to know of it, whichever is
later
B application must be made within two year from the date on which the order in question was
earlier
C application must be made within 3 year from the date on which the order in question was
later
D application must be made within one year from the date on which the order in question was
earlier
MCQ - CF - 04
What is time limit for CIT to pass order u/s 264 pursuant to application made by assessee.
Your Options are,

A two year from the end of the financial year in which such application is made by the assessee
for revision
B one year from the end of the assessment year in which such application is made by the
assessee for revision
C one year from the end of the month in which such application is made by the assessee for
revision
D one year from the end of the financial year in which such application is made by the assessee
for revision

MCQ - CF - 05
Amount of fees to be paid for making the application u/s 264
Your Options are,

A 500 INR
B 1000 INR
C 1500 INR
D Nil

MCQ - CG - 01
Time limit for filing an appeal to CIT(A) against order of assessment u/s 143(3)
Your Options are,

A 30 days from the date of service of the notice of demand relating to the assessment
B 90 days from the date of service of the notice of demand relating to the assessment
C 120 days from the date of service of the notice of demand relating to the assessment
D 150 days from the date of service of the notice of demand relating to the assessment
MCQ - CG - 02
Time limit for filing an appeal to CIT(A) against TDS matters u/s 248
Your Options are,

A 120 days from date of payment of the tax.
B 60 days from date of payment of the tax.
C 90 days from date of payment of the tax.
D 30 days from date of payment of the tax.
MCQ - CG - 03
Time limit for filing an appeal to CIT(A) against orders of 263.
Your Options are,

A The appeal cannot lie to CIT(A)

MCQ - CG - 04
Time limit for filing an appeal to CIT(A) against orders of settlement commission.
Your Options are,

MCQ - CG - 05
Time limit for filing an appeal to CIT(A) against orders of authority of advance ruling.
Your Options are,

MCQ - CG - 06
Time limit for filing an appeal to CIT(A) against orders u/s 264.
Your Options are,


MCQ - CG - 07
Amount of fees for making appeal to CIT(A) where Total Income returned is 50,000 however assessing officer
has done the assessment by making additions of 20,000.
Your Options are,

A 250 INR
B 500 INR
C 1000 INR
D 1500 INR
MCQ - CG - 08
has done the assessment by making additions of 1,20,000.
Your Options are,

A 250 INR
B 500 INR
C 1000 INR
D 1500 INR
MCQ - CG - 09
has done the assessment by making additions of 2,20,000.
Your Options are,

A 250 INR
B 500 INR
C 1000 INR
D 1500 INR

MCQ - CG - 10
Amount of fees for making appeal to CIT(A) where matter related to TDS.
Your Options are,

A 250 INR
B 500 INR
C 1000 INR
D 1500 INR
MCQ - CG - 11
Time limit for passing orders by CIT(A)
Your Options are,

A one year from the end of the financial year in which such appeal is filed before him
B where it is possible, may hear and decide such appeal within a period of one year from the
end of the financial year in which such appeal is filed before him
C two years from the end of the financial year in which such appeal is filed before him
D one years from the end of the financial year in which such appeal is filed before him

MCQ - CH - 01
Time limit for filing appeals by assessee to ITAT against the orders of CIT(A).
Your Options are,

A 60 days of the date on which the order sought to be appealed against is communicated to the
assessee or to the Principal Commissioner or Commissioner
B 30 days of the date on which the order sought to be appealed against is communicated to the
C 90 days of the date on which the order sought to be appealed against is communicated to the
D 120 days of the date on which the order sought to be appealed against is communicated to
the assessee or to the Principal Commissioner or Commissioner
MCQ - CH - 02
Time limit for filing appeals by assessee to ITAT against the orders of 158BC
Your Options are,

D 120 days of the date on which the order sought to be appealed against is communicated to
the assessee or to the Principal Commissioner or Commissioner

MCQ - CH - 03
Time limit for filing appeals by department to ITAT against the orders of CIT(A).
Your Options are,

D Department cannot file an appeal to ITAT.
MCQ - CH - 04
What is the Time limit for Appellant to file memorandum of cross-objections.
Your Options are,

A 45 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
B 30 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
C 15 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
D memorandum of cross-objections is not to be filed
MCQ - CH - 05
What is the Time limit for Respondent to file memorandum of cross-objections.
Your Options are,

A 45 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
B 30 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
C 15 days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner
D memorandum of cross-objections is not to be filed

MCQ - CH - 06
Amount of fees payable by assessee to ITAT where assessed income is 70,000
Your Options are,

A 500 INR
B 1000 INR
C 1 per cent of the assessed income, subject to a maximum of ten thousand rupees
D No fees is payable
MCQ - CH - 07
Your Options are,

A 500 INR
B 1500 INR
MCQ - CH - 08
Your Options are,

A 500 INR
B 1000 INR
MCQ - CH - 09
Amount of fees payable by assessee to ITAT where matter relates to TDS
Your Options are,

A 500 INR
B 1000 INR

MCQ - CH - 10
Amount of fees payable by assessee to ITAT where application for stay is made.
Your Options are,

A 500 INR
B 1000 INR
MCQ - CH - 11
Time limit for passing orders by ITAT
Your Options are,

A four years from the end of the financial year in which such appeal is filed
B where it is possible, may hear and decide such appeal within a period of four years from the
end of the financial year in which such appeal is filed
C two years from the end of the financial year in which such appeal is filed
D one years from the end of the financial year in which such appeal is filed
MCQ - CH - 12
What is the time period for which stay can be operative where appropriate orders have been passed by ITAT.
Your Options are,

A 180 days from the date of such order (extended up to aggregate period of 365 days)
B 90 days from the date of such order (extended up to aggregate period of 365 days)
C 180 days from the date of such order (extended up to aggregate period of 360 days)
D 90 days from the date of such order (extended up to aggregate period of 360 days)

MCQ - CH - 13
Time limit for ITAT to rectify its own orders.
Your Options are,

A 6 months from the end of the month in which the order was passed
B 6 months from the end of the month in which the application for rectification is received by
ITAT
C 6 months from the end of the month in which the order was served
D 6 months from the end of the month in which the order was communicated

C.A. Kalpesh Sanghavi deemed to accrue or arise - P a g e | F51-A1 . 1
Sub-Topics Sections
A Non – Residents (provisions for specific business.) 110 to 115
B DTAA 90 to 91
C Transfer Pricing 92 to 94A
D Authority of advance ruling 245N to V
Whatsapp 996910000 (pen drive videos available)


The assessee, which was a part of the Department of Space in the Government of India, had the objective of
developing satellite technology and application of space technology for socio-economic development and space
research. It entered into a contract with Inmarsat Global of the U. K. for leasing of the Inmarsat navigation
transponder capacity for its GAGAN TDS project, under which it had taken on lease the space segment capacity
of L1 and L5 transponder centered on an Inmarsat 4th generation satellite, making an orbit at 36,000 km altitude
above the earth’s atmosphere. The capacity was utilized through data commands sent from a ground station set
up by the applicant to that transponder out of many which was for navigation purposes which dispatched signals
in space on two specified frequencies. The corrected or augmented data sent from the satellite and transmitted
by the transponder were used for better navigational accuracies. The applicant paid a fixed annual charge
regardless of the actual use of transponder capacity. On these you are required to answer (i) whether the payment
to Inmarsat Global of the U. K. for leasing of transponder was not royalty; and (ii) whether the applicant had to
deduct tax at source under section 195 of the Income-tax Act, 1961, in respect of the lease amount.
The assessee, a non-resident Australian company, was engaged in the business of providing professional services
to the energy and resource industries. It was awarded a contract for providing (i) engineering and procurement
services, (ii) project management services, and (iii) construction advisory and commissioning advisory services,
to Reliance, an Indian company, for laying cross-country pipelines for transportation of hydro-carbons from
Jamnagar to Bhopal and from Goa to Hyderabad, in India. The assessee was provided with office space in the
office of the local engineering contractor of Reliance in Mumbai. Under an engineering and procurement
services agreement, the assessee received substantial amounts : Australian dollars 2,229,794 for the Jamnagar
to Bhopal project and Australian dollars 1,232,994 for the Goa to Hyderabad project. According to the applicant,
80 per cent. of the activities concerning basic engineering services were primarily carried out in Perth in
Australia, the procurement functions were essentially performed in India and some work relating to project
management services was also carried out in India. The assessee employees were present in India for 127 days
during the financial year and 241 days during the next year. On these facts your advise is sought on the following
questions :
1. whether the assessee formed a permanent establishment in India due to its activities and services
rendered in India;
2. whether the services were in the nature of "royalty” and
3. whether the the receipts of the assessee were not taxable in India.


A private company registered in India, was a part of the Dell group of companies. It was mainly engaged in the
business of providing call centre, data processing and information technology support services to the Dell group
companies. The applicant’s parent company had entered into an agreement with BT, a non-resident company
formed and registered in the USA, under which BT, the non-resident company, provided the company with two
way transmission of voice and data through telecom bandwidth. While BT was to provide the international half-
circuit from the USA/Ireland, the Indian half-circuit was provided by VSNL, an Indian telecom company. Apart
from installation charges payable initially, fixed monthly recurring charges for the circuit between the USA and
Ireland and for the circuit between Ireland and India were payable by the applicant to BT, and this was net of
Indian taxes. BT raised its invoice directly on the applicant and the applicant made the payment directly to BT.
The company was paying tax in India in relation to the recurring charges in accordance with section 195 of the
Income-tax Act, 1961. There was no equipment of BT in the applicant’s premises and the applicant had no right
over any equipment held by BT for providing the bandwidth. Fibre link cables and other equipment were used
for all customers including the company. The bandwidth was provided through a huge network of optical fibre
cables laid under seas across several countries of which BT used only a small fraction. There was no dedicated
machinery or equipment identified or allowed to be used in the hands of the company; a common infrastructure
was being utilised by various operators to provide service to various service recipients and the company was
one among them receiving the service. The landing site was at Mumbai, and the Indian leg thereof to Bangalore,
including the last mile connectivity to the premises of the company, was catered to by Bharti Telecom. On these
facts the company sought your advise on questions relating to the tax liability of BT and the companies duty to
deduct tax at source. You are required to offer your comments.
Company incorporated in Canada, was a contract research organization providing clinical and bio-analytical
services to assist pharmaceutical companies around the world in the development of new drugs or generic copies
of drugs already being marketed. It evaluated on behalf of its clients the bio-equivalence and/or comparative
bio-availability of the new generic drug vis-a-vis the reference drug which was already available in the market,
by devising various methods/protocols in conformity with international regulations. The reports produced by
the company were acceptable to the regulatory authorities. Neither the methods/protocols developed, which
were product specific, nor the specimens, were given to the clients. Only the final reports/conclusions of the
evaluation were given to the clients. The client seeking approval of regulatory authorities for marketing of a
new generic drug would enclose the test report provided by the applicant along with its application. The
applicant entered into agreements with Indian pharmaceutical companies, viz., Sandoz and Ranbaxy, for
rendering such services. The clients paid a fee to the applicant for these services. You are required to give your
comments on taxability of above transaction.


A private company an assessee engaged in the business of prospecting and mining for diamonds and other
minerals, had been granted licences by the State Governments of Karnataka, Andhra Pradesh and Chattisgarh
for mineral reconnaissance activities. Reconnaisance is the early stage of exploration. During the early stage
various techniques are employed like collection of steam samples, geophysical survey like airborne multispectral
scanner survey, electro-magnetic survey. Exploration has various stages like the early stage, initially for a period
of 3 to 5 years, the advanced stage for a period of 5 to10 years and the feasibility stage of 5 to10 years. On an
average the time taken from a discovery to production is eight years. For the purposes of carrying out
geophysical survey, the assessee-company entered into an agreement with F of the Netherlands which had a
team of experts who specialised in performing airborne geophysical services for clients, process the data
acquired during the survey and provide necessary reports. The services of F were engaged to conduct the
airborne survey for providing high quality, high resolution, geophysical data suitable for selecting probable
kimberlite targets. F conducted the airborne survey using its specialised equipment, but the helicopter for the
survey was hired by the assessee. All the logistics of the survey, such as flight schedule, re-flights survey lines,
control lines, positioning, etc. were set by F and F deputed technical personnel for conducting the survey. The
data collected from the survey was provided to the assessee in a particular format called the acquisition and
processing report. The Assessing Officer treated the consideration paid to F under the agreement as falling
within the definition of “fees for technical services” You are required to give your comments on taxability of
above transaction.

Question (ID 10 and 15) (Deemed to accrue or arise in India)

Joel Ltd., a foreign company, owns a property in Mumbai. It is given on rent (rent being 5,000 US dollar per
month) to Peter Ltd., another foreign company. The two companies are non-residents in India. The agreement
is made outside India. Rent is payable in foreign currency outside India. As per agreement, rent is accrued
outside India. Discuss whether the rental income of Joel Ltd. is chargeable to tax in India under the Income-tax
Act, 1961.
OR
R, a non resident and not an Indian citizen, holds 5000 equity shares in X Ltd., an Indian Company. The
share certificates are lying with R, in UK where he normally resides. R sold these shares to G by handing
over to G in UK, the duly executed share transfer form and the relevant share certificates. The purchase
consideration is received in UK in sterling currency. Discuss giving reasons whether the above
transaction will give rise to income which will be deemed to accrue or arise in India.


Mr. Ravi citizen of India and a non-resident purchased the Savings Certificate issued by the Central Government
from out of Dollars remitted from USA on 11.07 on which the interest for the year was Rs. 3 lakhs.
Question (ID 09 and 16) (Deemed to accrue or arise in India)
Thomo, a South Korean company, a non-resident under the Income-tax Act, 1961, had the following receipts of
royalty during the previous year. Indicate whether these will be taxable in India. Give reasons for your answer
:
a) Rs. 1,50,000 from the Government of India under an agreement approved by the governments of
South Korea and India.
b) Rs. 70,000 from an Indian company for import of technical know-how for use in business in India.
c) Rs. 86,000 from an Indian organization for import of drawings for use in its business in Singapore
and Malaysia.
d) Rs. 50,000 from X, a non-resident under the Indian income-tax law, for use of a formula for a
business at NOIDA (UP).
e) Rs. 92,000 from X, an Indian non-resident, for use of drawings and technical know-how, for a
business in U.K.
OR
X, a non-resident lent Rs.5 Lakhs to Y, a resident in India. Y used the money borrowed by him for
purposes of business in India. Y paid an interest of Rs. 75,000 during the year ended 31st March to X in
the United Kingdom. Discuss the tax liability of such interest in the hands of X in India.

Question: (ID 35) (Deemed to accrue or arise in India)

Foreign company Forbings Inc is operating its services in Germany in the field of commission agency. An
Indian company Raja Ram Ltd has paid commission to a foreign company Forbings Inc for procuring a
machinery from Germany from Zoaapto Inc a German Company. The machinery imported by Raja Ram Ltd
will be further supplied to prospective customer in Indonesia. Forbings Inc is registered as per law of Germany
and selling commission is received by it in Germany in German Mark 25,000 (conversion rate assumed @ 40).
Tax is not deducted as per the Indian Laws. Business income of Raja Ram Ltd is 85,00,000 INR after claiming
the deduction of the commission.
Question A
You are required to discuss the tax treatment of the above transaction.
Question B
Would your answer be different if Forbings Inc had place of operation in India and would have undertaken the
services to show demo of machinery in India.
Question C
Forbings Inc do not have any place of operations in India however it provides consultancy services for the sale
of machinery in Germany for which the 25000 German Mark have been paid.

Question: (ID 17 and 18 and 35 and 23) (Foreign collaboration contracts)

A Foreign Company has entered into an agreement with an Indian Company on 1.6.PY under which industrial
equipment belonging to the firm has been leased to the latter on lump sum payment of $50,000. How will the
lease rent be taxed in the hands of the Foreign Company?
OR
Bharat Mines Ltd., an Indian Company, entered into an agreement with British Mines Ltd., a Company
registered in the United Kingdom for rendering technical services in India for exploration and extraction
of ores. The consideration fixed was $5,00,000 and was arrived at as follows-
Drawings, designs prepared in U.K $1,00,000
Engineering Services rendered in India $2,00,000
Salary and allowances paid to staff deputed for work in India $2,00,000
Discuss the taxability of above payments in the hands of British Mines Ltd. (registered in U.K.).
OR
“Mingle Engineering Ltd”, a Korean non – resident company, had entered into an agreement for
designing, fabricating, hook – up and commissioning of a platform in the Bombay High with “Crude Oil
India Ltd.”, an Indian company. The agreement entered into was in two parts, one for the value to be
charged for fabrication of structure in Korea for Rs.20 crores (having element of profit in it of Rs.2
crores) and other for the installation and commissioning of the structure in Bombay High for Rs.15 crores
(having element of profit in it of Rs.1.5 crores). The Korean company will also be setting up an office
in India for the activity of installation and commissioning of the platform which is likely to be completed
9 months. You are required to discuss tax treatment of the same.
OR
An Indian company made 2 agreements with a foreign company for purchase of machines at a
consolidated consideration. Foreign Company deputed 2 technicians for supervising installation free of
cost. Assessing officer held that Indian Company was agent u/s 163 for the foreign Co. & there was a
business connection between the 2 companies. Do you agree ?

Question: (ID 19) (Foreign collaboration contracts)

M/s Kangaru Australia, a Non-Resident Foreign Company had entered into a collaboration agreement on
21.2.2008 with an Indian Company and was in receipt of the following payments during the Previous Year. How
do you deal with them for computation, in the case of M/s Kangaroo Australia?
(a) Interest on 8% Debentures for Rs. 50 Lakhs issued by Indian Company on 1.7 in consideration of
providing of technical know-how, manufacturing process and designs.
(b) Service Charges at 2.5% of the value of Plant and Machinery for Rs.500 Lakhs leased out to Indian
Company payable each year before 31st March.
Question: (ID 31) (Deemed to accrue or arise in India) (Home Work)

State with reasons whether the following transaction is subject to tax as deemed income.
XYZ Ltd. is a broadcaster of News Channel in India. It had made payments to a Malaysian company having no
PE in India for downlinking Television Channels into India and international footprint through a channel.
“Key to success is only writing

practice.”
CA Kalpesh Sanghavi


State with reasons whether the following transaction is subject to tax as deemed income.
Mr. A, a foreign citizen and a diamond merchant from US, has earned income of Rs. 10 crores from display of
uncut and unassorted diamonds in the Bharat Diamond Bourse, a notified special zone in Surat.
Explain the term “Royalty” as per UN model Tax Convention. Is it different from the definition contained in
OECD Model? Discuss.
Explain the meaning of “treaty” as per Article 2 of Vienna Convention on Law of Treaties, 1969. Why it come
onto play?

C.A. Kalpesh Sanghavi Other Topics for NR - P a g e | F51-A5 . 1
Question 1 (specific computations, Non resident) (CG ID 46)

Mr. N (non resident) purchased shares of Reliance industries on 01-01-2009 by remitting US $. The following
data is given.
Cost of acquisition : 5,85,000 (Dated : 1.1. 2009)
Sale price : 9,00,000 (Dated : 1.1. PY)
Expense on transfer : 6,600 (Dated : 28.12. PY)
On 24.04.AY 6,15,000 was invested out of above sale proceeds and it was sold on 18.08.AY for value of
10,50,000.
Date TT BR TT SR
01-01-2009 38 40
28-12-PY 42 44
01-01-PY 39 41
24-04-AY 40 42
18-08-AY 41 43

C.A. Kalpesh Sanghavi Other Topics for NR - P a g e | F51-A5 . 2
Question 2 (specific computations, Non resident) (CG ID 47)
X, a non-resident, remits US$ 60,000 to India on August 10, 2009. The amount is partly utilised on August 17,
2009 for purchasing 50,000 shares in Lotus Ltd., an Indian company at the rate of Rs. 6 per share. These shares
are sold for Rs. 28 per share on April 10.
Find out the capital gains chargeable to tax for the year on the assumption that telegraphic transfer buying and
selling rate of US dollars adopted by the State Bank of India is as follows:
Buying (1 US $) Selling (1 US $)
August 10, 2009 18.30 19.10
August 17, 2009 18.40 19.30
April 10, 45.90 46.40
CA Kalpesh Sanghavi

C.A. Kalpesh Sanghavi Other Topics for NR - P a g e | F51-B . 1
Question (Tax Liability) (ID 51)
Rosy and Mary are sisters, born and brought up at Mumbai. Rosy got married in 1982 and settled at Canada
since 1982. Mary got married and settled in Mumbai Both of them are below 60 years. The following are the
details of their income for the previous year.
Rosy Mary
Pension received from State Government - 10,000
Pension received from Canadian Government 20,000 -
Long-term capital gain on sale of land at Mumbai 1,00,000 50,000
Short-term capital gain on sale of shares of Indian listed companies in

20,000 250,000
respect of which STT was paid
Life Insurance Corporation 10,000
Premium paid to Canadian life insurance at Canada 40,000 -
Mediclaim policy premium paid - 25,000
Investment in PPF - 20,000
Rent received in respect of house property at Mumbai 60,000 30,000
Compute taxable income and tax liability.
Guarantee Pass Else Refund subject to T&C

Calculate the income-tax liability in the following cases:
Mr.A (age 45) Mrs.B (age 62) Mr C (age 81) Mr.D (age 82)
Status Resident Non-Resident Resident Non-Resident
Total Income other than

2,40,000 2,80,000 5,90,000 4,80,000
long term capital gain
Long term capital gain 15,000 10,000 60,000 Nil
from sale of
listed shares
from sale of
from sale of (STT paid on agricultural land
vacant site sale and in rural area
purchase of
shares)

Mr. Mithun purchased 100 shares of Good money Co. Ltd. on 01-04-2005 at rate of 1,000 per share (FMV as
on 31-01-2018 is 600 per share) in public issue of the company by paying securities transaction tax. Company
allotted bonus shares in the ratio of 1:1 on 4 years back. He has also received dividend of 10 per share on
01.05.PY. He has sold all the shares on 01.10.PY at the rate of 4,000 per share through a recognized stock
exchange and paid brokerage of 1% and securities transaction tax of 0.02% to celebrate his birthday.
Compute his capital gains and tax liability.
The Gross Total Income of Mr. C a resident in India aged 65 years, was 8,18,240 which includes long-term
capital gain of 2,45,000 and Short-term capital gain of 58,000. The Gross Total Income also includes interest
income of 10,000 from savings bank deposits with banks, Mr C has invested in PPF 1,40,000 and also paid a
medical insurance premium 30,000. Mr. C also contributed 50,000 to Public Charitable Trust eligible for
deduction under section 80G by way of an account payee cheque.
Compute the total income and tax thereon.
Question (Tax Liability) (ID 55) (Home work)

Mr Mukesh Jain a Resident individual Aged 66 years has following incomes and transaction during the year.
You are required to compute his total income and tax liability.
Salary Income 90,000
Profit on sale land, Long term capital gains computed as per Income tax act 500,000
Profit on sale of listed shares, transaction is carried out through NSE and STT is
400,000
already paid
Interest on savings bank account 12,000
Interest on Fixed deposit with State bank of India 75,000
Mediclaim premium paid to united India insurance for 2 year policy 60,000
Medical expense on disease specified u/s 80DDB 105,000
Mediclaim claimed from United India Insurance is full amount of 105,000 however
the company has approved only amount of 33,000 and given the re-imbursement
accordingly.


F51-A1 10,15 Deemed to accrue
F51-A1 17,18,35,23 Scope of Royalty TF V.Imp
F51-A1 19 Net of tax payment V.Imp
F51-A2 47 NR Financial assets V.Imp
F51-B 53 Tax Liability V.Imp

F51-B 54 Tax Liability V.Imp

C.A. Kalpesh Sanghavi None Residents - P a g e | F51-C . 1
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident
includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section
6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a
business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-
resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within
the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in
India.
Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total
income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall
not again be so included on the basis that it is received or deemed to be received by him in India.

6. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-
two days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods
amounting in all to three hundred and sixty-five days or more, is in India for a period
or periods amounting in all to sixty days or more in that year.
Explanation. 1—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew
of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of
1958), or for the purposes of employment outside India, the provisions of sub-clause (c)
shall apply in relation to that year as if for the words "sixty days", occurring therein, the words
"one hundred and eighty-two days" had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to
clause (e) of section 115C, who, being outside India, comes on a visit to India in any
previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the
words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been
substituted.
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India
and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India
shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be
prescribed.
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India
in any previous year in every case except where during that year the control and
management of its affairs is situated wholly outside India.
(3) A company is said to be a resident in India in any previous year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause "place of effective management" means a place where
key management and commercial decisions that are necessary for the conduct of business
of an entity as a whole are, in substance made.
(4) Every other person is said to be resident in India in any previous year in every case, except
where during that year the control and management of his affairs is situated wholly outside
India.
(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any
source of income, he shall be deemed to be resident in India in the previous year relevant to
the assessment year in respect of each of his other sources of income.
(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years
preceding that year, or has during the seven previous years preceding that year been in
India for a period of, or periods amounting in all to, seven hundred and twenty-nine days
or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the
ten previous years preceding that year, or has during the seven previous years preceding that year
been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days
or less.

7. The following incomes shall be deemed to be received in the previous year :—

(i) the annual accretion in the previous year to the balance at the credit of an employee
participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth
Schedule ;
(ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of
rule 11 of Part A of the Fourth Schedule ;
(iii) the contribution made, by the Central Government or any other employer in the previous year, to
the account of an employee under a pension scheme referred to in section 80CCD.

8. For the purposes of inclusion in the total income of an assessee,—

(a) any dividend declared by a company or distributed or paid by it within the meaning of sub-clause
(a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall
be deemed to be the income of the previous year in which it is so declared, distributed or
paid, as the case may be ;
(b) any interim dividend shall be deemed to be the income of the previous year in which the amount of
such dividend is unconditionally made available by the company to the member who is entitled
to it.

Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :—
22
(i) all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any
asset or source of income in India, or through the transfer of a capital asset situate in India.
Explanation 1.—For the purposes of this clause—
(a) in the case of a business of which all the operations are not carried out in India, the
income of the business deemed under this clause to accrue or arise in India shall be only such
part of the income as is reasonably attributable to the operations carried out in India ;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to
him through or from operations which are confined to the purchase of goods in India for the
purpose of export ;
(c) in the case of a non-resident, being a person engaged in the business of running a news
agency or of publishing newspapers, magazines or journals, no income shall be deemed to
accrue or arise in India to him through or from activities which are confined to the collection
of news and views in India for transmission out of India ;
(d) in the case of a non-resident, being—
(1) an individual who is not a citizen of India ; or
(2) a firm which does not have any partner who is a citizen of India or who is resident in India ;
or
(3) a company which does not have any shareholder who is a citizen of India or who is resident
in India,
no income shall be deemed to accrue or arise in India to such individual, firm or
company through or from operations which are confined to the shooting of any
cinematograph film in India;
23
[(e) in the case of a foreign company engaged in the business of mining of diamonds,
no income shall be deemed to accrue or arise in India to it through or from the
activities which are confined to the display of uncut and unassorted diamond in any
special zone notified by the Central Government in the Official Gazette in this behalf.]

Explanation 2.—For the removal of doubts, it is hereby declared that "business connection" shall
include any business activity carried out through a person who, acting on behalf of the non-
resident,—
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the
non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-
resident; or
Following clause (a) shall be substituted for the existing clause (a) of Explanation 2 to clause
(i) of sub-section (1) of section 9 by the Finance Act, 2018, w.e.f. 1-4-2019 :
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the
non-resident or habitually concludes contracts or habitually plays the principal role leading to
conclusion of contracts by that non-resident and the contracts are—
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned
by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise
from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for
that non-resident and other non-residents controlling, controlled by, or subject to the same
common control, as that non-resident:
Provided that such business connection shall not include any business activity carried out
through a broker, general commission agent or any other agent having an
independent status, if such broker, general commission agent or any other agent having an
independent status is acting in the ordinary course of his business :
Provided further that where such broker, general commission agent or any other agent
works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the
principal non-resident) or on behalf of such non-resident and other non-residents which are controlled
by the principal non-resident or have a controlling interest in the principal non-resident or are subject
to the same common control as the principal non-resident, he shall not be deemed to be a broker,
general commission agent or an agent of an independent status.

Following Explanation 2A shall be inserted after Explanation 2 to clause (i) of sub-section (1) of
section 9 by the Finance Act, 2018, w.e.f. 1-4-2019 :
Explanation 2A.—For the removal of doubts, it is hereby clarified that the significant economic
presence of a non-resident in India shall constitute "business connection" in India and
"significant economic presence" for this purpose, shall mean—
(a) transaction in respect of any goods, services or property carried out by a non-resident in India
including provision of download of data or software in India, if the aggregate of
payments arising from such transaction or transactions during the previous year
exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in
interaction with such number of users as may be prescribed, in India through digital means:
Provided that the transactions or activities shall constitute significant economic
presence in India, whether or not,—
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or
activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.
Explanation 3.—Where a business is carried on in India through a person referred to in clause (a) or
clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations
carried out in India shall be deemed to accrue or arise in India.
Explanation 4.—For the removal of doubts, it is hereby clarified that the expression "through" shall
mean and include and shall be deemed to have always meant and included "by means of", "in
consequence of" or "by reason of".
Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset
being any share or interest in a company or entity registered or incorporated outside India
shall be deemed to be and shall always be deemed to have been situated in India, if
the share or interest derives, directly or indirectly, its value substantially from the assets located in India:
Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is
held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor
as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on
or after the 1st day of April, 2012 but before the 1st day of April, 2015:]
Provided further that nothing contained in this Explanation shall apply to an asset or capital asset,
which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-
II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio
Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992 (15 of
1992).

Explanation 6.—For the purposes of this clause, it is hereby declared that—

(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially
from the assets (whether tangible or intangible) located in India, if, on the specified date, the value
of such assets—
(i) exceeds the amount of ten crore rupees; and
(ii) represents at least fifty per cent of the value of all the assets owned by the
company or entity, as the case may be;
(b) the value of an asset shall be the fair market value as on the specified date, of such asset
without reduction of liabilities, if any, in respect of the asset, determined in such manner as
may be prescribed;
(c) "accounting period" means each period of twelve months ending with the 31st day of March:
Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a
period of twelve months ending on a day other than the 31st day of March for the purpose of—
(i) complying with the provisions of the tax laws of the territory, of which it is a resident, for
tax purposes; or
(ii) reporting to persons holding the share or interest,
then, the period of twelve months ending with the other day shall be the accounting period of the
company or, as the case may be, the entity:
Provided further that the first accounting period of the company or, as the case may be, the entity
shall begin from the date of its registration or incorporation and end with the 31st day of March
or such other day, as the case may be, following the date of such registration or incorporation, and
the later accounting period shall be the successive periods of twelve months:
Provided also that if the company or the entity ceases to exist before the end of accounting period,
as aforesaid, then, the accounting period shall end immediately before the company or, as the case
may be, the entity, ceases to exist;
(d) "specified date" means the—
(i) date on which the accounting period of the company or, as the case may be, the entity ends
preceding the date of transfer of a share or an interest; or
(ii) date of transfer, if the book value of the assets of the company or, as the case may be, the
entity on the date of transfer exceeds the book value of the assets as on the date referred to in
sub-clause (i), by fifteen per cent.

Explanation 7.— For the purposes of this clause,—

(a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any
share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in
the Explanation 5,—
(i) if such company or entity directly owns the assets situated in India and the
transferor (whether individually or along with its associated enterprises), at any time in
the twelve months preceding the date of transfer, neither holds the right of
management or control in relation to such company or entity, nor holds voting power or
share capital or interest exceeding five per cent of the total voting power or total share capital
or total interest, as the case may be, of such company or entity; or
(ii) if such company or entity indirectly owns the assets situated in India and the transferor
(whether individually or along with its associated enterprises), at any time in the twelve
months preceding the date of transfer, neither holds the right of management or control in
relation to such company or entity, nor holds any right in, or in relation to, such company or
entity which would entitle him to the right of management or control in the company or entity
that directly owns the assets situated in India, nor holds such percentage of voting power or
share capital or interest in such company or entity which results in holding of (either
individually or along with associated enterprises) a voting power or share capital or interest
exceeding five per cent of the total voting power or total share capital or total interest, as the
case may be, of the company or entity that directly owns the assets situated in India;
(b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be,
an entity referred to in the Explanation 5, are not located in India, the income of the non-resident
transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed
to accrue or arise in India under this clause, shall be only such part of the income as is reasonably
attributable to assets located in India and determined in such manner as may be prescribed;
(c) "associated enterprise" shall have the meaning assigned to it in section 92A;
(ii) income which falls under the head "Salaries", if it is earned in India.
Explanation.—For the removal of doubts, it is hereby declared that the income of the nature referred to
in this clause payable for—
(a) service rendered in India; and
(b) the rest period or leave period which is preceded and succeeded by services rendered in India and
forms part of the service contract of employment,
shall be regarded as income earned in India ;
(iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service
outside India ;
(iv) a dividend paid by an Indian company outside India ;
(v) income by way of interest payable by—
(a) the Government ; or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or
moneys borrowed and used, for the purposes of a business or profession carried on by such person
outside India or for the purposes of making or earning any income from any source outside India
; or

(c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or
moneys borrowed and used, for the purposes of a business or profession carried on by such person
in India.
(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of
banking, any interest payable by the permanent establishment in India of such non-resident to the
head office or any permanent establishment or any other part of such non-resident outside India
shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income
attributable to the permanent establishment in India and the permanent establishment in India shall
be deemed to be a person separate and independent of the non-resident person of which it is a
permanent establishment and the provisions of the Act relating to computation of total income,
determination of tax and collection and recovery shall apply accordingly;
(b) "permanent establishment" shall have the meaning assigned to it in clause (iiia) of section 92F;

(vi) income by way of royalty payable by—

(b) a person who is a resident, except where the royalty is payable in respect of any right, property
or information used or services utilised for the purposes of a business or profession carried on by
such person outside India or for the purposes of making or earning any income from any source
outside India ; or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property
or information used or services utilised for the purposes of a business or profession carried on by
such person in India or for the purposes of making or earning any income from any source in India
:
Provided that nothing contained in this clause shall apply in relation to so much of the income by way
of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of
information outside India in respect of, any data, documentation, drawing or specification relating to
any patent, invention, model, design, secret formula or process or trade mark or similar property, if such
income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the
agreement is approved by the Central Government :
Provided further that nothing contained in this clause shall apply in relation to so much of the income
by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer
of all or any rights (including the granting of a licence) in respect of computer software supplied by a
non-resident manufacturer along with a computer or computer-based equipment under any scheme
approved under the Policy on Computer Software Export, Software Development and Training, 1986
of the Government of India.
Explanation 1.—For the purposes of the first proviso, an agreement made on or after the 1st day of
April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance
with proposals approved by the Central Government before that date; so, however, that, where the
recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to
have been made before that date unless, before the expiry of the time allowed under sub-section (1) or
sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of
income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in
respect of which such income first becomes chargeable to tax under this Act, whichever assessment
year is later, the company exercises an option by furnishing a declaration in writing to the Assessing
Officer (such option being final for that assessment year and for every subsequent assessment year) that
the agreement may be regarded as an agreement made before the 1st day of April, 1976.
Explanation 2.—For the purposes of this clause, "royalty" 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") for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention,
model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention,
model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar
property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the
amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, but not including consideration
for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv),
(iva) and (v).
Explanation 3.—For the purposes of this clause, "computer software" means any computer programme
recorded on any disc, tape, perforated media or other information storage device and includes any such
programme or any customized electronic data.
Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in
respect of any right, property or information includes and has always included transfer of all or any right
for use or right to use a computer software (including granting of a licence) irrespective of the medium
through which such right is transferred.
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always
included consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes
and shall be deemed to have always included transmission by satellite (including up-linking,
amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar
technology, whether or not such process is secret;

(vii) income by way of fees for technical services payable by—

(b) a person who is a resident, except where the fees are payable in respect of services utilised
in a business or profession carried on by such person outside India or for the purposes of making
or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised
in a business or profession carried on by such person in India or for the purposes of making or
earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for
technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and
approved by the Central Government.
Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day
of April, 1976, shall be deemed to have been made before that date if the agreement is made in
accordance with proposals approved by the Central Government before that date.
Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration
(including any lump sum consideration) for the rendering of any managerial, technical or consultancy
services (including the provision of services of technical or other personnel) but does not include
consideration for any construction, assembly, mining or like project undertaken by the recipient or
consideration which would be income of the recipient chargeable under the head "Salaries".
(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person
residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a
person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th
day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government
of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.
Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a
non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-
section (1) and shall be included in the total income of the non-resident, whether or not,—
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.

Certain activities not to constitute business connection in India.26

9A. (1) Notwithstanding anything contained in sub-section (1) of section 9 and subject to the provisions of this
section, in the case of an eligible investment fund, the fund management activity carried out through an eligible
fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund.
(2) Notwithstanding anything contained in section 6, an eligible investment fund shall not be said to be resident
in India for the purpose of that section merely because the eligible fund manager, undertaking fund management
activities on its behalf, is situated in India.
(3) The eligible investment fund referred to in sub-section (1), means a fund established or incorporated or
registered outside India, which collects funds from its members for investing it for their benefit and fulfils the
following conditions, namely:—
(a) the fund is not a person resident in India;
(b) the fund is a resident of a country or a specified territory with which an agreement referred to in sub-
section (1) of section 90 or sub-section (1) of section 90A has been entered into 27[or is established or
incorporated or registered in a country or a specified territory notified by the Central Government in
this behalf];
(c) the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India
does not exceed five per cent of the corpus of the fund;
(d) the fund and its activities are subject to applicable investor protection regulations in the country or
specified territory where it is established or incorporated or is a resident;
(e) the fund has a minimum of twenty-five members who are, directly or indirectly, not connected persons;
(f) any member of the fund along with connected persons shall not have any participation interest, directly
or indirectly, in the fund exceeding ten per cent;
(g) the aggregate participation interest, directly or indirectly, of ten or less members along with their
connected persons in the fund, shall be less than fifty per cent;
(h) the fund shall not invest more than twenty per cent of its corpus in any entity;
(i) the fund shall not make any investment in its associate entity;
(j) the monthly average of the corpus of the fund shall not be less than one hundred crore rupees:
Provided that if the fund has been established or incorporated in the previous year, the corpus of fund
shall not be less than one hundred crore rupees at the end of such previous year:
28
[Provided further that nothing contained in this clause shall apply to a fund which has been wound
up in the previous year;]
(k) the fund shall not carry on or control and manage, directly or indirectly, any business in India 29[***];
(l) the fund is neither engaged in any activity which constitutes a business connection in India nor has any
person acting on its behalf whose activities constitute a business connection in India other than the
activities undertaken by the eligible fund manager on its behalf;
(m) the remuneration paid by the fund to an eligible fund manager in respect of fund management activity
undertaken by him on its behalf is not less than the arm's length price of the said activity :
Provided that the conditions specified in clauses (e), (f) and (g) shall not apply in case of an investment fund
set up by the Government or the Central Bank of a foreign State or a sovereign fund, or such other fund as the
Central Government may subject to conditions, if any, by notification in the Official Gazette, specify in this
behalf.

(4) The eligible fund manager, in respect of an eligible investment fund, means any person who is engaged in
the activity of fund management and fulfils the following conditions, namely:—
(a) the person is not an employee of the eligible investment fund or a connected person of the fund;
(b) the person is registered as a fund manager or an investment advisor in accordance with the specified
regulations;
(c) the person is acting in the ordinary course of his business as a fund manager;
(d) the person along with his connected persons shall not be entitled, directly or indirectly, to more than
twenty per cent of the profits accruing or arising to the eligible investment fund from the transactions
carried out by the fund through the fund manager.
(5) Every eligible investment fund shall, in respect of its activities in a financial year, furnish within ninety days
from the end of the financial year, a statement in the prescribed form30, to the prescribed income-tax authority
containing information relating to the fulfilment of the conditions specified in this section and also provide such
other relevant information or documents as may be prescribed.
(6) Nothing contained in this section shall apply to exclude any income from the total income of the eligible
investment fund, which would have been so included irrespective of whether the activity of the eligible fund
manager constituted the business connection in India of such fund or not.
(7) Nothing contained in this section shall have any effect on the scope of total income or determination of total
income in the case of the eligible fund manager.
(8) The provisions of this section shall be applied in accordance with such guidelines and in such manner as the
Board may prescribe in this behalf.
(a) "associate" means an entity in which a director or a trustee or a partner or a member or a fund manager
of the investment fund or a director or a trustee or a partner or a member of the fund manager of such
fund, holds, either individually or collectively, share or interest, being more than fifteen per cent of its
share capital or interest, as the case may be;
(b) "connected person" shall have the meaning assigned to it in clause (4) of section 102;
(c) "corpus" means the total amount of funds raised for the purpose of investment by the eligible investment
fund as on a particular date;
(d) "entity" means any entity in which an eligible investment fund makes an investment;
(e) "specified regulations" means the Securities and Exchange Board of India (Portfolio Managers)
Regulations, 1993 or the Securities and Exchange Board of India (Investment Advisers) Regulations,
2013, or such other regulations made under the Securities and Exchange Board of India Act, 1992 (15
of 1992), which may be notified by the Central Government under this clause.

C.A. Kalpesh Sanghavi Representative assessee - P a g e | F52 . 1
Question 1 (ID 11 and 20 and 24) (Representative assessee)

A Firm of solicitors in Delhi engaged a barrister of London for arguing a case before the Supreme Court in
India. A payment of $ 50,000 was made to the barrister in London, according to the terms of the professional
engagement. It is claimed that since the payment is made outside India, no tax is payable on the fee paid. How
should the Assessing Officer proceed in this matter ?
OR
C, a British barrister, was appointed by an English company to represent it in a patent case before the
Delhi High Court. The High Court rules provided that an advocate who is not a member of the Delhi Bar
can address the court only through a member advocate. B, a member of Delhi Bar, was appointed to be
the advocate on record. B briefed C regarding Indian precedents relating to the case. The English
company paid him a fee of Rs. 10,000 while C received in England a fee of $ 25,000. The Assessing
Officer treated B as the agent of C under section 163 and taxed him in respect of $ 25,000. Comment on
the actions of the Assessing Officer.
OR
'K' was a non-resident Indian. He purchased certain agricultural land in a village in India. The entire
income from such land was spent by K's father 'S' for household expenses. So no part of the income was
paid to ‘K’. How can the assessment be made by the assessing officer in respect of income from such
land ? what are the rights and duties of “S” under the income tax act ?
Question 2 (ID 12 and 13) (Representative assessee) (Revision / Home work)

A Non-Resident Company purchases goods in India for the purpose of export and thereby earns profit. Examine
the tax consequence of the above transaction.
OR
XY Pvt Ltd a Company having registered head office in Singapore for the first time had carried out
operations during year of purchase of goods in India on four occasions. Immediately after the purchase
the Company exported the same to China. The total value of such exports was Rs.100 Lakhs on which
it earned profits of Rs. 20 Lakhs before the expenses of Rs. 12 Lakhs, which were directly paid by HO.
Company seeks your advice to its liability to tax in India.
OR
A foreign Company having no Indian citizen / resident of India as shareholder, has shot a TV film entirely
on India locations. The film is to be telecast exclusively in the foreign countries. But it has also agreed
with the Government of India to give the right of telecast in India, free of charge. Discuss, giving reasons
whether the above transaction will give rise to income which will be deemed to accrue or arise in India.

Question: 3 (ID 14) (Representative assessee)

X Co. Ltd is the Indian subsidiary of an American Company manufacturing and selling copier machines. The
Indian Company among other things purchases and sells these copier machines also. Does any part of the profits
on the sales of American Company to the Indian Company accrue or arise in India ? Discuss.
Question: 4 (ID 21) (Representative assessee)

During the previous year X exported tobacco to Japan and France where it was sold through non-resident
assesses – A a Japanese company and B, a French concern. A and B were operating as X’ s agents and were to
be paid commission on sales effected through them. X received the entire sale proceeds in India. X made credit
entries in his books of account in respect of commission payable to A and B and remitted the same to them
subsequently. State whether A and B are chargeable to tax in respect of commission on the basis of receipt of
income (actual or constructive in India and whether it can be said that they have received or are deemed to have
received commission when their accounts were credited.
Question: 5 (ID 36) (Representative assessee) (Revision / Home work)

The procedure relating to the recovery of tax due or the arrears of taxes from a non – resident is different than
the resident assessee. Comment and state how such recovery is to be made along with its limitation.
CA Kalpesh Sanghavi


Representative assessee.
160. (1) For the purposes of this Act, "representative assessee" means—
(i) in respect of the income of a non-resident specified in 49[***] sub-section (1) of section 9, the agent of
the non-resident, including a person who is treated as an agent under section 163;
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to
receive or is in receipt of such income on behalf of such minor, lunatic or idiot;
(iii) in respect of income which the Court of Wards, the Administrator- General, the Official Trustee or
any receiver or manager (including any person, whatever his designation, who in fact manages property
on behalf of another) appointed by or under any order of a court, receives or is entitled to receive,
on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee,
receiver or manager;
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument
in writing whether testamentary or otherwise [including any wakf50 deed which is valid under the
Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the
benefit of any person, such trustee or trustees;
51
[(v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on
behalf or for the benefit of any person, such trustee or trustees.
Explanation 1.—A trust which is not declared by a duly executed instrument in writing [including any wakf
deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] shall be deemed, for the
purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a statement in writing,
signed by the trustee or trustees, setting out the purpose or purposes of the trust, particulars as to the trustee or
trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the 52[Assessing] Officer,—
(i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from
that day; and
(ii) in any other case, within three months from the date of declaration of the trust.
Explanation 2.—For the purposes of clause (v), "oral trust" means a trust which is not declared by a duly
executed instrument in writing [including any wakf deed which is valid under the Mussalman Wakf Validating
Act, 1913 (6 of 1913),] and which is not deemed under Explanation 1 to be a trust declared by a duly executed
instrument in writing.]
(2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.

Liability of representative assessee.

161. (1) Every representative assessee, as regards the income in respect of which he is a representative assessee,
shall be subject to the same duties, responsibilities and liabilities as if the income were
income received by or accruing to or in favour of him beneficially, and shall be liable to
assessment in his own name in respect of that income; but any such assessment shall be deemed to be
made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained
in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it
would be leviable upon and recoverable from the person represented by him.
53
[(1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person
mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or
includes, profits and gains of business, tax shall be charged on the whole of the income in respect of
which such person is so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable
under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for
support and maintenance, and such trust is the only trust so declared by him.
54
[***]
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a
representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.

Right of representative assessee to recover tax paid

162. (1) 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.
(2) Any representative assessee, or any person 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 under this Chapter, and in the event of any disagreement between the principal and such representative
assessee or person as to the amount to be so retained such representative assessee or person may secure from
the Income-tax 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.
(3) The amount recoverable from such representative assessee or person at the time of final settlement shall
not exceed the amount specified in such certificate, except to the extent to which such representative
assessee or person may at such time have in his hands additional assets of the principal.

Who may be regarded as agent.

163. (1) For the purposes of this Act, "agent", in relation to a non-resident, includes any person in India—
(a) who is employed by or on behalf of the non-resident; or
(b) who has any business connection with the non-resident; or
(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly;
or
(d) who is the trustee of the non-resident;
and includes also any other person who, whether a resident or non-resident, has acquired
by means of a transfer, a capital asset in India :
Provided that a broker in India who, in respect of any transactions, does not deal directly with or on
behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed
to be an agent under this section in respect of such transactions, if the following conditions are fulfilled,
namely:—
(i) the transactions are carried on in the ordinary course of business through the first-mentioned
broker; and
(ii) the non-resident broker is carrying on such transactions in the ordinary course of his business
and not as a principal.
Explanation.—For the purposes of this sub-section, the expression "business connection" shall have the meaning
assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this Act.
(2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard
by the Assessing Officer as to his liability to be treated as such.

Charge of tax where share of beneficiaries unknown.

164. (1) Subject to the provisions of sub-sections (2) and (3), where any income in respect of which the persons
mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or
any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the
individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is
receivable are indeterminate or unknown (such income, such part of the income and such persons being
hereafter in this section referred to as "relevant income", "part of relevant income" and "beneficiaries",
respectively), tax shall be charged on the relevant income or part of relevant income at the maximum
marginal rate:
Provided that in a case where—
(i) none of the beneficiaries has any other income chargeable under this Act exceeding the
maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary
under any other trust; or
(ii) the relevant income or part of relevant income is receivable under a trust declared by any person by
will and such trust is the only trust so declared by him; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of
March, 1970, by a non-testamentary instrument and the Assessing Officer is satisfied, having regard to
all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for
the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively
for the benefit of the members of such family, in circumstances where such relatives or members were
mainly dependent on the settlor for their support and maintenance; or
(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund,
gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or
profession exclusively for the benefit of persons employed in such business or profession,
tax shall be charged on the relevant income or part of relevant income as if it were the total
income of an association of persons :
Provided further that where any income in respect of which the person mentioned in clause (iv) of sub-section
(1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business,
the preceding proviso shall apply only if such profits and gains are receivable under a trust declared by
any person by will exclusively for the benefit of any relative dependent on him for support and
maintenance, and such trust is the only trust so declared by him.
(2) In the case of relevant income which is derived from property held under trust wholly for charitable or
religious purposes, or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2, or which
is of the nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of the relevant
income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income
of an association of persons :

Provided that in a case where the whole or any part of the relevant income is not exempt under section
11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13,
tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.
(3) In a case where the relevant income is derived from property held under trust in part only for charitable or
religious purposes or is of the nature referred to in sub-clause (iia) of clause (24) of section 2 or is of the nature
referred to in sub-section (4A) of section 11, and either the relevant income applicable to purposes other than
charitable or religious purposes (or any part thereof) is not specifically receivable on behalf or for the benefit of
any one person or the individual shares of the beneficiaries in the income so applicable are indeterminate or
unknown, the tax chargeable on the relevant income shall be the aggregate of—
(a) the tax which would be chargeable on that part of the relevant income which is applicable to charitable
or religious purposes (as reduced by the income, if any, which is exempt under section 11) as if such
part (or such part as so reduced) were the total income of an association of persons; and
(b) the tax on that part of the relevant income which is applicable to purposes other than charitable or
religious purposes, and which is either not specifically receivable on behalf or for the benefit of any one
person or in respect of which the shares of the beneficiaries are indeterminate or unknown, at the
maximum marginal rate :
Provided that in a case where—
(i) none of the beneficiaries in respect of the part of the relevant income which is not applicable to
charitable or religious purposes has any other income chargeable under this Act exceeding the maximum
amount not chargeable to tax in the case of an association of persons or is a beneficiary under any other
trust; or
(ii) the relevant income is receivable under a trust declared by any person by will and such trust is the only
trust so declared by him; or
(iii) the relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-
testamentary instrument and the Assessing Officer is satisfied, having regard to all the circumstances
existing at the relevant time, that the trust, to the extent it is not for charitable or religious purposes, was
created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu
undivided family, exclusively for the benefit of the members of such family, in circumstances where
such relatives or members were mainly dependent on the settlor for their support and maintenance,
tax shall be charged on the relevant income as if the relevant income (as reduced by the income, if any, which
is exempt under section 11) were the total income of an association of persons :
Provided further that where the relevant income consists of, or includes, profits and gains of business, the
preceding proviso shall apply only if the income is receivable under a trust declared by any person by will
exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the
only trust so declared by him :

Provided also that in a case where the whole or any part of the relevant income is not exempt under section
11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13,
tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.
(i) any income in respect of which the persons mentioned in clause (iii) and clause (iv) of sub-section (1)
of section 160 are liable as representative assessee or any part thereof shall be deemed as being not
specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf
or for whose benefit such income or such part thereof is receivable during the previous year is expressly
stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is
identifiable as such on the date of such order, instrument or deed ;
(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part
thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the
persons on whose behalf or for whose benefit such income or such part thereof is receivable, are
expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and
are ascertainable as such on the date of such order, instrument or deed.
Explanation 2.— [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.]

Charge of tax in case of oral trust.

164A. Where a trustee receives or is entitled to receive any income on behalf or for the benefit of any person
under an oral trust, then, notwithstanding anything contained in any other provision of this Act, tax shall be
charged on such income at the maximum marginal rate.
(i) [***]
(ii) "oral trust" shall have the meaning assigned to it in Explanation 2 below sub-section (1) of section 160.
Case where part of trust income is chargeable.

165. Where part only of the income of a trust is chargeable under this Act, that proportion only of the income
receivable by a beneficiary from the trust which the part so chargeable bears to the whole income of the trust
shall be deemed to have been derived from that part.
Direct assessment or recovery not barred.

166. Nothing in the foregoing sections in this Chapter shall prevent either the direct
assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or
the recovery from such person of the tax payable in respect of such income.

C.A. Kalpesh Sanghavi NR / Special Rates of Taxes - P a g e | F53-A . 1
Question (ID 02) (Royalty Technical Fees)

Massy incorporated in Switzerland, a foreign company furnishes the following data for the previous year.
Massy does not have any branch offices in India.
1. Royalty from Indian concern under an agreement made on 15-9-2008

3,00,000
approved by Central Government
2. Expenditures as per section 28 to 44C for earning such income 2,00,000
3. Interest from an Indian company on money lent in foreign currency 11,00,000
4. Expenditure on collection of above interest 50,000
5. Income from units purchased in foreign currency 5,00,000
6. Collection charges for collecting above income 40,000
7. Gross sale of business in India 30,00,000
8. Expenditure as per sections 28 to 44C for above business 28,00,000
9. Donations to P.M.N.R.F. 6,00,000
Question A
Determine the total income of the foreign company and the tax payable by it.
Question B
What would be the total income and the tax payable, if the donation was Rs. 4,00,000 instead of Rs. 6,00,000
Question C
What would be the total income and the tax payable, if the donation was Rs. 4,00,000 instead of Rs. 6,00,000
and DTAA between India and Switzerland provides for tax rate on royalty as 5 % and Interest income as 25 %.
Question D
What would be total income and tax payable if the donation is 100,000 instead of 600,000 and Massy have
branch office in India for providing to services to Indian concern in form of royalty.
Question E
Determine the total income of the foreign company and the tax payable by it in question D above if the place of
effective management of the company is in India.

Question (ID 05) (NR / NC sports person)
Brian Lara, a well know cricketer, as a member of the West Indian touring team, received a sum of Rs. 5 lakhs
for participation in matches in India. He also received a sum of Rs. 1 lakh for an advertisement of a product on
TV. He contributed articles in a newspaper for which he received Rs. 10,000. During the tour of India, he
attended horse racing in Bombay and won a prize of Rs. 10,000.
1. What will be his tax liability, if he has come to India for the first time on 15-Feb of PY?
2. What will be the TDS obligation of the cricket council while making payment of 5 lakhs to Brian Lara?
3. What will be TDS liability if the payment made Rs. 5 lakhs is net of taxes as per the terms of contract?
4. Whether he is required to file return of income India, advice.
Question (ID 11) (NR / NC sports person)

Ricky, a foreign national and a cricketer came to India as a member of South African Cricket Team in the year.
He received Rs. 4 lakhs for participation in matches in India. He also received Rs. 1.5 lakhs for an advertisement
of a product on Radio. He wrote an article for a local newspaper and received Rs. 20,000 for it. During his stay
in India, He also won a prize of Rs. 25,000 from horse racing in Kolkata. He has no other income in India during
the year. You are required to do the following:
(1) Compute his tax liability in India.
(2) Comment whether these incomes are subject to deduction of tax at source.
(3) Comment whether he is liable to file return of income in India.
What would have been his tax liability, had he been a match referee instead of cricketer? (8 marks)

CHAPTER XII
DETERMINATION OF TAX IN
CERTAIN SPECIAL CASES
Determination of tax where total income includes income on which no tax is payable.
110. Where there is included in the total income of an assessee any income on which no income-tax is payable
under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of income-tax
with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average
rate of income-tax on the amount on which no income-tax is payable.

Tax on short-term capital gains in certain cases.

111A. (1) Where the total income of an assessee includes any income chargeable under the head "Capital gains",
arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity
oriented fund or a unit of a business trust and—
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter
VII of the Finance (No. 2) Act, 2004 comes into force; and
(b) such transaction is chargeable to securities transaction tax under that Chapter,
the tax payable by the assessee on the total income shall be the aggregate of—
(i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent; and
(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount
were the total income of the assessee:
Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as
reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax,
then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls
short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term
capital gains shall be computed at the rate of fifteen per cent :
Provided further that nothing contained in clause (b) shall apply to a transaction undertaken on a recognised
stock exchange located in any International Financial Services Centre and where the consideration for such
transaction is paid or payable in foreign currency.
(3) Where the total income of an assessee includes any short-term capital gains referred to in sub-section (1),
the rebate under section 88 shall be allowed from the income-tax on the total income as reduced by such capital
gains.
(a) "equity oriented fund" shall have the meaning assigned to it in the Explanation to clause (38) of section
10;
(b) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of
(c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of the Explanation 1 to
sub-section (5) of section 43.

Tax on long-term capital gains.

112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term
capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the
total income shall be the aggregate of,—
(a) in the case of an individual or a Hindu undivided family, being a resident,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-
term capital gains, had the total income as so reduced been his total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent
:
Provided that where the total income as reduced by such long-term capital gains is below the maximum
amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the
amount by which the total income as so reduced falls short of the maximum amount which is not chargeable
to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of
twenty per cent;
(b) in the case of a domestic company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-
term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent;
(c) in the case of a non-resident (not being a company) or a foreign company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term
capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on long-term capital gains [except where such gain arises
from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty per cent; and
(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset,
being unlisted securities or shares of a company not being a company in which
the public are substantially interested, calculated at the rate of ten per cent on the capital
gains in respect of such asset as computed without giving effect to the first and second
proviso to section 48;
(d) in any other case of a resident,—
(i) the amount of income-tax payable on the total income as reduced by the amount of long-term
capital gains, had the total income as so reduced been its total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent.
Explanation.—[***]
Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset,
being listed securities (other than a unit) or zero coupon bond, exceeds ten per cent of the amount of capital gains
before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the
purpose of computing the tax payable by the assessee :
Provided further that where the tax payable in respect of any income arising from the transfer of a long-term
capital asset, being a unit of a Mutual Fund specified under clause (23D) of section 10, during the period
beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014, exceeds ten per cent of the

amount of capital gains, before giving effect to the provisions of the second proviso to section 48, then, such
excess shall be ignored for the purpose of computing the tax payable by the assessee.

(a) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (32 of 1956);
(aa) "listed securities" means the securities which are listed on any recognised stock exchange in India;
(ab) "unlisted securities" means securities other than listed securities.
(b) [***]
(3) Where the total income of an assessee includes any income arising from the transfer of a long-term capital
asset, the total income shall be reduced by the amount of such income and the rebate under section 88 shall be
allowed from the income-tax on the total income as so reduced.

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total
income shall be determined in accordance with the provisions of sub-section (2), if—
(i) the total income includes any income chargeable under the head "Capital gains";
(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company
or a unit of an equity oriented fund or a unit of a business trust;
(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—
(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been
paid on acquisition and transfer of such capital asset; or
(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or
a unit of a business trust, been paid on transfer of such capital asset.
(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—
(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at
the rate of ten per cent; and
(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital
gains referred to in sub-section (1) as if the total income so reduced were the total income of the
assessee:
Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as
reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then,
the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income
as so reduced falls short of the maximum amount which is not chargeable to income-tax.
(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on
a recognised stock exchange located in any International Financial Services Centre and where the
consideration for such transfer is received or receivable in foreign currency.
(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in
respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.


(a) "equity oriented fund" means a fund set up under a scheme of a mutual fund specified under clause
(23D) of section 10 and,—
(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock
exchange,—
(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such
other fund; and
(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity
shares of domestic companies listed on a recognised stock exchange; and
(ii) in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested
in the equity shares of domestic companies listed on a recognised stock exchange:
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may
be, shall be computed with reference to the annual average of the monthly averages of the opening and
closing figures;
(b) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of section
2 of the Special Economic Zones Act, 2005 (28 of 2005);
(c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to
clause (5) of section 43.

Tax on dividends, royalty and technical service fees in the case of foreign companies.
115A. (1) Where the total income of—
(a) a non-resident (not being a company) or of a foreign company, includes any income by way of—
(i) dividends other than dividends referred to in section 115-O ; or
(ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by
Government or the Indian concern in foreign currency not being interest of the nature referred to
in sub-clause (iia) or sub-clause (iiaa); or
(iia) interest received from an infrastructure debt fund referred to in clause (47) of section 10; or
(iiaa) interest of the nature and extent referred to in section 194LC; or
(iiab) interest of the nature and extent referred to in section 194LD; or
(iiac) distributed income being interest referred to in sub-section (2) of section 194LBA;
(iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified
under clause (23D) of section 10 or of the Unit Trust of India,
the income-tax payable shall be aggregate of—
(A) the amount of income-tax calculated on the amount of income by way of dividends other than
dividends referred to in section 115-O, if any, included in the total income, at the rate of
twenty per cent;
(B) the amount of income-tax calculated on the amount of income by way of interest referred to in
sub-clause (ii), if any, included in the total income, at the rate of twenty per cent;
(BA) the amount of income-tax calculated on the amount of income by way of interest referred to in
sub-clause (iia) or sub-clause (iiaa) or sub-clause (iiab) or sub-clause (iiac), if any,
included in the total income, at the rate of five per cent;
(C) the amount of income-tax calculated on the income in respect of units referred to in sub-clause
(iii), if any, included in the total income, at the rate of twenty per cent; and
(D) the amount of income-tax with which he or it would have been chargeable had his or its total
income been reduced by the amount of income referred to in sub-clause (i), sub-clause (ii), sub-
clause (iia), sub-clause (iiaa), sub-clause (iiab), sub-clause (iiac) and sub-clause (iii) ;
(b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or
fees for technical services other than income referred to in sub-section (1) of section
44DA received from Government or an Indian concern in pursuance of an agreement made by the
foreign company with Government or the Indian concern after the 31st day of March, 1976, and where
such agreement is with an Indian concern, the agreement is approved by the Central Government
or where it relates to a matter included in the industrial policy, for the time being in force, of the
Government of India, the agreement is in accordance with that policy, then, subject to the provisions of
sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,—
(A) the amount of income-tax calculated on the income by way of royalty, if any, included in the
total income, at the rate of ten per cent;
(B) the amount of income-tax calculated on the income by way of fees for technical services, if
any, included in the total income, at the rate of ten per cent; and
(C) the amount of income-tax with which it would have been chargeable had its total income been
reduced by the amount of income by way of royalty and fees for technical services.


(a) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-
section (1) of section 9 ;
(b) "foreign currency" shall have the same meaning as in the Explanation below item (g) of sub-clause (iv)
of clause (15) of section 10 ;
(c) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9
;
(d) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963
(52 of 1963).
(1A) Where the royalty referred to in clause (b) of sub-section (1) is in consideration for the transfer of all or
any rights (including the granting of a licence) in respect of copyright in any book to an Indian concern
or in respect of any computer software to a person resident in India, the provisions of sub-section (1)
shall apply in relation to such royalty as if the words the agreement is approved by the Central
Government or where it relates to a matter included in the industrial policy, for the time being in force,
of the Government of India, the agreement is in accordance with that policy occurring in the said clause had
been omitted :
Provided that such book is on a subject, the books on which are permitted, according to the Import Trade
Control Policy of the Government of India for the period commencing from the 1st day of April, 1977, and
ending with the 31st day of March, 1978, to be imported into India under an Open General Licence :
Provided further that such computer software is permitted according to the Import Trade Control Policy of the
Government of India for the time being in force to be imported into India under an Open General Licence.
Explanation 1.—In this sub-section, "Open General Licence" means an Open General Licence issued by the
Central Government in pursuance of the Imports (Control) Order, 1955.
Explanation 2.—In this sub-section, the expression "computer software" shall have the meaning assigned to it
in clause (b) of the Explanation to section 80HHE.
(2) Nothing contained in sub-section (1) shall apply in relation to any income by way of royalty received by a
foreign company from an Indian concern in pursuance of an agreement made by it with the Indian concern after
the 31st day of March, 1976, if such agreement is deemed, for the purposes of the first proviso to clause (vi) of
sub-section (1) of section 9, to have been made before the 1st day of April, 1976; and the provisions of the
annual Finance Act for calculating, charging, deducting or computing income-tax shall apply in relation to such
income as if such income had been received in pursuance of an agreement made before the 1st day of April,
1976.
(3) No deduction in respect of any expenditure or allowance shall be allowed to the assessee
under sections 28 to 44C and section 57 in computing his or its income referred to in sub-section (1).
(4) Where in the case of an assessee referred to in sub-section (1),
(a) the gross total income consists only of the income referred to in clause (a) of that sub-
section, no deduction shall be allowed to him or it under Chapter VI-A;
(b) the gross total income includes any income referred to in clause (a) of that sub-section, the
gross total income shall be reduced by the amount of such income and the deduction under
Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of
the assessee.
(5) It shall not be necessary for an assessee referred to in sub-section (1) to furnish under sub-section (1)
of section 139 a return of his or its income if—
(a) his or its total income in respect of which he or it is assessable under this Act during the previous year
consisted only of income referred to in clause (a) of sub-section (1); and
(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from
such income.

Tax on income from units purchased in foreign currency or capital gains arising from their transfer.
115AB. (1) Where the total income of an assessee, being an overseas financial organisation (hereinafter
referred to as Offshore Fund) includes—
(a) income received in respect of units purchased in foreign currency; or
(b) income by way of long-term capital gains arising from the transfer of units purchased
in foreign currency,
the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the income in respect of units referred to in clause (a), if any,
included in the total income, at the rate of ten per cent;
(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to
in clause (b), if any, included in the total income, at the rate of ten per cent; and
(iii) the amount of income-tax with which the Offshore Fund would have been chargeable had its total
income been reduced by the amount of income referred to in clause (a) and clause (b).
(2) Where the gross total income of the Offshore Fund,—
(a) consists only of income from units or income by way of long-term capital gains arising from the transfer
of units, or both, no deduction shall be allowed to the assessee under sections 28 to 44C or clause (i)
or clause (iii) of section 57 or under Chapter VI-A and nothing contained in the provisions of the
second proviso to section 48 shall apply to income referred to in clause (b) of sub-section (1);
(b) includes any income referred to in clause (a), the gross total income shall be reduced by the
amount of such income and the deduction under Chapter VI-A shall be allowed as if the
gross total income as so reduced were the gross total income of the assessee.
(a) "overseas financial organisation" means any fund, institution, associa-tion or body, whether
incorporated or not, established under the laws of a country outside India, which has entered into an
arrangement for investment in India with any public sector bank or public financial institution or a
mutual fund specified under clause (23D) of section 10 and such arrangement is approved by the
Securities and Exchange Board of India, established under the Securities and Exchange Board of India
Act, 1992 (15 of 1992), for this purpose;
(b) "unit" means unit of a mutual fund specified under clause (23D) of section 10 or of the Unit Trust of
India;
(c) "foreign currency" shall have the meaning as in the Foreign Exchange Management Act, 1999 (42 of
1999);
(d) "public sector bank" shall have the meaning assigned to it in clause (23D) of section 10;
(e) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act,
1956 (1 of 1956);
(f) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963
(52 of 1963).

Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains
arising from their transfer.
115AC. (1) Where the total income of an assessee, being a non-resident, includes—
(a) income by way of interest on bonds of an Indian company issued in accordance with such scheme
as the Central Government may, by notification in the Official Gazette, specify in this behalf, or on
bonds of a public sector company sold by the Government, and purchased by him in foreign
currency; or
(b) income by way of dividends, other than dividends referred to in section 115-O, on Global
Depository Receipts—
(i) issued in accordance with such scheme as the Central Government may, by notification in
the Official Gazette, specify in this behalf, against the initial issue of shares of an Indian company
and purchased by him in foreign currency through an approved intermediary; or
(ii) issued against the shares of a public sector company sold by the Government and purchased
by him in foreign currency through an approved intermediary; or
(iii) issued or re-issued in accordance with such scheme as the Central Government may, by
notification in the Official Gazette, specify in this behalf, against the existing shares of an Indian
company purchased by him in foreign currency through an approved intermediary; or
(iv) [***]
(c) income by way of long-term capital gains arising from the transfer of bonds referred to in clause
(a) or, as the case may be, Global Depository Receipts referred to in clause (b),
(i) the amount of income-tax calculated on the income by way of interest or dividends, other
than dividends referred to in section 115-O, as the case may be, in respect of bonds referred
to in clause (a) or Global Depository Receipts referred to in clause (b), if any, included in the
total income, at the rate of ten per cent;
(ii) the amount of income-tax calculated on the income by way of long-term capital gains
referred to in clause (c), if any, at the rate of ten per cent; and
(iii) the amount of income-tax with which the non-resident would have been chargeable had his total
income been reduced by the amount of income referred to in clauses (a), (b) and (c).
(2) Where the gross total income of the non-resident—
(a) consists only of income by way of interest or dividends, other than dividends referred to in section 115-
O in respect of bonds referred to in clause (a) of sub-section (1) or, as the case may be, Global
Depository Receipts referred to in clause (b) of that sub-section, no deduction shall be allowed
to him under sections 28 to 44C or clause (i) or clause (iii) of section 57 or under
Chapter VI-A;
(b) includes any income referred to in clause (a) or clause (b) or clause (c) of sub-section (1), the gross
total income shall be reduced by the amount of such income and the deduction under
Chapter VI-A shall be allowed as if the gross total income as so reduced, were the gross
total income of the assessee.
(3) Nothing contained in the first and second provisos to section 48 shall apply for the computation of
long-term capital gains arising out of the transfer of long-term capital asset, being bonds or Global Depository
Receipts referred to in clause (c) of sub-section (1).
(4) It shall not be necessary for a non-resident to furnish under sub-section (1) of section 139 a
return of his income if—
(a) his total income in respect of which he is assessable under this Act during the previous year consisted
only of income referred to in clauses (a) and (b) of sub-section (1); and
(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such
income.
(5) Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company
by virtue of his holding Global Depository Receipts or bonds in the amalgamating or demerged company, as the
case may be, in accordance with the provisions of sub-section (1), the provisions of that sub-section shall apply
to such Global Depository Receipts or bonds.
(a) "approved intermediary" means an intermediary who is approved in accordance with such scheme as
may be notified by the Central Government in the Official Gazette;
(b) "Global Depository Receipts" shall have the same meaning as in clause (a) of the Explanation to section
115ACA.

Tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising
from their transfer.
115ACA. (1) Where the total income of an assessee, being an individual, who is a resident and an
employee of an Indian company engaged in specified knowledge based industry or service, or
an employee of its subsidiary engaged in specified knowledge based industry or service (hereafter in this section
referred to as the resident employee), includes—
(a) income by way of dividends, other than dividends referred to in section 115-O, on Global
Depository Receipts of an Indian company engaged in specified knowledge based industry or
service, issued in accordance with such Employees' Stock Option Scheme as the Central Government
may, by notification in the Official Gazette, specify in this behalf and purchased by him in foreign
currency; or
(b) income by way of long-term capital gains arising from the transfer of Global
Depository Receipts referred to in clause (a),
(i) the amount of income-tax calculated on the income by way of dividends, other than dividends referred
to in section 115-O, in respect of Global Depository Receipts referred to in clause (a), if any, included
in the total income, at the rate of ten per cent;
(ii) the amount of income-tax calculated on the income by way of long-term capital gains
referred to in clause (b), if any, at the rate of ten per cent; and
(iii) the amount of income-tax with which the resident employee would have been chargeable had his total
income been reduced by the amount of income referred to in clauses (a) and (b).
(a) "specified knowledge based industry or service" means—
(i) information technology software;
(ii) information technology service;
(iii) entertainment service;
(iv) pharmaceutical industry;
(v) bio-technology industry; and
(vi) any other industry or service, as may be specified by the Central Government, by notification in
the Official Gazette;
(b) "subsidiary" shall have the meaning assigned to it in section 4 of the Companies Act, 1956 (1 of 1956)
and includes subsidiary incorporated outside India.
(2) Where the gross total income of the resident employee—
(a) consists only of income by way of dividends, other than dividends referred to in section 115-O, in
respect of Global Depository Receipts referred to in clause (a) of sub-section (1), no deduction shall
be allowed to him under any other provision of this Act;
(b) includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income
shall be reduced by the amount of such income and the deduction under any provision of
this Act shall be allowed as if the gross total income as so reduced were the gross total income of the
assessee.

long-term capital gains arising out of the transfer of long-term capital asset, being Global Depository Receipts
referred to in clause (b) of sub-section (1).
(a) "Global Depository Receipts" means any instrument in the form of a depository receipt or certificate (by
whatever name called) created by the Overseas Depository Bank outside India and issued to investors
against the issue of,—
(i) ordinary shares of issuing company, being a company listed on a recognised stock exchange in
India; or
(ii) foreign currency convertible bonds of issuing company;
(b) "information technology service" means any service which results from the use of any information
technology software over a system of information technology products for realising value addition;
(c) "information technology software" means any representation of instructions, data, sound or image,
including source code and object code, recorded in a machine readable form and capable of being
manipulated or providing inter-activity to a user, by means of an automatic data processing machine
falling under heading information technology pro-ducts but does not include non-information
technology products;
(d) "Overseas Depository Bank" means a bank authorised by the issuing company to issue Global
Depository Receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the
issuing company.

Tax on income of Foreign Institutional Investors from securities or capital gains arising from their
transfer.
115AD. (1) Where the total income of a Foreign Institutional Investor includes—
(a) income other than income by way of dividends referred to in section 115-O received in respect
of securities (other than units referred to in section 115AB); or
(b) income by way of short-term or long-term capital gains arising from the transfer of such securities,
(i) the amount of income-tax calculated on the income in respect of securities referred to in clause
(a), if any, included in the total income, at the rate of twenty per cent :
Provided that the amount of income-tax calculated on the income by way of interest referred
to in section 194LD shall be at the rate of five per cent;
(ii) the amount of income-tax calculated on the income by way of short-term capital gains referred
to in clause (b), if any, included in the total income, at the rate of thirty per cent :
Provided that the amount of income-tax calculated on the income by way of short-term
capital gains referred to in section 111A shall be at the rate of fifteen per cent;
(iii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in
clause (b), if any, included in the total income, at the rate of ten per cent; 26[and]
Following proviso shall be inserted in clause (iii) of sub-section (1) of section 115AD by the Finance
Act, 2018, w.e.f. 1-4-2019 :
Provided that in case of income arising from the transfer of a long-term capital asset
referred to in section 112A, income-tax at the rate of ten per cent shall be calculated on
such income exceeding one lakh rupees; and
(iv) the amount of income-tax with which the Foreign Institutional Investor would have been chargeable
had its total income been reduced by the amount of income referred to in clause (a) and clause (b).
(2) Where the gross total income of the Foreign Institutional Investor—
(a) consists only of income in respect of securities referred to in clause (a) of sub-section (1), no deduction
shall be allowed to it under sections 28 to 44C or clause (i) or clause (iii) of section 57 or
under Chapter VI-A;
(b) includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income
shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be
allowed as if the gross total income as so reduced, were the gross total income of the Foreign
Institutional Investor.
capital gains arising out of the transfer of securities referred to in clause (b) of sub-section (1).
(a) the expression "Foreign Institutional Investor" means such investor as the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(b) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956).

Tax on profits and gains of life insurance business.

115B. (1) Where the total income of an assessee includes any profits and gains from life insurance
business, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the amount of profits and gains of the life insurance
business included in the total income, at the rate of twelve and one-half per cent; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of
the assessee been reduced by the amount of profits and gains of the life insurance business.
(2) Notwithstanding anything contained in sub-section (1) or in any other law for the time being in force or any
instrument having the force of law, the assessee shall, in addition to the payment of income-tax computed under
sub-section (1), deposit, during the previous years relevant to the assessment years commencing on the 1st day
of April, 1989 and the 1st day of April, 1990, an amount equal to thirty-three and one-third per cent of the
amount of income-tax computed under clause (i) of sub-section (1), in such social security fund (hereafter in
this sub-section referred to as the security fund), as the Central Government may, by notification in the Official
Gazette, specify in this behalf :
Provided that where the assessee makes during the said previous years any deposit of an amount of not
less than two and one-half per cent of the profits and gains of the life insurance business in
the security fund, the amount of income-tax payable by the assessee under the said clause (i) shall
be reduced by an amount equal to two and one-half per cent of such profits and gains and, accordingly,
the deposit of thirty-three and one-third per cent required to be made under this sub-section shall be calculated
on the income-tax as so reduced.

Tax on income of certain domestic companies.

115BA. (1) Notwithstanding anything contained in this Act but subject to the 27[other provisions of this
Chapter], the income-tax payable in respect of the total income of a person, being a domestic company,
for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2017, shall, at
the option of such person, be computed at the rate of twenty-five per cent, if the conditions contained
in sub-section (2) are satisfied.
(2) For the purposes of sub-section (1), the following conditions shall apply, namely:—
(a) the company has been set-up and registered on or after the 1st day of March, 2016;
(b) 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; and
(c) the total income of the company has been computed,—
(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1)
of section 32 or section 32AC or section 32AD or section 33AB or section 33ABA or sub-clause
(ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section
(2AB) of section 35 or section 35AC or section 35AD or section 35CCC or section 35CCD or
under any provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain
incomes" other than the provisions of section 80JJAA;
(ii) without set off of any loss carried forward from any earlier assessment year if such loss is
attributable to any of the deductions referred to in sub-clause (i); and
(iii) depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, is
determined in the manner as may be prescribed.
(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) 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.
(4) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed
manner on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the
returns of income which the person is required to furnish under the provisions of this Act:
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn
for the same or any other previous year.

Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or gambling or betting of any form or nature whatsoever.
115BB. Where the total income of an assessee includes any income by way of winnings from any lottery
or crossword puzzle or race including horse race (not being income from the activity of owning and
maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or
nature whatsoever, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword
puzzle or race including horse race or card game and other game of any sort or from gambling or betting
of any form or nature whatsoever, at the rate of thirty per cent; and
been reduced by the amount of income referred to in clause (i).
Explanation.—For the purposes of this section, "horse race" shall have the same meaning as in section 74A.

Tax on non-resident sportsmen or sports associations.

115BBA. (1) Where the total income of an assessee,—
(a) being a sportsman (including an athlete), who is not a citizen of India and is a non-resident,
includes any income received or receivable by way of—
(i) participation in India in any game (other than a game the winnings wherefrom are taxable
under section 115BB) or sport; or
(ii) advertisement; or
(iii) contribution of articles relating to any game or sport in India in newspapers,
magazines or journals; or
(b) being a non-resident sports association or institution, includes any amount guaranteed to be
paid or payable to such association or institution in relation to any game (other than a game the
winnings wherefrom are taxable under section 115BB) or sport played in India; or
(c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income
received or receivable from his performance in India,
the income-tax payable by the assessee shall be the aggregate of—
(i) the amount of income-tax calculated on income referred to in clause (a) or clause (b) or clause (c) at
the rate of twenty per cent; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of
the assessee been reduced by the amount of income referred to in clause (a) or clause (b) or clause (c) :
Provided that no deduction in respect of any expenditure or allowance shall be allowed under
any provision of this Act in computing the income referred to in clause (a) or clause (b) or clause (c).
(2) It shall not be necessary for the assessee to furnish under sub-section (1) of section 139 a
return of his income if—
only of income referred to in clause (a) or clause (b) or clause (c) of sub-section (1); and
income.

Tax on income from units of an open-ended equity oriented fund of the Unit Trust of India or of Mutual
Funds.
115BBB. (1) Where the total income of an assessee includes any income from units of an open-ended equity
oriented fund of the Unit Trust of India or of a Mutual Fund, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on income from units of an open-ended equity oriented fund of
the Unit Trust of India or of a Mutual Fund, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income
been reduced by the amount of income referred to in clause (a).
Explanation.—For the purposes of this section, the expressions "Mutual Fund", "open-ended equity oriented
fund" and "Unit Trust of India" shall have the meanings respectively assigned to them in
the Explanation to section 115T.

Anonymous donations to be taxed in certain cases.

115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any
university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital
or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in
sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust
or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax
payable shall be the aggregate of—
(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous
donations received in excess of the higher of the following, namely:—
(A) five per cent of the total donations received by the assessee; or
(B) one lakh rupees, and
been reduced by the aggregate of anonymous donations received in excess of the amount referred to in
sub-clause (A) or sub-clause (B) of clause (i), as the case may be.
(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by—
(a) any trust or institution created or established wholly for religious purposes;
(b) any trust or institution created or established wholly for religious and charitable purposes other than
any anonymous donation made with a specific direction that such donation is for any
university or other educational institution or any hospital or other medical
institution run by such trust or institution.
(3) For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-
clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record
of the identity indicating the name and address of the person making such contribution and such other particulars

Tax on certain dividends received from foreign companies.

115BBD. (1) Where the total income of an assessee, being an Indian company, includes any income by way of
dividends declared, distributed or paid by a specified foreign company, the income-tax payable
shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen
per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had its total income
been reduced by the aforesaid income by way of dividends.
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or
allowance shall be allowed to the assessee under any provision of this Act in computing its income
by way of dividends referred to in sub-section (1).
(3) In this section,—
(i) "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall
not include sub-clause (e) thereof;
(ii) "specified foreign company" means a foreign company in which the Indian company
holds twenty-six per cent or more in nominal value of the equity share capital of the
company.

Tax on certain dividends received from domestic companies.

115BBDA. (1) Notwithstanding anything contained in this Act, where the total income of a specified
assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of
dividends declared, distributed or paid by a domestic company or companies, the income-tax payable
shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate
exceeding ten lakh rupees, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of
the assessee been reduced by the amount of income by way of dividends.
(2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee
under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-
section (1).
29
[Explanation.—For the purposes of this section,—
(a) "dividend" shall have the meaning assigned to it in clause (22) of section 2 but shall
not include sub-clause (e) thereof;
(b) "specified assessee" means a person other than,—
(i) a domestic company; or
(ii) a fund or institution or trust or any university or other educational institution or any
hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause
(vi) or sub-clause (via) of clause (23C) of section 10; or
(iii) a trust or institution registered under section 12A or section 12AA.]

Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section
69C or section 69D.
115BBE. [(1) Where the total income of an assessee,—
(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section
69C or section 69D and reflected in the return of income furnished under section 139; or
(b) determined by the Assessing Officer includes any income referred to in section 68, section
69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause
(a),
(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate
of sixty per cent; and
been reduced by the amount of income referred to in clause (i).]
allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in
computing his income referred to in clause (a) and clause (b) of sub-section (1).

Tax on income from patent.

115BBF. (1) 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, the income-tax payable shall be the aggregate
of—
(a) the amount of income-tax calculated on the income by way of royalty in respect of the patent at the rate
of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income
been reduced by the income referred to in clause (a).
allowance shall be allowed to the eligible assessee under any provision of this Act in computing his income
referred to in clause (a) of sub-section (1).
(3) The eligible assessee may exercise the option for taxation of income by way of royalty in respect
of a patent developed and registered in India in accordance with the provisions of this section, in the prescribed
manner, on or before the due date specified under sub-section (1) ofsection 139 for furnishing the return of
income for the relevant previous year.
(4) Where an eligible assessee opts for taxation of income by way of royalty in respect of a patent developed
and registered in India for any previous year in accordance with the provisions of this section and the assessee
offers the income for taxation for any of the five assessment years relevant to the previous year
succeeding the previous year not in accordance with the provisions of sub-section (1), then, the assessee
shall not be eligible to claim the benefit of the provisions of this section for five 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 the provisions of sub-section (1).
(a) "developed" means at least seventy-five per cent 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 (39 of 1970)
(herein referred to as the Patents Act);
(b) "eligible assessee" means a person resident in India and who is a patentee;
(c) "invention" shall have the meaning assigned to it in clause (j) of sub-section (1) of section 2 of the
Patents Act;
(d) "lump sum" includes an advance payment on account of such royalties which is not returnable;
(e) "patent" shall have the meaning assigned to it in clause (m) of sub-section (1) of section 2 of the Patents
Act;
(f) "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;
(g) "patented article" and "patented process" shall have the meanings respectively assigned to them in clause
(o) of sub-section (1) of section 2 of the Patents Act;
(h) "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 to in sub-clauses (i) to (iii);
(i) "true and first inventor" shall have the meaning assigned to it in clause (y) of sub-section (1) of section
2 of the Patents Act.

C.A. Kalpesh Sanghavi NR / Special Rates of Taxes - P a g e | F53-B . 1
Question (ID 51)

An Indian company Ximc Private Limited (The Company) profit and loss as per books of account is 30.25 lakhs.
Following amounts have been debited and credited to its profit and loss account. Company equity shares consist
of 10,00,000 shares of fully paid face value 10 each issued for premium of 30 per share.
1. Ximc Private Limited has entered in to contract with Alpha Limited 2 years for providing continuous
supply of chemical H2SO4. In the month of July there was modification on terms of contract and as
result Ximc Limited has received 2 Lakhs compensation.
2. Ximc Private Limited has loss on Agriculture commodities derivatives transaction to the tune of 3 lakhs.
No CTT have been paid on such transactions.
3. The Company owns a flat at Chennai for re-sale. It has entered in to agreement to sale it on 10th June
when the stamp duty guidance value was 100 lakhs. At time of entering in to agreement in June advance
was received Rs. 10 Lakhs by means of account payee cheque. The Registration of sale was done on 12th
Feb when the stamp duty paid was @ 5 % Rs. 5.5 Lakhs. Actual consideration received as result of sale
is 98 Lakhs. The sale price was credited to Flat account in balance sheet.
4. The Company is operating 2 heavy goods vehicle for its transport division. Un-laden weight of vehicle
is 13 tons and 16 tons. The company has gross receipt from operation of both the trucks 2.5 lakhs and
expense to operate the same is 1 lakh.
5. Profit on sale of listed shares listed on NSE is 6 lakhs. STT have been duly paid.
6. The Company is entitled to export incentive. Company has made claim of 200,000 with the appropriate
authorities with all the supporting documents and evidences in January. However the claim is received
after 15 days of the end of the financial year.
7. The Company has also been dealing in to interest swaps, and marked to market loss accounted is 1.5
lakhs.
8. The Company is providing BPO services. It has entered in to contract with Sihan Limited to provide
services from 1st of March for 60 days. As per the terms of contract entire contract value is to be paid
after 7 days of completion of services. Value of services contract is 6 lakhs for 60 days. Expense incurred
to provide the services is 2 lakhs during the year.
9. The Company has borrowed from Anonymous Lender 10 lakhs. Name and address of the lender is not
available. The amount is credited to liability account in balance sheet. The foreign travelling expense for
travel of one of the directors for business purpose is 10,000 however officer has considered reasonable
air fare and hotel stay for 10 days at 2,10,000. The assessing officer is of the view that it is bogus
transactions and requires additions to income.
Paper 6C International Taxation (Pen Drive Available)

Additional Information
The Company acquired for 25 lakhs one flat at Baroda, Gujarat for the purpose of Re-sale. However company
has decided to give it to one of its directors Mr. Bhardwaj to stay and now it does not have any intention to sale
it. Company has converted it in to capital asset on 15th March. FMV of the flat on 15th March is 35 lakhs.
However Broker in Baroda has indicated that its Market value on 31st of March is 36 Lakhs.
The company advanced loan of Rs. 28 lakhs to one of its director Mr. Amit Shah on 12 October (holding 25 %
shares in company). The accumulated profits on that date is 16 lakhs. The company has not declared any
dividends during the year. The loan to the tune of 25 Lakhs have been paid off up to 15 Feb.
The company is habitually executing contract on behalf of Foreign company DIER Inc. The company is duly
authorised by DIER Inc for such execution of contract. The income of DIER Inc is Rs. 200,000 out of the
execution of such contract through the company.
Question A
You are required to compute (ignore the provision of MAT)
1. Tax Liability of Ximc Limited.
2. Tax liability of Mr. Amit Assuming that he has dividend income of 15,00,000 from other Indian
companies.
Question B
Assuming that pursuant to resolution plan approved under the Insolvency and Bankruptcy Code, 2016 and
considering following additional information you are also required to compute the tax liability of the company.
One of the shareholder Mr. Nimish holding 60 % shares in the company has sold his shares to Mr. Jain during
the year.
Brought forward loss – as per books of accounts 4 lakhs
Brought forward depreciation – as per books of accounts 3 lakhs
Brought forward business loss from 2 years back – as per income tax act – 60 lakhs
You are required to compute (applying the provision of MAT)

1. Total Tax Liability of Ximc Limited.
Question C
Assuming company has declared dividend of Rs. 2 each on equity shares on 15 Feb and accumulated profits are
250 lakhs. You are required to calculate dividend tax liability. The company has adjusted the dividend of Rs. 2
payable to Mr. Amit against the loan remain unpaid on 15 Feb.

Question (ID 52)
Arnold Ltd. (incorporated in UK) has a branch office (PE) in India. The Net profit of the Branch as per the
statement of profit and loss for the year was Rs. 83 lakhs. It includes the following:
(1) Dividend from Indian companies (listed) Rs. 8,00,000.
(2) Dividend from Indian companies (unlisted) Rs. 4,00,000.
(3) Interest received from MMS Ltd. of Mumbai Rs. 7,00,000. The amount was received by the
Indian company MMS Ltd. in foreign currency as per loan agreement dated 01.04.2014 (section
194LC applicable).
(4) Fee for technical services received from Barun Co. Ltd., Kolkata Rs. 25,00,000. The agreement
was made on 10.08.2007 and was approved by Central Government Expenditure incurred for
providing technical service amount to Rs. 6,00,000.
(5) Income out of trading in market at its prevailing market price of Carbon Credit Rs. 700,000.
(6) Royalty income out of patents registered in India 12,00,000.
(7) Arnold Ltd is member of an AOP M/s Flingo an in India. Arnold Ltd has 60% share. Total
Income of AOP is 10,00,000 Rupees.
Additional Information :
Total income chargeable to tax as per regular provisions of the Income-tax Act, 1961 (Act) is Rs. 20,00,000
(without considering the items (1) to (7) above). You are required to compute the book profit tax under section
115JB of the Act and also the total income-tax liability of the assessee.
Your working should be supported by notes.

Question (ID 53)
SDK Ltd. is engaged in the manufacture of textile since 01-04-2010. The company has issued 20,00,000 shares
of face value 10 each fully paid up at premium of 20 each. One of the shareholder Mr. Rajesh is holding 500,000
shares in the company. New Pension System Trust covered by 10(44) is holding 100,000 shares in SDK Ltd.
Accumulated Reserves of the company is 250 Lakhs. Its Statement of profit and loss for the previous year ended
31st March, shows a profit of Rs. 600 lakhs after debiting or crediting the following items:
(1) Depreciation charged on the basis of useful life of assets as per Companies Act is Rs. 62 lakhs.
(2) Industrial power tariff concession of Rs. 3.5 lakhs, received from State Government was credited to
P & L Account.
(3) The company had provided Rs. 25 lakhs being sum fairly estimated as payable with reasonable
certainty, to workers on agreement to be entered with the workers union towards periodical wage
revision once in every three years.
(4) Dividend received details are as under
a. From Zahir Inc Incorporated in Singapore in which SDK Ltd is holding 35 % shares 7 lakhs.
b. From Moxizm Inc Incorporated in Cayman Islands in which SDK ltd is holding 60 % shares
3 lakhs.
c. From Atul Ltd, Domestic company 21 lakhs.
d. From RIMS Ltd, domestic company in which SDK ltd is holding 70 % shares 1 Lakh.
(5) Loss Rs. 25 lakhs, due to destruction of a machine worth Rs. 30 lakhs by fire due to short circuit and
Rs. 5 lakhs received as scrap value. The insurance company did not admit the claim of the company
on charge of gross negligence.
(6) Provision for gratuity based on actuarial valuation was Rs.400 lakhs. Actual gratuity paid debited to
gratuity provision account was Rs. 275 lakhs.
(7) The company has purchased 500 tons of industrial paper as packing material at a price of Rs. 30,000
per ton from M/S. Shiv Bramha, a firm in which majority of the directors of SDK Ltd. are partners.
The firm’s normal selling price of the same material in market is Rs. 28,000 per ton.
(8) Advertisement charges Rs. 1.5 lakhs, paid by cheque for advertisement published in the souvenir of
a political party registered with the Election Commission of India.
(9) Long term capital gain Rs. 4.5 lakhs on sale of equity shares on which Securities Transaction Tax
(STT) was paid at the time of acquisition and sale.

Additional information:
(1) Normal depreciation as per Income-tax Rules is Rs. 65 lakhs.

(2) The GST Rs. 11 Lakhs collected from its customers was paid by the company on the due dates.
On an appeal, the High Court directed the sales tax department to refund Rs. 4 Lakhs to the
company. The company in turn refunded Rs. 3 lakhs to the customers from whom it was collected
and the balance Rs. 1 lakh is still lying under the head “Current Liabilities”.
(3) SDK limited has given loan of 25,00,000 on 16th May to M/s Adinath a Registered Firm in which
Mr. Rajesh is partner for 40%. M/s Adinath has repaid Loan to extent of 23,50,000 up to 12
September. SDK limited has declared the dividend to its shareholder at Rs. 1.9 per share on 12
September.
You are required to:

Compute the total income, tax liability and dividend tax liability of SDK Ltd. by analysing and applying the
relevant provisions of income-tax law.
Compute the tax Liability of Mr. Rajesh on the assumption that his total dividend income from domestic
companies is Rs. 17,00,000 and he has received loan from Funjik Inc registered in Thailand in which he his
holding 35 % of shares Rs. 12,00,000.
Briefly explain the reasons for treatment of each item. Ignore the provisions relating to Minimum Alternate Tax.

Question (ID 54)
BG (P) Ltd. is engaged in multiple businesses. The Net Profit as per the statement of profit and loss was Rs. 52
lakhs for the year. Company total issued share capital is 9,00,000 shares at face value of Rs. 10 Each as on 01st
April. New Pension system trust covered by 10(44) is holding 150,000 shares in the company. Miss Radha is
one of the directors of the company holding 250,000 shares.
A scrutiny of the statement of profit and loss revealed the following items which were debited / credited therein:
1. Share income @ 25% from a partnership firm ABC & Co. of Pune Rs. 9,50,000.
2. The company paid Rs. 1 lakh as service charges to a call centre for attending the calls of customers and
suppliers. Tax was deducted at source on such payment @ 2%.
3. Expenditure incurred Rs. 8 lakhs for digging of wells near the factory for use by public under Corporate
Social Responsibility Scheme as per the Companies Act,2013.
4. Grant received from State Government for acquisition of generator Rs. 10 lakhs. The generator was
acquired on 01.06. for Rs. 35 lakhs. A sum of Rs. 5 lakhs was paid as advance by cash to the supplier of
generator. The grant amount received is credited to statement of profit and loss. Depreciation charged
on Rs. 35 lakhs@15%.
Note : Assume that the company is not eligible for additional depreciation.
5. During the year, the company bought textile goods from local suppliers. Cash payment was made
exceeding Rs. 10,000 but below Rs. 20,000 in a day to 15 suppliers aggregating to Rs. 2,00,000.
6. Depreciation debited to statement of profit and loss Rs. 10 lakhs (it includes Rs. 8 lakhs being
depreciation on assets revalued).
7. Provision for deferred tax debited to statement of profit and loss Rs. 6,50,000.
8. Trade creditors Rs.5,00,000 were outstanding for more than 5 years and there is no business relationship
with them. The amount was unilaterally transferred to credit of statement of profit and loss.
9. Royalty income in respect of patents chargeable under section 115BBF Rs.12,00,000.
10. Depreciation eligible under section 32 (before considering adjustment of any of the items described
above) Rs.12,25,000.

Additional Information :
(a) The assessee executed only one civil construction contract of the value of Rs. 15 lakhs. The contractee
withheld 20% of the contract amount which would be released only after 2 years. The amount withheld
has not been credited to statement of profit and loss.
(b) On 15 May 1,00,000 equity shares of Rs.10 each was issued for Rs. 25 per share. The fair market value
of the shares as per rule 11UA of the Income-tax Rules. 1962 was determined @ Rs. 17 per share.
(c) During the year, the company advanced Rs. 15,50,000 on 12 November to one of the partnership firm
M/s RFG in which Miss Radha is having 30 % share. The Loan is repaid to the extent of 14,00,000 up
to 15 Jan. The company has accumulated profit of Rs. 250 lakhs.
(d) Miss Radha has visited London for personal trip with her friends for 20 days. The expense debited in her
books of accounts is 50,000 which is shown as her personal drawings. However assessing officer has
ascertained that Fair amount of Air ticket is 50,000 and 20 days stay is reasonably 500,000.
You are required to compute the total income, tax liability and dividend tax liability for the year stating clearly
the reasons for treatment for each of the items given above. The company has declared Rs. 1 per share dividend
on 15 Jan. Ignore the provisions of minimum alternate tax.
You are also required to compute the tax liability of Miss Radha.

C.A. Kalpesh Sanghavi NR / Special Rates of Taxes - P a g e | F53-C . 1
Question (ID 06)
Ritesh, a Non-Resident Indian remitted USD 75,000 to India in 31.1.1992, part of which is utilized for acquiring
5,000 Shares of Akash Ltd. and Indian Company at Rs. 210 on 15.2.1992. These shares are sold for Rs. 1,760
per share on 28.3.PY. Ritesh deposited Rs. 50 Lakhs with an Indian Public Company on 1.8.AY (one day after
due date of filing return of income).
Compute Capital Gains chargeable to tax on the basis of the following TT Rates (as per State Bank of India)
Date TT Buying Rate (Rs. / $) TT Selling Rate (Rs. / $)

31.1.1992 20.00 21.00
15.2.1992 20.50 21.50
28.3.PY 43.00 45.00
If the above shares were sold through a Recognized Stock Exchange, what will be tax incidence?
Question (ID 04)
The total income of Mr. Narayan non-resident Indian includes:
Investment income (gross) 62,500

Long-term capital gains on unlisted shares (foreign exchange assets) 25,000
Other income 1,25,000
What will be the tax payable by him on the above income under Chapter XII or Chapter XII-A of the Income-
tax Act? Long term capital gains on foreign exchange assets after the application of Prov 1 to 48 shall be assumed
as 20,000.

Question (ID 01)

A non- resident Indian has the following sources of income in India. You are required to compute his total
income and determine his tax liability. Details of your workings, with reasons, should form part of your answer.
(1) Dividend from Indian company 50,000

(2) Interest on debentures of an Indian company invested out of
remittances in convertible foreign exchange 75,000
Less : Interest paid on money borrowed in India for investment in
the debentures 25,000 50,000
(3) Long – term capital gains on sale of unlisted shares subscribed in
convertible foreign exchange:
Cost in 2009-10 2,00,000
Sale 3,00,000
1,00,000
Less : Brokerage 10,000 90,000
(4) Property income in Indian (Net) 2,00,000

(5) T.D.S. 30,000
The property was acquired partly out of a loan from HDFC. The repayment of loan made during the year
amounted to Rs. 20,000. The assessee also claims deduction of Rs. 10,000 by way of donation to the Prime
Minister’s Relief Fund and of Rs. 50,000 towards repayment of loan taken for higher education in India before
his migration. It shall be assumed that capital gains in (3) above after the exchange fluctuation of Prov 1 to 48
is 82,000.


F53-A All questions are important V.Imp
F53-B All questions are important V.Imp
F53-C All questions are important V.Imp

Definitions.
115C. In this Chapter, unless the context otherwise requires,—
(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the
Management Act, 1999 (42 of 1999), and any rules made thereunder;
(b) "foreign exchange asset" means any specified asset which the assessee has acquired or
purchased with, or subscribed to in, convertible foreign exchange;
(c) "investment income" means any income derived other than dividends referred to in section 115-O from
a foreign exchange asset;
(d) "long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital
asset, being a foreign exchange asset which is not a short-term capital asset;
(e) "non-resident Indian" means an individual, being a citizen of India or a person of Indian
origin who is not a "resident".
Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or
any of his grand-parents, was born in undivided India;
(f) "specified asset" means any of the following assets, namely :—
(i) shares in an Indian company;
(ii) debentures issued by an Indian company which is not a private company68 as defined in the
Companies Act, 1956 (1 of 1956);
(iii) deposits with an Indian company which is not a private company68 as defined in the Companies
Act, 1956 (1 of 1956);
(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt
Act, 1944 (18 of 1944);
(v) such other assets as the Central Government may specify in this behalf by notification in the
Official Gazette.

Special provision for computation of total income of non-residents.

115D. (1) No deduction in respect of any expenditure or allowance shall be allowed under any provision
of this Act in computing the investment income of a non-resident Indian.
(2) Where in the case of an assessee, being a non-resident Indian,—
(a) the gross total income consists only of investment income or income by way of long-
term capital gains or both, no deduction shall be allowed to the assessee under Chapter VI-
A and nothing contained in the provisions of the second proviso to section 48 shall apply
to income chargeable under the head "Capital gains";
(b) the gross total income includes any income referred to in clause (a), the gross total income
shall be reduced by the amount of such income and the deductions under Chapter VI-A shall
be allowed as if the gross total income as so reduced were the gross total income of the assessee.
Tax on investment income and long-term capital gains.

115E. Where the total income of an assessee, being a non-resident Indian, includes—
(a) any income from investment or income from long-term capital gains of an asset other
than a specified asset;
(b) income by way of long-term capital gains,
the tax payable by him shall be the aggregate of—
(i) the amount of income-tax calculated on the income in respect of investment income referred to in
clause (a), if any, included in the total income, at the rate of twenty per cent;
(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to
in clause (b), if any, included in the total income, at the rate of ten per cent; and
(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced
by the amount of income referred to in clauses (a) and (b).

Capital gains on transfer of foreign exchange assets not to be charged in certain cases.
115F. (1) Where, in the case of an assessee being a non-resident Indian, any long- term capital gains arise
from the transfer of a foreign exchange asset (the asset so transferred being hereafter in this section referred
to as the original asset), and the assessee has, within a period of six months after the date of such transfer,
invested the whole or any part of the net consideration in any specified asset, or in any savings
certificates referred to in clause (4B) of section 10 (such specified asset, or such savings certificates being
hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance
with the following provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset,
the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset,
so much of the capital gain as bears to the whole of the capital gain the same proportion as
the cost of acquisition of the new asset bears to the net consideration shall not be charged
undersection 45.
(i) "cost", in relation to any new asset, being a deposit referred to in sub-clause (iii), or specified under sub-
clause (v), of clause (f) of section 115C, means the amount of such deposit;
(ii) "net consideration", in relation to the transfer of the original asset, means the full value of the
consideration received or accruing as a result of the transfer of such asset as reduced by any expenditure
incurred wholly and exclusively in connection with such transfer.
(2) Where the new asset is transferred or converted (otherwise than by transfer) into money, within a
period of three years from the date of its acquisition, the amount of capital gain arising from the transfer of
the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause
(a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under
the head "Capital gains" relating to capital assets other than short-term capital assets of the previous year in
which the new asset is transferred or converted (otherwise than by transfer) into money.

Return of income not to be filed in certain cases.

115G. It shall not be necessary for a non-resident Indian to furnish under sub- section (1) of section
139 a return of his income if—
only of investment income or income by way of long-term capital gains or both; and
income.
Benefit under Chapter to be available in certain cases even after the assessee becomes resident.
115H. Where a person, who is a non-resident Indian in any previous year, becomes assessable as
resident in India in respect of the total income of any subsequent year, he may furnish to the Assessing Officer
a declaration in writing along with his return of income under section 139 for the assessment year
for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in
relation to the investment income derived from any foreign exchange asset being an asset of the nature referred
to in sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of clause (f) of section 115C; and if he
does so, the provisions of this Chapter shall continue to apply to him in relation to such income for
that assessment year and for every subsequent assessment year until the transfer or conversion
(otherwise than by transfer) into money of such assets.
Chapter not to apply if the assessee so chooses.

115-I. A non-resident Indian may elect not to be governed by the provisions of this Chapter for any
assessment year by furnishing his return of income for that assessment year under section 139 declaring therein
that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions
of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall
be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.

C.A. Kalpesh Sanghavi DTAA - P a g e | F54 . 1
Question (ID 01) (DTAA)

A is a musician deriving income from concerts performed outside India of Rs. 50,000. Tax of Rs. 10,000 was
deducted at source in the country where the concerts were given. India does not have any agreement with that
country for avoidance of double taxation. Assuming that the Indian income of A is Rs . 290,000 what is the
relief due to him u/s 91 and explain the provisions of law.
Question (ID 04) (Revision / Home work) (DTAA)

Nandita, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well-known dramatist
deriving income of Rs. 1,10,000 from theatrical works played abroad. Tax of Rs. 11,000 was deducted in the
county where the plays were performed. India does not have any Double Tax Avoidance Agreement under
section 90 of the Income-tax Act, 1961, with that country. Her income in India amounted to Rs.5,10,000. In
view of tax planning, she has deposited Rs. 70,000 in Public Provident Fund and paid contribution to approved
Pension Fund of LIC Rs.32,000. She also contributed Rs. 18,000 to Central Government Health Scheme during
the previous year and gave payment of medical insurance premium of Rs. 21,000 to insure the health of her
father, a non resident aged 76 years, who is not dependent on her. Compute the tax liability of Nandita.

X (28 years) is resident and ordinarily resident in India. His income is Rs.8,96,000 from a business in India and
Rs. 1,92,000 from a business in a foreign country with whom India has an ADT agreement. According to the
ADT agreement, income is taxable in the country in which it is earned and not in the other country. However,
in the other country such income can be included for computation of tax rate. According to the tax laws of the
foreign country, business income of Rs. 1,92,000 is taxable @ 23 per cent. During the previous year, X has
deposited Rs. 42,000 in his public provident fund account (out of which Rs. 10,000 is deposited out of foreign
income). He has also received an interest of Rs. 32,000 on Government securities.

X Ltd. is an Indian company. For the previous year, the following incomes are noted from the books of account
of the taxpayer –
Income from a business in India 3,80,000

Income from a business in a foreign country with whom India has ADT agreement 2,16,000
According to the ADT agreement, Rs. 2,16,000 is taxable in India. However, it can also be taxed in the foreign
country @ 17.5 per cent which can be set off against Indian tax liability.
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A foreign company, ST, has entered into an agreement with an Indian Company KN for supply of know – how
and the agreement is within the industrial policy conditions laid down by the Central Government. In the year,
Rs. 50 lakh is paid, under the agreement, to ST by KN. ST claims to have spent Rs. 14 lakh as expenses in India
to be recognized as a deduction.
In the following situations, what will be your decision on the tax liability of the parties:
i) The agreement having been entered into before June 1, 2008 and approved by the Government, KN
pays to the Indian Income-tax Authorities the tax payable by ST;
ii) There is no agreement as to KN bearing the tax liability. The royalty payable is decided to be Rs. 59
lakh net of taxes.

Y (24 years) and Z (26 years) are resident in India. The following points are noted for the previous year from
the books of account -
Y Z
Rs. Rs.
Income from a business in India 80,000 (-)1,30,000
Income from business in Argentina
(India does not have ADT agreement with Argentina) 1,80,000 5,50,000
Income from other sources in India (bank FD interest) 60,000 1,40,000
PPF contribution 16,000 41,500
Tax levied in Argentina 39,000 15,000

X (61 years) is a musician deriving income from concerts performed outside India of Rs. 7,50,000. Tax of Rs.
1,50,000 was deducted at source in the country where the concerts were given and remaining Rs. 6,00,000 is
remitted to India. India does not have any agreement with that country for avoidance of double taxation.
Assuming that the Indian income of X is Rs. 4,00,000, what is the relief due to him under section 91 for year,
assuming that X has deposited Rs. 22,000 in the public provident fund account during the previous year.
CA Kalpesh Sanghavi

Arif, a resident both in India and Malaysia in previous year, owns immovable properties (including residential
house) at Malaysia and India. He has earned income of Rs. 50 lakhs from rubber estates in Malaysia during the
financial year. He also sold some property in Malaysia resulting in short-term capital gain of Rs. 10 lakhs during
the year. Arif has no permanent establishment of business in India. However, he has derived rental income of
Rs. 6 lakhs from property let out in India and he has a house in Lucknow where he stays during his visit to India.
The Article 4 of the double taxation avoidance agreement between India and Malaysia provides that where an
individual is a resident of both the Contracting States, then he shall be deemed to be resident of the Contracting
State in which he has permanent home available to him. If he has permanent home in both the Contracting
States, he shall be deemed to be a resident of the Contracting State with which his personal and economic
relations are closer (centre of vital interests).
You are required to state with reasons whether the business income of Arif arising in Malaysia and the capital
gains in respect of sale of the property situated in Malaysia can be taxed in India. Also explain the relevant
provisions of law.


Amrutha is a resident individual. She has income from the following sources :
(1) Taxable income from a sole-proprietary concern in Kochi Rs. 50 lakhs.
(2) Share of profit from a partnership firm in Chennai Rs. 30 lakhs.
(3) Agricultural Income from rubber estate in Country A which has no DTAA with India, USD 70,000.
Withholding Tax on the above income USD 10500 (Assume 1USD = Rs. 64).
(4) Brought forward Business Loss in Country A was USD 10000 which is not permitted to be set off
against other income as per the laws of that country.
Compute taxable income and tax payable by Amrutha. (6 marks)
Smt. Laxmi (age 70), a resident individual furnishes you the following particulars for the year:
Particulars Rs.
Income from business in India (computed) 6,00,000
Loss from let out property at chennai 4,40,000
Dividend received from a domestic company 12,00,000
Business income in country “B” (tax paid thereon at 20%) 4,00,000
Rental income from property at Mumbai (computed) 1,80,000
Note : Assume that there is no double taxation avoidance agreement between India and country “B”.
Compute the total income and tax payable by Smt. Laxmi. (6 marks)
Question (ID 13) (DTAA) (Home work)
Mr. A is taxable in case of certain income as per the Income-tax Act, 1961. The DTAA, which is applicable to
him excludes the income earned by him from the purview of tax. Is Mr. A liable to pay tax on the income earned
by him under Income-tax Act, 1961 ? (4 marks)


A Foreign Company Yam Inc Incorporated in Armenia has entered into an approved agreement with an Indian
Company Raju Ltd under which Technical services for plant at Orissa is to be provided for lump sum payment
of US $ 71,50,000 (conversion rate to be taken as 1 $ = 70). Yam Inc has subsidiaries in Australia, Jordan and
Japan. As per the corporate structure the Technical Services can provided from either of the countries or from
Armenia. Expense claimed against the income of technical fees is US $ 10,15,000. You are required to advise
Yam Inc on the selection of country from which said services to be provided. Yam Inc does not have PAN in
India.
Tax rates as per IT Act vis a vis Tax Treaties
Country Dividend Interest Royalty Fee for Technical
(not being covered under Services
Section 115-O)
Tax Treaty I-T Act (Note Tax Treaty I-T Act Tax I-T Tax Treaty I-T Act
6) (Note 7) Treaty Act (Note
(Note 4)
4)
Armenia 10% 20%/10% 10%[Note1] 20%/10%/5% 10% 10% 10% 10%
Australia 15% 20%/10% 15% 20%/10%/5% 10%/15% 10% 10%/15% 10%

[Note 2] [Note 2]
Japan 10% 20%/10% 10% 20%/10%/5% 10% 10% 10% 10%

[Note1]
Jordan 10% 20%/10% 10% 20%/10%/5% 20% 10% 20% 10%

[Note1]
Note
1. Dividend/Interest earned by the Government and certain specified institutions, inter-alia, Reserve Bank of
India is exempt from taxation in the country of source.
2. Royalties and fees for technical services would be taxable in the country of source at the rates prescribed for
different categories of royalties and fees for technical services. These rates shall be subject to various conditions
and nature of services/royalty for which payment is made. For detailed conditions refer to relevant Double
Taxation Avoidance Agreements.

3. Royalties and fees for technical services would be taxable in the country of source at the following rates:
a. 10 per cent in case of royalties relating to the payments for the use of, or the right to use, industrial,
commercial or scientific equipment;
b. 20 per cent in case of fees for technical services and other royalties.
4. From Assessment Year 2016-17, Royalty and fees for technical service received by a foreign company or a
non-resident non-corporate assessee from government or an Indian concern shall be taxed at the rate of 10% if
agreement is made at any time after 31 March 1976.
From Assessment Year 2017-18, any income of a person resident in India by way of royalty in respect of a
patent developed and registered in India shall be taxable at the rate of 10% as per section 115BBF,
5. (a)15 per cent of the gross amount of the dividends where those dividends are paid out of income (including
gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment
vehicle which distributes most of this income annually and whose income from such immovable property is
exempted from tax;
(b) 10 per cent of the gross amount of the dividends, in all other cases
6. Dividend:
a) Rate of tax shall be 10% on income from Global Depository Receipts under Section 115AC(1)(b) of
Income-tax Act, 1961 (other than dividends referred to in section 115-O).
b) Rate of tax shall be 20% under Section 115A on dividend (other than dividends referred to in section 115-
O) received by a foreign company or a non-resident non-corporate assessee
c) Rate of tax shall be 20% under Section 115AD on dividend (other than dividends referred to in section
115-O) received by a Foreign institutional investor.
d) From Assessment Year 2017-18, dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of
an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10% as per
section 115BBDA.
e) From Assessment Year 2018-19, dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of
person who is resident in India other than:
i) a domestic company; or
ii) a fund or institution or trust or any university or other educational institution or any hospital or
other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via); or
iii) a trust or institution registered under section 12AA.
at the rate of 10% as per section 115BBDA.

7. Interest
a) Rate of tax shall be 20% under Section 115A on interest received by a foreign company or a non-resident
non-corporate assessee from Government or an Indian concern on moneys borrowed or debt incurred by
Government or the Indian concern in foreign currency.
b) Rate of tax shall be 10% under Section 115AC on income from bonds of an Indian company issued in
accordance with such scheme as the Central Government may, by notification in the Official Gazette,
specify in this behalf, or on bonds of a public sector company sold by the Government, and purchased by
non-resident in foreign currency
c) Rate of tax shall be 5% in following cases:
(i) Interest received from an infrastructure debt fund as referred to in section 10(47)
(ii) Interest received from an Indian company specified in section 194LC.
(iii) Interest of the nature and extent referred to in section 194LD (applicable from the assessment year
2014-15).
(iv) Distributed income being interest referred to in section 194LBA(2) (section 194LBA is inserted by
the Finance (No. 2) Act, 2014 w.e.f. 01-10-2014)
8. The CBDT has clarified that DTAA signed with Government of the Czech Republic on the 27th January 1986
continues to be applicable to the residents of the Slovak Republic. [Notification No. 25, dated 23-03-2015]


F54 05 DTAA agreement is there V.Imp
F54 03 Net of tax payment V.Imp
F54 07 Loss and Income V.Imp
F54 02 Tie Breaker V.Imp

Agreement with foreign countries or specified territories.

90. (1) The Central Government may enter into an agreement with the Government of any country
outside India or specified territory outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in that
country or specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or
specified territory, as the case may be, to promote mutual economic relations, trade and
investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in
force in that country or specified territory, as the case may be, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable
under this Act or under the corresponding law in force in that country or specified territory, as the case
may be, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that
country or specified territory, as the case may be,
and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing
the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside
India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or
as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement
applies, the provisions of this Act shall apply to the extent they are more beneficial to that
assessee.
(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall
apply to the assessee even if such provisions are not beneficial to him.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall,
unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement,
have the same meaning as assigned to it in the notification issued by the Central Government in the
Official Gazette in this behalf.
(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be
entitled to claim any relief under such agreement unless a certificate of his being a resident in any
country outside India or specified territory outside India, as the case may be, is obtained by him from the
Government of that country or specified territory.
(5) The assessee referred to in sub-section (4) shall also provide such other documents and
information, as may be prescribed29.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign
company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less
favourable charge or levy of tax in respect of such foreign company.

Explanation 2.—For the purposes of this section, "specified territory" means any area outside India which may
be notified as such by the Central Government.
Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any
agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but
is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder
being in force, then, the meaning assigned to such term shall be deemed to have effect from the
date on which the said agreement came into force.
Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement
entered into under sub-section (1) is defined under the said agreement, the said term shall have the same
meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but
defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any,
given to it by the Central Government.

Adoption by Central Government of agreement between specified associations for double taxation relief.
90A. (1) 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 in the Official Gazette,
make such provisions as may be necessary for adopting and implementing such agreement—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in any
specified territory outside India; or
(ii) income-tax chargeable under this Act and under the corres-ponding law in force in that specified
territory outside India to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in
force in that specified territory outside India, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable
under this Act or under the corresponding law in force in that specified territory outside India, or
investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that
specified territory outside India.
(2) Where a specified association in India has entered into an agreement with a specified association of any
specified territory outside India under sub-section (1) and such agreement has been notified under that sub-
section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the
assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they
are more beneficial to that assessee.
(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall
apply to the assessee even if such provisions are not beneficial to him.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1)
shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the
agreement, have the same meaning as assigned to it in the notification issued by the Central
Government in the Official Gazette in this behalf.
(4) An assessee, not being a resident, to whom the agreement referred to in sub-section (1) applies, shall not
be entitled to claim any relief under such agreement unless a certificate of his being a resident in
any specified territory outside India, is obtained by him from the Government of that specified
territory.
(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as
may be prescribed32.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a
company incorporated in the specified territory outside India at a rate higher than the rate at
which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of
tax in respect of such company.
Explanation 2.—For the purposes of this section, the expressions—
(a) "specified association" means any institution, association or body, whether incorporated or not,
functioning under any law for the time being in force in India or the laws of the specified territory

outside India and which may be notified as such by the Central Government for the purposes of this
section;
(b) "specified territory" means any area outside India which may be notified as such by the Central
Government for the purposes of this section.
Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any
agreement entered into under sub-section (1) and not defined under the said agreement or the
Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued
thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect
from the date on which the said agreement came into force.
Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement
entered into under sub-section (1) is defined under the said agreement, the said term shall have the same
meaning as assigned to it in the agreement; and where the term is not defined in the said agreement,
but defined in the Act, it shall have the same meaning as assigned to it in the Act and
explanation, if any, given to it by the Central Government.

Countries with which no agreement exists.

91. (1) If any person who is resident in India in any previous year proves that, in respect of his income
which accrued or arose during that previous year outside India (and which is not deemed to accrue or
arise in India), he has paid in any country with which there is no agreement undersection 90 for the
relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in
that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum
calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said
country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
(2) If any person who is resident in India in any previous year proves that in respect of his income which
accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction
or otherwise, tax payable to the Government under any law for the time being in force in that country relating
to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by
him—
(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax
under this Act also; or
(b) of a sum calculated on that income at the Indian rate of tax;
whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as
resident in India in any previous year and such share includes any income accruing or arising outside India
during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is
no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid
income-tax by deduction or otherwise under the law in force in that country in respect of the income so included
he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly
taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower,
or at the Indian rate of tax if both the rates are equal.
(i) the expression "Indian income-tax" means income-tax charged in accordance with the provisions of this
Act;
(ii) the expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-
tax after deduction of any relief due under the provisions of this Act but before deduction of any relief
due under this Chapter, by the total income;
(iii) the expression "rate of tax of the said country" means income-tax and super-tax actually paid in the said
country in accordance with the corresponding laws in force in the said country after deduction of all
relief due, but before deduction of any relief due in the said country in respect of double taxation, divided
by the whole amount of the income as assessed in the said country;
(iv) the expression "income-tax" in relation to any country includes any excess profits tax or business profits
tax charged on the profits by the Government of any part of that country or a local authority in that
country.

Foreign Tax Credit.

Rule 128.
(1) An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by
him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the
income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the
extent as specified in this rule :
Provided that in a case where income on which foreign tax has been paid or deducted, is offered to tax in
more than one year, credit of foreign tax shall be allowed across those years in the same
proportion in which the income is offered to tax or assessed to tax in India.
(2) The foreign tax referred to in sub-rule (1) shall mean,—
(a) in respect of a country or specified territory outside India with which India has entered into an
agreement for the relief or avoidance of double taxation of income in terms of section 90
or section 90A, the tax covered under the said agreement;
(b) in respect of any other country or specified territory outside India, the tax payable under
the law in force in that country or specified territory in the nature of income-tax referred to
in clause (iv) of the Explanation to section 91.
(3) The credit under sub-rule (1) shall be available against the amount of tax, surcharge and cess payable
under the Act but not in respect of any sum payable by way of interest, fee or penalty.
(4) No credit under sub-rule (1) shall be available in respect of any amount of foreign tax or part thereof
which is disputed in any manner by the assessee:
Provided that the credit of such disputed tax shall be allowed for the year in which such income is
offered to tax or assessed to tax in India if the assessee within six months from the end of the
month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an
evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes
an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be
claimed.
(5) The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for
each source of income arising from a particular country or specified territory outside India and shall be given
effect to in the following manner:—
(i) the credit shall be the lower of the tax payable under the Act on such income and the
foreign tax paid on such income :
Provided that where the foreign tax paid exceeds the amount of tax payable in accordance
with the provisions of the agreement for relief or avoidance of double taxation, such
excess shall be ignored for the purposes of this clause;
(ii) the credit shall be determined by conversion of the currency of payment of foreign tax at the
telegraphic transfer buying rate on the last day of the month immediately preceding the
month in which such tax has been paid or deducted.
(6) In a case where any tax is payable under the provisions of section 115JB or section 115JC,
the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against
any tax payable under the provisions of the Act other than the provisions of the said sections (hereafter referred
to as the "normal provisions").

(7) Where the amount of foreign tax credit available against the tax payable under the provisions of section
115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while
computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under
section 115JB or section 115JC, as the case may be, such excess shall be ignored.
(8) Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely:—
(i) a statement of income from the country or specified territory outside India offered
for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67
and verified in the manner specified therein;
(ii) certificate or statement specifying the nature of income and the amount of tax deducted
therefrom or paid by the assessee,—
(a) from the tax authority of the country or the specified territory outside India; or
(b) from the person responsible for deduction of such tax; or
(c) signed by the assessee:
Provided that the statement furnished by the assessee in clause (c) shall be valid if it is
accompanied by,—
(A) an acknowledgement of online payment or bank counter foil or challan for payment
of tax where the payment has been made by the assessee;
(B) proof of deduction where the tax has been deducted.
(9) The statement in Form No.67 referred to in clause (i) of sub-rule (8) and the certificate or the statement
referred to in clause (ii) of sub-rule (8) shall be furnished on or before the due date specified for furnishing
the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return
of income.
(10) Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in
refund of foreign tax for which credit has been claimed

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-A . 1
Question: (ID 12)

Quipro Ltd is an Indian Company engaged in the business of developing and manufacturing industry
components. Its Canadian Subsidiary Techpro Inc. supplies technical information and offers technical support
to Quipro for manufacturing goods, for a consideration of Euro 80,000 per year.
Income of Quipro Ltd is Rs. 70 Lakhs. Determine the Taxable Income of Quipro Ltd if Techpro charges Euro
1,00,000 per year to other entities in India. What will be the answer if Techpro charges Euro 50,000 per year to
other entities. (Rate per Euro may be taken at Rs. 50.)
Question (ID 06)

X Ltd., an Indian company is engaged in manufacturing electronic components. 4 % of shares with differential
voting rights (DVR) in X Ltd. are held by Y Inc., incorporated in Kazakhstan. X Ltd. has borrowed funds from
Y Inc. at London Inter-Bank Offer Rate (LIBOR) plus 150 points. The LIBOR prevalent at the time of borrowing
is 4 percent of US$. The borrowings allowed under the External Commercial Borrowings (ECB) guidelines
issued under Foreign Exchange Management Act (FEMA) are LIBOR plus 200 points. Kazakhstan is notified
by government of India u/s 94A. Discuss whether the borrowings made by X Ltd. is at arm’s length.
Question: (ID 11)

Doc Solutions Inc. a US Company, sells Laser Printer Cartridge Drums to its Indian Subsidiary Quality Printing
Ltd at $ 10 per drum. Doc Solutions Inc. has other takers in India for its Cartridge Drums, for whom the price
is $ 15 per drum. During the year, Doc Solutions had supplied 10,000 Cartridge Drums to Quality Printing Ltd.
Determine the Arm’s Length Price and taxable income of Quality Printing Ltd if its income after considering
the above is Rs. 35,00,000. Compliance with TDS provisions may be assumed and Rate per USD is Rs. 45.
CA Kalpesh Sanghavi Teaching Experience of 20 Years

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-A . 2

A Ltd., an Indian company, sells computer monitor to its 100 per cent subsidiary X Ltd. in United States @ $
50 per piece. A Ltd. also sells its computer monitor to another company Y Ltd. in United States @ $ 80 per
piece. Total income of A Ltd. for the assessment year is Rs. 12,00,000 which includes sales made for 100
computer monitors @ 50 to X Ltd. Compute the arm’s length price and taxable income of A Ltd. The rate of
one dollar may be assumed to be equivalent to Rs. 49 for the sake of simplicity.

I Ltd., an Indian company, supplies billets to its holding United Kingdom company, U Ltd. during the previous
year. I Ltd. also supplies the some product to another UK based company. V Ltd., an unrelated entity. The
transactions with U Ltd. are Euro 500 per MT (FOB), whereas the transactions with V Ltd. are priced at Euro
700 per MT (CIF). Insurance and freight amounts to Euro 200 per MT. Compute the arm’s length price for the
transaction with U Ltd.

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-B . 1
Question: (ID 14)

A Ltd. an Indian company, provides technical services to a company, XYZ Inc., located in a NJA for a
consideration of 40 Lakhs in October. It charges 42 Lakhs for similar services rendered to PQR Inc., which is
not located in a NJA. PQR Inc. is not an associated enterprise of A Ltd. Discuss the tax implications under
section 94A read with section 92C in respect of the above transaction of provision of technical services by A
Ltd. to XYZ Inc.
Question: (ID 15)

Mr. X, a non-resident individual, is due to receive interest of 5 lakhs a notified infrastructure debt fund eligible
for exemption under section 10(47). He incurred expenditure amounting to 10,000 for earning such income.
Assuming that Mr. X is a resident of a NJA. Discuss the tax implications under section 94A read with Rule 11M
and Section 194LB.

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-C . 1
Question: (ID 07)

Kio Japan and AB Ltd, an Indian Company are associated enterprises. AB Ltd manufactures Cellule Phones and
sells them to Kio Japan and Geel, a Company based at Beijing, During the year AB Ltd supplied 2,50,000
Cellular Phones to Kio Japan at a price of Rs. 3,000 per unit and 35,000 units Geel at a price of Rs. 4,800 per
unit. The transactions of AB Ltd with Kio and Geel are comparable subject to the following considerations
(a) Sales to Kio is on FOB basis, sales to Geel are CIF basis. The freight and insurance paid by Kio for each
unit is Rs. 700.
(b) Sales to Geel are under a free warranty for Two Years whereas sales to Kio are without any warranty.
The estimated cost of executing such warranty is Rs. 500.
(c) Since Kio’s order was huge in volume, quantity discount of Rs. 200 per unit was offered to it.
Compute the Arm’s Length Price and the amount of increase in the Total income of AB Ltd, if are due to such
Arm’s Length Price.
Question: (ID 08)

Mobeaux LLP of Poland and Vamsi Ltd of India are associated enterprises. Vamsi imports 1000 compressors
for Air Conditioners from Mobeaux at Rs. 7,500 per unit and these are sold to Winland cooling Solutions Ltd
at a price of Rs. 11,000 per unit. Vamsi had also imported similar products from De-Heat Ltd and sold outside
at a Gross Profit of 20% on Sales.
Mobeaux offered a quantity discount of Rs. 1,500 per unit. De-Heat could offer only Rs. 500 per unit as quantity
Discount. The freight and customs duty paid for imports from Poland had cost Vamsi Rs. 1,200 a piece. In
respect of purchase from De-Heat, Vamsi had to pay Rs. 200 only as freight charges. Determine the Arm’s
Length Price and the amount of increase in Total income of Vamsi Ltd.

Question (ID 01)

Anush Motors Ltd., an Indian company declared income of Rs. 300 crores computed in accordance with Chapter
IV-D but before making any adjustments in respect of the following transactions for the year:
(i) 10,000 cars sold to Rida Ltd. Which holds 30% shares in Anush Motors Ltd. At a price which is
less by $ 200 each car than the price charged from Shingto Ltd.
(ii) Royalty of $ 1,20,00,000 was paid to Kyoto Ltd. For use of technical know-how in the
manufacturing of car. However, Kyoto Ltd. Had provided the same know-how to another Indian
company for $ 90,00,000.
(iii) Loan of Euro 1000 crores carrying interest @ 10% p.a. advanced by Dorf ltd., a German
company, was outstanding on 31.3. the total book value of assets of Anush Motors Ltd. On the
date was Rs.90,000 crores. The said German company had also advanced a loan of similar
amount to another Indian company @ 9% p.a. Total interest paid for the year was EURO 100
crores.
Explain in brief the provisions of the Act affecting all these transaction and compute the income of the company
to tax keeping in mind that the value of 1$ and of 1 EURO was Rs. 50 and Rs. 55, respectively, throughout the
year.

Question (ID 02)

Hotmail, a U.S.A. company holds 30% shares in Staffing Solution Ltd. (India). Staffing Solution Ltd. develops
software for various customers including Hotmail. Staffing Solution Ltd during the year billed Hotmail U.S.A.
for 2,000 man-hours at the rate of Rs. 400 per man-hour. The total cost (direct and indirect) for executing this
work amounted to Rs. 6,50,000.
Staffing Solution Ltd. billed R Ltd. India at the rate of Rs. 800 per man-hour although the persons who were
working for development of the software of R Ltd. were of the same caliber and level that of persons who
developed the software for Hotmail U.S.A. Staffing Solution Ltd. earned a Gross Profit of 40% on its sales to R
Ltd.
The transactions of Staffing Solution Ltd. with Hotmail U.S.A. and R Ltd are comparable subject to the
following differences:
i) While Hotmail U.S.A. have given technical know-how to Staffing Solution, there is no such know-
how provided by R Ltd. The value of technical know-how received from Hotmail U.S.A. can be
taken at 10% of normal gross profit.
ii) A quantity discount was given by Staffing Solution Ltd. to Hotmail Co. which can be valued at 5%
of normal gross profits.
iii) Staffing Solution Ltd. offered 60 days credit to Hotmail. The cost of providing such credit may be
valued at 2.5% of gross profit. No such trade discount was given to R Ltd.
Compute the arm’s length price and the amount of increase in the total income of Staffing Solution Ltd, if any,
due to such arm’s length price.
Question (ID 03)

X Ltd. UK received an order from Y Ltd Germany for developing a software product for a sum of US $ 1,00,000.
In order to execute the same, X Ltd., Z Ltd. (a company in which X Ltd. holds 50% shares) and S Ltd India
(where Z Ltd holds 40% shares) together develop the above software.
X Ltd. UK pays to Z Ltd and S Ltd. India a sum of US $ 24,000 and $ 27,000 resectively and keeps the balance
for itself. In the entire transaction, a profit of $16,000 is earned. S Ltd. India incurred a total cost of $24,000 in
the execution of its work relating to the above project. Assume the relative contribution of X Ltd, Z Ltd and S
Ltd. is 40%, 25% 35% respectively. Compute the arm’s length price and the amount of increase in the total
income of S Ltd., if any due to such arm’s length price.

Question: (ID 09) (Revision / Home work)

Boulevard Inc., a French Company, holds 40% of Equity in the Indian Company Vista Technologies Ltd (VTL).
VTL is engaged in development of software and maintenance of the same for customers of the same for
customers across the globe. Its clientele includes Boulevard Inc.
During the year, VTL had spent 2,000 Man Hours for developing and maintaining software for Boulevard inc,
with each hour being billed at Rs. 1,250. Cost incurred by VTL for executing work for Boulevard Inc. amount
to Rs. 18,00,000.
VTL had also undertaken developing software for Bal Industries Ltd for which VTL had billed at Rs. 2,700 per
man Hour. The persons working for Bal industries Ltd and Boulevard were part of the same team and were of
matching credentials and caliber. VTL had made a Gross Profit of 50% on the Bal industries work.
VTL’s transactions with Boulevard inc. is comparable to the transactions with Bal industries, subject to the
following differences
(a) Boulevard gives technical know how support to VTL which can be valued at 8% of the Normal Gross
Profit. Bal industries does not provide any such support.
(b) Since the work for Boulevard involved huge number of man hours, a quantity discount of 14% of Normal
Gross Profits was given.
(c) VTL had offered 90 Days credit to Boulevard the cost of which is measured at 2% of the Normal Billing
Gross profit Rate. No such discount was offered to Bal industries Ltd.
Compute ALP and the amount of increase in Total Income of Vista Technologies Ltd.
Question: (ID 10) (Revision / Home work)

ABR Medical Equipments Inc. (ABR) of Canada has received an order from a leading UK bast Hospital for
development of a hi-tech medical equipment which will integrate the best of software and latest medical
examination tool to meet varied requirements. The order was for 2,50,000 Euros. ABR paid to BIL Euro 80,000
for executing the work to the extent assigned to BIL.
To execute the order, ABR joined hands with its subsidiary Precision Components inc. (PCI) of us and
Bioinformatics India Ltd (BIL), an India Company. PCI holds 40% of BIL. In the entire transaction, a profit of
Euro 50,000 is earned. Bioinformatics India Ltd incurred a Total Cost of Euro 75,000 in execution of its work
in the above contract. The relative contribution of ABR, PCI and BIL may be taken at 35%, 25% and 40%
respectively.
Compute the Arm’s Length Price and the incremental Total Income of Bioinformatics India Ltd, and due to
adopting Arms Length Price determined here under.

Question: (ID 16)

XE Ltd. is an Indian Company in which Zilla Inc., a US company, has 28% shareholding end voting power.
Following transactions were effected between these two companies.
(i) XE Ltd. sold 1,00.000 pieces of T-shirts at $ 2 per T-Shirt to Zilla Inc. The identical T-Shirts were sold to
unrelated party namely Kennedy Inc. at $ 3 per T-Shirt.
(ii) XE Ltd. borrowed $ 2,00,000 from a foreign lender based on the guarantee of Zille Inc. For this. XE Ltd.
paid $ 10,000 as guarantee fee to Zilla Inc. To an unrelated party for the same amount of loan, Zilla Inc. collected
$ 7000 as guarantee fee.
(iii) XE Ltd. paid $15,000 to Zilla Inc. for getting various potential customers details to improve its business.
Zilla Inc. provided the same service to unrelated parties for $ 10,000.
Assume the rate of exchange as 1 $ = 64
XE Ltd. is located in a Special Economic (SEZ) and its income before transfer pricing adjustments for the year
was 1,200 lakhs,
Compute the adjustments to be made to the total income of XE Ltd. State whether it can claim deduction under
section 10AA for the income enhanced by applying transfer pricing provisions.
Question (ID 21)

Amar P Ltd., Bangalore is engaged in IT Enabled services. It is the subsidiary of ABC Inc in US. It also provides
similar services to a company SAK Ltd. at Singapore. Its billings and other information is as given here under :
(1) Billing per month to ABC Inc. –USD 85000
(2) Billing per month to SKD Ltd. –USD 70000
(3) ABC Inc has provided a loan of USD 100000 to Amar P Ltd. towards purchase of hardware for
executing its project. Rate of interest charged for the said loan is at 3% p.a.
(4) Direct and indirect cost incurred are USD 100 and USD 200 per hour, respectively.
(5) Amar P Ltd. works 9 hours per day for 15 days to execute the project for ABC Inc and 8 hours per
day for 15 days to execute projects for SAK Ltd .service was provided by the company to both its
customers throughout the year.
(6) Warranty was provided to SAK Ltd. for a period of 2 years. Cost of warranty is calculated at 1% of
direct cost incurred. The cost of warranty is neither included in the direct nor indirect cost.
Assume conversion rate 1 USD = Rs. 64.
Compute Arm’s Length Price as per the cost-plus method and the amount to be added, if any, to the income of
Amar P Ltd. (6 marks)

Question (ID 22) (Home Work)

Company X and Company Y who have entered into Advance Pricing Agreements (APA) and eligible for
rollback provisions merged to form Company XY. Is the Company XY eligible for rollback provisions as it was
formed on merger of company X and Company Y?
Proceedings before the TPO were stayed by court order and it was subsequently lifted. The time limit for
completion of assessment after excluding the period of stay due to court order is only 30 days. Within how many
more days, the TPO has to pass his order?
The gross total income of Sachin Co. Ltd., Pune was Rs. 70 lakhs which is wholly attributable to a unit located
in SEZ since past 7 years. Adjustments to total income made by the Assessing Officer by applying the transfer
pricing provisions, enhanced the total income by Rs. 50 lakhs. What is the total income of the assesse chargeable
to tax and explain why?

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-D . 1
Question (ID 25)
X Ltd., a resident Indian Company, on 01-04-PY has borrowed Rs. 100 crores from M/S A Inc, a company
incorporated in US, at an interest rate of 9% p.a. The said loan is repayable over a period of 10 years. Further,
loan is guaranteed by M/s B Inc incorporated in US. M/s. K Inc, a non-resident, holds shares carrying 30% of
voting power both in M/s X Ltd. and M/s .B. Inc. M/s K Inc has also deposited Rs. 100 crores with M/s A Inc.
Other Information: Net profit of M/s. X Ltd. was Rs. 10 crores after debiting the above interest, depreciation of
Rs. 5 crores and income-tax of Rs. 3.40 crores. Calculate the amount of interest to be disallowed under the head
“profits and gains of business or profession” in the computation of M/s. X Ltd. (6 marks)

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-E . 1
Question (ID Avg-01)
X Ltd., an Indian company, is a subsidiary company of Y Inc., a company registered in the Netherlands. It
purchases raw materials from Y Inc. Purchase price of raw material determined under CUP method (being the
most appropriate method) for the previous year are Rs, 9,700, RS. 10,000 Rs. 10.100 and Rs.10,300 per unit. X
Ltd., however, pays to Y Inc. Rs.1,04,50,000 (i.e., 950 units at the rate of Rs.11,000 per unit). Net profit as per
statement of profit and loss for the year is Rs. 9,40,000. Determine arm’s length price and net income of X Ltd.
for the year. X Ltd. Is not a “wholesale trader”.

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-F . 1
Question (ID Domestic-01)
If Himalaya Ltd. has two Units, Unit 1 is engaged in power generation business and Unit 2 is engaged in
manufacture of wires. Both the units were set up in Himachal Pradesh in the year 2014. In the year, fourteen
lakh metres of wire are transferred from Unit 2 to Unit 1 at Rs. 150 per meter when the market price per metre
was Rs. 200. Which of the following statements is correct?
(a) Transfer pricing provisions would be attracted in this case

(b) Transfer pricing provisions would not be attracted in this case, since Unit I and Unit 2 belong to the same
company and are not associated enterprises
(c) Transfer pricing provisions would not be attracted in this case as it is not an international transaction as both
the Units are in India. For the purpose of Chapter VIA deduction, the profits of power generation business shall,
however, be computed as if the transfer has been made at the market value of Rs.200 per MT.
(d) Transfer pricing provisions would not be attracted in this case due to reasons mentioned in both (b) and (c)
above

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-G . 1
Question (ID TPO-01)
For the year, the Assessing Officer makes a reference to TPO under section 92CA on June 3 after the assessment
year. Find out the due date of passing order by TPO under section 92CA(3).
Suppose in problem, the assessment proceedings are stayed by the Bombay High Court on March 20, AY. The
stay is, however, vacated by the Supreme Court on April 29.

C.A. Kalpesh Sanghavi Transfer Pricing - P a g e | F55-H . 1
Question (ID Safe-01)
Adaswar Ltd., an Indian company provides user documentation preparation services to Rotomatic Inc., which
is a “specified foreign company”. The value of the transaction entered into is Rs. 87 crore. The operating
expenses incurred are Rs.68 crore. It has declared operating profit of Rs.10 crore. (Assume safe harbour 17 %)

C.A. Kalpesh Sanghavi P e n a l t i e s - P a g e | F55-I . 1
Question (ID Penalty-01)
Six and Ten Ltd. operating in India, is one of the dealers for the goods manufactured by Eilly Ltd., Country B.
During the course of assessment, the Assessing Officer, after verification of transactions between Six and Ten
Ltd and Eilly Ltd., opined that transfer pricing provisions would become applicable in this case. The Assessing
Officer adjusted the total income of Six and Ten Ltd. by making an addition of Rs. 2 crore to the declared income
of Rs. 6 crore. You are required to explain the penalty provisions if any in the above transaction.

Overview of the penalty provisions
Section Nature of Penalty Quantum of Penalty
270A Penalty for concealing particulars of income 200 % of tax on under reported income
or furnishing inaccurate particulars of income
271AA Penalty for failure to maintain documentation 2% of the value of international

prescribed under Section 92D of the Act, transaction or specified domestic
failure to report a transaction, or maintaining transaction
or furnishing incorrect information /
document
271BA Penalty for failure to furnish Accountant's INR 100,000

Report in Form 3CEB
271G Penalty for failure to furnish documentation 2% of the value of international

prescribed under Section 92D of the Act transaction or specified domestic
transaction
CA Kalpesh Sanghavi


F55 14 NJA V.Imp
F55 07 Computation
F55 08 Computation
F55 01 Computation V.Imp
F55 02 TNMM V.Imp
F55 03 TNMM V.Imp

C.A. Kalpesh Sanghavi T r a n s f e r P r i c i n g - P a g e | F55 . 1
CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
92. (1) Any income arising from an international transaction shall be computed having regard to the arm's
length price.
Explanation.—For the removal of doubts, it is hereby clarified that the allowance for any expense or interest
arising from an international transaction shall also be determined having regard to the arm's length price.
(2) Where in an international transaction or specified domestic transaction, two or more associated
enterprises enter into a mutual agreement or arrangement for the allocation or
apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with
a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense
allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined
having regard to the arm's length price of such benefit, service or facility, as the case may be.
(2A) 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.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section
(1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1)
or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may
be, contributed under sub-section (2) or sub-section (2A), 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.

92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "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.
(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any
time during the previous year,—
(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the
voting power in the other enterprise; or
(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per
cent of the voting power in each of such enterprises; or
(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent
of the book value of the total assets of the other enterprise; or
(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other
enterprise; or
(e) more than half of the board of directors or members of the governing board, or one or more
executive directors or executive members of the governing board of one enterprise, are appointed by
the other enterprise; or
(f) more than half 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
(g) the manufacture or processing of goods or articles or business carried out by one enterprise is
wholly 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
(h) ninety per cent 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
(i) 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

(j) 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
(k) 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
(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise
holds not less than ten per cent interest in such firm, association of persons or body of individuals; or
(m) there exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.

92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means
a transaction between two or more associated enterprises, either or both of whom are non-residents,
in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or
borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such
enterprises, and shall include a mutual agreement or arrangement between two or more associated
enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred
or to be incurred in connection with a benefit, service or facility provided or to be provided to any one
or more of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the
purposes of sub-section (1), be deemed to be an international transaction entered into between two associated
enterprises, if there exists a prior agreement in relation to the relevant transaction between
such other person and the associated enterprise, or the terms of the relevant transaction are
determined in substance between such other person and the associated enterprise where the enterprise or the
associated enterprise or both of them are non-residents irrespective of whether such other person is a non-
resident or not.
Explanation.—For the removal of doubts, it is hereby clarified that—
(i) the expression "international transaction" shall include—
(a) the purchase, sale, transfer, lease or use of tangible property including building, transportation
vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or
thing;
(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership
or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences,
franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial
property right, exterior design or practical and new design or any other business or commercial
rights of similar nature;
(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee,
purchase or sale of marketable securities or any type of advance, payments or deferred payment
or receivable or any other debt arising during the course of business;
(d) provision of services, including provision of market research, market development, marketing
management, administration, technical service, repairs, design, consultation, agency, scientific
research, legal or accounting service;
(e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an
associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or
assets of such enterprises at the time of the transaction or at any future date;
(ii) the expression "intangible property" shall include—
(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
(b) technology related intangible assets, such as, process patents, patent applications, technical
documentation such as laboratory notebooks, technical know-how;
(c) artistic related intangible assets, such as, literary works and copyrights, musical compositions,
copyrights, maps, engravings;

(d) data processing related intangible assets, such as, proprietary computer software, software
copyrights, automated databases, and integrated circuit masks and masters;
(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets,
engineering drawing and schema-tics, blueprints, proprietary documentation;
(f) customer related intangible assets, such as, customer lists, customer contracts, customer
relationship, open purchase orders;
(g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements,
franchise agreements, non-compete agreements;
(h) human capital related intangible assets, such as, trained and organised work force, employment
agreements, union contracts;
(i) location related intangible assets, such as, leasehold interest, mineral exploitation rights,
easements, air rights, water rights;
(j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill,
personal goodwill of professional, celebrity goodwill, general business going concern value;
(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates,
customer lists, or technical data;
(l) any other similar item that derives its value from its intellectual content rather than its physical
attributes.

92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction"
in case of an assessee means any of the following transactions, not being an international transaction, namely:—
(i) 35[***]
(ii) any transaction referred to in section 80A;
(iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA;
(iv) any business transacted between the assessee and other person as referred to in sub-section (10)
of section 80-IA;
(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which
provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
(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 twenty crore rupees.

92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall
be determined by any of the following methods, being the most appropriate method, having regard to
the nature of transaction or class of transaction or class of associated persons or functions performed by such
persons or such other relevant factors as the Board may prescribe36, namely :—
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of
arm's length price, in the manner as may be prescribed36 :
Provided that where more than one price is determined by the most appropriate method, the arm's length
price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the
international transaction or specified domestic transaction has actually been undertaken does not exceed such
percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the
Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction
has actually been undertaken shall be deemed to be the arm's length price :
Provided also that where more than one price is determined by the most appropriate method,
the arm's length price in relation to an international transaction or specified domestic
transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner
as may be prescribed and accordingly the first and second proviso shall not apply.
Explanation.—For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall
also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the
1st day of October, 2009.
(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act,
2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation
between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually
been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise
the option as referred to in the said proviso.
(2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess
under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have
been completed before the 1st day of October, 2009.

(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the
basis of material or information or document in his possession, of the opinion that—
(a) the price charged or paid in an international transaction or specified domestic transaction has not been
determined in accordance with sub-sections (1) and (2); or
(b) any information and document relating to an international transaction or specified domestic transaction
have not been kept and maintained by the assessee in accordance with the provisions contained in sub-
section (1) of section 92D and the rules made in this behalf; or
(c) the information or data used in computation of the arm's length price is not reliable or correct; or
(d) the assessee has failed to furnish, within the specified time, any information or document which he was
required to furnish by a notice issued under sub-section (3) of section 92D,
the Assessing Officer may proceed to determine the arm's length price in relation to the said international
transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on the basis of such
material or information or document available with him:
Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the
assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not
be so determined on the basis of material or information or document in the possession of the Assessing Officer.
(4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing
Officer may compute the total income of the assessee having regard to the arm's length price so determined :
Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter
VI-A shall be allowed in respect of the amount of income by which the total income of the
assessee is enhanced after computation of income under this sub-section :
Provided further that where the total income of an associated enterprise is computed under this sub-section on
determination of the arm's length price paid to another associated enterprise from which tax has been deducted
or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall
not be recomputed by reason of such determination of arm's length price in the case of the first mentioned
enterprise.

92CA. (1) Where any person, being the assessee, has entered into an international transaction or specified
domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient
so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the
computation of the arm's length price in relation to the said international transaction or specified
domestic transaction under section 92C to the Transfer Pricing Officer.
(2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the
assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on
which the assessee may rely in support of the computation made by him of the arm's length price in relation to
the international transaction or specified domestic transaction referred to in sub-section (1).
(2A) Where any other international transaction [other than an international transaction referred under
sub-section (1)], comes to the notice of the Transfer Pricing Officer during the course of the
proceedings before him, the provisions of this Chapter shall apply as if such other international transaction
is an international transaction referred to him under sub-section (1).
(2B) Where in respect of an international transaction, the assessee has not furnished the report
under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the
course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is
an international transaction referred to him under sub-section (1).
(2C) Nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or reassess
under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for any assessment year, proceedings for which have
been completed before the 1st day of July, 2012.
(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such
evidence as the assessee may produce, including any information or documents referred to in sub-section (3)
of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified
points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer
shall, by order in writing, determine the arm's length price in relation to the international transaction or specified
domestic transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the
Assessing Officer and to the assessee.
(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under
sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-
section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any
time before sixty days prior to the date on which the period of limitation referred to
in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or
recomputation or fresh assessment, as the case may be, expires:
Provided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section 153,
if the period of limitation available to the Transfer Pricing Officer for making an order is less than sixty
days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall
be deemed to have been extended accordingly.

(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the
total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price
as so determined by the Transfer Pricing Officer.
(5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend
any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be,
apply accordingly.
(6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall send a copy
of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity
with such order of the Transfer Pricing Officer.
(7) The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section,
exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section
(6) of section 133 or section 133A.
Explanation.—For the purposes of this section, "Transfer Pricing Officer" means a Joint Commissioner or
Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions
of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.

92CB. (1) The determination of arm's length price under section 92C or section 92CA shall be subject to safe
harbour rules.
(2) The Board may, for the purposes of sub-section (1), make rules for safe harbour.
Explanation.—For the purposes of this section, "safe harbour" means circumstances in which the income-tax
authorities shall accept the transfer price declared by the assessee.

92CC. (1) The Board, with the approval of the Central Government, may enter into an advance pricing
agreement with any person, determining the arm's length price or specifying the manner in which arm's
length price is to be determined, in relation to an international transaction to be entered into by that person.
(2) The manner of determination of arm's length price referred to in sub-section (1), may include the methods
referred to in sub-section (1) of section 92C or any other method, with such adjustments or variations, as may
be necessary or expedient so to do.
(3) Notwithstanding anything contained in section 92C or section 92CA, the arm's length price of any
international transaction, in respect of which the advance pricing agreement has been entered into, shall be
determined in accordance with the advance pricing agreement so entered.
(4) The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive
previous years as may be specified in the agreement.
(5) The advance pricing agreement entered into shall be binding—
(a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has
been entered into; and
(b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in
respect of the said person and the said transaction.
(6) The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts
having bearing on the agreement so entered.
(7) The Board may, with the approval of the Central Government, by an order, declare an agreement to be void
ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.
(8) Upon declaring the agreement void ab initio,—
(a) all the provisions of the Act shall apply to the person as if such agreement had never been entered into;
and
(b) notwithstanding anything contained in the Act, for the purpose of computing any period of limitation
under this Act, the period beginning with the date of such agreement and ending on the date of order
under sub-section (7) shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period, the period of limitation, referred
to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and
the aforesaid period of limitation shall be deemed to be extended accordingly.
(9) The Board may, for the purposes of this section, prescribe39 a scheme specifying therein the manner, form,
procedure and any other matter generally in respect of the advance pricing agreement.
(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as
may be prescribed39, provide for determining the arm's length price or specify the manner in which arm's length
price shall be determined in relation to the international transaction entered into by the person during any period
not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the
arm's length price of such international transaction shall be determined in accordance with the said agreement.
(10) Where an application is made by a person for entering into an agreement referred to in sub-section (1), the
proceeding shall be deemed to be pending in the case of the person for the purposes of the Act.

92CD. (1) Notwithstanding anything to the contrary contained in section 139, where any person has entered into
an agreement and prior to the date of entering into the agreement, any return of income has been furnished under
the provisions of section 139 for any assessment year relevant to a previous year to which such agreement
applies, such person shall furnish, within a period of three months from the end of the month in which the said
agreement was entered into, a modified return in accordance with and limited to the agreement.
(2) Save as otherwise provided in this section, all other provisions of this Act shall apply accordingly as if the
modified return is a return furnished under section 139.
(3) If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which
the agreement applies have been completed before the expiry of period allowed for furnishing of modified return
under sub-section (1), the Assessing Officer shall, in a case where modified return is filed in accordance with
the provisions of sub-section (1), proceed to assess or reassess or recompute the total income of the relevant
assessment year having regard to and in accordance with the agreement.
(4) Where the assessment or reassessment proceedings for an assessment year relevant to the previous year to
which the agreement applies are pending on the date of filing of modified return in accordance with the
provisions of sub-section (1), the Assessing Officer shall proceed to complete the assessment or reassessment
proceedings in accordance with the agreement taking into consideration the modified return so furnished.
(5) Notwithstanding anything contained in section 153 or section 153B or section 144C,—
(a) the order of assessment, reassessment or recomputation of total income under sub-section (3) shall be
passed within a period of one year from the end of the financial year in which the modified return under
sub-section (1) is furnished;
(b) the period of limitation as provided in section 153 or section 153B or section 144C for completion of
pending assessment or reassessment proceedings referred to in sub-section (4) shall be extended by a
period of twelve months.
(i) "agreement" means an agreement referred to in sub-section (1) of section 92CC;
(ii) the assessment or reassessment proceedings for an assessment year shall be deemed to have been
completed where—
(a) an assessment or reassessment order has been passed; or
(b) no notice has been issued under sub-section (2) of section 143 till the expiry of the limitation
period provided under the said section.

92CE. (1) Where a primary adjustment to transfer price,—

(i) has been made suo motu by the assessee in his return of income;
(ii) made by the Assessing Officer has been accepted by the assessee;
(iii) is determined by an advance pricing agreement entered into by the assessee under section 92CC;
(iv) is made as per the safe harbour rules framed under section 92CB; or
(v) is arising as a result of resolution of an assessment by way of the mutual agreement procedure under
an agreement entered into under section 90 or section 90A for avoidance of double taxation,
the assessee shall make a secondary adjustment:
Provided that nothing contained in this section shall apply, if,—
(i) the amount of primary adjustment made in any previous year does not exceed one crore rupees;
and
(ii) the primary adjustment is made in respect of an assessment year commencing on or before the 1st
day of April, 2016.
(2) Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or
reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated
enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an
advance made by the assessee to such associated enterprise and the interest on such advance,
shall be computed in such manner as may be prescribed41.

(i) "associated enterprise" shall have the meaning assigned to it in sub-section (1) and sub-section (2)
of section 92A;
(ii) "arm's length price" shall have the meaning assigned to it in clause (ii) of section 92F;
(iii) "excess money" means the difference between the arm's length price determined in primary adjustment
and the price at which the international transaction has actually been undertaken;
(iv) "primary adjustment" to a transfer price, means the determination of transfer price in accordance with
the arm's length principle resulting in an increase in the total income or reduction in the loss, as the
case may be, of the assessee;
(v) "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.]

92D. (1) Every person who has entered into an international transaction or specified domestic transaction
shall keep and maintain such information and document in respect thereof, as may be prescribed42 :
43
[Provided that the person, being a constituent entity of an international group, shall also keep and maintain
such information and document in respect of an international group as may be prescribed44.
(A) "constituent entity" shall have the meaning assigned to it in clause (d) of sub-section (9) of section 286;
(B) "international group" shall have the meaning assigned to it in clause (g) of sub-section (9) of section
286.]
(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for
which the information and document shall be kept and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act,
require any person who has entered into an international transaction or specified domestic transaction to furnish
any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of
thirty days from the date of receipt of a notice issued in this regard :
Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such
person, extend the period of thirty days by a further period not exceeding thirty days.
45
[(4) Without prejudice to the provisions of sub-section (3), the person referred to in the proviso to sub-section
(1) shall furnish the information and document referred to in the said proviso to the authority prescribed under
sub-section (1) of section 286, in such manner, on or before the date, as may be prescribed46.]

92E. Every person who has entered into an international transaction or specified domestic transaction during a
previous year shall obtain a report from an accountant and furnish such report on or before the specified date
in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting
forth such particulars as may be prescribed47.

92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,—
(i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288;
(ii) "arm's length price" means a price which is applied or proposed to be applied in a transaction between
persons other than associated enterprises, in uncontrolled conditions;
(iii) "enterprise"48 means a person (including a permanent establishment 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 articles or goods, or 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 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, whether such activity or business is
carried on, directly or through one or more 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;
(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which
the business of the enterprise is wholly or partly carried on;
(iv) "specified date" shall have the same meaning as assigned to "due date" in Explanation 2 below sub-
section (1) of section 139;
(v) "transaction" includes an arrangement, understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal
proceeding.

94A. (1) The Central Government may, having regard to the lack of effective exchange of information with
any country or territory outside India, specify by notification in the Official Gazette such country or
territory as a notified jurisdictional area in relation to transactions entered into by any assessee.
(2) Notwithstanding anything to the contrary contained in this Act, if an assessee enters into a transaction where
one of the parties to the transaction is a person located in a notified jurisdictional area, then—
(i) all the parties to the transaction shall be deemed to be associated enterprises within the
meaning of section 92A;
(ii) any transaction in the nature of purchase, sale or lease of tangible or intangible property or provision of
service or lending or borrowing money or any other transaction having a bearing on the profits, income,
losses or assets of the assessee including a mutual agreement or arrangement for allocation or
apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection
with a benefit, service or facility provided or to be provided by or to the assessee shall be deemed to
be an international transaction within the meaning of section 92B,
and the provisions of sections 92, 92A, 92B, 92C [except the second proviso to sub-
section (2)], 92CA, 92CB, 92D, 92E and 92F shall apply accordingly.
(3) Notwithstanding anything to the contrary contained in this Act, no deduction,—
(a) in respect of any payment made to any financial institution located in a notified jurisdictional area shall
be allowed under this Act, unless the assessee furnishes an authorisation in the prescribed form
authorising the Board or any other income-tax authority acting on its behalf to seek relevant information
from the said financial institution on behalf of such assessee; and
(b) in respect of any other expenditure or allowance (including depreciation) arising from the transaction
with a person located in a notified jurisdictional area shall be allowed under any other provision of this
Act, unless the assessee maintains such other documents and furnishes such information as may be
prescribed49, in this behalf.
(4) Notwithstanding anything to the contrary contained in this Act, where, in any previous year, the assessee has
received or credited any sum from any person located in a notified jurisdictional area and the assessee does not
offer any explanation about the source of the said sum in the hands of such person or in the hands of the beneficial
owner (if such person is not the beneficial owner of the said sum) or the explanation offered by the assessee, in
the opinion of the Assessing Officer, is not satisfactory, then, such sum shall be deemed to be the income of the
assessee for that previous year.

(5) Notwithstanding anything contained in any other provisions of this Act, where any person located in
a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible
under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely:—
(a) at the rate or rates in force;
(b) at the rate specified in the relevant provisions of this Act;
(c) at the rate of thirty per cent.
(6) In this section,—
(i) "person located in a notified jurisdictional area" shall include,—
(a) a person who is resident of the notified jurisdictional area;
(b) a person, not being an individual, which is established in the notified jurisdictional area; or
(c) a permanent establishment of a person not falling in sub-clause (a) or sub-clause (b), in the notified
jurisdictional area;
(ii) "permanent establishment" shall have the same meaning as defined in clause (iiia) of section 92F;
(iii) "transaction" shall have the same meaning as defined in clause (v) of section 92F.

94B. (1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent
establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest
or of similar nature exceeding one crore rupees which is deductible in computing income chargeable
under the head "Profits and gains of business or profession" in respect of any debt issued by a non-resident,
being an associated enterprise of such borrower, the interest shall not be deductible in computation of
income under the said head to the extent that it arises from excess interest, as specified in sub-section (2) :
Provided that where the debt is issued by a lender which is not associated but an associated
enterprise either provides an implicit or explicit guarantee to such lender or deposits a
corresponding and matching amount of funds with the lender, such debt shall be deemed to
have been issued by an associated enterprise.
(2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid
or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and
amortisation of the borrower in the previous year or interest paid or payable to associated
enterprises for that previous year, whichever is less.
(3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment
of a foreign company which is engaged in the business of banking or insurance.
(4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the
head "Profits and gains of business or profession", so much of the interest expenditure as has not been so
deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed
as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable
for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section
(2):
Provided that no interest expenditure shall be carried forward under this sub-section for more than eight
assessment years immediately succeeding the assessment year for which the excess interest expenditure was
first computed.

(5) For the purposes of this section, the expressions—

(i) "associated enterprise" shall have the meaning assigned to it in sub-section (1) and sub-section (2)
of section 92A;
(ii) "debt" means any loan, financial instrument, finance lease, financial derivative, or any arrangement
that gives rise to interest, discounts or other finance charges that are deductible in the computation of
income chargeable under the head "Profits and gains of business or profession";
(iii) "permanent establishment" includes a fixed place of business through which the business of the
enterprise is wholly or partly carried on.]

Rule 10. In any case in which the 51[Assessing Officer] is of opinion that the actual amount of the income
accruing or arising to any non-resident person whether directly or indirectly, through or from any business
connection in India or through or from any property in India or through or from any asset or source of income
in India or through or from any money lent at interest and brought into India in cash or in kind 51a cannot be
definitely ascertained, the amount of such income for the purposes of assessment to income-tax 52[* * *] may
be calculated :—
(i) at such percentage of the turnover so accruing or arising as the 51[Assessing Officer] may consider to
be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business of such
person (such profits and gains being computed in accordance with the provisions of the Act), as the
receipts so accruing or arising bear to the total receipts of the business, or
(iii) in such other manner as the 51[Assessing Officer] may deem suitable.

10A. For the purposes of this rule and rules 54a[10AB] to 10E,—
54b
[(a) "associated enterprise" shall,—
(i) have the same meaning as assigned to it in section 92A; and
(ii) in relation to a specified domestic transaction entered into by an assessee, include —
(A) the persons referred to in clause (b) of sub-section (2) of section 40A in respect of a
transaction referred to in clause (a) of sub-section (2) of the said section;
(B) other units or undertakings or businesses of such assessee in respect of a transaction
referred to in section 80A or, as the case may be, sub-section (8) of section 80-IA;
(C) any other person referred to in sub-section (10) of section 80-IA in respect of a
transaction referred to therein;
(D) other units, undertakings, enterprises or business of such assessee, or other person
referred to in sub-section (10) of section 80-IA, as the case may be, in respect of a
transaction referred to in section 10AA or the transactions referred to in Chapter
VI-A to which the provisions of sub-section (8) or, as the case may be, the provisions
of sub-section (10) of section 80-IA are applicable;
(aa) "enterprise" shall have the same meaning as assigned to it in clause (iii) of section 92F and shall,
for the purposes of a specified domestic transaction, include a unit, or an enterprise, or an
undertaking or a business of a person who undertakes such transaction;]
54c
[(ab)] "uncontrolled transaction" means a transaction between enterprises other than associated enterprises,
whether resident or non-resident;
(b) "property" includes goods, articles or things, and intangible property;
(c) "services" include financial services;
(d) "transaction" includes a number of closely linked transactions.

10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of
the arm's length price in relation to an international transaction 54b[or a specified domestic transaction]shall
be any method which takes into account the price which has been charged or paid, or would have been charged
or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under
similar circumstances, considering all the relevant facts.]

10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international
transaction 55a[or a specified domestic transaction] shall be determined by any of the following methods, being
the most appropriate method, in the following manner, namely :—
(a) comparable uncontrolled price method, by which,—
(i) the price charged or paid for property transferred or services provided in a comparable
uncontrolled transaction, or a number of such transactions, is identified;
(ii) such price is adjusted to account for differences, if any, between the international
transaction 55a[or the specified domestic transaction] and the comparable uncontrolled
transactions or between the enterprises entering into such transactions, which could
materially affect the price in the open market;
(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect
of the property transferred or services provided in the international transaction 55a[or the
specified domestic transaction] ;
(b) resale price method, by which,—
(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 55a[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 sub-clause (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;
(c) cost plus method, by which,—
(i) the direct and indirect costs of production incurred by the enterprise in respect of property
transferred or services provided to an associated enterprise, are determined;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same
accounting norms) arising from the transfer or provision of the same or similar property or
services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled
transaction, or a number of such transactions, is determined;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account
the functional and other differences, if any, between the international transaction 55b[or the
specified domestic transaction] and the comparable uncontrolled transactions, or between the
enterprises entering into such transactions, which could materially affect such profit mark-up
in the open market;

(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at
under sub-clause (iii);
(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the
property or provision of services by the enterprise;
(d) profit split method, which may be applicable mainly in international transactions 55b[or specified
domestic transactions] involving transfer of unique intangibles or in multiple international
transactions 55b[or specified domestic transactions] which are so interrelated that they cannot be
evaluated separately for the purpose of determining the arm's length price of any one transaction, by
which—
(i) the combined net profit of the associated enterprises arising from the international
transaction 55b[or the specified domestic transaction] in which they are engaged, is
determined;
(ii) the relative contribution made by each of the associated enterprises to the earning of such
combined net profit, is then evaluated on the basis of the functions performed, assets
employed or to be employed and risks assumed by each enterprise and on the basis of reliable
external market data which indicates how such contribution would be evaluated by unrelated
enterprises performing comparable functions in similar circumstances;
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative
contributions, as evaluated under sub-clause (ii);
(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length
price in relation to the international transaction 55b[or the specified domestic transaction] :
Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be
partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of
international transaction 55b[or specified domestic transaction] in which it is engaged, with reference
to market returns achieved for similar types of transactions by independent enterprises, and thereafter,
the residual net profit remaining after such allocation may be split amongst the enterprises in
proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in
such a case the aggregate of the net profit allocated to the enterprise in the first instance together with
the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be
taken to be the net profit arising to that enterprise from the international transaction 55c[or the specified
domestic transaction] ;
(e) transactional net margin method, by which,—
(i) the net profit margin realised by the enterprise from an international transaction 55c[or a
specified domestic transaction] entered into with an associated enterprise is computed in
relation to costs incurred or sales effected or assets employed or to be employed by the
enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction or a number of such transactions is computed having
regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled
transactions is adjusted to take into account the differences, if any, between the international
transaction 55c[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 net profit margin in the open market;

(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established
to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length
price in relation to the international transaction 55c[or the specified domestic transaction];
56
[ (f) any other method as provided in rule 10AB. ]
(2) For the purposes of sub-rule (1), the comparability of an international transaction 55c[or a specified domestic
transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:—
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks
assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which
lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between
the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate,
including the geographical location and size of the markets, the laws and Government orders in force,
costs of labour and capital in the markets, overall economic development and level of competition and
whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction 56a[or a specified domestic
transaction] if—
(i) none of the differences, if any, between the transactions being compared, or between the enterprises
entering into such transactions are likely to materially affect the price or cost charged or paid in, or
the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international
transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year 56aa[(hereafter
in this rule and in rule 10CA referred to as the 'current year')]in which the international transaction 56a[or the
specified domestic transaction] has been entered into :
Provided that data relating to a period not being more than two years prior to 57[the current year] may also be
considered if such data reveals facts which could have an influence on the determination of transfer prices in
relation to the transactions being compared:
58
[Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled
transaction with an international transaction or a specified domestic transaction, entered into on or after the
1st day of April, 2014. ]
59
[ (5) In a case where the most appropriate method for determination of the arm's length price of an
international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014,
is the method specified in clause (b), clause (c) or clause (e) of sub-section (1) of section 92C, then,
notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an
uncontrolled transaction with an international transaction or a specified domestic transaction shall be,—
(i) the data relating to the current year; or
(ii) the data relating to the financial year immediately preceding the current, if the data relating to the
current year is not available at the time of furnishing the return of income by the assessee, for the
assessment year relevant to the current year:

Provided that where the data relating to the current year is subsequently available at the time of determination
of arm's length price of an international transaction or a specified domestic transaction during the course of
any assessment proceeding for the assessment year relevant to the current year, then, such data shall be used
for such determination irrespective of the fact that the data was not available at the time of furnishing the
return of income of the relevant assessment year.]

10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the
method which is best suited to the facts and circumstances of each particular international
transaction 56a[or specified domestic transaction], and which provides the most reliable measure of an arm's
length price in relation to the international transaction 56a[or the specified domestic transaction, as the case
may be].
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken
into account, namely:—
(a) the nature and class of the international transaction 56a[or the specified domestic transaction];
(b) the class or classes of associated enterprises entering into the transaction and the functions performed
by them taking into account assets employed or to be employed and risks assumed by such enterprises;
(c) the availability, coverage and reliability of data necessary for application of the method;
(d) the degree of comparability existing between the international transaction 56a[or the specified domestic
transaction] and the uncontrolled transaction and between the enterprises entering into such
transactions;
(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any,
between the international transaction 56a[or the specified domestic transaction] and the comparable
uncontrolled transaction or between the enterprises entering into such transactions;
(f) the nature, extent and reliability of assumptions required to be made in application of a method.

10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application
of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more
than one price, then the arm's length price in respect of such international transaction or specified domestic
transaction shall be computed in accordance with the provisions of this rule.
(2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and
the arm's length price shall be determined on the basis of the dataset so constructed:
Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled
transaction has been identified on the basis of data relating to the current year and the enterprise undertaking
the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the
specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years
immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction
then,—
(i) the most appropriate method used to determine the price of the comparable uncontrolled transaction
or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled
transactions shall be determined; and
(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3),
of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid
period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1):
Provided further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the
comparable uncontrolled transaction has been identified on the basis of the data relating to the
financial year immediately preceding the current year and the enterprise undertaking the said
uncontrolled transaction, [not being the enterprise undertaking the international transaction or the
specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately
preceding the said financial year undertaken the same or similar comparable uncontrolled
transaction then,—
(i) the price in respect of such uncontrolled transaction shall be determined by applying the most
appropriate method in a similar manner as it was applied to determine the price of the
comparable uncontrolled transaction undertaken in the financial year immediately preceding
the current year; and
(ii) the weighted average of the prices, computed in accordance with the manner provided in
sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period
of two years shall be included in the dataset instead of the price referred to in sub-rule (1) :
Provided also that where the use of data relating to the current year in terms of the proviso
to sub-rule (5) of rule 10B establishes that,—
(i) the enterprise has not undertaken same or similar uncontrolled transaction during
the current year; or
(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not
a comparable uncontrolled transaction,
then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled
transaction in the financial year immediately preceding the current year or the financial year
immediately preceding such financial year, the price of comparable uncontrolled transaction or the
weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by
such enterprise shall not be included in the dataset.
(3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year,
then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed
in the following manner, namely:—
(i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of
rule 10B, the weighted average of the prices shall be computed with weights being assigned to the
quantum of sales which has been considered for arriving at the respective prices;
(ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of
quantum of costs which has been considered for arriving at the respective prices;
(iii) where the prices have been determined using the method referred to in clause (e) of sub- rule (1) of
quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may
be, any other base which has been considered for arriving at the respective prices.
(4) Where the most appropriate method applied is a method other than the method referred to in clause (d) or
clause (f) of sub-section (1) of section 92C and the dataset constructed in accordance with sub-rule (2) consists
of six or more entries, an arm's length range beginning from the thirty-fifth percentile of the dataset and ending
on the sixty-fifth percentile of the dataset shall be constructed and the arm's length price shall be computed in
accordance with sub-rule (5) and sub-rule (6).
(5) If the price at which the international transaction or the specified domestic transaction has actually been
undertaken is within the range referred to in sub-rule (4), then, the price at which such international
transaction or the specified domestic transaction has actually been undertaken shall be deemed to be
the arm's length price.
(6) If the price at which the international transaction or the specified domestic transaction has actually been
undertaken is outside the arm's length range referred to in sub-rule (4), the arm's length price shall be taken
to be the median of the dataset.
(7) In a case where the provisions of sub-rule (4) are not applicable, the arm's length price shall be the
arithmetical mean of all the values included in the dataset:
Provided that, if the variation between the arm's length price so determined and price at which the
international transaction or specified domestic transaction has actually been undertaken does not exceed
such percentage not exceeding three per cent of the latter, as may be notified by the Central Government
in the Official Gazette in this behalf, the price at which the international transaction or specified domestic
transaction has actually been undertaken shall be deemed to be the arm's length price.

(8) For the purposes of this rule,—

(a) "the thirty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the
lowest value in the dataset such that at least thirty five per cent of the values included in the dataset
are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole
number, then the thirty-fifth percentile shall be the arithmetic mean of such value and the value
immediately succeeding it in the dataset;
(b) "the sixty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the
lowest value in the dataset such that at least sixty five per cent of the values included in the dataset
are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole
number, then the sixty-fifth percentile shall be the arithmetic mean of such value and the value
immediately succeeding it in the dataset;
(c) "the median" of the dataset, having values arranged in an ascending order, shall be the lowest value
in the dataset such that at least fifty per cent of the values included in the dataset are equal to or less
than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number,
then the median shall be the arithmetic mean of such value and the value immediately succeeding it in the
dataset.
Illustration 1.—The data for the current year of the comparable uncontrolled transactions or the entities
undertaking such transactions is available at the time of furnishing return of income by the assessee and based
on the same, seven enterprises have been identified to have undertaken the comparable uncontrolled
transaction in the current year. All the identified comparable enterprises have also undertaken comparable
uncontrolled transactions in a period of two years preceding the current year. The Profit level Indicator (PLI)
used in applying the most appropriate method is operating profit as compared to operating cost (OP/OC). The
weighted average shall be based upon the weight of OC as computed below :
Sl. Name Year 1 Year 2 Year 3 [Current Aggregation of OC and Weighted
No. Year] OP Average
1 2 3 4 5 6 7
1 A OC = OC = OC = 225 Total OC = 475 OP/OC = 12%

100 150 OP = 35 Total OP = 57
OP = 12 OP = 10
2 B OC = 80 OC = OC = 100 Total OC = 305 OP/OC = 8.2%

OP = 10 125 OP = 10 Total OP = 25
OP = 5
3 C OC = OC = OC = 250 Total OC = 730 OP/OC = 9%

250 230 OP = 18 Total OP = 66
OP = 22 OP = 26
4 D OC = OC = OC = 150 Total OC = 550 OP/OC = 6%

180 220 OP = 20 Total OP = 33

OP = (- OP = 22
)9
5 E OC = OC = OC = 125 Total OC = 365 OP/OC = 2.2%

140 100 OP = (-)5 Total OP = 8
OP = 21 OP = (-
)8
6 F OC = OC = OC = 140 Total OC = 420 OP/OC = 11.9%

160 120 OP = 15 Total OP = 50
OP = 21 OP = 14
7 G OC = OC = OC = 155 Total OC = 435 OP/OC =

150 130 OP = 13 Total OP = 46 10.57%
OP = 21 OP = 12
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values 2.2% 6% 8.2% 9% 10.57% 11.9% 12%
For construction of the arm's length range the data place of thirty-fifth and sixty-fifth percentile shall be
computed in the following manner, namely:
Total no. of data points in dataset *(35/100)
Total no. of data points in dataset *(65/100)
Thus, the data place of the thirty-fifth percentile = 7*0.35=2.45.
Since this is not a whole number, the next higher data place, i.e. the value at the third place would have at
least thirty five per cent of the values below it. The thirty-fifth percentile is therefore value at the third place,
i.e. 8.2%.
The data place of the sixty-fifth percentile is = 7*0.65=4.55.
Since this is not a whole number, the next higher data place, i.e. the value at the fifth place would have at least
sixty five per cent of the values below it. The sixty-fifth percentile is therefore value at fifth place, i.e. 10.57%.
The arm's length range will be beginning at 8.2% and ending at 10.57%.
Therefore, if the transaction price of the international transaction or the specified domestic transaction has
OP/OC percentage which is equal to or more than 8.2% and less than or equal to 10.57%, it is within the
range. The transaction price in such cases will be deemed to be the arm's length price and no adjustment shall
be required. However, if the transaction price is outside the arm's length range, say 6.2%, then for the purpose
of determining the arm's length price the median of the dataset shall be first determined in the following
manner:
The data place of median is calculated by first computing the total number of data point in the dataset *
(50/100). In this case it is 7*0.5=3.5.
Since this is not a whole number, the next higher data place, i.e. the value at the fourth place would have at
least fifty per cent of the values below it (median).
The median is the value at fourth place, i.e., 9%. Therefore, the arm's length price shall be considered as 9%
and adjustment shall accordingly be made.
Illustration 2.—The data of the current year is available in respect of enterprises A, C, E, F and G at the time
of furnishing the return of income by the assessee and the data of the financial year preceding the current year
has been used to identify comparable uncontrolled transactions undertaken by entrprises B and D. Further, if
the enterprises have also undertaken comparable uncontrolled transactions in earlier years as detailed in the
table, the weighted average and dataset shall be computed as below:
1 2 3 4 5 6 7

100 150 OP = 35 Total OP = 57
OP = 12 OP = 10
2 B OC = 80 OC = Total OC = 205 OP/OC = 7.31%

OP = 10 125 Total OP = 15
OP = 5

250 230 OP = 18 Total OP = 66
OP = 22 OP = 26
4 D OC = Total OC = 220 OP/OC = 10%

220 Total OP = 22
OP = 22
5 E OC = 100 Total OC = 100 OP/OC = (-)5%

OP = (-)5 Total OP = (-)5

160 120 OP = 15 Total OP = 50
OP = 21 OP = 14

150 130 OP = 13 Total OP = 46 10.57%
OP = 21 OP = 12
SI. No. 1 2 3 4 5 6 7
Values (-)5% 7.31% 9% 10% 10.57% 11.9% 12%
If during the course of assessment proceedings, the data of the current year is available and the use of such
data indicates that B has failed to pass any qualitative or quantitative filter or for any other reason the
transaction undertaken is not a comparable uncontrolled transaction, then, B shall not be considered for
inclusion in the dataset. Further, if the data available at this stage indicates a new comparable uncontrolled
transaction undertaken by enterprise H, then, it shall be included. The weighted average and dataset shall be
recomputed as under :

1 2 3 4 5 6 7

100 150 OP = 35 Total OP = 57
OP = 12 OP = 10

250 230 OP = 18 Total OP = 66
OP = 22 OP = 26
3 D OC = OC = 150 Total OC = 370 OP/OC =

220 OP = 20 Total OP = 42 11.35%
OP = 22
4 E OC = 100 Total OC = 100 OP/OC = (-)5%

OP = (-)5 Total OP = (-)5

160 120 OP = 15 Total OP = 50
OP = 21 OP = 14

150 130 OP = 13 Total OP = 46 10.57%
OP = 21 OP = 12
7 H OC = OC = 80 Total OC = 230 OP/OC = 9.56%

150 OP = 10 Total OP = 22
OP = 12
SI. No. 1 2 3 4 5 6 7
Values (-)5% 9% 9.56% 10.57% 11.35% 11.9% 12%
Illustration 3.— In a given case the dataset of 20 prices arranged in ascending order is as under :
Sl. No. Profits (in Rs. Thousand)
1 2
1 42.00
2 43.00
3 44.00

4 44.50
5 45.00
6 45.25
7 47.00
8 48.00
9 48.15
10 48.35
11 48.45
12 48.48
13 48.50
14 49.00
15 49.10
16 49.35
17 49.50
18 49.75
19 50.00
20 50.15
Applying the formula given in the Illustration 1, the data place of the thirty-fifth and sixty-fifty percentile is
determined as follows:
Thirty-fifth percentile place = 20* (35/100) = 7.
Sixty-fifth percentile place = 20* (65/100) = 13.
Since the thirty-fifth percentile place is a whole number, it shall be the average of the prices at the seventh and
next higher, i.e.; eighth place. This is (47+48)/2 = Rs.47,500.
Similarly, the sixty-fifth percentile will be average of thirteenth and fourteenth place prices. This is
(48.5+49)/2=Rs.48,750
The median of the range (the fiftieth percentile place) = 20*(50/100)=10
Since the fiftieth percentile place is a whole number, it shall be the average of the prices at the tenth and next
higher, i.e.; eleventh place. This is (48.35+48.45)/2= Rs.48,400.
Thus, the arm's length range in this case shall be from Rs.47,500 to Rs.48,750.
Consequently, any transaction price which is equal to or more than Rs.47,500 but less than or equal to
Rs.48,750 shall be considered to be within the arm's length range.]

10CB. (1) For the purposes of sub-section (2) of section 92CE of the Act, the time limit for repatriation of
excess money shall be on or before ninety days,—
(i) from the due date of filing of return under sub-section (1) of section 139 of the Act where primary
adjustments to transfer price has been made suo-moto by the assessee in his return of income;
(ii) from the date of the order of Assessing Officer or the appellate authority, as the case may be, if the
primary adjustments to transfer price as determined in the aforesaid order has been accepted by the
assessee;
(iii) from the due date of filing of return under sub-section (1) of section 139 of the Act in the case of
agreement for advance pricing entered into by the assessee under section 92CD ;
(iv) from the due date of filing of return under sub-section (1) section 139 of the Act in the case of option
exercised by the assessee as per the safe harbour rules under section 92CB;or
(v) from the due date of filing of return under sub-section (1) section 139 of the Act in the case of an
agreement made under the mutual agreement procedure under a Double Taxation Avoidance
Agreement entered into under section 90 or 90A;
(2) The imputed per annum interest income on excess money which is not repatriated within the time limit as
per sub-section (1) of section 92CE of the Act shall be computed,—
(i) at the one year marginal cost of fund lending rate of State Bank of India as on 1st of April of the
relevant previous year plus three hundred twenty five basis points in the cases where the international
transaction is denominated in Indian rupee; or
(ii) at six month London Interbank Offered Rate as on 30th September of the relevant previous year plus
three hundred basis points in the cases where the international transaction is denominated in foreign
currency.
Explanation— For the purposes of this rule "International transaction" shall have the meaning assigned to it
in section 92B of the Act.]

10D . (1) Every person who has entered into an international transaction 56b[or a specified domestic
transaction] shall keep and maintain the following information and documents, namely:—
(a) a description of the ownership structure of the assessee enterprise with details of shares or other
ownership interest held therein by other enterprises;
(b) a profile of the multinational group of which the assessee enterprise is a part along with the name,
address, legal status and country of tax residence of each of the enterprises comprised in the group
with whom international transactions 56b[or specified domestic transactions, as the case may be,] have
been entered into by the assessee, and ownership linkages among them;
(c) a broad description of the business of the assessee and the industry in which the assessee operates,
and of the business of the associated enterprises with whom the assessee has transacted;
(d) the nature and terms (including prices) of international transactions 56b[or specified domestic
transactions] entered into with each associated enterprise, details of property transferred or services
provided and the quantum and the value of each such transaction or class of such transaction;
(e) a description of the functions performed, risks assumed and assets employed or to be employed by the
assessee and by the associated enterprises involved in the international transaction 56b[or the specified
domestic transaction] ;
(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates
prepared by the assessee for the business as a whole and for each division or product separately, which
may have a bearing on the international transactions 56b[or the specified domestic
transactions] entered into by the assessee;
(g) a record of uncontrolled transactions taken into account for analysing their comparability with the
international transactions 56b[or the specified domestic transactions] entered into, including a record
of the nature, terms and conditions relating to any uncontrolled transaction with third parties which
may be of relevance to the pricing of the international transactions 56b[or specified domestic
transactions, as the case may be] ;
(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the
relevant international transaction 56b[or specified domestic transaction] ;
(i) a description of the methods considered for determining the arm's length price in relation to each
international transaction 56b[or specified domestic transaction] or class of transaction, the method
selected as the most appropriate method along with explanations as to why such method was so
selected, and how such method was applied in each case;
(j) a record of the actual working carried out for determining the arm's length price, including details of
the comparable data and financial information used in applying the most appropriate method, and
adjustments, if any, which were made to account for differences between the international
transaction 56c[or the specified domestic transaction] and the comparable uncontrolled transactions,
or between the enterprises entering into such transactions;
(k) the assumptions, policies and price negotiations, if any, which have critically affected the
determination of the arm's length price;
(l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices
determined under these rules and consequent adjustment made to the total income for tax purposes;
(m) any other information, data or document, including information or data relating to the associated
enterprise, which may be relevant for determination of the arm's length price.

(2) 56d[Nothing contained in sub-rule (1), in so far as it relates to an international transaction, shall] apply in
a case where the aggregate value, as recorded in the books of account, of international transactions entered into
by the assessee does not exceed one crore rupees :
Provided that the assessee shall be required to substantiate, on the basis of material available with him, that
income arising from international transactions entered into by him has been computed in accordance with
section 92.
57
[(2A) Nothing contained in sub-rule (1), in so far as it relates to an eligible specified domestic transaction
referred to in rule 10THB, shall apply in a case of an eligible assessee mentioned in rule 10THA and—
(a) the eligible assessee, referred to in clause (i) of rule 10THA, shall keep and maintain the following
information and documents, namely:—
(i) a desciption of the ownership structure of the assessee enterprise with details of shares or
other ownership interest held therein by other enterprises;
(ii) a broad description of the business of the assessee and the industry in which the assessee
operates, and of the business of the associated enterprises with whom the assessee has
transacted;
(iii) the nature and terms (including prices) of specified domestic transactions entered into with
each associated enterprise and the quantum and value of each such transaction or class of
such transaction;
(iv) a record of proceedings, if any, before the regulatory commission and orders of such
commission relating to the specified domestic transaction;
(v) a record of the actual working carried out for determining the transfer price of the specified
domestic transaction;
(vi) the assumptions, policies and price negotiations, if any, which have critically affected the
determination of the transfer price; and
(vii) any other information, data or document, including information or data relating to the
associated enterprise, which may be relevant for determination of the transfer price;
(b) the eligible assessee, referred to in clause (ii) of rule 10THA, shall keep and maintain the following
information and documents, namely:—
(i) a description of the ownership structure of the assessee co-operative society with details of
shares or other ownership interest held therein by the members;
(ii) description of members including their addresses and period of membership;
(iii) the nature and terms (including prices) of specified domestic transactions entered into with
each member and the quantum and value of each such transaction or class of such
transaction;
(iv) a record of the actual working carried out for determining the transfer price of the specified
domestic transaction;
(v) the assumptions, policies and price negotiations, if any, which have critically affected the
determination of the transfer price;
(vi) the documentation regarding price being routinely declared in transparent manner and being
available in public domain; and
(vii) any other information, data or document which may be relevant for determination of the
transfer price.]

(3) The information specified in 58[sub-rules (1) and (2A)] shall be supported by authentic documents, which
may include the following :
(a) official publications, reports, studies and data bases from the Government of the country of residence
of the associated enterprise, or of any other country;
(b) reports of market research studies carried out and technical publications brought out by institutions of
national or international repute;
(c) price publications including stock exchange and commodity market quotations;
(d) published accounts and financial statements relating to the business affairs of the associated
enterprises;
(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in
respect of transactions similar to the international transactions 56e[or the specified domestic
transactions, as the case may be];
(f) letters and other correspondence documenting any terms negotiated between the assessee and the
associated enterprise;
(g) documents normally issued in connection with various transactions under the accounting practices
followed.
(4) The information and documents specified under 59[sub-rules (1), (2) and (2A)], should, as far as possible,
be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction 56f[or a specified domestic transaction] continues to have
effect over more than one previous year, fresh documentation need not be maintained separately in respect of
each previous year, unless there is any significant change in the nature or terms of the international
transaction 56f[or the specified domestic transaction, as the case may be], in the assumptions made, or in any
other factor which could influence the transfer price, and in the case of such significant change, fresh
documentation as may be necessary under 60[sub-rules (1), (2) and (2A)] shall be maintained bringing out the
impact of the change on the pricing of the international transaction 56f[or the specified domestic transaction].
(5) The information and documents specified in 61[sub-rules (1), (2) and (2A)] shall be kept and maintained for
a period of eight years from the end of the relevant assessment year.

10DA. (1) Every person, being a constituent entity of an international group shall,—
(i) if the consolidated group revenue of the international group, of which such person is a constituent
entity, as reflected in the consolidated financial statement of the international group for the
accounting year, exceeds five hundred crore rupees; and
(ii) the aggregate value of international transactions,—
(A) during the accounting year, as per the books of account, exceeds fifty crore rupees, or
(B) in respect of purchase, sale, transfer, lease or use of intangible property during the
accounting year, as per the books of accounts, exceeds ten crore rupees,
keep and maintain the following information and documents of the international group, namely:—
(a) a list of all entities of the international group along with their addresses;
(b) a chart depicting the legal status of the constituent entity and ownership structure of the
entire international group;
(c) a description of the business of international group during the accounting year including,—
(I) the nature of the business or businesses;
(II) the important drivers of profits of such business or businesses;
(III) a description of the supply chain for the five largest products or services of the
international group in terms of revenue and any other products including services
amounting to more than five per cent of consolidated group revenue;
(IV) a list and brief description of important service arrangements made among members
of the international group, other than those for research and development services;
(V) a description of the capabilities of the main service providers within the
international group;
(VI) details about the transfer pricing policies for allocating service costs and
determining prices to be paid for intra-group services;
(VII) a list and description of the major geographical markets for the products and
services offered by the international group;
(VIII) a description of the functions performed, assets employed and risks assumed by the
constituent entities of the international group that contribute at least ten per cent of
the revenues or assets or profits of such group; and
(IX) a description of the important business restructuring transactions, acquisitions and
divestments;
(d) a description of the overall strategy of the international group for the development,
ownership and exploitation of intangible property, in cluding location of principal research
and development facilities and their management;
(e) a list of all entities of the international group engaged in development and management of
intangible property along with their addresses;

(f) a list of all the important intangible property or groups of intangible property owned by the
international group along with the names and addresses of the group entities that legally own
such intangible property;
(g) a list and brief description of important agreements among members of the international
group related to intangible property, including cost contribution arrangements, principal
research service agreements and license agreements;
(h) a detailed description of the transfer pricing policies of the international group related to
research and development and intangible property;
(i) a description of important transfers of interest in intangible property, if any, among entities
of the international group, including the name and address of the selling and buying entities
and the compensation paid for such transfers;
(j) a detailed description of the financing arrangements of the international group, including the
names and addresses of the top ten unrelated lenders;
(k) a list of group entities that provide central financing functions, including their place of
operation and of effective management;
(l) a detailed description of the transfer pricing policies of the international group related to
financing arrangements among group entities;
(m) a copy of the annual consolidated financial statement of the international group; and
(n) a list and brief description of the existing unilateral advance pricing agreements and other
tax rulings in respect of the international group for allocation of income among countries.
(2) The report of the information referred to in sub-rule (1) shall be in Form No. 3CEAA and it shall be
furnished to the Director General of Income-tax (Risk Assessment) on or before the due date for furnishing the
return of income as specified in sub-section (1) of section 139:
Provided that the information in Form No.3CEAA for the accounting year 2016-17 may be furnished at any
time on or before the 31st day of March, 2018.
(3) Information in,—
(i) Part A of Form No. 3CEAA shall be furnished by every person, being a constituent entity of an
international group, whether or not the conditions as provided in sub-rule (1) are satisfied;
(ii) Part B of Form No. 3CEAA shall be furnished by a person, being a constituent entity of an
international group, in those cases where the conditions as provided in sub-rule (1) are satisfied.
(4) Where there are more than one constituent entities resident in India of an international group, then the
report referred to in sub-rule (2) or information referred to in clause (i) of sub-rule (3),as the case may be,
may be furnished by that constituent entity which has been designated by the international group to furnish the
said report or information, as the case may be, and the same has been intimated by the designated constituent
entity to the Director General of Income-tax (Risk Assessment) in Form 3CEAB.
(5) The intimation referred to in sub-rule (4) shall be made at least thirty days before the due date of filing the
report as specified under sub-rule (2).
(6) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems), as
the case may be, shall specify the procedure for electronic filing of Form No. 3CEAA and Form No. 3CEAB
and shall also be responsible for evolving and implementing appropriate security, archival and retrieval
policies in relation to the information furnished under this rule.
(7) The information and documents specified in sub-rule (1) shall be kept and maintained for a period of eight
years from the end of the relevant assessment year.

(8) The rate of exchange for the calculation of the value in rupees of the consolidated group revenue in foreign
currency shall be the telegraphic transfer buying rate of such currency on the last day of the accounting year.
Explanation.— For the purposes of this rule,—
(A) "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule
26;
(B) the terms 'accounting year', 'consolidated financial statement' and 'international group' shall have the
same meaning as assigned in sub-section (9) of section 286.]

10DB. (1) For the purposes of sub-section (1) of section 286, every constituent entity resident in India, shall,
if its parent entity is not resident in India, intimate the Director General of Income-tax (Risk Assessment) in
Form No. 3CEAC, the following, namely:—
(a) whether it is the alternate reporting entity of the international group; or
(b) the details of the parent entity or the alternate reporting entity, as the case may be, of the international
group and the country or territory of which the said entities are residents.
(2) Every intimation under sub-rule (1) shall be made at least two months prior to the due date for furnishing
of report as specified under sub-section (2) of section 286.
(3) Every parent entity or the alternate reporting entity, as the case may be, resident in India, shall, for every
reporting accounting year, furnish the report referred to in sub-section (2) of section 286 to the Director
General of Income-tax (Risk Assessment) in Form No. 3CEAD.
(4) A constituent entity of an international group, resident in India, other than the entity referred to in sub-rule
(3), shall furnish the report referred to in sub-rule (3) within the time specified therein if the provisions of sub-
section (4) of section 286 are applicable in its case.
(5) If there are more than one constituent entities resident in India of an international group, other than the
entity referred to in sub-rule (3), then the report referred to in sub-rule (4) may be furnished by that entity
which has been designated by the international group to furnish the said report and the same has been
intimated to the Director General of Income-tax (Risk Assessment) in Form No. 3CEAE.
(6) For the purposes of sub-section (7) of section 286, the total consolidated group revenue of the international
group shall be five thousand five hundred crore rupees.
(7) Where the total consolidated group revenue of the international group, as reflected in the consolidated
financial statement, is in foreign currency, the rate of exchange for the calculation of the value in rupees of
such total consolidated group revenue shall be the telegraphic transfer buying rate of such currency on the
last day of the accounting year preceding the accounting year.
(8) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems), as
the case may be, shall specify the procedure for electronic filing of Form No. 3CEAC, Form No. 3CEAD and
Form No. 3CEAE and shall also be responsible for evolving and implementing appropriate security, archival
and retrieval policies in relation to the information furnished under this rule.
Explanation.— For the purposes of this rule,—
(A) "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule
26;
(B) the terms 'accounting year', 'alternate reporting entity', 'consolidated financial statement',
'international group' and 'reporting accounting year' shall have the same meaning as assigned in sub-
section (9) of section 286.]

10E. The report from an accountant required to be furnished under section 92E by every person who has
entered into an international transaction 56f[or a specified domestic transaction] during a previous year shall be
in Form No. 3CEB and be verified in the manner indicated therein.]

10F . For the purposes of this rule and rules 10G to 10T,—
(a) "agreement" means an advance pricing agreement entered into between the Board and the applicant,
with the approval of the Central Government, as referred to in sub-section (1) of section 92CC of the
Act;
(b) "application" means an application for advance pricing agreement made under rule 10-I;
58
[(ba) "applicant" means a person who has made an application;]
(c) "bilateral agreement" means an agreement between the Board and the applicant, subsequent to, and
based on, any agreement referred to in rule 44GA between the competent authority in India with the
competent authority in the other country regarding the most appropriate transfer pricing method or
the arms' length price;
(d) "competent authority in India" means an officer authorised by the Central Government for the
purpose of discharging the functions as such for matters in respect of any agreement entered into
under section 90 or 90A of the Act;
(e) "covered transaction" means the international transaction or transactions for which agreement has
been entered into;
(f) "critical assumptions" means the factors and assumptions that are so critical and significant that
neither party entering into an agreement will continue to be bound by the agreement, if any of the
factors or assumptions is changed;
(g) "most appropriate transfer pricing method" means any of the transfer pricing method, referred to in
sub-section (1) of section 92C of the Act, being the most appropriate method, having regard to the
nature of transaction or class of transaction or class of associated persons or function performed by
such persons or such other relevant factors prescribed by the Board under rules 10B and 10C;
(h) "multilateral agreement" means an agreement between the Board and the applicant, subsequent to,
and based on, any agreement referred to in rule 44GA between the competent authority in India with
the competent authorities in the other countries regarding the most appropriate transfer pricing
method or the arms' length price;
59
[(ha) "rollback year" means any previous year, falling within the period not exceeding four previous years,
preceding the first of the previous years referred to in sub-section (4) of section 92CC;]
(i) "tax treaty" means an agreement under section 90, or section 90A of the Act for the avoidance of
double taxation;
(j) "team" means advance pricing agreement team consisting of income-tax authorities as constituted by
the Board and including such number of experts in economics, statistics, law or any other field as
may be nominated by the Director General of Income-tax (International Taxation);
(k) "unilateral agreement" means an agreement between the Board and the applicant which is neither a
bilateral nor multilateral agreement.

10G. Any person who—

(i) has undertaken an international transaction; or
(ii) is contemplating to undertake an international transaction,
shall be eligible to enter into an agreement under these rules.

10H . (1) 1[Any] person proposing to enter into an agreement under these rules 2[may], by an application in
writing, make a request for a pre-filing consultation.
(2) The request for pre-filing consultation shall be made in Form No. 3CEC to the Director General of Income-
tax (International Taxation).
(3) On receipt of the request in Form No. 3CEC, the team shall hold pre-filing consultation with the person
referred to in rule 10G.
(4) The competent authority in India or his representative shall be associated in pre-filing consultation
involving bilateral or multilateral agreement.
(5) The pre-filing consultation shall, among other things,—
(i) determine the scope of the agreement;
(ii) identify transfer pricing issues;
(iii) determine the suitability of international transaction for the agreement;
(iv) discuss broad terms of the agreement.
(6) The pre-filing consultation shall—
(i) not bind the Board or the person to enter into an agreement or initiate the agreement process;
(ii) not be deemed to mean that the person has applied for entering into an agreement.

10-I . (1) Any person, 1[referred to in rule 10G] may, if desires to enter into an agreement furnish an
application in Form No. 3CED along with the requisite fee.
(2) The application shall be furnished to Director General of Income-tax (International Taxation) in case of
unilateral agreement and to the competent authority in India in case of bilateral or multilateral agreement.
(3) Application in Form No. 3CED may be filed by the person referred to in rule 10G at any time—
(i) before the first day of the previous year relevant to the first assessment year for which the application
is made, in respect of transactions which are of a continuing nature from dealings that are already
occurring; or
(ii) before undertaking the transaction in respect of remaining transactions.
(4) Every application in Form No. 3CED shall be accompanied by the proof of payment of fees as specified in
sub-rule (5).
(5) The fees payable shall be in accordance with following table based on the amount of international
transaction entered into or proposed to be undertaken in respect of which the agreement is proposed:
Amount of international transaction entered into or proposed to be
undertaken in respect of which agreement is proposed during the proposed
period of agreement. Fee
Amount not exceeding Rs. 100 crores 10 lacs
Amount not exceeding Rs. 200 crores 15 lacs
Amount exceeding Rs. 200 crores 20 lacs

10J. (1) The applicant may withdraw the application for agreement at any time before the finalisation of the
terms of the agreement.
(2) The application for withdrawal shall be in Form No. 3CEE.
(3) The fee paid shall not be refunded on withdrawal of application by the applicant.

10K . (1) Every application filed in Form No. 3CED shall be complete in all respects and accompanied by
requisite documents.
(2) If any defect is noticed in the application in Form No. 3CED or if any relevant document is not attached
thereto or the application is not in accordance with understanding reached in 1[any] pre-filing consultation
referred to in rule 10H, the Director General of Income-tax (International Taxation) (for unilateral agreement)
and competent authority in India (for bilateral or multilateral agreement) shall serve a deficiency letter on the
applicant before the expiry of one month from the date of receipt of the application.
(3) The applicant shall remove the deficiency or modify the application within a period of fifteen days from the
date of service of the deficiency letter or within such further period which, on an application made in this
behalf, may be extended, so however, that the total period of removal of deficiency or modification does not
exceed thirty days.
(4) The Director General of Income-tax (International Taxation) or the competent authority in India, as the
case may be, on being satisfied, may pass an order providing that application shall not be allowed to be
proceeded with if the application is defective and defect is not removed by applicant in accordance with sub-
rule (3).
(5) No order under sub-rule (4) shall be passed without providing an opportunity of being heard to the
applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant shall be
refunded.

10L. (1) If the application referred to in rule 10K has been allowed to be proceeded with, the team or the
competent authority in India or his representative shall process the same in consultation and discussion with
the applicant in accordance with provisions of this rule.
(2) For the purpose of sub-rule (1), it shall be competent for the team or the competent authority in India or
its representative to—
(i) hold meetings with the applicant on such time and date as it deem fit;
(ii) call for additional document or information or material from the applicant;
(iii) visit the applicant's business premises; or
(iv) make such inquiries as it deems fit in the circumstances of the case.
(3) For the purpose of sub-rule (1), the applicant may, if he considers it necessary, provide further document
and information for consideration of the team or the competent authority in India or his representative.
(4) For bilateral or multilateral agreement, the competent authority shall forward the application to Director
General of Income-tax (International Taxation) who shall assign it to one of the teams.
(5) The team, to whom the application has been assigned under sub-rule (4), shall carry out the enquiry and
prepare a draft report which shall be forwarded by the Director General of Income-tax (International
Taxation) to the competent authority in India.
(6) If the applicant makes a request for bilateral or multilateral agreement in its application, the competent
authority in India shall in addition to the procedure provided in this rule invoke the procedure provided in rule
44GA.
(7) The Director General of Income-tax (International Taxation) (for unilateral agreement) or the competent
authority in India (for bilateral or multilateral agreement) and the applicant shall prepare a proposed mutually
agreed draft agreement enumerating the result of the process referred to in sub-rule (1) including the effect of
the arrangement referred to in sub-rule (5) of rule 44GA which has been accepted by the applicant in
accordance with sub-rule (8) of the said rule.
(8) The agreement shall be entered into by the Board with the applicant after its approval by the Central
Government.
(9) Once an agreement has been entered into the Director General of Income-tax (International Taxation) or
the competent authority in India, as the case may be, shall cause a copy of the agreement to be sent to the
Commissioner of Income-tax having jurisdiction over the assessee.

10M . (1) An agreement may among other things, include—

(i) the international transactions covered by the agreement;
(ii) the agreed transfer pricing methodology, if any;
(iii) determination of arm's length price, if any;
(iv) definition of any relevant term to be used in item (ii) or (iii);
(v) critical assumptions;
1
[(va) rollback provision referred to in rule 10MA;]
(vi) the conditions if any other than provided in the Act or these rules.
(2) The agreement shall not be binding on the Board or the assessee if there is a change in any of critical
assumptions or failure to meet conditions subject to which the agreement has been entered into.
(3) The binding effect of agreement shall cease only if any party has given due notice of the concerned other
party or parties.
(4) In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which
the agreement has been entered into, the agreement can be revised or cancelled, as the case may be.
(5) The assessee which has entered into an agreement shall give a notice in writing of such change in any of
the critical assumptions or failure to meet conditions to the Director General of Income-tax (International
Taxation) as soon as it is practicable to do so.
(6) The Board shall give a notice in writing of such change in critical assumptions or failure to meet conditions
to the assessee, as soon as it comes to the knowledge of the Board.
(7) The revision or the cancellation of the agreement shall be in accordance with rules 10Q and 10R
respectively.

10MA. (1) Subject to the provisions of this rule, the agreement may provide for determining the arm's length
price or specify the manner in which arm's length price shall be determined in relation to the international
transaction entered into by the person during the rollback year (hereinafter referred to as "rollback
provision").
(2) The agreement shall contain rollback provision in respect of an international transaction subject to the
following, namely:—
(i) the international transaction is same as the international transaction to which the agreement (other
than the rollback provision) applies;
(ii) the return of income for the relevant rollback year has been or is furnished by the applicant before
the due date specified in Explanation 2 to sub-section (1) of section 139;
(iii) the report in respect of the international transaction had been furnished in accordance with section
92E;
(iv) the applicability of rollback provision, in respect of an international transaction, has been requested
by the applicant for all the rollback years in which the said international transaction has been
undertaken by the applicant; and
(v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule
(5);
(3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of
an international transaction for a rollback year, if,—
(i) the determination of arm's length price of the said international transaction for the said year has been
subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order
disposing of such appeal at any time before signing of the agreement; or
(ii) the application of rollback provision has the effect of reducing the total income or increasing the loss, as
the case may be, of the applicant as declared in the return of income of the said year.
(4) Where the rollback provision specifies the manner in which arm's length price shall be determined in
relation to an international transaction undertaken in any rollback year then such manner shall be the same
as the manner which has been agreed to be provided for determination of arm's length price of the same
international transaction to be undertaken in any previous year to which the agreement applies, not being a
rollback year.
(5) The applicant may, if he desires to enter into an agreement with rollback provision, furnish along with the
application, the request for the same in Form No. 3 CEDA with proof of payment of an additional fee of five
lakh rupees:
2
[Provided that in a case where an application has been filed on or before the 31st day of March, 2015, Form
No.3CEDA along with proof of payment of additional fee may be filed at any time on or before the 30th day of
June, 2015 or the date of entering into the agreement whichever is earlier:]
3
[Provided further that in a case where an agreement has been entered into on or before the 31st day of
March, 2015, Form No.3CEDA along with proof of payment of additional fee may be filed at any time on or
before the 30th day of June, 2015 and, notwithstanding anything contained in rule 10Q, the agreement may be
revised to provide for rollback provision in the said agreement in accordance with this rule.]

10T. (1) Mere filing of an application for an agreement under these rules shall not prevent the operation of
Chapter X of the Act for determination of arms' length price under that Chapter till the agreement is entered
into.
(2) The negotiation between the competent authority in India and the competent authority in the other country
or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance with the
provisions of the tax treaty between India and the other country or countries.]

10N. (1) An applicant may request in writing for an amendment to an application at any stage, before the
finalisation of the terms of the agreement.
(2) The Director General of Income-tax (International Taxation) (for unilateral agreement) or the competent
authority in India (for bilateral or multilateral agreement) may, allow the amendment to the application, if
such an amendment does not have effect of altering the nature of the application as originally filed.
(3) The amendment shall be given effect only if it is accompanied by the additional fee, if any, necessitated by
such amendment in accordance with fee as provided in rule 10-I.

10-O. (1) The assessee shall furnish an annual compliance report to Director General of Income-tax
(International Taxation) for each year covered in the agreement.
(2) The annual compliance report shall be in Form 3CEF.
(3) The annual compliance report shall be furnished in quadruplicate, for each of the years covered in the
agreement, within thirty days of the due date of filing the income-tax return for that year, or within ninety days
of entering into an agreement, whichever is later.
(4) The Director General of Income-tax (International Taxation) shall send one copy of annual compliance
report to the competent authority in India, one copy to the Commissioner of Income-tax who has the jurisdiction
over the income-tax assessment of the assessee and one copy to the Transfer Pricing Officer having the
jurisdiction over the assessee.

10P. (1) The Transfer Pricing Officer having the jurisdiction over the assessee shall carry out the compliance
audit of the agreement for each of the year covered in the agreement.
(2) For the purposes of sub-rule (1), the Transfer Pricing Officer may require—
(i) the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the
critical assumptions, correctness of the supporting data or information and consistency of the
application of the transfer pricing method;
(ii) the assessee to submit any information, or document, to establish that the terms of the agreement has
been complied with.
(3) The Transfer Pricing Officer shall submit the compliance audit report, for each year covered in the
agreement, to the Director General of Income-tax (International Taxation) in case of unilateral agreement and
to the competent authority in India, in case of bilateral or multilateral agreement, mentioning therein his
findings as regards compliance by the assessee with terms of the agreement.
(4) The Director General of Income-tax (International Taxation) shall forward the report to the Board in a
case where there is finding of failure on part of assessee to comply with terms of agreement and cancellation
of the agreement is required.
(5) The compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the
end of the month in which the Annual Compliance Report referred to in rule 10-O is received by the Transfer
Pricing Officer.
(6) The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer if an
agreement has been entered into under rule 10L except where the agreement has been cancelled under rule
10R.

10Q. (1) An agreement, subsequent to it having been entered into, may be revised by the Board, if,—
(a) there is a change in critical assumptions or failure to meet a condition subject to which the agreement
has been entered into;
(b) there is a change in law that modifies any matter covered by the agreement but is not of the nature
which renders the agreement to be non-binding ; or
(c) there is a request from competent authority in the other country requesting revision of agreement, in
case of bilateral or multilateral agreement.
(2) An agreement may be revised by the Board either suo motu or on request of the assessee or the competent
authority in India or the Director General of Income-tax (International Taxation).
(3) Except when the agreement is proposed to be revised on the request of the assessee, the agreement shall
not be revised unless an opportunity of being heard has been provided to the assessee and the assessee is in
agreement with the proposed revision.
(4) In case the assessee is not in agreement with the proposed revision the agreement may be cancelled in
accordance with rule 10R.
(5) In case the Board is not in agreement with the request of the assessee for revision of the agreement, the
Board shall reject the request in writing giving reason for such rejection.
(6) For the purpose of arriving at the agreement for the proposed revision, the procedure provided in rule 10L
may be followed so far as they apply.
(7) The revised agreement shall include the date till which the original agreement is to apply and the date from
which the revised agreement is to apply.

10R . (1) An agreement shall be cancelled by the Board for any of the following reasons:
(i) the compliance audit referred to in rule 10P has resulted in the finding of failure on the part of the
assessee to comply with the terms of the agreement;
(ii) the assessee has failed to file the annual compliance report in time;
(iii) the annual compliance report furnished by the assessee contains material errors; or
(iv) the agreement is to be cancelled under sub-rule (4) of rule 10Q 1[or sub-rule (7) of rule 10RA].
(2) The Board shall give an opportunity of being heard to the assessee, before proceeding to cancel an
application.
(3) The competent authority in India shall communicate with the competent authority in the other country or
countries and provide reason for the proposed cancellation of the agreement in case of bilateral or multilateral
agreement.
(4) The order of cancellation of the agreement shall be in writing and shall provide reasons for cancellation
and for non-acceptance of assessee's submission, if any.
(5) The order of cancellation shall also specify the effective date of cancellation of the agreement, where
applicable.
(6) The order under the Act, declaring the agreement as void ab initio, on account of fraud or
misrepresentation of facts, shall be in writing and shall provide reason for such declaration and for non-
acceptance of assessee's submission, if any.
(7) The order of cancellation shall be intimated to the Assessing Officer and the Transfer Pricing Officer,
having jurisdiction over the assessee.

10RA. (1) The effect to the rollback provisions of an agreement shall be given in accordance with this rule.
(2) The applicant shall furnish modified return of income referred to in section 92CD in respect of a rollback
year to which the agreement applies along with the proof of payment of any additional tax arising as a
consequence of and computed in accordance with the rollback provision.
(3) The modified return referred to in sub-rule(2) shall be furnished along with the modified return to be
furnished in respect of first of the previous years for which the agreement has been requested for in the
application.
(4) If any appeal filed by the applicant is pending before the Commissioner (Appeals), Appellate Tribunal or
the High Court for a rollback year, on the issue which is the subject matter of the rollback provision for that
year, the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the
applicant before furnishing the modified return for the said year.
(5) If any appeal filed by the Assessing Officer or the Principal Commissioner or Commissioner is pending
before the Appellate Tribunal or the High Court for a rollback year, on the issue which is subject matter of the
rollback provision for that year, the said appeal to the extent of the subject covered under the agreement shall
be withdrawn by the Assessing Officer or the Principal Commissioner or the Commissioner, as the case may
be, within three months of filing of modified return by the applicant.
(6) The applicant, the Assessing Officer or the Principal Commissioner or the Commissioner, shall inform the
Dispute Resolution Panel or the Commissioner (Appeals) or the Appellate Tribunal or the High Court, as the
case may be, the fact of an agreement containing rollback provision having been entered into along with a
copy of the same as soon as it is practicable to do so.
(7) In case effect cannot be given to the rollback provision of an agreement in accordance with this rule, for
any rollback year to which it applies, on account of failure on the part of applicant, the agreement shall be
cancelled.]

10S. Request for renewal of an agreement may be made as a new application for agreement, using the same
procedure as outlined in these rules except pre-filing consultation as referred to in rule 10H.

10T. (1) Mere filing of an application for an agreement under these rules shall not prevent the operation of
Chapter X of the Act for determination of arms' length price under that Chapter till the agreement is entered
into.
(2) The negotiation between the competent authority in India and the competent authority in the other country
or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance with the
provisions of the tax treaty between India and the other country or countries.]

10TA. For the purposes of this rule and rule 10TB to rule 10TG,—
1
[(a) "accountant" means an accountant referred to in the Explanation below sub-section (2) of section 288 of
the Act and includes any person recognised for undertaking cost certification by the Government of the
country where the associated enterprise is registered or incorporated or any of its agencies, who fulfils
the following conditions, namely:—
(I) if he is a member or partner in any entity engaged in rendering accountancy or valuation services
then,—
(i) the entity or its affiliates have presence in more than two countries; and
(ii) the annual receipt of the entity in the year preceding the year in which cost certification is
undertaken exceeds ten crore rupees;
(II) if he is pursuing the profession of accountancy individually or is a valuer then,—
(i) his annual receipt in the year preceding the year in which cost certification is undertaken,
from the exercise of profession, exceeds one crore rupees; and
(ii) he has professional experience of not less than ten years.]
2
[(aa)] "contract research and development services wholly or partly relating to software development" means
the following, namely:—
(i) research and development producing new theorems and algorithms in the field of theoretical
computer science;
(ii) development of information technology at the level of operating systems, programming languages,
data management, communications software and software development tools;
(iii) development of Internet technology;
(iv) research into methods of designing, developing, deploying or maintaining software;
(v) software development that produces advances in generic approaches for capturing, transmitting,
storing, retrieving, manipulating or displaying information;
(vi) experimental development aimed at filling technology knowledge gaps as necessary to develop a
software programme or system;
(vii) research and development on software tools or technologies in specialised areas of computing
(image processing, geographic data presentation, character recognition, artificial intelligence and
such other areas);or
(viii) upgradation of existing products where source code has been made available by the principal 3[,
except where the source code has been made available to carry out routine functions like debugging
of the software];
(b) "core auto components" means,—
(i) engine and engine parts, including piston and piston rings, engine valves and parts cooling systems
and parts and power train components;
(ii) transmission and steering parts, including gears, wheels, steering systems, axles and clutches;
(iii) suspension and braking parts, including brake and brake assemblies, brake linings, shock
absorbers and leaf springs;
(c) "corporate guarantee" means explicit corporate guarantee extended by a company to its wholly owned
subsidiary being a non-resident in respect of any short-term or long-term borrowing.
Explanation.—For the purposes of this clause, explicit corporate guarantee does not include letter of
comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature;
4
[(ca) "employee cost" includes,—
(i) salaries and wages;
(ii) gratuities;
(iii) contribution to Provident Fund and other funds;
(iv) the value of perquisites as specified in clause (2) of section 17 of the Act;
(v) employment related allowances, like medical allowance, dearness allowance, travel allowance and
any other allowance;
(vi) bonus or commission by whatever name called;
(vii) lump sum payments received at the time of termination of service or superannuation or voluntary
retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits,
commutation of pension and similar payments;
(viii) expenses incurred on contractual employment of persons performing tasks similar to those
performed by the regular employees;
(ix) outsourcing expenses, to the extent of employee cost, wherever ascertainable, embedded in the total
outsourcing expenses:
Provided that where the extent of employee cost embedded in the total outsourcing expenses is not
ascertainable, eighty per cent of the total outsourcing expenses shall be deemed to be the employee
cost embedded in the total outsourcing expenses;
(x) recruitment expenses;
(xi) relocation expenses;
(xii) training expenses;
(xiii) staff welfare expenses; and
(xiv) any other expenses related to employees or the employment;]
(d) "generic pharmaceutical drug" means a drug that is comparable to a drug already approved by the
regulatory authority in dosage form, strength, route of administration, quality and performance
characteristics, and intended use;
(e) "information technology enabled services" means the following business process outsourcing services
provided mainly with the assistance or use of information technology, namely:—
(i) back office operations;
(ii) call centres or contact centre services;
(iii) data processing and data mining;
(iv) insurance claim processing;
(v) legal databases;
(vi) creation and maintenance of medical transcription excluding medical advice;
(vii) translation services;
(viii) payroll;

(ix) remote maintenance;

(x) revenue accounting;
(xi) support centres;
(xii) website services;
(xiii) data search integration and analysis;
(xiv) remote education excluding education content development; or
(xv) clinical database management services excluding clinical trials,
but does not include any research and development services whether or not in the nature of contract
research and development services;
(f) "intra-group loan" means loan advanced to wholly owned subsidiary being a non-resident, where the
loan—
(i) is sourced in Indian rupees;
(ii) is not advanced by an enterprise, being a financial company including a bank or a financial
institution or an enterprise engaged in lending or borrowing in the normal course of business; and
(iii) does not include credit line or any other loan facility which has no fixed term for repayment;
(g) "knowledge process outsourcing services" means the following business process outsourcing services
provided mainly with the assistance or use of information technology requiring application of knowledge
and advanced analytical and technical skills, namely:—
(i) geographic information system;
(ii) human resources services;
(iii) engineering and design services;
(iv) animation or content development and management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research,
research and development services;
5
[(ga) "low value-adding intra-group services" means services that are performed by one or more members of a
multinational enterprise group on behalf of one or more other members of the same multinational
enterprise group and which,—
(i) are in the nature of support services;
(ii) are not part of the core business of the multinational enterprise group, i.e., such services neither
constitute the profit-earning activities nor contribute to the economically significant activities of
the multinational enterprise group;
(iii) are not in the nature of shareholder services or duplicate services;
(iv) neither require the use of unique and valuable intangibles nor lead to the creation of unique and
valuable intangibles;
(v) neither involve the assumption or control of significant risk by the service provider nor give rise to
the creation of significant risk for the service provider; and

(vi) do not have reliable external comparable services that can be used for determining their arm's
length price, but does not include the following services, namely:—
(i) research and development services;
(ii) manufacturing and production services;
(iii) information technology (software development) services;
(iv) knowledge process outsourcing services;
(v) business process outsourcing services;
(vi) purchasing activities of raw materials or other materials that are used in the manufacturing
or production process;
(vii) sales, marketing and distribution activities;
(viii) financial transactions;
(ix) extraction, exploration, or processing of natural resources; and
(x) insurance and reinsurance;]
(h) "non-core auto components" mean auto components other than core auto components;
(i) "no tax or low tax country or territory" means a country or territory in which the maximum rate of income-
tax is less than fifteen per cent;
(j) "operating expense" means the costs incurred in the previous year by the assessee in relation to the
international transaction during the course of its normal operations including 6[costs relating to
Employee Stock Option Plan or similar stock-based compensation provided for by the associated
enterprises of the assessee to the employees of the assessee, reimbursement to associated enterprises of
expenses incurred by the associated enterprises on behalf of the assessee, amounts recovered from
associated enterprises on account of expenses incurred by the assessee on behalf of those associated
enterprises and which relate to normal operations of the assessee and] depreciation and amortisation
expenses relating to the assets used by the assessee, but not including the following, namely:—
(i) interest expense;
(ii) provision for unascertained liabilities;
(iii) pre-operating expenses;
(iv) loss arising on account of foreign currency fluctuations;
(v) extraordinary expenses;
(vi) loss on transfer of assets or investments;
(vii) expense on account of income-tax; and
(viii) other expenses not relating to normal operations of the assessee:
7
[Provided that reimbursement to associated enterprises of expenses incurred by the associated
enterprises on behalf of the assessee shall be at cost:
Provided further that amounts recovered from associated enterprises on account of expenses
incurred by the assessee on behalf of the associated enterprises and which relate to normal
operations of the assessee shall be at cost;]
(k) "operating revenue" means the revenue earned by the assessee in the previous year in relation to the
international transaction during the course of its normal operations 8[including costs relating to
Employee Stock Option Plan or similar stock-based compensation provided for by the associated
enterprises of the assessee to the employees of the assessee] but not including the following, namely:—
(i) interest income;

(ii) income arising on account of foreign currency fluctuations;
(iii) income on transfer of assets or investments;
(iv) refunds relating to income-tax;
(v) provisions written back;
(vi) extraordinary incomes; and
(vii) other incomes not relating to normal operations of the assessee.
(l) "operating profit margin" in relation to operating expense means the ratio of operating profit, being the
operating revenue in excess of operating expense, to the operating expense expressed in terms of
percentage;
9
[(la) "relevant previous year" means the previous year relevant to the assessment year in which the option for
safe harbour is validly exercised;]
(m) "software development services" means,—
(i) business application software and information system development using known methods and
existing software tools;
(ii) support for existing systems;
(iii) converting or translating computer languages;
(iv) adding user functionality to application programmes;
(v) debugging of systems;
(vi) adaptation of existing software; or
(vii) preparation of user documentation,
research and development services.]

Rule-10TB, Income-tax Rules
10TB. (1) Subject to the provisions of sub-rules (2) and (3), the 'eligible assessee' means a person who has
exercised a valid option for application of safe harbour rules in accordance with rule 10TE, and—
(i) is engaged in providing software development services or information technology enabled services or
knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprise
(hereinafter referred as foreign principal);
(ii) has made any intra-group loan;
(iii) has provided a corporate guarantee;
(iv) is engaged in providing contract research and development services wholly or partly relating to software
development, with insignificant risk, to a foreign principal;
(v) is engaged in providing contract research and development services wholly or partly relating to generic
pharmaceutical drugs, with insignificant risk, to a foreign principal; 1[***]
(vi) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent
or more of total turnover during the relevant previous year is in the nature of original equipment
manufacturer sales 2[; or]
3
[(vii) is in receipt of low value-adding intra-group services from one or more members of its group.]
(2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in item (i) of sub-rule
(1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following
factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved, including the
critical functions such as conceptualisation and design of the product and providing the strategic direction
and framework, either through its own employees or through its other associated enterprises, while the
eligible assessee carries out the work assigned to it by the foreign principal;
(b) the capital and funds and other economically significant assets including the intangibles required, are
provided by the foreign principal or its other associated enterprises, and the eligible assessee is only
provided a remuneration for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise
which not only has the capability to control or supervise but also actually controls or supervises the
activities carried out through its strategic decisions to perform core functions as well as by monitoring
activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract
shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible
assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the
outcome of any intangible generated or arising during the course of rendering of services, which vests
with the foreign principal as evident from the contract and the conduct of the parties.
(3) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in items (iv) and (v)
of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to
the following factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved in research or
product development cycle, including the critical functions such as conceptualisation and design of the

product and providing the strategic direction and framework, either through its own employees or through
its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign
principal;
(b) the foreign principal or its other associated enterprises provides the funds or capital and other
economically significant assets including intangibles required for research or product development and
also provides a remuneration to the eligible assessee for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its other associated
enterprise which has not only the capability to control or supervise but also actually controls or supervises
research or product development, through its strategic decisions to perform core functions as well as by
monitoring activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract
shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible
assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on the outcome of the research which
vests with the foreign principal and is evident from the contract as well as the conduct of the parties.]

10TC. 'Eligible international transaction' means an international transaction between the eligible assessee and
its associated enterprise, either or both of whom are non-resident, and which comprises of:
(i) provision of software development services;
(ii) provision of information technology enabled services;
(iii) provision of knowledge process outsourcing services;
(iv) advance of intra-group loan;
(v) provision of corporate guarantee, where the amount guaranteed,—
(a) does not exceed one hundred crore rupees; or
(b) exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an
agency registered with the Securities and Exchange Board of India, is of the adequate to highest
safety;
(vi) provision of contract research and development services wholly or partly relating to software
development;
(vii) provision of contract research and development services wholly or partly relating to generic
pharmaceutical drugs;
(viii) manufacture and export of core auto components; 1[***]
(ix) manufacture and export of non-core auto components 2[; or]
by the eligible assessee.
3
[(x) receipt of low value-adding intra-group services from one or more members of its group,]

10TD. (1) Where an eligible assessee has entered into an eligible international transaction and the option
exercised by the said assessee is not held to be invalid under rule 10TE, the transfer price declared by the
assessee in respect of such transaction shall be accepted by the income-tax authorities, if it is in accordance
with the circumstances as specified in sub-rule (2) 13a[or, as the case may be, sub-rule (2A)].
(2) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in
column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:—
Sl. Eligible International Transaction Circumstances
No.
(1) (2) (3)
1. Provision of software development The operating profit margin declared by the eligible
services referred to in item (i) of rule assessee from the eligible international transaction
10TC. in relation to operating expense incurred is -
(i) not less than 20 per cent, where the aggregate
value of such transactions entered into during
the previous year does not exceed a sum of five
hundred crore rupees; or
(ii) not less than 22 per cent, where the aggregate
the previous year exceeds a sum of five
hundred crore rupees.
2. Provision of information technology The operating profit margin declared by the eligible
enabled services referred to in item (ii) of assessee from the eligible international transaction
rule 10TC. in relation to operating expense is -
(i) not less than 20 per cent, where the aggregate
the previous year does not exceed a sum of five
(ii) not less than 22 per cent, where the aggregate
the previous year exceeds a sum of five
hundred crore rupees.
3. Provision of knowledge process The operating profit margin declared by the eligible
outsourcing services referred to in item assessee from the eligible international transaction
(iii) of rule 10TC. in relation to operating expense is not less than 25
per cent.
4. Advancing of intra-group loans referred The Interest rate declared in relation to the eligible
to in item (iv) of rule 10TC where the international transaction is not less than the base
amount of loan does not exceed fifty crore rate of State Bank of India as on 30th June of the
rupees. relevant previous year plus 150 basis points.

5. Advancing of intra-group loans referred The Interest rate declared in relation to the eligible
to in item (iv) of rule 10TC where the international transaction is not less than the base
amount of loan exceeds fifty crore rupees. rate of State Bank of India as on 30th June of the
relevant previous year plus 300 basis points.
6. Providing corporate guarantee referred The commission or fee declared in relation to the
to in sub-item (a) of item (v) of rule 10TC. eligible international transaction is at the rate not
less than 2 per cent per annum on the amount
guaranteed.
7. Providing corporate guarantee referred The commission or fee declared in relation to the
to in sub-item (b) of item (v) of rule 10TC. eligible international transaction is at the rate not
less than 1.75 per cent. per annum on the amount
guaranteed.
8. Provision of contract research and The operating profit margin declared by the eligible
development services wholly or partly assessee from the eligible international transaction
relating to software development referred in relation to operating expense incurred is not less
to in item (vi) of rule 10TC. than 30 per cent.
9. Provision of contract research and The operating profit margin declared by the eligible
development services wholly or partly assessee from the eligible international transaction
relating to generic pharmaceutical drugs in relation to operating expense incurred is not less
referred to in item (vii) of rule 10TC. than 29 per cent.
10. Manufacture and export of core auto The operating profit margin declared by the eligible
components referred to in item (viii) of assessee from the eligible international transaction
rule 10TC. in relation to operating expense is not less than 12
per cent.
11. Manufacture and export of non-core auto The operating profit margin declared by the eligible
components referred to in item (ix) of rule assessee from the eligible international transaction
10TC. in relation to operating expense is not less than 8.5
per cent.
13aa
[(2A) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction
specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the
said Table:—
Sl. Eligible International Circumstances
No. Transaction
(1) (2) (3)
1. Provision of software The operating profit margin declared by the eligible
development services referred to assessee from the eligible international transaction in
in item (i) of rule 10TC. relation to operating expense incurred is -

(i) not less than 17 per cent, where the value of

international transaction does not exceed a sum of one
(ii) not less than 18 per cent, where the value of
international transaction exceeds a sum of one
hundred crore rupees but does not exceed a sum of
two hundred crore rupees.
2. Provision of information The operating profit margin declared by the eligible
technology enabled services assessee from the eligible international transaction in
referred to in item (ii) of rule relation to operating expense is -
10TC. (i) not less than 17 per cent, where the aggregate value
of such transactions entered into during the previous
year does not exceed a sum of one hundred crore
rupees; or
(ii) not less than 18 per cent, where the aggregate value
of such transactions entered into during the previous
year exceeds a sum of one hundred crore rupees but
does not exceed a sum of two hundred crore rupees.
3. Provision of knowledge process The value of international transaction does not exceed a
outsourcing services referred to sum of two hundred crore rupees and the operating profit
in item (iii) of rule 10TC. margin declared by the eligible assessee from the eligible
international transaction in relation to operating expense is
-
(i) not less than 24 per cent. and the Employee Cost in
relation to the Operating Expense is at least sixty per
cent.
(ii) not less than 21 per cent. and the Employee Cost in
relation to the Operating Expense is forty per cent. or
more but less than sixty per cent. or
(iii) not less than 18 per cent and the Employee Cost in
relation to the Operating Expense does not exceed
forty per cent.
4. Advancing of intra-group loans The interest rate declared in relation to the eligible
referred to in item (iv) of rule international transaction is not less than the one-year
10TC where the amount of loan is marginal cost of funds lending rate of State Bank of India as
denominated in Indian Rupees on 1st April of the relevant previous year plus,-
(INR). (i) 175 basis points, where the associated enterprise has
CRISIL credit rating between AAA to A or its
equivalent;
(ii) 325 basis points, where the associated enterprise has
CRISIL credit rating of BBB-, BBB or BBB+ or its
equivalent;

(iii) 475 basis points, where the associated enterprise has

CRISIL credit rating between BB to B or its
equivalent;
(iv) 625 basis points, where the associated enterprise has
CRISIL credit rating between C to D or its equivalent;
or
(v) 425 basis points, where credit rating of the associated
enterprise is not available and the amount of loan
advanced to the associated enterprise including loans
to all associated enterprises in Indian Rupees does not
exceed a sum of one hundred crore rupees in the
aggregate as on 31st March of the relevant previous
year.
5. Advancing of intra-group loans The interest rate declared in relation to the eligible
referred to in item (iv) of rule international transaction is not less than the six-month
10TC where the amount of loan is London Inter-Bank Offer Rate of the relevant foreign
denominated in foreign currency. currency as on 30th September of the relevant previous year
plus, -
(i) 150 basis points, where the associated enterprise has
CRISIL credit rating between AAA to A or its
equivalent;
(ii) 300 basis points, where the associated enterprise has
CRISIL credit rating of BBB-, BBB or BBB+ or its
equivalent;
(iii) 450 basis points, where the associated enterprise has
CRISIL credit rating between BB to B or its
equivalent;
(iv) 600 basis points, where the associated enterprise has
CRISIL credit rating between C to D or its equivalent;
or
(v) 400 basis points, where credit rating of the associated
enterprise is not available and the amount of loan
advanced to the associated enterprise including loans
to all associated enterprises does not exceed a sum
equivalent to one hundred crore Indian rupees in the
aggregate as on 31st March of the relevant previous
year.
6. Providing corporate guarantee The commission or fee declared in relation to the eligible
referred to in sub-item (a) or sub- international transaction is at the rate not less than one per
item (b) of item (v) of rule 10TC. cent per annum on the amount guaranteed.
7. Provision of contract research The operating profit margin declared by the eligible
and development services wholly assessee from the eligible international transaction in
or partly relating to software relation to operating expense incurred is not less than 24

development referred to in item per cent, where the value of the international transaction
(vi) of rule 10TC. does not exceed a sum of two hundred crore rupees.
8. Provision of contract research The operating profit margin declared by the eligible
and development services wholly assessee from the eligible international transaction in
or partly relating to generic relation to operating expense incurred is not less than 24
pharmaceutical drugs referred to per cent, where the value of the international transaction
in item (vii) of rule 10TC. does not exceed a sum of two hundred crore rupees.
9. Manufacture and export of core The operating profit margin declared by the eligible
auto components referred to in assessee from the eligible international transaction in
item (viii) of rule 10TC. relation to operating expense is not less than 12 per cent.
10. Manufacture and export of non- The operating profit margin declared by the eligible
core auto components referred to assessee from the eligible international transaction in
in item (ix) of rule 10TC. relation to operating expense is not less than 8.5 per cent.
11. Receipt of low value-adding The entire value of the international transaction, including
intra-group services in item (x) of a mark-up not exceeding 5 per cent., does not exceed a sum
rule 10TC. of ten crore rupees:
Provided that the method of cost pooling, the exclusion of
shareholder costs and duplicate costs from the cost pool and
the reasonableness of the allocation keys used for allocation
of costs to the assessee by the overseas associated
enterprise, is certified by an accountant.]
(3) The provisions of sub‐rules (1) and (2) shall apply for the assessment year 2013-14 and four assessment
years immediately following that assessment year.
13ab
[(3A) The provisions of sub-rules (1) and (2A) shall apply for the assessment year 2017-18 and two
assessment years immediately following that assessment year:
Provided that where an eligible assessee is eligible to exercise option under sub-rule (2) or, as the case
may be, sub-rule (2A) above, the assessee shall have the right to choose the option which is most beneficial
to him.]
(4) No comparability adjustment and allowance under the second proviso to sub-section (2) of section 92C shall
be made to the transfer price declared by the eligible assessee and accepted under sub-rules (1) and (2) 13ac[or,
as the case may be, (2A)] above.
(5) The provisions of sections 92D and 92E in respect of an international transaction shall apply irrespective
of the fact that the assessee exercises his option for safe harbour in respect of such transaction.]

10TE. (1) For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form 3CEFA,
complete in all respects, to the Assessing Officer on or before the due date specified in Explanation 2 below sub-
section (1) of section 139 for furnishing the return of income for—
(i) the relevant assessment year, in case the option is exercised only for that assessment year; or
(ii) the first of the assessment years, in case the option is exercised for more than one assessment year:
Provided that the return of income for the relevant assessment year or the first of the relevant assessment years,
as the case may be, is furnished by the assessee on or before the date of furnishing of Form 3CEFA.
(2) The option for safe harbour validly exercised shall continue to remain in force for the period specified in
Form 3CEFA or a period of five years whichever is less:
Provided that the assessee shall, in respect of the assessment year or years following the initial assessment
year, furnish a statement to the Assessing Officer before furnishing return of income of that year, providing
details of eligible transactions, their quantum and the profit margins or the rate of interest or commission
shown:
Provided further that an option for safe harbour shall not remain in force in respect of any assessment year
following the initial assessment year, if—
(i) the option is held to be invalid for the relevant assessment year by the Transfer Pricing Officer under sub-
rule (11) or by the Commissioner under sub-rule (8) in respect of an objection filed by the assessee against
the order of the Transfer Pricing Officer under sub-rule (11), as the case may be; or
(ii) the eligible assessee opts out of the safe harbour, for the relevant assessment year, by furnishing a
declaration to that effect, to the Assessing Officer:
14a
[Provided also that in case of the option for safe harbour validly exercised under sub-rule (2A) of rule 10TD,
the word "three" shall be substituted for "five".]
(3) On receipt of Form 3CEFA, the Assessing Officer shall verify whether—
(i) the assessee exercising the option is an eligible assessee; and
(ii) the transaction in respect of which the option is exercised is an eligible international transaction,
before the option for safe harbour by the assessee is treated to be validly exercised.
(4) Where the Assessing officer doubts the valid exercise of the option for the safe harbour by an assessee, he
shall make a reference to the Transfer Pricing Officer for determination of the eligibility of the assessee or the
international transaction or both for the purposes of the safe harbour.
(5) For the purposes of sub-rule (4) and sub-rule (10), the Transfer Pricing Officer may require the assessee,
by notice in writing, to furnish such information or documents or other evidence as he may consider necessary,
and the assessee shall furnish the same within the time specified in such notice.
(6) Where—
(a) the assessee does not furnish the information or documents or other evidence required by the Transfer
Pricing Officer; or
(b) the Transfer Pricing Officer finds that the assessee is not an eligible assessee; or
(c) the Transfer Pricing Officer finds that the international transaction in respect of which the option referred
to in sub-rule (1) has been exercised is not an eligible international transaction,
the Transfer Pricing Officer shall, by order in writing, declare the option exercised by the assessee under sub-
rule (1) to be invalid and cause a copy of the said order to be served on the assessee and the Assessing Officer:

Provided that no order declaring the option exercised by the assessee to be invalid shall be passed without
(7) If the assessee objects to the order of the Transfer Pricing Officer under sub-rule (6) or sub-rule (11)
declaring the option to be invalid, he may file his objections with the Commissioner, to whom the Transfer
Pricing Officer is subordinate, within fifteen days of receipt of the order of the Transfer Pricing Officer.
(8) On receipt of the objection referred to in sub-rule (7), the Commissioner shall after providing an opportunity
of being heard to the assessee pass appropriate orders in respect of the validity or otherwise of the option
exercised by the assessee and cause a copy of the said order to be served on the assessee and the Assessing
Officer.
(9) In a case where option exercised by the assessee has been held to be valid, the Assessing officer shall proceed
to verify whether the transfer price declared by the assessee in respect of the relevant eligible international
transactions is in accordance with the circumstances specified in sub-rule (2) 14aa[or, as the case may be, sub-
rule (2A)] of rule 10 TD and, if it is not in accordance with the said circumstances, the Assessing Officer shall
adopt the operating profit margin or rate of interest or commission specified in sub-rule (2) 14ab[or, as the case
may be, sub-rule (2A)] of rule 10TD.
(10) Where the facts and circumstances on the basis of which the option exercised by the assessee was held to
be valid have changed and the Assessing Officer has reason to doubt the eligibility of an assessee or the
international transaction for any assessment year other than the initial Assessment Year falling within the period
for which the option was exercised by the assessee, he shall make a reference to the Transfer Pricing Officer
for determination of eligibility of the assessee or the international transaction or both for the purpose of safe
harbour.
Explanation.—For purposes of this sub-rule the facts and circumstances include:—
(a) functional profile of the assessee in respect of the international transaction;
(b) the risks being undertaken by the assessee;
(c) the substantive contractual conditions governing the role of the assessee in respect of the international
transaction;
(d) the conduct of the assessee as referred to in sub-rule (2) or sub-rule (3) of rule 10TB; or
(e) the substantive nature of the international transaction.
(11) The Transfer Pricing Officer on receipt of a reference under sub-rule (10) shall, by an order in writing,
determine the validity or otherwise of the option exercised by the assessee for the relevant year after providing
an opportunity of being heard to the assessee and cause a copy of the said order to be served on the assessee
and the Assessing Officer.
(12) Nothing contained in this rule shall affect the power of the Assessing Officer to make a reference under
section 92CA in respect of international transaction other than the eligible international transaction.
(13) Where no option for safe harbour has been exercised under sub-rule (1) by an eligible assessee in respect
of an eligible international transaction entered into by the assessee or the option exercised by the assessee is
held to be invalid, the arm's length price in relation to such international transaction shall be determined in
accordance with the provisions of sections 92C and 92CA without having regard to the profit margin or the rate
of interest or commission as specified in sub-rule (2) 14ac[or, as the case may be, sub-rule (2A)] of rule 10TD.
(i) no reference under sub-rule(4) shall be made by an Assessing Officer after expiry of a period of two
months from the end of the month in which Form 3CEFA is received by him;

(ii) no order under sub-rule (6) or sub-rule (11) shall be passed by the Transfer Pricing Officer after expiry
of a period of two months from the end of the month in which the reference from the Assessing officer
under sub-rule(4) or sub-rule (10), as the case may be, is received by him;
(iii) the order under sub-rule (8) shall be passed by the Commissioner within a period of two months from the
end of the month in which the objection filed by the assessee under sub-rule (7) is received by him.
(15) If the Assessing Officer or the Transfer Pricing Officer or the Commissioner, as the case may be, does not
make a reference or pass an order, as the case may be, within the time specified in sub-rule (14), then the option
for safe harbour exercised by the assessee shall be treated as valid.]

10TF. Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in respect of eligible
international transactions entered into with an associated enterprise located in any country or territory notified
under section 94A or in a no tax or low tax country or territory.]

10THA. The 'eligible assessee' means a person who has exercised a valid option for application of safe
harbour rules in accordance with the provisions of rule 10THC, 2 [ and—
(i) is a Government company engaged in the business of generation, 3[supply,] transmission or
distribution of electricity; or
(ii) is a co-operative society engaged in the business of procuring and marketing milk and milk products.]]

10THB . The "Eligible specified domestic transaction" means a specified domestic transaction undertaken by
an eligible assessee and which comprises of :—
(i) supply of electricity 1a[***] or
(ii) transmission of electricity; or
(iii) wheeling of electricity; ] 2 [ or
(iv) purchase of milk or milk products by a co-operative society from its members.]

10THC. (1) Where an eligible assessee has entered into an eligible specified domestic transaction in any
previous year relevant to an assessment year and the option exercised by the said assessee is treated to be
validly exercised under rule 10THD, the transfer price declared by the assessee in respect of such transaction
for that assessment year shall be accepted by the income-tax authorities, if it is in accordance with the
circumstances as specified in sub-rule (2).
(2) The circumstances referred to in sub-rule (1) in respect of the eligible specified domestic transaction
specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the
said Table:—
Table
S.No. Eligible specified domestic Circumstances
transaction
1. 2. 3.
1. Supply of electricity, The tariff in respect of supply of electricity, transmission

transmission of electricity, of electricity, wheeling of electricity, as the case may be,
wheeling of electricity is determined 3[or the methodology for determination of
referred to 2 [in clause (i), the tariff is approved] by the Appropriate Commission in
(ii) or (iii) of rule 10THB, as accordance with the provisions of the Electricity Act,
the case may be] 2003 (36 of 2003).
4
[ 2. Purchase of milk or milk The price of milk or milk products is determined at a rate
products referred to in which is fixed on the basis of the quality of milk, namely,
clause (iv) of rule 10THB. fat content and Solid Not FAT (SNF) content of milk ;
and—
(a) the said rate is irrespective of,—
(i) the quantity of milk procured;
(ii) the percentage of shares held by the members
in the co-operative society;
(iii) the voting power held by the members in the
society; and
(b) such prices are routinely declared by the co-
operative society in a transparent manner and are
available in public domain.]
(3) No comparability adjustment and allowance under the second proviso to sub-section (2) of section 92C
shall be made to the transfer price declared by the eligible assessee and accepted under sub-rule (1).
(4) The provisions of sections 92D and 92E in respect of a specified domestic transaction shall apply
irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction.]

10THD. (1) For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form
3CEFB, complete in all respects, to the Assessing Officer on or before the due date specified in Explanation
2 to sub-section (1) of section 139 for furnishing the return of income for the relevant assessment year:
Provided that the return of income for the relevant assessment year is furnished by the assessee on or before
the date of furnishing of Form 3CEFB:
2
[Provided further that in respect of eligible specified domestic transactions, other than the transaction
referred to in clause (iv) of rule 10THB, undertaken during the previous year relevant to the assessment year
beginning on the 1st day of April, 2013 or beginning on the 1st day of April, 2014 or beginning on the 1st day
of April, 2015, Form 3CEFB may be furnished by the assessee on or before the 31st day of March, 2016:]
3
[Provided also that in respect of eligible specified domestic transactions, referred to in clause (iv) of rule
10THB, undertaken during the previous year relevant to the assessment year beginning on the 1st day of April,
2013 or beginning on the 1st day of April, 2014 or beginning on the 1st day of April, 2015, Form 3CEFB may
be furnished by the assessee on or before the 31st day of December, 2015.]
(2) On receipt of Form 3CEFB, the Assessing Officer shall verify whether—
(i) the assessee exercising the option is an eligible assessee; and
(ii) the transaction in respect of which the option is exercised is an eligible specified domestic transaction,
before the option for safe harbour by the assessee is treated to be validly exercised.
(3) Where the Assessing Officer doubts the valid exercise of the option for the safe harbour by an assessee, he
may require the assessee, by notice in writing, to furnish such information or documents or other evidence as
he may consider necessary, and the assessee shall furnish the same within the time specified in such notice.
(4) Where—
(a) the assessee does not furnish the information or documents or other evidence required by the
Assessing Officer; or
(b) the Assessing Officer finds that the assessee is not an eligible assessee; or
(c) the Assessing Officer finds that the specified domestic transaction in respect of which the option
referred to in sub-rule (1) has been exercised is not an eligible specified domestic transaction; or
(d) the tariff is not in accordance with the circumstances specified in sub-rule (2) of rule 10THC,
the Assessing Officer shall, by order in writing, declare the option exercised by the assessee under sub-rule
(1) to be invalid and cause a copy of the said order to be served on the assessee:
Provided that no order declaring the option exercised by the assessee to be invalid shall be passed without
(5) If the assessee objects to the order of the Assessing Officer under sub-rule (4) declaring the option to be
invalid, he may file his objections with the Principal Commissioner or the Commissioner or the Principal
Director or the Director, as the case may be, to whom the Assessing Officer is subordinate, within fifteen days
of receipt of the order of the Assessing Officer.
(6) On receipt of the objection referred to in sub-rule (5), the Principal Commissioner or the Commissioner or
the Principal Director or the Director, as the case may be, shall after providing an opportunity of being heard
to the assessee, pass appropriate orders in respect of the validity or otherwise of the option exercised by the
assessee and cause a copy of the said order to be served on the assessee and the Assessing Officer.

(i) no order under sub-rule (4) shall be made by an Assessing Officer after expiry of a period of three
months from the end of the month in which Form 3CEFB is received by him;
(ii) the order under sub-rule (6) shall be passed by the Principal Commissioner or Commissioner or
Principal Director or Director, as the case may be, within a period of two momths from the end of the
month in which the objection filed by the assessee under sub-rule (5) is received by him.
(8) If the Assessing Officer or the Principal Commissioner or the Commissioner or the Principal Director or
the Director, as the case may be, does not pass an order within the time specified in sub-rule (7), then the
option for safe harbour exercised by the assessee shall be treated as valid.]

10U. Chapter X-A not to apply in certain cases.—(1) The provisions of Chapter X-A shall not apply to—
(a) an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the
parties to the arrangement does not exceed a sum of rupees three crore;
(b) a Foreign Institutional Investor,—
(i) who is an assessee under the Act;
(ii) who has not taken benefit of an agreement referred to in section 90 or section 90A as the case may
be; and
(iii) who has invested in listed securities, or unlisted securities, with the prior permission of the
competent authority, in accordance with the Securities and Exchange Board of India (Foreign
Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in
relation to such investments;
(c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative
instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;
(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received
by, any person from transfer of investments made before the 17a[1st day of April, 2017] by such person.
(2) Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply
to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit
obtained from the arrangement on or after the 17aa[1st day of April, 2017].
(i) "Foreign Institutional Investor" shall have the same meaning as assigned to it in the Explanation to section
115AD;
(ii) "off shore derivative instrument" shall have the same meaning as assigned to it in the Securities and
Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 issued under Securities and
Exchange Board of India Act, 1992 (15 of 1992) ;
(iii) "Securities and Exchange Board of India" shall have the same meaning as assigned to it in clause (a) of
sub-section (1) of section 2 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(iv) "tax benefit" as defined in clause (10) of section 102 and computed in accordance with Chapter X-A shall
be with reference to—
(a) sub-clauses (a) to (e) of the said clause, the amount of tax; and
(b) sub-clause (f) of the said clause, the tax that would have been chargeable had the increase in loss
referred to therein been the total income.]

10UA . For the purposes of sub-section (1) of section 98, where a part of an arrangement is declared to be an
impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference
to such part only.]

10UB. (1) For the purposes of sub-section (1) of section 144BA, the Assessing Officer shall, before making a
reference to the Commissioner, issue a notice in writing to the assessee seeking objections, if any, to the
applicability of provisions of Chapter X-A in his case.
(2) The notice referred to in sub-rule (1) shall contain the following:—
(i) details of the arrangement to which the provisions of Chapter X-A are proposed to be applied;
(ii) the tax benefit arising under the arrangement;
(iii) the basis and reason for considering that the main purpose of the identified arrangement is to obtain tax
benefit;
(iv) the basis and the reasons why the arrangement satisfies the condition provided in clause (a), (b), (c) or
(d) of sub-section (1) of section 96; and
(v) the list of documents and evidence relied upon in respect of (iii) and (iv) above.
(3) The reference by the Assessing Officer to the Commissioner under sub-section (1) of section 144BA shall be
in Form No. 3CEG.
(4) Where the Commissioner is satisfied that the provisions of Chapter X-A are not required to be invoked with
reference to an arrangement after considering—
(i) the reference received from the Assessing Officer under sub-section (1) of section 144BA; or
(ii) the reply of the assessee in response to the notice issued under sub-section (2) of section 144BA,
he shall issue directions to the Assessing Officer in Form No. 3CEH.
(5) Before a reference is made by the Commissioner to the Approving Panel under sub-section (4) of section
144BA, he shall record his satisfaction regarding the applicability of the provisions of Chapter X-A in Form
No. 3CEI and enclose the same with the reference.]

10UC. (1) For the purposes of section 144BA,—

(i) no directions under sub-section (3) of section 144BA shall be issued by the Commissioner after the expiry
of one month from the end of the month in which the date of compliance of the notice issued under sub-
section (2) of section 144BA falls;
(ii) no reference shall be made by the Commissioner to the Approving Panel under sub-section (4) of section
144BA after the expiry of two months from the end of the month in which the final submission of the
assessee in response to the notice issued under sub-section (2) of section 144BA is received;
(iii) the Commissioner shall issue directions to the Assessing Officer in Form No.3CEH,—
(a) in the case referred to in clause (i) of sub-rule (4) of rule 10UB, within a period of one month from
the end of month in which the reference is received by him; and
(b) in the case referred to in clause (ii) of sub-rule (4) of rule 10UB, within a period of two months
from the end of month in which the final submission of the assessee in response to the notice issued
under sub-section (2) of section 144BA is received by him.]

C.A. Kalpesh Sanghavi Advance Ruling - P a g e | F56-A . 1

Designated Authority can determine any issue under the Income-tax Act, 1961 by giving `Advance Ruling'.
Elaborate the meaning assigned to `Advance Ruling' under the aforesaid Act.

Can a person resident in India seek advance ruling from the Authority for Advance Ruling?

List a few instances of issues on which rulings can be asked for from AAR.

“The term ‘Advance ruling’ includes within its scope, a determination by the Authority for Advance Ruling
only in relation to a transaction undertaken by a non- resident applicant”.
Discuss the correctness or otherwise of this statement, as per the income tax law. (3 marks)
Do not take Chances, Join US for complete coverage

C.A. Kalpesh Sanghavi Advance Ruling - P a g e | F56-A . 2

SAIL (steel authority of India Limited) a public sector undertaking filed the return of income claiming the
deduction of section 80IA. Assessing officer has dis-allowed the claim made by the assessee. SAIL has preferred
an appeal against the order of officer and is pending before Appellate tribunal as of 01-08-2018 and four hearings
are already completed. However due to delay in decision SAIL prefers to make application to authority of
advance ruling in lieu of appellate tribunal, appellate tribunal take it as content of court. You are required to
offer your comments on the issue.

C.A. Kalpesh Sanghavi Advance Ruling - P a g e | F56-B . 1
Question (ID 01)

Mr. Sushil Kumar is a non-resident. The appeal pertaining to the assessment year is pending before the Appellate
Tribunal, the issue involved being computation of capital gains. The same issue persists for the subsequent
assessment year also. Mr. Sushil Kumar’s friend Mr. Sachin Gupta has obtained an advance ruling under chapter
XIX-B of the Income-tax Act, 1961 from the Authority for Advance Rulings on an identical Point. Mr. Sushil
Kumar proposed to use the said ruling for his assessment. Can he do so?
OR
R is a non-resident. The appeal pertaining to the assessment year is pending before the Appellate
Tribunal, the issue involved being computation of income from house property. The same issue persists
for the subsequent assessment year also. R’s friend has obtained an advance ruling under Chapter XIX-
B from the Authority for Advance Rulings on an identical point. R proposes to use the said ruling for his
assessment. Advise R suitably?
OR
Saba Karim is a non-resident. The appeal pertaining to the Assessment Year is pending before the
Appellate Tribunal, the issue involved being computation of income form house property. The same
issue persists for the subsequent Assessment Year also. Saba Karim’s friend Sheikh Ali has obtained an
advance ruling under Chapter XIX-B of the Income Tax Act, 1961 from the Authority for Advance
Rulings on an identical Point. Saba Karim proposes to use the said ruling for his assessment. Advise
Saba Karim suitably?
OR
Who are the persons in respect of whom Advance Ruling given u/s 245R shall be binding?

C.A. Kalpesh Sanghavi Advance Ruling - P a g e | F56-B . 2
Question (ID 06)

ABC Inc. a Non-resident investor Company is a beneficiary of a contributory trust established in India. The
application for advance ruling u/s 245Q by ABC Inc. on a question affecting the trust involving, inter alia,
provisions of Sections 161 to 164 is resisted by the Department on two grounds
(a) This is a question which really affects the contributory trust in India, and that the applicant though a non-
resident cannot avail the benefits of Chapter XIX-B for getting clarifications about a resident assessee’s
liability to income-tax merely because they have some mutual connections;
(b) Since the ruling given would bind only the applicant and the Department, any action at the time of assessment
of the Indian trust cannot be questioned on the basis of the ruling and hence the ruling would be infructuous.
Discuss the pros and cons of the objections of the Department.

C.A. Kalpesh Sanghavi Advance Ruling - P a g e | F56-C . 1
Question (ID 05)

A Foreign Company entered into contracts with several Indian companies for installation of mobile telephone
system and made an application to the AAR for advance ruling on the rate of withholding tax on receipts from
Indian Companies. One of the Indian Companies made an application to its Assessing Officer for determination
of the rate of tax at which tax is deductible on payment to the said Foreign Company.
The AAR rejected the application of the Foreign Company on the ground that the question raised is already
pending before an income tax authority. Is the rejection of the application of the Foreign Company justified in
law?
Question (ID 07)

Mr. Kalpesh Sanghavi employed with a company, V, of the U.S.A. since May, 2002. He came to India for the
first time on November 1 of previous year and was in India thereafter. An Indian company, VIPL, was promoted
by V. In order to provide better access to technology and technical expertise to its people, VIPL decided to
engage the services of the kalpesh sanghavi. He sought an advance ruling by an application dated March 30 for
the question whether he will be technician and whether he would be entitled to exemption under section 10.
After making the application to AAR he has filed return of income on March 31. You are required to answer
whether application is maintainable.

Microsoft corporation supplied the software to MSRC ltd for the distribution in India. Software was supplied at
40 % discount on retail qutoe of the product. Similar product to Chunking corporation in china was supplied at
43 % discount on retail price. Microsoft corporation made application to AAR regarding Transfer pricing tax
liability in India if any. AAR rejected the application. You are required to answer whether the action of AAR is
justified.

X & Co. filed an application for advance ruling for assessment years 2011-12, 2012-13 and 2013-14 with the
Authority for Advance Ruling (AAR). For the assessment years 2011-12, 2012-13 notices section 143(2) were
issued to the assessee and, subsequently, before the date of filing with AAR, notice under section 142(1) along
with questionnaire was issued. For the assessment year 2013-14, notice under section 143(2) was issued before
the date of filing of application with the AAR and notice under section 142(1) along with questionnaire was
served on the assessee after the date of filing of application with AAR. Can the AAR reject the application on
the ground that proceedings are already pending? Assume that the provisions relating to Advance Ruling for the
earlier assessment years are the same as those prevailing for the assessment year.

245N. In this Chapter, unless the context otherwise requires,—

(a) "advance ruling" means—
(i) a determination by the Authority in relation to a transaction which has been undertaken or is
proposed to be undertaken by a non-resident applicant; or†
(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of
a transaction which has been undertaken or is proposed to be undertaken by a resident
applicant with such non-resident; or*
(iia) a determination by the Authority in relation to the tax liability of a resident applicant, arising
out of a transaction which has been undertaken or is proposed to be undertaken by such applicant;
and such determination shall include the determination of any question of law or of fact specified
in the application;
(iii) a determination or decision by the Authority in respect of an issue relating to computation of
total income which is pending before any income-tax authority or the Appellate Tribunal
and such determination or decision shall include the determination or decision of any question of
law or of fact relating to such computation of total income specified in the application;
(iv) a determination or decision by the Authority whether an arrangement, which is proposed to be
undertaken by any person being a resident or a non-resident, is an impermissible avoidance
arrangement as referred to in Chapter X-A or not:
Provided that where an advance ruling has been pronounced, before the date on which the Finance Act,
2003 receives the assent of the President, by the Authority in respect of an application by a resident
applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling
shall be binding on the persons specified in section 245S;
(b) "applicant" means—
(A) any person who—
(I) is a non-resident referred to in sub-clause (i) of clause (a); or
(II) is a resident referred to in sub-clause (ii) of clause (a); or
(III) is a resident referred to in sub-clause (iia) of clause (a) falling within any such class or
category of persons as the Central Government may, by notification in the Official Gazette,
specify; or
(IV) is a resident falling within any such class or category of persons as the Central Government
may, by notification in the Official Gazette, specify in this behalf; or
(V) is referred to in sub-clause (iv) of clause (a),
and makes an application under sub-section (1) of section 245Q;
(B) an applicant as defined in clause (c) of section 28E of the Customs Act, 1962 (52 of 1962);
(C) an applicant as defined in clause (c) of section 23A of the Central Excise Act, 1944 (1 of 1944);
(D) an applicant as defined in clause (b) of section 96A of the Finance Act, 1994 (32 of 1994);]
(c) "application" means an application made to the Authority under sub-section (1) of section 245Q;

(d) "Authority" means the Authority for Advance Rulings constituted under section 245-O;
(e) "Chairman" means the Chairman of the Authority;
(f) "Member" means a Member of the Authority and includes the Chairman and Vice-chairman;
(g) "Vice-chairman" means the Vice-chairman of the Authority.

245-O. (1) The Central Government shall constitute an Authority for giving advance rulings, to be known as
"Authority for Advance Rulings":
87
[Provided that the Authority shall cease to act as an Authority for Advance Rulings for the purposes of
Chapter V of the Customs Act, 1962 (52 of 1962) on and from the date of appointment of the Customs Authority
for Advance Rulings under section 28EA of that Act.]
87
[(1A) On and from the date of appointment of the Customs Authority for Advance Rulings referred to in the
proviso to sub-section (1), the Authority shall act as an Appellate Authority, for the purpose of Chapter V of the
Customs Act, 1962 (52 of 1962):
Provided that the Authority shall not admit any appeal against any ruling or order passed earlier by it in the
capacity of the Authority for Advance Rulings in relation to any matter under Chapter V of the Customs Act,
1962 (52 of 1962) after the date of such appointment of the Customs Authority for Advance Rulings.]
(2) 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.
(3) A person shall be qualified for appointment as—
(a) Chairman, who has been a Judge of the Supreme Court 88[or the Chief Justice of a High Court or for at
least seven years a Judge of a High Court];
(b) Vice-chairman, who has been Judge of a High Court;
89
[(c) a revenue Member—
(i) from the Indian Revenue Service, who is, or is qualified to be, a Member of the Board; or
(ii) 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 90[on the date of occurrence of vacancy].
(4) The terms and conditions of service and the salaries and allowances payable to the Members shall be such
(5) The Central Government shall provide to the Authority with such officers and employees, as may be
necessary, for the efficient discharge of the functions of the Authority under this Act.
(6) The powers and functions of the Authority may be discharged by its Benches as may be constituted by the
Chairman from amongst the Members thereof.
91
[(6A) In the event of the occurrence of any vacancy in the office of the Chairman by reason of his death,
resignation or otherwise, the senior-most Vice-chairman shall act as the Chairman until the date on which a new
Chairman, appointed in accordance with the provisions of this Act to fill such vacancy, enters upon his office.
(6B) In case the Chairman is unable to discharge his functions owing to absence, illness or any other cause, the
senior-most Vice-Chairman shall discharge the functions of the Chairman until the date on which the Chairman
resumes his duties.]
(7) A Bench shall consist of the Chairman or the Vice-chairman and one revenue Member and one law Member:
92
[Provided that where the Authority is dealing with an application seeking advance ruling in any matter
relating to this Act, the revenue Member of the Bench shall be such Member as referred to in sub-clause (i) of
clause (c) of sub-section (3).]

(8) The Authority shall be located in the National Capital Territory of Delhi and its Benches shall be located at
such places as the Central Government may, by notification specify.

245-OA. Notwithstanding anything contained in this Act, the qualifications, appointment, term of office,
salaries and allowances, resignation, removal and the other terms and conditions of service of the Chairman,
Vice-Chairman and other Members of the Authority appointed after the commencement of Part XIV of Chapter
VI of the Finance Act, 2017, shall be governed by the provisions of section 184 of that Act:
Provided that the Chairman, Vice-Chairman and Member appointed before the commencement of Part XIV of
Chapter VI of the Finance Act, 2017, shall continue to be governed by the provisions of this Act and the rules
made thereunder as if the provisions of section 184 of the Finance Act, 2017 had not come into force.]
245P. No proceeding before, or pronouncement of advance ruling by, the Authority shall be questioned or shall
be invalid on the ground merely of the existence of any vacancy or defect in the constitution of the Authority.

Application for advance ruling.

245Q. (1) An applicant desirous of obtaining an advance ruling under this Chapter 94[95[or under Chapter V of
the Customs Act, 1962 (52 of 1962)] or under Chapter IIIA of the Central Excise Act, 1944 (1 of 1944) or under
Chapter VA of the Finance Act, 1994 (32 of 1994)] may make an application in such form and in such
manner as may be prescribed96, stating the question on which the advance ruling is sought.
(2) The application shall be made in quadruplicate and be accompanied by a fee of ten thousand
rupees or such fee as may be prescribed97 in this behalf, whichever is higher.
(3) An applicant may withdraw an application within thirty days from the date of the application.

Procedure on receipt of application.

245R. (1) On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the
Principal Commissioner or Commissioner and, if necessary, call upon him to furnish the relevant
records:
Provided that where any records have been called for by the Authority in any case, such records shall, as soon
as possible, be returned to the Principal Commissioner or Commissioner.
(2) The Authority may, after examining the application and the records called for, by order, either allow or
reject the application :
Provided that the Authority shall not allow the application 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 sub-clause (iii) of clause (b) of section 245N] 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 sub-clause (iii) of clause (b) of section
245N or in the case of an applicant falling in sub-clause (iiia) of clause (b) of section 245N:
Provided further that no application shall be rejected under this sub-section unless an opportunity
has been given to the applicant of being heard:
Provided also that where the application is rejected, reasons for such rejection shall be given in the order.
(3) A copy of every order made under sub-section (2) shall be sent to the applicant and to the Principal
Commissioner or Commissioner.
(4) Where an application is allowed under sub-section (2), the Authority shall, after examining such further
material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling
on the question specified in the application.
(5) On a request received from the applicant, the Authority shall, before pronouncing its advance ruling, provide
an opportunity to the applicant of being heard, either in person or through a duly authorised representative.
Explanation.—For the purposes of this sub-section, "authorised representative" shall have the meaning assigned
to it in sub-section (2) of section 288, as if the applicant were an assessee.
(6) The Authority shall pronounce its advance ruling in writing within six months of the receipt
of application.
(7) A copy of the advance ruling pronounced by the Authority, duly signed by the Members and certified in the
prescribed manner98 shall be sent to the applicant and to the Principal Commissioner or Commissioner, as soon
as may be, after such pronouncement.

Appellate authority not to proceed in certain cases.

245RR. No income-tax authority or the Appellate Tribunal shall proceed to decide any issue in respect to which
an application has been made by an applicant, being a resident, under sub-section (1) of section 245Q.
Applicability of advance ruling.

245S. (1) The advance ruling pronounced by the Authority under section 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 Principal Commissioner or Commissioner, and the income-tax authorities subordinate
to him, in respect of the applicant and the said transaction.
(2) The advance ruling referred to in sub-section (1) 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.
Advance ruling to be void in certain circumstances.

245T. (1) Where the Authority finds, on a representation made to it by the Principal Commissioner or
Commissioner or otherwise, that an advance ruling pronounced by it under sub-section (6) of section 245R 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 (after excluding the period
beginning with the date of such advance ruling and ending with the date of order under this sub-section) to the
applicant as if such advance ruling had never been made.
(2) A copy of the order made under sub-section (1) shall be sent to the applicant and the Principal Commissioner
or Commissioner.
Powers of the Authority.

245U. (1) 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 (5 of 1908) as are referred to in section 131 of this Act.
(2) The Authority shall be deemed to be a civil court for the purposes of section 195, but not for the purposes of
Chapter XXVI, of the Code of Criminal Procedure, 1973 (2 of 1974) and every proceeding before the Authority
shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purpose of
section 196, of the Indian Penal Code (45 of 1860).
Procedure of Authority.
245V. The Authority shall, subject to the provisions of this Chapter, have power to regulate its own procedure
in all matters arising out of the exercise of its powers under this Act.

C.A. Kalpesh Sanghavi NR Shipping and Air Craft - P a g e | F57-A . 1
Question (SLID 007) (Revision / Home work) (Non Resident Shipping / air crafts 172, 44B, 44BBA)
M/s Global Airlines incorporated as a Company in USA operated its flights to India and vice versa during the
year and collected charges of Rs.125 Lakhs for carriage of passengers and cargo out of which Rs.65 Lakhs were
received in US dollars for the Passenger Fare booked from New York to Mumbai. The total expenses for the
year on operation of such flights were Rs. 195 Lakhs. Income chargeable to tax of the foreign airlines may please
be computed.
Question (ID 032) (Revision / Home work) (Non Resident Shipping / air crafts 172, 44B, 44BBA)
Discuss the following
X, a non-resident, operates an aircraft between Singapore and Chennai. He received the following amounts in
the course of the business of operation of aircraft during the year.
a) Rs. 2 crore in India on account of carriage of passengers from Chennai.
b) Rs. 1 crore in India on account of carriage of goods from Chennai.
c) Rs. 3 crore in India on account of carriage of passengers from Singapore.
d) Rs. 1 crore in Singapore on account of carriage of passengers from Chennai.
The total expenditure incurred by X for the purposes of the business was Rs. 675 crore.
Compute the income of X chargeable to tax in India under the head “Profits and gains of business or profession”
for the assessment.
M/s. Fly Airlines incorporated as a company in UK operated its flights to India and vice versa during the
financial year and collected charges of Rs. 95 lakhs for carriage of passengers and cargo out of which, Rs. 45
lakhs were received in London in Pounds for the passenger fare booked from London to Delhi. The total
expenses for the year on operation of such flights were Rs. 165 lakhs.
Compute the income chargeable to tax of the foreign airlines. (4 marks)

C.A. Kalpesh Sanghavi NR Shipping and Air Craft - P a g e | F57-A . 1
Special provision for computing profits and gains of the business of operation of aircraft in the case of
non-residents.
44BBA. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee,
being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of
the aggregate of the amounts specified in sub-section (2) 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".
(2) The amounts referred to in sub-section (1) shall be the following, namely :—
(a) 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 carriage of passengers, livestock, mail or goods from any place in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the
carriage of passengers, livestock, mail or goods from any place outside India.

C.A. Kalpesh Sanghavi NR Shipping and Air Craft - P a g e | F57-B . 1
The assessee was non-resident shippers. During the relevant years, assessments were made under section 172(4)
in respect of the fright earnings. On regular assessment under section 172(2) as claimed by the assessee the
Assessing Officer, found that the total income assessed was far less than the earlier assessed under section
172(4). So he held that assessee’s were entitled to refunds of the excess amount paid by them. After refunds the
assessee’s claimed interest on excess amount which was turned down by the revenue on the ground that
assessment under section 172(4) could not be said to be payment of advance income-tax. What is your opinion
?
Question (ID 031) (Non Resident Shipping / air crafts 172, 44B, 44BBA)
X (45 years), a non resident, is engaged in the business of shipping. During the previous year, one of the ships
owned by X collects freight as follows:
a) On August 6, a sum of Rs. 40 lakh for shipping goods from Cochin Port (it includes demurrage of Rs. 10,000
and handling charges of Rs. 60,000); and
b) On January 10, a sum of Rs. 25 lakh for shipping goods from Bombay (it is paid to X in New York).
Besides, X collects Rs. 22,70,000 in India on March 31, for shipping goods from Karachi to California. Barring
the cases noted above, X does not have any other income in India. X incurs an expenditure of Rs. 2,40,000 in
India (out of which Rs. 65,000 is paid in cash). X has brought forward loss of Rs. 5,000 from a trading business
in India which has discontinued 3 years back. Compute the tax liability of X.


F56 01 Binding force V.Imp
F56 05 Binding force
F56 06 Pending
F56 10 Pending V.Imp
F57 007 Aircrafts V.Imp

F57 031 Shipping V.Imp

Special provision for computing profits and gains of shipping business in the case of non-residents.
44B. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee,
being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half
per cent of the aggregate of the amounts specified in sub-section (2) 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".
(i) 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 carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the
carriage of passengers, livestock, mail or goods shipped at any port outside India.
Explanation.—For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include
the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage
charges or handling charges or any other amount of similar nature.

Shipping business of non-residents.

172. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this
Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered
by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India.
(2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a half
per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to
any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income
accruing in India to the owner or charterer on account of such carriage.
(3) Before the departure from any port in India of any such ship, the master of the ship shall prepare
and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer
or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that
port since the last arrival of the ship thereat:
Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish
the return required by this sub-section before the departure of the ship from the port and provided the master of
the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other
person on his behalf, the Assessing Officer may, if the return is filed within thirty days of the departure of the
ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this
sub-section.
(4) On receipt of the return, the Assessing Officer shall assess the income referred to in sub-section (2) and
determine the sum payable as tax thereon at the rate or rates in force applicable to the total income
of a company which has not made the arrangements referred to in section 194and such sum shall be payable
by the master of the ship.
(4A) No order assessing the income and determining the sum of tax payable thereon shall be
made under sub-section (4) after the expiry of nine months from the end of the financial year in which the
return under sub-section (3) is furnished:
Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007, such
order shall be made on or before the 31st day of December, 2008.
(5) For the purpose of determining the tax payable under sub-section (4), the Assessing Officer may call for
such accounts or documents as he may require.
(6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly
authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that
satisfactory arrangements have been made for the payment thereof.

(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming
before the expiry of the assessment year relevant to the previous year in which the date of departure of the
ship from the Indian port falls, that an assessment be made of his total income of the previous year
and the tax payable on the basis thereof be determined in accordance with the other
provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers,
livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in
advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount
of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be.
(8) For the purposes of this section, the amount referred to in sub-section (2) shall include the amount paid or
payable by way of demurrage charge or handling charge or any other amount of similar nature.

C.A. Kalpesh Sanghavi NR Oil Exploration Business - P a g e | F58-A . 1
Question (ID 033) (Oil Exploration 44BB)

ONGC has agreements (approved by the Government) with the following three foreign companies which
provide services and facilities to ONGC in connection with prospecting for (or extraction / production of)
mineral oils in India-
A Inc. B Inc. C Inc.

Due of agreement June 10, 1982 June 10, 1992 June 10, 2002
Amount paid by ONGC on account services
90 crore 90 crore 90 crore
provided by foreign companies.
Tax liability borne by ONGC (in Rs.) No Yes Yes
Find out the taxable income and tax liability of the foreign companies. Discuss whether tax liability borne by
ONGC would be perquisite arising to B Inc. and C Inc. under section 28(iv) and would be taxable separately in
addition to income computed under section 44BB. You are also required to ascertain amount of taxes to be paid
by ONGC for C Inc and offer your comments.

44BB. (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in
the case of an assessee, being a non-resident, engaged in the business of providing services or facilities
in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting
for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the
amounts specified in sub-section (2) 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" :
Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or
section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other
income referred to in those sections.
(a) 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 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
(b) 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.
(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than
the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other
documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a
report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make
an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the
sum payable by, or refundable to, the assessee.
(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the
purposes of the said business;
(ii) "mineral oil" includes petroleum and natural gas.

44BBB. (1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an
assessee, being a foreign company, engaged in the business of civil construction or the business of erection
of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project
approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid
or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such
civil construction, erection, testing or commissioning 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".
(2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than
the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other
documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a
report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to
make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and
determine the sum payable by, or refundable to, the assessee.

C.A. Kalpesh Sanghavi HO Expense - P a g e | F58-B . 1
Problem (Head office expense) (ID 34)

The net result of the business carried on by a branch of foreign company in India for the year was a loss of 100
lacs after charge of head office expenses of 200 lacs allocated to the branch. Explain with reasons the income
to be declared by the branch in its return.

Deduction of head office expenditure in the case of non-residents.

44C. Notwithstanding anything to the contrary contained in sections 28 to 43A, 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, namely:—
(a) an amount equal to five per cent of the adjusted total income; or
(b) [***]
(c) 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 :
Provided that in a case where the adjusted total income of the assessee is a loss, the amount under clause (a)
shall be computed at the rate of five per cent of the average adjusted total income of the assessee.
(i) "adjusted total income" means the total income computed in accordance with the provisions of this Act,
without giving effect to the allowance referred to in this section or in sub-section (2) of section 32 or
the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix)
of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-
section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section
74A or the deductions under Chapter VI-A;
(ii) "average adjusted total income" means,—
(a) in a case where the total income of the assessee is assessable for each of the three assessment
years immediately preceding the relevant assessment year, one-third of the aggregate amount of
the adjusted total income in respect of the previous years relevant to the aforesaid three assessment
years;
(b) in a case where the total income of the assessee is assessable only for two of the aforesaid three
assessment years, one-half of the aggregate amount of the adjusted total income in respect of the
previous years relevant to the aforesaid two assessment years;
(c) in a case where the total income of the assessee is assessable only for one of the aforesaid three
assessment years, the amount of the adjusted total income in respect of the previous year relevant
to that assessment year;
(iii) [***]
(iv) "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.

C.A. Kalpesh Sanghavi Withholding Tax - P a g e | F59 . 1
Question (ID 01) (withholding tax)

Indian Co. pays charges for accessing database to a foreign co. This is a regular subscription charge. Whether
amount is to be deducted or not? If yes, under what head?

An Indian consultancy firm pay fees to a NR outside India. For a project outside India. Whether TDS is required
to be deducted? If yes, why?

Capital Gains in case of sale of government securities in India. The NR person was a resident in UAE. DTAA
with UAE, Capital gains taxable in UAE and not India. Should tax be deducted at source?

Satellite rights of a movie are transferred to an Indian Co. The right to use the movie is given for 99 years.
Whether this amounts to sale or payment of royalty to use the satellite rights?

The assessee (employer) paid salary to NR employee with deducting tax at source. The employer then makes
the TDS payment in the next month. Can the expenditure be disallowed by the officer?


Indo Krishna Limited an Indian Company has profit as per profit and loss account 80 lakhs after considering the
following debits and credits to its profit and loss account.
1. In order to create an advertisement campaign it appointed a sports person Mr. Tim Paine an Australian
cricket team captain to endorse the company’s brand and paid Rs. 400,000. Mr. Tim Paine had come to
India for playing the world cup matches in the month of October for 14 days. The amount was paid to
Mr. Tim Paine in India.
2. It has paid to Zombbie Ltd a foreign company on account of transfer of rights of video tapes for use in
connection with television and other tapes for use in connection with radio broadcasting Rs. 600,000.
The agreement for transfer for right was entered in to Malaysia. This tapes will be used for advertisement
broadcasting of the company’s product.
3. It has taken a premises on hire at Mumbai BKC from Swastik Limited an Indian Company, for which
the rent is Rs. 10,00,000 per annum. The rent was remitted to London in HSBC bank account of swastika
Limited.
4. It has appointed an Indian Company Classic Printers Limited as its premier supplier for printed material
like letter heads, visiting cards, printed brochures etc. Aggregate payment to classic Printers limited for
the printed material during the year is 10,00,000.
5. It has paid salary to its CEO 18,00,000 per annum, however CEO has paid the advance tax accordingly
on his own and filed the return of return of income and tax there on has already been paid adequately.
Tax has not been deducted on the above transactions. You are required to compute the total income of Indo
Krishna Limited.

195. (1) 86Any person responsible for paying to a non-resident, not being a company, or to a foreign
company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or
any other sum chargeable under the provisions of this Act not being income chargeable under the head
"Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment
thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-
tax thereon at the rates in force :
Provided that in the case of interest payable by the Government or a public sector bank within the
meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause,
deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque
or draft or by any other mode :
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-
O.
Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any
account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of
account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to
the account of the payee and the provisions of this section shall apply accordingly.
Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section
(1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall
be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident
person has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary)
to a non-resident considers that the whole of such sum would not be income chargeable in the case of the
recipient, he may make an application to the Assessing Officer to determine, by general or special
order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be
deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules87 made under sub-section (5), any person entitled to receive any interest or other
sum on which income-tax has to be deducted under sub-section (1) may make an application in the
prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such
interest or other sum without deduction of tax under that sub-section, and where any such certificate is
granted, every person responsible for paying such interest or other sum to the person to whom such certificate
is granted shall, so long as the certificate is in force, make payment of such interest or other sum without
deducting tax thereon under sub-section (1).

(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period
specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such
cancellation.
(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification
in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an
application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which
such certificate may be granted and providing for all other matters connected therewith.
(6) The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum,
whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of
such sum, in such form and manner, as may be prescribed.88
(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification
in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-
resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions
of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the
appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section
(1) on that proportion of the sum which is so chargeable.

Requirement to furnish Permanent Account Number.

206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to
receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter
referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting
such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the
following rates, namely:—
(i) at the rate specified in the relevant provision of this Act; or

(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent.
(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid
unless the person furnishes his Permanent Account Number in such declaration.
(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in
accordance with the provisions of sub-section (1).
(4) No certificate under section 197 shall be granted unless the application made under that section contains the
Permanent Account Number of the applicant.
(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same
in all the correspondence, bills, vouchers and other documents which are sent to each other.
(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee,
it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the
provisions of sub-section (1) shall apply accordingly.
(7) The provisions of this section shall not apply to a non-resident, not being a company, or to a
foreign company, in respect of—
(i) payment of interest on long-term bonds as referred to in section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.]

Relaxation from deduction of tax at higher rate under section 206AA.

37BC. (1) In the case of a non-resident, not being a company, or a foreign company (hereafter referred
to as 'deductee') and not having permanent account number the provisions of section 206AA shall not apply in
respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of
any capital asset, if the deductee furnishes the details and the documents specified in sub-rule (2) to the
deductor.
(2) The deductee referred to in sub-rule (1), shall in respect of payments specified therein, furnish
the following details and documents to the deductor, namely:—
(i) name, e-mail id, contact number;
(ii) address in the country or specified territory outside India of which the deductee is a resident;
(iii) a certificate of his being resident in any country or specified territory outside India from the
Government of that country or specified territory if the law of that country or specified territory
provides for issuance of such certificate;
(iv) Tax Identification Number of the deductee in the country or specified territory of his residence and in
case no such number is available, then a unique number on the basis of which the deductee is identified
by the Government of that country or the specified territory of which he claims to be a resident.]

Rates for tax deduction at source
Particulars TDS Rates (in %)
1. In the case of a person other than a company
1.1 where the person is resident in India-
Section 192: Payment of salary Normal Slab Rate
Section 192A: Payment of accumulated balance of provident fund which is taxable 10

in the hands of an employee.
Section 193: Interest on securities
a) any debentures or securities for money issued by or on behalf of any local 10
authority or a corporation established by a Central, State or Provincial Act;
b) any debentures issued by a company where such debentures are listed on a 10
recognised stock exchange in accordance with the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and any rules made thereunder;
c) any security of the Central or State Government; 10
[i.e. 8% Savings (Taxable) Bonds, 2003 and 7.75% Saving (Taxable) Bonds, 2018]
d) interest on any other security 10
Section 194A: Income by way of interest other than "Interest on securities" 10
Section 194B: Income by way of winnings from lotteries, crossword puzzles, card 30
games and other games of any sort
Section 194BB: Income by way of winnings from horse races 30
Section 194C: Payment to contractor/sub-contractor

a) HUF/Individuals 1
b) Others 2
Section 194D: Insurance commission 5
Section 194DA: Payment in respect of life insurance policy 1
Section 194EE: Payment in respect of deposit under National Savings scheme 10
Section 194F: Payment on account of repurchase of unit by Mutual Fund or Unit 20

Trust of India
Section 194G: Commission, etc., on sale of lottery tickets 5

Section 194H: Commission or brokerage 5
Section 194-I: Rent

a) Plant & Machinery 2
b) Land or building or furniture or fitting 10
Section 194-IA: Payment on transfer of certain immovable property other than 1

agricultural land
Section 194-IB:Payment of rent by individual or HUF not liable to tax audit 5

Note: This provision is applicable from June 1, 2017
Section 194-IC:Payment of monetary consideration under Joint Development 10

Agreements
Section 194J: Any sum paid by way of 10

a) Fee for professional services,
b) Fee for technical services
c) Royalty,
d) Remuneration/fee/commission to a director or
e) For not carrying out any activity in relation to any business
f) For not sharing any know-how, patent, copyright etc.
Note: With effect from June 1, 2017 the rate of TDS would be 2% in case of payee
engaged in business of operation of call center.
Section 194LA: Payment of compensation on acquisition of certain immovable 10

property
Note: With effect from April 1, 2017, no deduction of tax shall be made on any
payment which is exempt from levy of income-tax under Right to Fair
Compensation Act, 2013.
Section 194LBA(1): Business trust shall deduct tax while distributing, any interest 10
received or receivable by it from a SPV or any income received from renting or
leasing or letting out any real estate asset owned directly by it, to its unit holders.
Section 194LBB: Investment fund paying an income to a unit holder [other than 10
income which is exempt under Section 10(23FBB)]
Section 194LBC: Income in respect of investment made in a securitisation trust 25% in case of
(specified in Explanation of section115TCA) Individual or HUF
30% in case of other
person
Any Other Income 10
1.2 where the person is not resident in India*-

Section 192: Payment of Salary Normal Slab Rate
Section 192A: Payment of accumulated balance of provident fund which is taxable 10

in the hands of an employee.
Section 194E: Payment to non-resident sportsmen/sports association 20
Section 194EE: Payment in respect of deposits under National Savings Scheme 10
Section 194F:Payment on account of repurchase of unit by Mutual Fund or Unit 20

Trust of India
Section 194LB: Payment of interest on infrastructure debt fund 5
Section 194LBA(2): Business trust shall deduct tax while distributing any interest 5
income received or receivable by it from a SPV to its unit holders.
Section 194LBA(3): Business trust shall deduct tax while distributing any income 30
received from renting or leasing or letting out any real estate asset owned directly
by it to its unit holders.
income which is exempt under Section 10(23FBB)].
Section 194LBC: Income in respect of investment made in a securitisation trust 30
(specified in Explanation of section115TCA)
Section 194LC: Payment of interest by an Indian Company or a business trust in 5
respect of money borrowed in foreign currency under a loan agreement or by way
of issue of long-term bonds (including long-term infrastructure bond)
Note: With effect from April 1, 2018 benefit of such concessional TDS rate has
been further extended by three years. Now TDS at concessional rate of 5% will be
applicable for borrowings made before July 1, 2020.
Section 194LD: Payment of interest on rupee denominated bond of an Indian 5

Company or Government securities to a Foreign Institutional Investor or a
Qualified Foreign Investor
Section 195: Payment of any other sum to a Non-resident

a) Income in respect of investment made by a Non-resident Indian Citizen 20

b) Income by way of long-term capital gains referred to in Section 115E in case of 10

a Non-resident Indian Citizen
c) Income by way of long-term capital gains referred to in sub-clause (iii) of clause 10
(c) of sub-Section (1) of Section 112
d) Income by way of long-term capital gains as referred to in Section 112A 10
e) Income by way of short-term capital gains referred to in Section 111A 15
f) Any other income by way of long-term capital gains [not being long-term capital 20
gains referred to in clauses 10(33), 10(36) and 112A
g) Income by way of interest payable by Government or an Indian concern on 20
moneys borrowed or debt incurred by Government or the Indian concern in foreign
currency (not being income by way of interest referred to in Section
194LB or Section 194LC)
h) Income by way of royalty payable by Government or an Indian concern in 10
pursuance of an agreement made by it with the Government or the Indian concern
where such royalty is in consideration for the transfer of all or any rights (including
the granting of a licence) in respect of copyright in any book on a subject referred
to in the first proviso to sub-section (1A) of Section 115A of the Income-tax Act,
to the Indian concern, or in respect of any computer software referred to in the
second proviso to sub-section (1A) of Section 115A of the Income-tax Act, to a
person resident in India
i) Income by way of royalty [not being royalty of the nature referred to point g) 10
above E] payable by Government or an Indian concern in pursuance of an
agreement made by it with the Government or the Indian concern and where such
agreement is with an Indian concern, the agreement is approved by the Central
Government or where it relates to a matter included in the industrial policy, for the
time being in force, of the Government of India, the agreement is in accordance
with that policy
j) Income by way of fees for technical services payable by Government or an 10
Indian concern in pursuance of an agreement made by it with the Government or
the Indian concern and where such agreement is with an Indian concern, the
agreement is approved by the Central Government or where it relates to a matter
included in the industrial policy, for the time being in force, of the Government of
India, the agreement is in accordance with that policy
k) Any other income 30
Section 196B: Income from units (including long-term capital gain on transfer of 10
such units) to an offshore fund
Section 196C: Income from foreign currency bonds or GDR of an Indian company 10
(including long-term capital gain on transfer of such bonds or GDR)

Section 196D: Income of foreign Institutional Investors from securities (not being 20
dividend or capital gain arising from such securities)
2. In the case of a company-
2.1 where the company is a domestic company-
Section 193: Interest on securities

a) any debentures or securities for money issued by or on behalf of any local 10
authority or a corporation established by a Central, State or Provincial Act;
b) any debentures issued by a company where such debentures are listed on a 10
recognised stock exchange in accordance with the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and any rules made thereunder;
c) any security of the Central or State Government; 10
[i.e. 8% Saving (Taxable) Bonds, 2003 and 7.75% Saving (Taxable) Bonds, 2018]
d) interest on any other security 10
Section 194: Dividend 10
Section 194A: Income by way of interest other than "Interest on securities" 10
Section 194C: Payment to contractor/sub-contractor

a) HUF/Individuals 1
b) Others 2
Section 194D: Insurance commission 10
Section 194DA: Payment in respect of life insurance policy 1
Section 194EE: Payment in respect of deposit under National Savings scheme 10
Section 194F: Payment on account of repurchase of unit by Mutual Fund or Unit 20

Trust of India
Section 194H: Commission or brokerage 5
Section 194-I: Rent

a) Plant & Machinery 2

b) Land or building or furniture or fitting 10
Section 194-IA:Payment on transfer of certain immovable property other than 1

agricultural land
Section 194-IC:Payment of monetary consideration under Joint Development 10

Agreements
Section 194J: Any sum paid by way of 10
a) Fee for professional services,
b) Fee for technical services
c) Royalty,
d) Remuneration/fee/commission to a director or
e) For not carrying out any activity in relation to any business
f) For not sharing any know-how, patent, copyright etc.
Note: With effect from June 1, 2017 the rate of TDS would be 2% in case of payee
engaged in business of operation of call center.
Section 194LA: Payment of compensation on acquisition of certain immovable 10

property
Note: With effect from April 1, 2017, no deduction of tax shall be made on any
payment which is exempt from levy of income-tax under Right to Fair
Compensation Act, 2013.
Section 194LBA(1): Business trust shall deduct tax while distributing, any interest 10
received or receivable by it from a SPV or any income received from renting or
leasing or letting out any real estate asset owned directly by it, to its unit holders.
income which is exempt under Section 10(23FBB)] .
Any Other Income 10
2.2 where the company is not a domestic company*-
Section 194E: Payment to non-resident sports association 20
Section 194LB: Payment of interest on infrastructure debt fund 5

Section 194LBA(2): Business trust shall deduct tax while distributing any interest 5
income received or receivable by it from a SPV to its unit holders.
Section 194LBA(3): Business trust shall deduct tax while distributing any income 40
received from renting or leasing or letting out any real estate asset owned directly
by it to its unit holders.
income which is exempt under Section 10(23FBB)].
Section 194LC: Payment of interest by an Indian Company or a business trust in 5
respect of money borrowed in foreign currency under a loan agreement or by way
of issue of long-term bonds (including long-term infrastructure bond)
Section 194LD:Payment of interest on rupee denominated bond of an Indian 5

Company or Government securities to a Foreign Institutional Investor or a
Qualified Foreign Investor
Section 195: Payment of any other sum

a) Income by way of long-term capital gains referred to in sub-clause (iii) of clause 10
(c) of sub-section (1) of Section 112
b) Income by way of long-term capital gains as referred to in Section 112A 10
c) Income by way of short-term capital gains referred to in Section 111A 15
d) Any other income by way of long-term capital gains [not being long-term capital 20
gains referred to in clauses 10(33), 10(36) and 112A
e) Income by way of interest payable by Government or an Indian concern on 20
moneys borrowed or debt incurred by Government or the Indian concern in foreign
currency (not being income by way of interest referred to in Section
194LB or Section 194LC)
f) Income by way of royalty payable by Government or an Indian concern in 10
pursuance of an agreement made by it with the Government or the Indian concern
after the 31st day of March, 1976 where such royalty is in consideration for the
transfer of all or any rights (including the granting of a licence) in respect of
copyright in any book on a subject referred to in the first proviso to sub-section
(1A) of Section 115A of the Income-tax Act, to the Indian concern, or in respect

of any computer software referred to in the second proviso to sub-section (1A)

of Section 115A of the Income-tax Act, to a person resident in India
g) Income by way of royalty [not being royalty of the nature referred to in point e)
above C] payable by Government or an Indian concern in pursuance of an
agreement made by it with the Government or the Indian concern and where such
agreement is with an Indian concern, the agreement is approved by the Central
Government or where it relates to a matter included in the industrial policy, for the
time being in force, of the Government of India, the agreement is in accordance
with that policy—
A. where the agreement is made after the 31st day of March, 1961 but before the 50
1st day of April, 1976
B. where the agreement is made after the 31st day of March, 1976 10
h) Income by way of fees for technical services payable by Government or an
Indian concern in pursuance of an agreement made by it with the Government or
the Indian concern and where such agreement is with an Indian concern, the
agreement is approved by the Central Government or where it relates to a matter
included in the industrial policy, for the time being in force, of the Government of
India, the agreement is in accordance with that policy—
A. where the agreement is made after the 29th day of February, 1964 but before 50
the 1st day of April, 1976
B. where the agreement is made after the 31st day of March, 1976 10
i) Any other income 40
Section 196B: Income from units (including long-term capital gain on transfer of 10
such units) to an offshore fund
Section 196C: Income from foreign currency bonds or GDR of an Indian company 10
(including long-term capital gain on transfer of such bonds or GDR)
Section 196D: Income of foreign Institutional Investors from securities (not being 20
dividend or capital gain arising from such securities)
__________________________
* The rate of TDS shall be increased by applicable surcharge and Health & Education cess.

C.A. Kalpesh Sanghavi Equilisation Levy - P a g e | F60-A . 1
Problem (Equilisation Levy) (ID 01)
ABC Ltd. Indian company is carrying on the business of manufacture and sale of teakwood furniture under the
brand name PUREWOOD In order to expand its overseas sales/exports. It launched a massive advertisement
campaign of its products. For the purpose of online advertisement, it utilized the services of PQR Inc., A London
based company During the previous year, ABC Ltd. paid 5 lakhs to PQR Inc. for such services. Discuss the tax
implications of such payment and receipt in the hands of ABC Ltd. and PQR lnc, respectively, if
(I) PQR Inc. has no permanent establishment in India

(ii) PQR Inc. has a permanent establishment in india
Problem (Equilisation Levy) (ID 02)

Nikanu Ltd. is an Indian Company involved in manufacturing and trading in cotton garments under the brand
name “PCOTT”. In order to expand its exports sale, it launched a massive publicity campaign in overseas
market. For the purpose of online advertising it hired the Sky Inc., a New York based company which has no
permanent establishment in India and paid Rs. 10 lakh for its services in the previous year.
Discuss the tax and TDS implication of such transaction both in the hands of Nikanu Ltd. and Sky Inc. (3 marks)

C.A. Kalpesh Sanghavi Black Money Act - P a g e | F60-B . 1
Problem (BM act ID 01)
Mr. Ram Resident in India aged 35 years has following foreign assets which have not been disclosed for the
purpose of income tax act. He owns a building in Cayman Islands purchased in 1992 for 65 million US dollars
(exchange rate at time of acquisition $ = Rs 32) and brokerage was paid at time of acquisition @ 2 % to a Irish
Broking company. Mr. Ram has one Russian Girlfriend Mrs. Dubari apart from his wife Sita in India. Mrs.
Dubari oftenly comes to cayman islands and spends time with Mr. Ram however Mrs. Dubari did not like the
interior of the Building and thus on her request Mr. Ram Spend 1 million Dollar (exchange rate at that time $ =
38) on interior of building in 2001. Assessing officer has come to notice of the asset during the July of previous
year. Market value of the Building on 1st April of PY (exchange rate is $=64) is 105 million US dollars and 108
million US dollar on 31st March of PY (exchange rate is $=65). You are required to discuss the tax treatment of
same from BM act point of view.
Mr. Jyotinder resident Aged 42 years is a partrner in a firm registered in British Virgin Islands. Mr. Jyotinder
and Mr. Juntao of China are partners and sharing profit and losses in ratio of 60:40. Mr. Jyotinder has not
disclosed this interest in firm to income tax authorities in India. The balancesheet of firm on 31st March of PY
in Euro Millions is given below. You are required to ascertain tax liablity to be paid by Jyotinder under BM act.
31st March 31st March

Capital and Reserves
Mr. Jyotinder 100 Drawing and Paintings (MV 120) 50
Mr. Juntao 120 Buildings in Panama Islands (MV 160) 30
Bank account in HSBC 10
Other assets (MV 165) 130
Total 220 Total 220
Following addition information is available:-
Market Value of Drawing and Paintings as at 01st April of PY is 110

Market Value of buildings in Panama Islands as at 01st April of PY is 150
Bank account in HSBC represents total deposits of 112 and total withdrawal of 102 over period of last 7 years
since date of its opening.
Exchange Rate of Euro = 95 (1st April of PY)
Exchange Rate of Euro = 96 (31st March of PY)
CA Final Taxation Exclusive Place for Pen Drive Classes

Mr. Rajest Aged 42 Resident in India acquired house property at British Virgin Islands located outside India in
1997 for twenty million USD. It was sold in 2001 for twenty five million USD which were deposited in a foreign
bank account (BA). In 2002 another house property at Caymans Island was bought for thirty million USD. The
investment in property at Caymans Island was made through withdrawal from HSBC bank account (BA) in
Singapore. House at cayman’s islands has not been transferred before the valuation date and its value on the
valuation date is 62 million USD. Assuming that the value of BA as computed under Rule 3(1)(e) is seventy
million USD, find out the fair market value (FMV) of the assets. Exchange rate on 01/04/PY is 70 and on
31/03/PY is 71.
A house property located outside India was acquired by Mr. Thoprani a resident in India during the previous
year 2009-10 for fifty million USD. Out of the investment of fifty million USD, twenty million USD was
assessed to tax in the total income of the previous year 2009-10 and earlier years. Such undisclosed asset comes
to the notice of the Assessing Officer in the previous year. If the value of the asset in the previous year is 200
million USD, find out the amount chargeable to tax. Exchange rate on 01/04/PY is 70 and on 31/03/PY is 71.
 Mr. Imran a Heart Surgeon Resident in India. In the year 2010, he operated on a foreign patient in India. The
NR patient directly deposits Rs. 10 lakhs to the credit of the doctor in a Swiss bank. In the year 2014, Dr. went
abroad and spent away entire amount. You are required to give your answer in light of BM act.

Mr. Ritesh a resident in India is found to be operating a foreign bank account and following are the details of
his bank account right from it opening it. The bank account has come to the notice of the assessing officer on
13th July of previous year. The amount represent USD thousands.
Swiss Bank Account Deposit Withdrawal Balance

Opening balance (newly opened account in 2012) Nil
Cash Deposit 10,000 10,000
Acquired shares of Company X (foreign Company) 6,400 3,600
Clearing 3,000 6,600
Acquired Paintings in Macau Islands 2,500 4,100
Bank Charges 2 4,098
Interest / Dividend Income. 12 4,110
Market Value of shares of Company X as per Rule 3 is 7,500 thousand USD.

Market Value of Painting as per Rule 3 is 3,500 thousand USD.
Exchange rate on 01/04/PY is 70 and on 31/03/PY is 71.
You are required to

1. Compute the tax liability under the BM act.
2. Suppose instead of acquiring the shares of company X he would have acquired Property in China at total
cost of 10,000 partly funded from above bank account and other disclosed assets in India. The market
value of property as per the report of registered valuer is 20,000.
Mr. Rajaram Aged 51 Resident in India acquired house property at Hong Kong in 2008 for 18 million USD. It
was sold in 2012 for 25 million USD which were deposited in a foreign bank account HSBC (BA). However
the sale price was for inadequate consideration and fair value of selling price is 35 million USD. The sale price
was received partly in cash and bank. 10 million USD was deposited in bank account (BA). Assuming that the
value of BA as computed under Rule 3(1)(e) is 73 million USD, find out the fair market value (FMV) of the
assets. Exchange rate on 01/04/PY is 70 and on 31/03/PY is 71.


F58 33 NR Oil exploration
F60-A 01 Equilisation levy
F60-B 02 Firm V.Imp

06 Bank account V.Imp

C.A. Kalpesh Sanghavi MCQ (international Taxation) - P a g e | F61. 1
Multiple Choice Question (ID MCQ-0001)

Mr. Abhinav, a citizen of India, aged 48 years, for the first time, moved for employment purpose to Country X,
a country outside India, on 1 September, 2013. He was employed with a consulting firm in Country X. Since
then, he has visited India during the P.Y. 2013-14, 2014-15. 2015-16. 2016-17, 2017-18 for 30 days, 50 days,
50 days, 170 days and 150 days. respectively, for both personal and professional purposes. His family consist
of himself, his spouse Mrs. Archana aged 45 years; his mother, Mrs. Kamala (aged 81 years); and his two sons,
Rohan and Kapil, aged 19 years and 15 years, respectively. In addition, Mr. Abhinavs unmarried sister Ms.
Geetha, aged 42 years, is living with his family in Country X since September, 2013, Ms. Geetha and Mrs.
Kamala have been visiting India during the P.Y. 2013-14, 2014-15, 2015-16, 2016-17, 2017-18 for 50 days, 50
days, 120 days, 150 days and 150 days, respectively.
Based on the above facts, Mr. Abhinav’s residential status in India for P.Y. 2017-18 and P.Y. 2013-14 is –
(a) Non-resident for both the years

(b) Non-resident for P.Y.2017-18 and Resident but not ordinarily resident for P.Y.2013-14
(c) Resident but not ordinarily resident for P.Y.2017-18 and Resident for P.Y.2013-14
(d) Non-resident for P.Y.2017-18 and Resident and ordinarily resident for P.Y.2013-14.
(Note — Assume that the rules for determining residential status for all the years is same as that of PY.)
hard-core basics

Based on the facts of MCQ-0001,
Which of the following benefits are not allowable to Ms. Geetha, while computing her total income and tax
liability under the Income-tax Act ?
(a) Deduction of 30 % of gross annual value while computing her income from house property in Bangalore,
India
(b) Tax rebate of NR 2,500 from tax payable on her total income of INR 340,000
(c) Deduction for donation made by her to Prime Minister’s National Relief Fund
(d) Deduction for interest earned by her on NRO savings account.
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Unexhausted basic exemption limit, if any, of Mr. Thomas who stay in India for 36 days for every year since
last 10 years, for can be adjusted against —
(a) Only LTCG taxable@20%
(b) Only STCG taxable@15%
(c) Both (a) and (b)
(d) Neither (a) nor (b)

Had Ms. Geetha been seconded on employment outside India by the Indian Government, which of the following
emoluments paid to her by the Indian Government shell be taxable under the income tax Act, 1961:
(a) Basic Salary paid outside India
(b) Allowances and Perquisites paid outside India
(c) Both (a) and (b), since emoluments are paid to her by the Indian Government
(d) Neither (a) nor (b), since she has rendered services outside India

Ms. Geetha is an enthusiastic sports person and is keen on contributing an article on a game of Soccer in a
leading newspaper in India. She approaches you to enquire on taxability of such income. As per the provisions
of Income-tax Act, 1961, such income shall be taxable in her hands at -
(a) 5%
(b) 10%
(c) 20%
(d) Normal tax slab rates
(Note — The above tax rates are excluding cess and surcharge. if any)

Ms. Geetha shall be mandatorily required to file return of income in India -
(a) if she holds assets outside India even though she does not have taxable income in India
(b) if she has income exceeding the basic exemption limit but after taking into account deduction under Chapter
VI-A, her income falls below the basic exemption limit
(c) if she has income, without giving effect to deduction under Chapter VI-A, below the basic exemption limit
and tax credit appearing in Form 26AS, in respect of which she does not wish to claim the refund
(d) in all the above situations
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In December 4 years back Ms. Geetha bought, in foreign currency, 500 Global Depository Receipts of PQR Ltd.
an Indian Company, which were issued in accordance with the notified scheme of the Central Government. In
January, she sold 300 GDRs outside India to Mr Frank, a citizen and resident of Country ‘X’ and 200 GDRs to
Mr. Kamal, a Resident but not ordinarily resident in India Comment on the tax consequences of such sale
transaction under the Income-tax Act, 1961 -
(a) Capital gains arising on sale of 500 GDRs shall be subject to tax @20% with indexation benefit in India
(b) No capital gains would arise on sale of 500 GDRs in India. since the GDRs are purchased in foreign currency
(c) No capital gains would arise on sale of 300 GDRs, but capital gains arising on sale of 200 GDRs shall be
taxed in India @10% without indexation benefit
(d) No capital gains would arise on sale of 300 GDRs, but capital gains arising on sale of 200 GDRs shall be
taxed @20% with indexation benefit in India

Benefit of presumptive taxation under the Income-tax Act, 1961 would not be available to Mr. George (non-
resident) for, in respect of the related Indian income, if he is engaged in the business of -
(a) Operation of Ships
(b) Operation of Aircrafts
(c) Civil Construction in connection with an approved turnkey project
(d) Plying, hiring or leasing of goods carriages.

Interest income earned by Mr. George (non-resident) on bonds, issued by MNO Ltd., an Indian company, under
a scheme notified by the Central Government. which were purchased by him in convertible foreign currency, is
-
(a) taxable@10%
(b) taxable@15%
(c) taxabie@20%
(d) not taxable
(Note — the above tax rates are excluding cess and surcharge, if any)

An agent, in relation to income which is deemed to accrue or arise in India to a non-resident, is considered as a
representative assessee. However, an agent, in relation to a non-resident person does not include -
(a) An employed in India of the non-resident
(b) A trustee in India of the non-resident
(c) A broker in India dealing with the non-resident person only through a non-resident broker, where both non-
residents carry on transactions in the ordinary course of business
(d) A person in India having business connection with the non-resident
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The provisions relating to limitation of interest deduction in respect of debt issued by a non-resident associated
enterprise are not applicable to an Indian company engaged in the business of:
(a) Information Technology
(b) Banking and Insurance
(c) Bio-technology
(d) Aviation

The provisions relating to limitation of interest deduction in respect of debt issued by a non-resident associated
enterprise would not apply where the expenditure by way of interest or similar nature is –
(a) 2.10 crore
(b) 2 crore
(c) 1.50 crore
(d) 1 crore

A Ltd. an Indian company was incorporated in the year 2008. It is a wholly owned subsidiary of A Inc., USA.
A Ltd. is engaged in the business of manufacturing and selling virtual reality cameras. During the previous year,
A Ltd. entered into various transactions with the following enterprises for purchase of raw materials, use of
technology and sale of finished goods, The earnings before interest, dividend, tax and amortization of A Ltd for
Financial year is 100 crores. The details of the transactions entered into by A Ltd. During the year are given
hereunder:
Crores
1 Purchase of Raw material AA Ltd China 80
2 Payment of Royalty A Inc. USA 5
3 Sale of finished goods AAA Limited Taiwan 50
4 Interest Free Loan Obtained A Pty Singapore 50
Prior to financial year, A Ltd. had obtained loan of 200 crores @ 8% from A LLC, Cyprus in April 2 years back.
Interest of 16 crores paid to A LLC, Cyprus on the loan of 200 crores, which constituted 52% of the total assets
of A Ltd. A Ltd. obtained loan of 100 crores from Bank of Chennai, India based on a guarantee provided by A
Inc., USA. Interest of 8 crores paid on such loan and guarantee fee of 50 lacs paid to A Inc., USA. 90% of raw
materials required by A Ltd. is supplied by AA Ltd., China.
Which of the following enterprises are associated enterprises or deemed associated enterprises of A Ltd.?
(a) A Inc., USA: A LLC. Cyprus; and AAA Ltd., Taiwan.
(b) A Inc., USA: A LLC. Cyprus; and A Pty. Singapore.
(c) A Inc., USA: A LLC. Cyprus; and AA Ltd., China.
(d) A Inc., USA: AA Ltd., China: and A Pty, Singapore,
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In respect of any payment made to a person located in a Notified Jurisdictional Area (NJA) tax is deductible at
higher of the rate specified in the Income-tax Act 1961 or rates in force or-
(a) 10%
(b) 15%
(c) 20%
(d) 30%

A Ltd. has a wholly owned subsidiary in Sri Lanka, and it extends corporate guarantee to the said non-resident
subsidiary. If the amount guaranteed is 95 crore, the Assessing Officer has to accept the guarantee fee declared
by A Ltd, if the guarantee fee declared is -
(a) 47.50 lakhs
(b) 90 Lakhs
(c) 95 Lakhs
(d) Either (a) or (b)

If A Ltd. does not furnish transfer pricing report, what would be the quantum of penalty imposable under the
Income-tax Act, 1961 for such a failure ?
(a) 1% of the value of international transaction
(b) 2% of the value of international transaction
(e) 1 crore — fixed penalty
(d) 1 lakh—fixed penalty

Interest paid to non-resident associated enterprise disallowed under the relevant provision of the Income-tax
Act. 1961, during the A.Y. 2018-19 can be carried forward up to
(a) A.Y.2022-23
(b) A.Y.2023-24
(c) A.Y.2026-27
(d) Indefinitely

In a case where primary adjustment to transfer price is made suo moto by A Ltd. the time limit for repatriation
of “excess money” is -
(a) 60 days from 30th September of the Assessment Year
(b) 90 days from 30th September of the Assessment Year
(c) 60 days from 30th November of the Assessment Year
(d) 90 days from 30th November of the Assessment Year
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If the excess money is not repatriated. A Ltd. has to make secondary adjustment in A.Y. 2018-19, if the primary
adjustment to transfer price, made by it suo moto in its return of income, is in respect of-
(a) A.Y.2016-17 and the amount of primary adjustment is 2 crores.
(b) A.Y.2017-18 and the amount of primary adjustment is 1 crore
(c) A.Y.2017-18 and the amount of primary adjustment s 1.05 crore
(d) A.Y.2018-19 and the amount of primary adjustment is 1 crore.

Which of the following approaches does India follow in relation to secondary adjustments?
(a) Deemed equity approach
(b) Deemed dividend approach
(c) Deemed loan approach
(d) Either (a) or (c)
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Mr. Harry Smith, a citizen and resident of Country Y and a swimmer came to India for participation in
international swimming competition held in New Delhi. He came to New Delhi on 5th February and left on 30th
March, for Country Y. He received Rs. 15 lakhs for participation in competitions in India. He also received Rs.
2 Lakh from XYZ Ltd. for advertisement of a product, namely shaving cream, on television, He contributed
articles related to swimming in a newspaper for which he received Rs. 20,000. He incurred Rs.1 lakh as his
travel costs to India. All other expenses were met by his sponsors. When he stayed in India, he also won a prize
of Rs. 25,000 from horse racing in Mumbai. He has no other income in India during the year. He wants to know
his tax liability in India. He also wants to know whether he has to file return of income in India.
Mr. Harry Smith has a sister Ms. Rita Smith and a brother Mr. Austin Smith, who are also citizens and residents
of Country Y. Ms. Rita Smith is a pop singer who accompanied Mr. Harry Smith to India in February-March,.
She earned Rs. 2 Lakhs from music performances given by her in India during that period. She has no other
Income In India during the year. Mr. Harry Smith wants to know Ms. Rita Smith’s tax liability in India and
whether she has to file her return of income in India.
In respect of income earned by Mr. Harry Smith in India —

(a) Tax is deductible at source at the rates in force under section 195
(b) Tax is deductible at source @30% plus cess on income from horse races and at the rates in force under
section 195 on other income.
(c) Tax is deductible at source @30% plus cess on income from horse races and @20% plus cess on other
income
(d) Tax is deductible at source@30% plus cess on income from horse races and income from advertisement of
a product on TV, 20% plus cess on income from participation in international swimming competition in India
and no tax is deductible at source on income from contribution of articles relatin9 to swimming in India.

Based on Facts of MCQ-0021
Assuming that the tax deductible at source. If any, has been fully deducted, does Mr. Harry Smith and Ms. Rita
Smith have to file return of income in India?
(a) Yes, because they have earned income in India which is chargeable to tax as per the provisions of the Income-
tax Act, 1981.
(b) No, because tax deductible at source has been fully deducted from income earned by them in India
(c) Harry Smith has to file his return of income but Rita Smith need not file her return of income
(d) Rita Smith has to file her return of income but Harry Smith need not file his return of income
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Based on Facts of MCQ-0021
If Harry Smith had been a match referee instead of a swimmer, then, in respect of income earned by him in India
(assuming the other facts remain the Same) -
(a) Tax is deductible at source at the rates in force under section 195
(b) Tax is deductible at source @ 30% plus cess on income from horse races and at the rates in force under
section 195 on other income,
(c) Tax is deductible at source@ 30% plus cess on income from horse races and @20% plus cess on other
income
(d) Tax is deductible at source 30% plus cess on income from horse races and advertisement of a product on
TV, 20% plus cess on Income from participation in international swimming competition in India and no tax is
deductible at source on income from contribution of articles in India.

MNO Ltd., a company having registered head office in Country X, for the first time, carried out operations
during the year of purchase of goods in India on three occasions. Immediately after purchase, the company
exported the same to China. The total value of such exports was Rs. 85 lakhs, on which it earned profits of Rs.
15 lakhs, before the expenses of Rs. 8 lakhs, which were directly paid by H.O. The company does not carry on
any other operation in India and its board meetings are held in Country X and key management and commercial
decisions for the conduct of the company’s business as a whole are taken in such board meetings. The company
wants to know its tax liability in India.
(a) resident in India, since it has carried on the operation of purchase of goods in India
(b) non-resident in India. since its registered head office is in Country X
(c) non-resident in India. since key management decisions are taken in Country X
(d) non-resident in India, due to reasons stated in (b) and (c) above.
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M/s. Pacific Airlines, incorporated as a company in Country Y. operated its flights to India and vice versa during
the year and collected charges of Rs. 280 crores for carnage of passengers and cargo out of which Rs. 100 crores
were received in Country Y Dollars for the passenger fare from Country Y to Delhi. Out of Rs. 100 crores,
Country Y dollars equivalent to Rs. 40 crores is received in India. The total expenses for the year on operation
of such flights were Rs. 11 crores. The company wants to know its income chargeable to tax in India and the
rate at which such income would be subject to tax.
The effective rate of income-tax applicable on total income of M/s. Pacific Airlines is —
(a) 42.024%
(b) 44.084%
(c) 43.960%
(d) none of the above

M/s. Hari om & Co.. an Indian firm, is a leading tax consultant with headquarters in Mumbai. The firm has four
resident partners, Mr. Shivakumar, Mr. Hari Prakash, Mr. om Prakash and Mr. Narayan and one non-resident
partner, Mr. Vallish. As per the partnership deed, the profits and losses are shared equally amongst partners. All
partners are working partners and salary is paid to all partners as per the terms of the partnership deed.
Salary paid by M/s. Hari Om & Co. to its partners falls within the limits prescribed under section 40(b)(v). Does
Hari om & Co. have to deduct tax on salary paid to its partners?
(a) Yes; tax is deductible at source under section 192 on salary paid to its partners.
(b) No; salary paid to partners is not subject to tax deduction at source
(c) Yes; tax is deductible at source under section 192 on salary paid to resident partners and under section 195
on salary paid to the non-resident partner
(d) Salary paid to resident partners is not subject to tax deduction at source; but tax has to be deducted under
section 195 on salary paid to the non-resident partner

Country L is a notified jurisdictional area (NJA), then, the rate at which interest receivable from India lnfradebt
Ltd. is taxable in the hands of Mr. Vallish and the rate at which tax has to be deducted at source on such income
are —
Tax rate TDS rate

A 5% 30%
B 5% 5%
C 30% 30%
D 30% 5%
Note — The above rates are exclusive of cess,
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Mr. Harish and Mr. Austin Smith have been appointed as senior officials of Country L embassy and Country Y
embassy, respectively, in India in October. Mr. Harish and Mr. Austin Smith are subjects of Country L and
Country Y, respectively, and are not engaged in any other business or profession in India. The remuneration
received by Indian officials working in Indian embassy in Country L is exempt but in Country Y is taxable. The
tax treatment of remuneration received by Mr. Harish and Mr. Austin Smith from embassies of Country L and
Country Y, respectively, in India is:
(a) Exempt from income-tax under section 10

(b) Taxable under the Income-tax Act, 1961
(c) Remuneration received by Mr. Harish is exempt but remuneration received by Mr. Austin Smith is taxable
(d) Remuneration received by Mr. Harish is taxable but remuneration received by Mr. Austin Smith is exempt.

On the subject of principles of interpretation of tax treaties, match the principles given in Column A with the
description examples given in Column B and choose the correct option:
(i) Subjective (i) Such interpretation should not be done if it defeats the
Interpretation primary objective of the tax treaty as far as the particular
item under consideration is concerned.
(ii) Purposive (ii) Article 32 of Vienna Convention embodies this principle
Interpretation
(iii) Contemporanea (iii) Speeches of Finance Ministers of India can be relied upon
Expositio to find out the common intent at the time of signing the
treaties
(iv) Liberal Construction (iv) The fact that treaties are entered into for promoting mutual
trade and investment needs to be kept in mind while
interpreting a treaty
(v) Any term used in the treaty has to be interpreted according
to their plain and natural meaning
(vi) A treaty should be interpreted in a manner to have effect
rather than to make it ineffective.
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On the subject of BEPS Action Plans, match the BEPS Action Plans given in Column A with the description
examples given in Column B and choose the correct option:
(i) Action Plan 5 (i) Controlled Foreign Corporation Rules not incorporated in
the Income-tax law
(ii) Action Plan 3 (ii) Limitation of interest deduction incorporated in the Income-
tax Act, 1961
(iii) Action Plan 13 (iii) Special tax regime incorporated in the Income-tax Act. 1961
for taxation of royalty income from patents developed and
registered in India
(iv) Action Plan 4 (iv) New category Receipt of Low Value-Adding Intra-Group
services has been added in the newly notified safe harbour
rules effective from A.Y.2018-19.
(v) (v) CBC Reporting requirement incorporated in the Income- tax
Act, 1961
(vi) (vi) Limitation of Benefits Clause incorporated in select tax
treaties for taxing capital gains on transfer of shares of an
Indian company
(vii) (vii) Equalisation Levy introduced in Indian tax regime.
(viii) (viii) Incorporation of secondary adjustment in transfer pricing
regime
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If Fulcrum Ltd. an Indian Company had entered into an agreement for sale of 1000 units of non-core auto
components to Mr. Rajiv, an unrelated party, on 13th July and Mr. Rajiv had entered into an agreement for sale
of such components with Gigo Inc. on 8th July, Fulcrum Ltd and Gigo Inc are associated enterprise. Which of
the following statements is correct?
(a) Transfer pricing provisions would not be attracted since Fulcrum Ltd. and Mr. Rajiv are not associated
enterprises
(b) Transaction between Fulcrum Ltd. and Mr. Rajiv would be deemed to be an international transaction between
associated enterprises, only if Mr. Rajiv is a non-resident.
(c) Transaction between Gigo Inc. and Mr. Rajiv would be deemed to be an international transaction between
associated enterprises, only if Mr. Rajiv is a non-resident.
(d) Transaction between Fulcrum Ltd. and Mr. Rajiv would be deemed to be an international transaction between
associated enterprises, whether or not Mr. Rajiv is a non-resident

In respect of the transaction referred to in MCQ-0031 above, what would be the penalty leviable if Fulcrum Ltd.
fails to report the above transaction?
(i) 2% of the value of transaction
(ii) 50% of tax payable on under-reported income
(iii) 200% of tax payable on under-reported income
(a) Only (i) above

(b) (i) and (ii) above
(c) (i) and (iii) above
(d) No penalty is leviable since Fulcrum Ltd. and Rajiv are not associated enterprises

Let us suppose Alpha Ltd. has entered into an advance pricing agreement (APA) in respect of its transactions
with Xylo Inc. for the year. The company decides to make an application for roll back of the said APA. However,
rollback provision shall not be available in respect of the said transaction for a rollback year, if —
(i) such application has the effect of reducing total income declared in the return of income of the said year
(ii) Determination of the arm’s length price of the said transactions for the said year has been the subject matter
of appeal before Commissioner (Appeals) and the Commissioner (Appeals) has passed an order disposing of
such appeal at any time before signing of the agreement
(iii) determination of the arm’s length price of the said transactions for the said year has been the subject matter
of appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal
at any time before signing of the agreement
(iv) return of income for the relevant roll back year has been furnished by the company under section 139(4)
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The most appropriate answer is -

(a) (i) and (ii) above.
(b) (i) and (iii) above
(c) (i), (ii) and (iv) above
(d) (i), (iii) and (iv) above.

Assuming that Fulcrum Ltd. an Indian Company business income of has increased by Rs. 2 crores due to
application of arm’s length price by the Assessing Officer, and the same has been accepted by Fulcrum Ltd.,
then, -
(a) business loss cannot be set-off against the enhanced income
(b) deductions under Chapter VI-A cannot be claimed in respect of the enhanced income.
(c) unabsorbed depreciation of A.Y.2012-13 cannot be set-off against the enhanced income
(d) business loss referred to in (a) above, deductions referred to in (b) above and unabsorbed depreciation
referred to n (c) above cannot be set-off against the enhanced income.

Assuming that there has been an increase in the total income of Alpha Ltd. by Rs 3 crores due to application of
arm’s length price, and the same has been accepted by Alpha Ltd., the said sum of Rs.3 crores
(a) Is not required to be repatriated if the said increase is as per the safe harbour rules
(b) is not required to be repatriated if the said increase is determined by an advance price agreement
(c) need not be repatriated in both cases (a) and (b) mentioned above. However, had the increase been made by
the Assessing Officer during the course of assessment, the same has to be repatriated failing which it would be
treated as a deemed advance.
(d) has to be repatriated in both cases (a) and (b) mentioned above, failing which the same would be treated as
a deemed advance.
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Shareholding pattern of ABC Ltd
Shareholder Number of equity shares
Ganga Ltd., India 20,000
Yamuna Ltd., India 10,000
Saraswati Ltd.. India 10,000
Thames Inc., Country A 30,000
ABC Inc., Country A 1,20,000
General public 1,10,000
Shareholding pattern of PQR Inc.
Pena Inc., Country A 30,000
Andes Inc., Country A 4,000
Niagra Inc., Country A 25,000
Atlanta Inc., Country A 15,000
EFG Ltd., India 50,000
General Public 80,000
Details relating to XYZ Motors Ltd.
DEF Ltd., India 6,000
GHI Inc., Country D 3,000
LMN Inc., Country A 50,000
RST Ltd., Country C 10,000
HIT Ltd., Country D 1,000
Others 60,000
(2) Total book value of its assets. as on year end : Rs 12,000 crore
(3) XYZ Motors Ltd. has neither entered into advance pricing agreement nor has it opted for safe harbour rules.
(4) The manufacture of vans by XYZ Motors Ltd is wholly dependent on the use of know-how owned by RST
Ltd. RST Ltd. is the sole owner of such technical knowhow,
(5) The value of Country C $ and of 1 EURO was Rs, 80 and Rs.81, receptively. Throughout the year.
Which of the following pairs of companies are Associated Enterprises / deemed to be associated enterprises?
(i) ABC Ltd. & ABC Inc.
(ii) Satpura Ltd. & Sigma Ltd.
(iii) XYZ Motors Ltd. & RST Ltd.
(iv) XYZ Motors Ltd. & HIT Ltd.
The correct answer is -
(a) Only (i) above
(b) (i) and (ii) above
(c) (i) and (iii) above
(d) (i), (iii) and (iv) above.
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If Himalaya Ltd. has two Units, Unit 1 is engaged in power generation business and Unit 2 is engaged in
manufacture of wires. Both the units were set up in Himachal Pradesh in the year 2014. In the year, fourteen
lakh metres of wire are transferred from Unit 2 to Unit 1 at Rs. 150 per meter when the market price per metre
was Rs.200. Which of the following statements is correct?
(a) Transfer pricing provisions would be attracted in this case
(b) Transfer pricing provisions would not be attracted in this case, since Unit I and Unit 2 belong to the same
company and are not associated enterprises
(c) Transfer pricing provisions would not be attracted in this case as it is not an international transaction as both
the Units are in India. For the purpose of Chapter VIA deduction, the profits of power generation business shall,
however, be computed as if the transfer has been made at the market value of Rs.200 per MT.
(d) Transfer pricing provisions would not be attracted in this case due to reasons mentioned in both (b) arid (c)
above

Ram, an individual aged 35 years resident in India, bought 3,000 equity shares of Rs. 10 each of ABC Ltd. at
Rs. 70 per share on 1.6. He sold 1800 equity shares at Rs.50 per share on 3.11. and the remaining 1200 shares
at Rs.60 per share on 23.3. ABC Ltd. declared a dividend of 40%, the record date being 14.8. Ram sold a house
from which he derived a long-term capital gain of Rs.1,25,000 Assuming Ram’s interest income from bank
fixed deposit is Rs. 3,00,000, his tax liability would be -
(a) 18,440
(b) 18,810
(c) 19,920
(d) None of the above

Which of the following is not an eligible international transaction for application of safe harbour rules?
(i) Preparation of user documentation
(ii) Receipt of intra-group loans where the amount of loan is denominated in Indian rupees
(iii) Providing implicit corporate guarantee
(iv) Purchase and export of core auto components
(v) Receipt of intra-group services from group member
(a) Only (ii)

(b) (ii) and (v)
(c) (ii), (iv) and (v)
(d) (ii), (iii), (iv) and (v)
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Let us consider two hypothetical cases -
Case 1: Ganga Ltd. Yamuna Ltd. and Saraswati Ltd. amalgamate to form Ganga Ltd.
Case 2: Ganga Ltd., Yamuna Ltd. and Saraswati Ltd. merge to form new company, Triveni Sangam Ltd.
Which companies are eligible to apply for rollback provisions post amalgamation / merger in the above cases,
assuming that all other conditions are satisfied?
(a) In Cases 1 & 2: Ganga Ltd. Yamuna Ltd. and Saraswati Ltd.
(b) In Case 1: Ganga Ltd and in Case 2 : Ganga Ltd., Yamuna Ltd. and Saraswati Ltd.
(c) In Case 1: Ganga Ltd. Yamuna Ltd. and Saraswati Ltd. and in Case 2, None.
(d) In Case 1: Ganga Ltd. and in Case 2. None.
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Athena Ltd. incorporated in Country Q (DTAA is as per OCED Model) will hire three professionals residing in
India based on prescribed qualifications. It would be ideal for the team to comprise one lawyer, one accountant
and one business professional up to December as part of their business expansion plan in India.
The agent Mr. Shyam can hold the first round of discussions and negotiations with any such interested party.
Based on such discussions, the agent must convey the expectations of the interested party to Athena Ltd. While
the agent can enter into any such preliminary negotiations with the advisors / investors, local partners, the desired
terms of relationship would be subject to the consideration, confirmation and final approval of Athena Ltd.
Appointment of Mr. Shyam is for the period June to December.
The income earned by Athena Ltd. from sale of hair straighteners and hair curlers in India during the period
from June to December
a) Would not be taxable in India , since no business connection is established on account Of Mr. Shyam
not having authority to conclude contracts on behalf Of Athena Ltd.
b) Would be taxable in India, since business connection would be established on account Of Mr. Shyam
securing orders in India wholly for Athena Ltd,
c) Would not be taxable in India, since Athena Ltd. does not have a PE in India
d) Would be taxable in India, since Athena Ltd. has a PE in India

Dividend from an Indian company is exempt in the hands of a non -resident shareholder by virtue of section
10(34). Can such income be subject to tax in his hands in accordance with the provisions of the tax treaty?
(a) Yes, since the provisions of the treaty override the domestic law
(b) No, due to the non-aggravation principle
(c) No, due to the equivalent beneficiary principle
(d) No, due to allocation of taxing rights principle

Which of the following may be viewed by the tax authorities as a tax avoidance measure undertaken by
Athena Ltd. (foreign company)?
(a) Choosing Google Inc., a company not having a PE in India, for advertising its products.
(b) Hosting the website on a server based in Cayman islands
(c) both (a) and (b)
(d) Entering into limited period engagements with persons resident in India.
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In respect of remuneration per month paid by Athena Ltd. (foreign company) to Mr. Shyam, which of the
following statements is correct, having regard to the provisions of the Income-tax Act, 1961 (provisions of
DTAA may be ignored)
a) No tax is deductible at source as per the provisions of the Income-tax Act, 1961 since Athena Ltd is a
foreign company and is not resident in India
b) Tax has to be deducted at source under section 192 at the average rate of income-tax computed on the
basis of the rates in force.
c) Tax has to be deducted at source at the rates in force under section 195
d) Tax has to be deducted at source as per 194J

As per the provisions of the Income-tax Act, 1961 , who can act as a representative assessee in respect of
the income deemed to accrue or arise in India in the hands of Athena Ltd (foreign company).
(a) Only an employee of Athena Ltd.
(b) Only a trustee of Athena Ltd.
(c) Only an agent of Athena Ltd.
(d) All the above

As per the DTAA (OCED model of tax treaty) with Country A, which of the following statements is correct?
a) The DTAA applies only to taxes on income
b) The DTAA applies both in respect Of taxes on income and capital
c) The DTAA applies only to persons who are resident of Country A in respect of taxes on income and
capital
d) The DTAA applies only to persons who are resident of India in respect of taxes on income.

Which of the following is ordinarily not a function served by a tax treaty (OCED model of tax treaty)?
(a) Relieving economic double taxation
(b) Imposing a fresh tax liability
(c ) Boosting mutual trade and investment in the two Contracting States
(d) Allocating taxing rights
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Which of the following statements reflects the incorrect position?
a) Domestic tax laws are irrelevant while considering application of the provisions of a DTAA
b) provisions of Income-tax Act, 1961 empower be union Government to enter into tax treaties for relieving
double taxation
c) Provisions of a DTAA overrides the provisions of domestic laws unless the latter are more beneficial for
a taxpayer
d) In the absence of DTAA, domestic law provide unilateral relief to tackle the double taxation.

In the absence of a DTAA, domestic tax laws provide unilateral relief to tackle double taxation Which of the
following is not a principle incorporated in the Vienna Convention on Law of Treaties ?
a) preparatory work of the treaty can be used as a supplementary means Of interpretation
b) A State Which is a third party cannot be bound by the terms Of a bilateral tax treaty without its consent
c) Violation of any term of the tax treaty by one Contracting State entitles the other Contracting State to
terminate the treaty
d) Ordinarily, each authenticated version of a treaty in more than one language carries equal force

Which article has been introduced in the India-Mauritius tax treaty to specifically target the practice of treaty
shopping?
(a) Elimination of double taxation
(b) Limitation of benefits
(c ) Most Favoured Nation clause
(d) Non-discrimination
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Delhi Tamil Sangam a charitable trust in India, as per its rules, pays a fixed honorarium per concert to each
musician performing in the concerts organised by it. Shivam, however, refuses to accept this sum. If he requests
Delhi Tamil Sangam to pay such sum directly to Help All, an unregistered institution providing relief to the
poor and needy in rural India, what would be the tax consequence?
a) No amount would be chargeable to tax in the hands of Mr. Shivam, since this is a case of diversion of
income at source by overriding title
b) The amount payable to Help All would be chargeable to tax only in the hands of Mr. Shivam, since it is
a case of application of income.
c) The amount payable to Help All would be chargeable to tax only in the hands of the institution which
has received the amount.
d) The amount payable to Help All would be chargeable to tax both in the hands of Mr. Shivam and in the
hands of the institution.

Mr. Arvind resident in India opened a bank account in Country P on 1st July 2 years back he has made deposits
of foreign currency equivalent to INR 5 lakhs and INR 7 lakhs and INR 12 lakhs on 1.9.PY and INR 25 lakhs
on 1.3.PY, that bank, out of Indian income which has not been assessed to tax in India. The deposit of INR 12
lakhs on 1.9.PY is made out of the withdrawal of earlier deposits made 2 years back with the said bank. Further,
out of INR 25 lakhs deposited by him on 1.3.PY Mr. Arvind withdrew INR 2 lakh on 31.3.PY. The value of an
undisclosed asset in form of bank account is:
(a) INR 49 lakhs

(b) INR47 lakhs
(c) INR371akhs
(d) INR351akhs

Which of the following statements does not hold good in the case of OECD Model Convention? :
(a) OECD Model lays emphasis on the right of the State of Residence to tax
(b) The relevant article of the Convention providing for determination of business profits of a PE, does not
provide for deduction of expenses
(c) The relevant article relating to PE of the Convention explicitly deals with mechanism of Service PE
(d) It is essentially a model treaty between two developed nations
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To address the problem of dual residency, under OECD Model Convention, certain rules are provided. The rules
are to be applied:
a) At the discretion of competent authority Of the respective countries based on permanent home and
nationality of the assessee
b) Sequentially in order of nationality, permanent home , centre of vital interest and habitual abode
c) Sequentially in order of permanent home, centre of vital interest, habitual abode and nationality
d) Only if an assessee is not able to produce Tax Residency Certificate from the respective country.

If Cure House Inc. opts for advance ruling for the projects of providing consultancy in field of medicine, such
ruling shall be binding on
a) Cure House Inc., in relation to the abovementioned project
b) Jurisdictional Assessing Officer of Cure House
c) both (a) and (b)
d) Cure House Inc. and Jurisdictional Assessing Officer in relation to the above mentioned project and for
any future transaction of similar nature in India

Which of the following would not be considered as a permanent home of Mr. Shivam in context of the relevant
rule in the DTAA with Country Q for dual residency?
(i) House in Defence Colony, Delhi where his family lives
(ii) Own house in Mumbai which has been let out
(iii) Rent-free accommodation provided by his employer in Country Q
The correct answer is -

(a) Only (i) above
(b) Only (ii) above
(c) Only (iii) above
(d) Both (i) and (iii) above
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Form 67 has to be filed mandatorily on or before due date of fling of return of income
(i) If the assessee claims foreign tax credit in his return of income for the year in which such corresponding
income was offered to tax
(ii) if the assessee owns directly, or a beneficial owner, any foreign assets
(iii) if there is a carry backward of loss of the current year resulting in refund of foreign tax for has been claimed
in an earlier previous year.
The correct answer is
(a) Only (i) above
(b) Both (i) and (ii) above
(c) Both (i) and (iii) above
(d) (i), (ii) and (iii) above.

While interpreting the treaty entered into by India with Country P, the Budget Speech of Shri Arun Jaitley
was relied upon to understand the intent at the time of signing the treaty. Which law of interpretation has been
followed in this case?
(a) Liberal Interpretation

(b) Subjective Interpretation
(c) Purposive Interpretation
(d) Objective Interpretation

An application for advance ruling was made on 31.05.PY in relation to a transaction proposed to be undertaken
by Mr. James, a resident of County P. On 07.07.PY he decides to withdraw the said application such application:
(a) cannot be withdrawn once filed

(b) can be withdrawn on 07.07.PY only with special permission of Principal Chief Commissioner
(c ) cannot be withdrawn since 30 days from date of application have passed
(d) Can be withdrawn on 07.07.PY with permission of the AAR, if the circumstances of the case so justify

Mr Arvind resident in India acquired a flat in Country P in for INR 50 lakhs out of his Indian income out of the
said sum, INR 20 lakhs was assessed to tax in India during the P.Y 2013-14 and earlier years. This asset comes
to the notice of the Assessing Officer in the previous year. If the value of the flat on 1.4.PY is INR 90 lakhs, the
amount chargeable to tax in the previous year would be:
a) INR 90 lakhs
b) INR 70 lakhs
c) INR 54 lakh
d) INR 30 lakhs
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ABC Ltd. an Indian company paid dividend distribution tax under section 115-0 in respect of dividend
distributed by it to its resident and non-resident shareholders. Mr. John, a shareholder of ABC Ltd. and a resident
of Country X, has to pay tax in Country X on dividend received by him from ABC Ltd., as per the domestic tax
laws of Country X. This is an example of:
(a) Juridical double taxation
(b) Territorial double taxation
(c) Economic double taxation
(d) Municipal double taxation

Tax treaty is part of international law; hence its interpretation should be based on a certain set of principles and
rules of interpretation. Which convention is used globally for interpretation of tax treaties?
(a) The UN Model Convention
(b) The OECD Model Convention
(c) Either (a) or (b) (Except in case of USA, where US Model Convention is used)
(d) The Vienna Convention

Can benefit of India-Country X tax treaty be availed by M/S Gryffindor’s LLP ('the firm'), Country X in respect
of income earned by it in India from Assignment A, which is taxable in both India and Country X, by virtue of
the respective domestic tax laws?
a) Yes, since the income is subject to tax in both countries
b) No, since as per the laws of Country X, the firm is a fiscally transparent entity. Hence, there is no double
taxation of income in its hands.
c) Yes, since the firm's employees and partners stayed in India for more than 100 days. Hence, the requisite
condition for availing treaty benefit under the DTAA is satisfied.
d) Yes, since the execution of work was done partly from India and partly rom Country X. Hence, treaty
benefit can be availed.
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A fiscally transparent entity means —
(a) An entity entitled to concessional rate Of tax
(b) An entity enjoying tax pass through status
(c) An entity entitled to benefits of DTAA
(d) An entity which is subject to distribution tax on profits distributed by it.

What are the tax implications under the Income-tax Act, 1961 respect of income earned from assignment A by
M/s. Gryffindor’s LLP, a Country X based partnership firm (You may ignore the provisions of DTAA for the
purpose of answering this question) -
a) the entire income from the assignment is taxable in India
b) Only income attributable to the services rendered in India is taxable in India
c) No part of the income is taxable in India since the firm does not have a permanent establishment in India
d) No part of the income is taxable in India since the income was received outside India.

In order to claim relief under the tax treaty in India , a non-resident -
(a) should have a business presence in India
(b) should produce his Permanent Account Number
(c) should produce Tax Residency Certificate (TRC)
(d) should produce the income-tax return filed in the home country.

As per the provisions of the Income-tax Act. 1961, which of the following is not an objective of the Central
Government to enter into tax treaty with another Country:
(a) For granting relief in respect of income tax chargeable to tax in India and the offer country
(b) For enabling round tripping of unaccounted money into India
(c) For recovery of income-tax
(d) For exchange or information for prevention of evasion or avoidance of income tax
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When a term used in a tax treaty is not defined in the tax treaty or in the Act, but the same is defined subsequently
through a notification in the Official Gazette by the Central Government, then, in such a case:
(a) The notification shall take effect from the date of its publication in the Official Gazette
(b) The notification shall be deemed to be effective from the date when the tax treaty came into force
(c) The notification shall be deemed to be effective from the date when the tax treaty was last modified
(d) The notification shall take effect from 1st April and be effective from the current assessment year.

In order to invoke the tax treaty for a person who is a dual resident i.e. tax resident in both he countries,
which rule may be applied under the relevant article of the tax treaties to resolve the issue?
(a) Force Of Attraction
(b) Tie-breaker
(c) Equivalent beneficiary
(d) Non-discrimination

Under the provisions Of the Income-tax Act, 1961, the term person would not include:
a) A body corporate incorporated in a country outside India
b) A Limited Liability Partnership (LLP)
c) Indian branch of a foreign company
d) A co-operative society
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Two methods were found suitable for determination of the Arm’s Length Price (ALP). As per CUP methods, it
was found to be Rs. 1,200 per unit and as per resale price method, it was Rs. 1,250 per unit. The ALP per unit
will be taken as
(A) Rs. 1,200 since it is more favourable to the assesse
(B) Rs. 1,250 since it is more favourable to the Department
(C) Rs. 1,225
(D) None of the above

An assesse having specified domestic transactions covered by section 92BA, should furnish audit report, if the
value of such transactions exceeds
(A) Rs.2 crores
(B) Rs. 20 crores
(C) Rs.10 crores

An assesse deriving income from profits of business of an eligible industrial undertaking for which 100%
deduction is available u/s 80-1B has entered into international transactions with an associated enterprise for Rs.
200 crores. The TPO has made an addition of Rs. 15 crores in respect of the ALP. The normal GP margin is
10%. The additional deduction u/s 80-IB which can be claimed by the assesse on account of the increase in the
ALP is
(A) Nil
(B) Rs. 20 crores
(C) Rs.25 crores
(D) Rs.15 crores

The OECD member countries have accepted the concept of Arm’s Length Price (ALP) for reaping the following
benefit:
(A) Minimises double taxation
(B) Real taxable profits can be determined
(C) Artificial price distortion is reduced
(D) All the three above
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In the context of transfer pricing provisions, international transaction should be in the nature of
(A) Purchase, sale or lease of tangible or intangible property
(B) Provision of service
(C) Lending or borrowing money
(D) Any of the above

Mr. Dhanush holds shares in both L Ltd., and M Ltd. In the context of transfer pricing provisions,
(A) L Ltd. and M Ltd. can never be associated enterprises.
(B) L Ltd. and M Ltd. are deemed associated enterprises if Mr.Dhanush holds 26% or more of voting power
in each of these companies.
(C) L Ltd. and M Ltd. are deemed associated enterprises if Mr.Dhanush holds 26% or more of voting power
in L Ltd., which in turn holds 26% or more of voting power in M Ltd.
(D) L Ltd. and M Ltd. are deemed associated enterprises if Mr. Dhanush holds totally 52% or more combined
voting power in both these companies.

The book value of assets of SCL is Rs. 200 crores, whereas the market value of the said assets is Rs. 80 crores.
Sun Ltd. has advanced a loan of Rs. 45 crores. In the context of transfer pricing provisions, SCL and Sun Ltd.
are
(A) Not associated enterprises
(B) Associated enterprises, considering the book value of assets of SCL and its borrowing from Sun Ltd.
(C) Deemed to be associated enterprises, considering the book value of assets of SCL and its borrowing from
Sun Ltd.
(D) Deemed to be associated enterprises considering the market value of assets of SCL and its borrowings from
Sun Ltd.

J Ltd. is controlled by Rajeev (HUF). K Ltd. is controlled by Raghav (sole proprietor of RR & Co.,), a close
relative of Rajeev, a member of Rajeev (HUF). For the purpose of transfer pricing provisions.
(A) J Ltd. and K Ltd. are deemed associated enterprises.
(B) Rajeev HUF, J Ltd. and K Ltd. are deemed associated enterprises.
(C) RR & Co., Rajeev HUF, J Ltd. and K Ltd. are deemed associated enterprises.
(D) There is no associate enterprises relationship involved in this.
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There is an arrangement between SCL and Q Ltd., which are associated enterprises. Such arrangement is oral
and is also not intended to be legally enforced. For transfer pricing purposes, such arrangement-
(A) is not treated as a “transaction” because it is not in writing.
(B) is not treated as a “transaction” because it is not intended to be legally enforced.
(C) is treated as a “transaction”.
(D) is not treated as a “transaction” for (A) and (B) above.

The ALP determined by the TPO for some product is Rs. 2,000 per unit sold by SCL. Considering the tolerance
band permitted by the CBDT, the tolerated international transaction price for a transaction with an associated
enterprise can be up to
(A) Rs. 1,960
(B) Rs. 2,040
(C) Rs. 2,060

Following can be an applicant for advance ruling:
(A) Non-resident entering into a transaction
(B) Resident entering into a transaction with a non-resident
(C) Resident entering into a transaction with another resident
(D) (A) or (B)

An applicant for advance ruling may withdraw an application within days from the date of the application.
(A) 30
(B) 60
(C) 90
(D) 120

Composition of AAR is as under:
(A) A Chairman, Vice-chairman and Revenue Member
(B) A Chairman, Vice-Chairman and Law Member
(C) A Chairman and such number of Vice-Chairman, Revenue Members and Law Members as the Central
Government may, by notification, appoint.
(D) Chairman, Vice-Chairman, Law Member and Revenue Member
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Following can make an application for advance ruling:
(A) Department
(B) Applicant
(C) Central Government
(D) All above

Application for advance ruling is not allowed in the following situations:
(A) When the question involved is already pending before any income-tax authority.
(B) Where it is for determining the fair market value of a property
(C) Excepting in exceptions, where the transaction in question is designed for avoidance of tax.
(D) Any one of the above
Multiple Choice Question (ID MCQ-0086 TO MCQ-0090)
Fill in blanks:
(1) The applicant desiring roll back of the APA may furnish the request for rollback provision in Form No.
3CEDA with proof of payment of an additional fee of ________________.
(2) The transfer pricing provisions contained in section 92 shall not apply if the same has the effect of
________________ chargeable to tax.
(3) If there is an arrangement between SCL and TFL (an associate enterprise) for mark up of a semi-finished
product and safe thereafter, the ideal method for determining the ALP is _____________ method.
(4) In a case where the aggregate value of international transactions exceeds Rs. ___________ it will be
obligatory for the assesse to maintain the stipulated information and documents required for transfer pricing
purposes.
(5) Where SCL has maintained proper records and documents, and the TPO has made some adjustments to the
ALP, thereby increasing the total income by, say, Rs. 2.68 crores, the penalty leviable u/s 270Awill be Rupees
______________
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The person responsible for making payment of income by way of interest or dividends in respect of bonds or
Global Depository Receipts referred to in section 115AC, shall deduct tax at the rate of
(A) 10%
(B) 10 % plus cess
(C) 20%
(D) (B) or at the rate specified in the DTAA, whichever is lower.

The rate of deduction of tax from interest payable to a foreign company (located in a country with which there
is no DTAA) by an Indian company on borrowing made on 12-6 in foreign currency from sources outside India
is
(A) 5 % plus cess
(B) 10 % plus cess
(C) 15 % plus cess
(D) None of above

Surcharge applicable to a foreign company whose total income is Rs. 1.2 crores is
(A) Nil
(B) 2%
(C) 7%

Following income which is accruing or arising outside India, directly or indirectly, is not deemed to be income
accruing or arising in India:
(A) Through or from any business connection in India.
(B) Through or from any property in India.
(C) Through transfer of capital asset located outside India.
(D) Through or from any asset or sources of income in India.

Remuneration received for services rendered in India by a foreign national employed by foreign enterprise is
exempt, if the number of days stay in India of such foreign national does not exceed
(A) 60 days
(B) 90 days
(C) 30 days
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A resident in relation to his tax liability arising out of one or more transactions valuing Rs. ________ in total
which has been undertaken or is proposed to be undertaken would be eligible to be an applicant for advance
ruling:
(A) 60 crores or more
(B) 80 crores or more
(C) 100 crores or more
(D) 200 crores or more

An applicant, who has sought for an advance ruling, may withdraw the application within ______________
(A) 30 days from the date of the application
(B) 30 days from the end of the month in which the application has been made
(C) 60 days from the date of the application.
(D) 60 days from the end of the month in which the application has been made

In case of a non-notified resident, the AAR will not allow an application in respect of certain matters. The
following is not covered in the hit list:
(A) Matter pending with income-tax authorities/tribunal/court.
(B) Determination of fair market value of a property.
(C) Relates to a transaction or issue which is designed prima facie for avoidance of income-tax.
(D) Whether an arrangement, which is proposed to be undertaken by any person being a resident or a
non-resident, is an impermissible avoidance arrangement as referred to in chapter x-A or not.

The advance ruling given by the Authority for Advance Ruling (AAR) is not binding on the following person(s)
:
(A) On the applicant who sought the ruling.
(B) On the other person to the transaction entered into by the applicant, if it is a non-resident.
(C) On the other person to the transaction entered into by the applicant, whether it is resident or non-
resident.
(D) On the principal commissioner or commissioner and the income-tax authorities subordinate to the
principal commissioner or commissioner who has jurisdiction over the application.
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Following income from ‘salaries’ which is payable by ___________ would be deemed to accrue or arise in India
:
(A) The government to a citizen of India for services rendered outside India.
(B) The government to a non-resident for services rendered outside India.
(C) The government to a non-citizen or non-resident for services rendered outside India.
(D) The government or any other person to a non-citizen or non-resident for services rendered outside
India. (1x10= 10 marks)
Multiple Choice Question (ID MCQ-0101 to MCQ-0103)
State with reasons, whether the following statements are true or false:
(1) When interest payable to a non-resident by the Government or a public sector bank within the
meaning of section 10(23D), deduction of tax shall be made at the time of payment thereof in cash
or by the issue of a cheque or draft or by any other mode, or at the time of credit of such interest to
the account of the non-resident, whichever is earlier. (2 marks)
(2) Where payment is made to a non-resident, even if such non-residents falls within the specified class
notified by the CBDT, even if the payment is not chargeable to tax in India, the payer has to be make
an application to the Assessing Officer ,before making the impugned payment. (5 marks)
(3) Where any interest is payable by a person resident in India, the same is deemed to accrue or arise in
India (3 marks)
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A shopping complex was purchased by the assesse in Colombo for Rs. 5 crores on 12-3-2015. Out of this,
investment of Rs. 3 crores is from disclosed sources, which had been offered for tax. This asset comes to the
knowledge of the Assessing Officer on 27-12-PY. If the fair market of the house as on the relevant date to be
adopted is Rs. 8 crores, the undisclosed foreign income under the Black Money (undisclosed Foreign Income
and Assets) and Imposition of Tax Act, 2015 (BM Act) will be taken as (Rs. Crores)
(A) 5
(B) 3.2
(C) 3.8

Under the BM Act, the rate of exchange to be adopted for conversion purposes will be the rate specified by
(A) RBI
(B) SBI
(C) Central Government
(D) CBDT

The Assessing Officer has detected undisclosed foreign income of Rs. 3 crores earned during the year ended 31-
3-2017. There is foreign loss of Rs. 1.2 crores also, hitherto not shown in the income-tax return filed for the
Year. The quantum of undisclosed foreign income assessed under the BM Act will be
(A) Rs. 1.8 crores
(B) Rs. 1.2 crores
(C) Rs. 3 crores

Unquoted shares acquired in Tokyo on 21-3-2016 came to the notice of the Assessing Officer on 13-3-PY. There
is no explanation of the source for the same. The converted value of the shares on 21-3-2016, 1-4-2016, 1-4-
PY, 1-4-N1 are Rs. 12, 13, 14 and 15 crores, respectively. The undisclosed foreign income representing the
value of the undisclosed foreign asset, as per the BM Act is
(A) Rs. 12 crores
(B) Rs. 13 crores
(C) Rs. 14 crores
(D) Rs. 15 crores
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Under the BM Act, a tax authority below the rank of Commissioner can retain the impounded books normally
for a period of
(A) 120 days
(B) 90 days
(C) 60 days
(D) 30 days

In a typical Tax Convention based on OECD model or UN model, the definition of the term “national” is
primarily relevant to the Article dealing with ______________.
(A) Persons covered/General scope
(B) Non-discrimination
(C) Resident
(D) Credit Method

Controlled Foreign Corporations (CFCs) are _________entities incorporated in an overseas low tax jurisdiction.
(A) Corporate
(B) Non-Corporate
(C) Both corporate and Non-corporate

Existence of a __________ in a jurisdiction is a pre-requisite for the purpose of taxation of business profit of an
enterprise in that jurisdiction major Tax Convention:
(A) Business connection
(B) Permanent establishment
(C) Business or professional connection
(D) Any connection giving rise to the said profit

For the purpose of equalization levy, “specified service” means
(A) Online advertisement
(B) Any provision for digital advertising space or any other facility or service for the purpose of
online advertisement.
(C) Specified Service also includes any other service as may be notified by the Central Government.
(D) All of the above.
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Following is not an anti-tax avoidance measure in the context of international taxation:
(A) TIEAS (Tax information exchange agreements)
(B) POEM
(C) GAAP
(D) Transfer pricing provisions
Multiple Choice Question (ID MCQ-0114 to MCQ-0117)

Test the correctness of the following statements, with brief reasons:
(1) A tax authority under the BM Act shall be deemed to be a civil court for all intents and purposes. (3
marks)
(2) Any payment received for online advertisement will attract equalization levy of 6% (3 marks)
(3) ABC Ltd. is a domestic company. It has a foreign subsidiary FGH Inc., in a tax haven. If the place
of effective management is found to be in India, under the CFC legislation, the entire income of can
be taxed in India and FGH Inc., can be treated as a domestic company for several other purposes as
well. (4 marks)
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MCQ Answer Hints / Analysis Section

MCQ-0001 D 6
MCQ-0002 B 87A
MCQ-0003 D 112/111A
MCQ-0004 A 9 / 10
MCQ-0005 D 115BBA
MCQ-0006 B 139
MCQ-0007 C 115AC
MCQ-0008 C 44BBB
MCQ-0009 A 115AC
MCQ-0010 C 163 Prov
MCQ-0011 B 94B
MCQ-0012 D 94B
MCQ-0013 C 92A
MCQ-0014 D 94A
MCQ-0015 C Rule 10TD
MCQ-0016 D 271BA
MCQ-0017 C 94B
MCQ-0018 D 92CE
MCQ-0019 C 92CE
MCQ-0020 C 92CE
MCQ-0021 C 15BBA
MCQ-0022 C 115BBA
MCQ-0023 B 115BBA
MCQ-0024 D 6
MCQ-0025 D Tax Rate
MCQ-0026 D 195
MCQ-0027 A 115A
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MCQ-0028 B 10
MCQ-0029 Match (i) – (iii), (ii) – (iv), (iii) – (ii), (iv) – (i)
MCQ-0030 Match (i) – (iii), (ii) – (i), (iii) – (v), (iv) – (ii)
MCQ-0031 D 92B
MCQ-0032 C Penalty
MCQ-0033 D Rule 10MA
MCQ-0034 B 92C
MCQ-0035 D 92CE
MCQ-0036 C 92A
MCQ-0037 A 92BA
Total Income 384200
MCQ-0038 D Tax Liab
LTCG at special rates of taxes 84200
MCQ-0039 D Rule 10TD
MCQ-0040 D APA
MCQ-0041 C 90 / 90A
MCQ-0042 B 90 / 90A
MCQ-0043 B PE
MCQ-0044 D 194J
MCQ-0045 D 163
MCQ-0046 B 90 / 90A
MCQ-0047 B 90 / 90A
MCQ-0048 A 90 / 90A
MCQ-0049 C 90 / 90A
MCQ-0050 B DTAA
MCQ-0051 D Diversion
MCQ-0052 C BM Act
MCQ-0053 C DTAA
MCQ-0054 C DTAA
MCQ-0055 C AAR
MCQ-0056 B DTAA
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MCQ-0057 C Rule 128

MCQ-0058 B DTAA
MCQ-0059 D AAR
MCQ-0060 C BM Act
MCQ-0061 C DTAA
MCQ-0062 D DTAA
MCQ-0063 A DTAA
MCQ-0064 B DTAA
MCQ-0065 A DTAA
MCQ-0066 C DTAA
MCQ-0067 B GAAR
MCQ-0068 B DTAA
MCQ-0069 B DTAA
MCQ-0070 C DTAA
MCQ-0071 D 92 / TP
MCQ-0072 B 92BA
MCQ-0073 A 92 / TP
MCQ-0074 D DTAA
MCQ-0075 D TP
MCQ-0076 B 92A
MCQ-0077 A 92A
MCQ-0078 A 92A
MCQ-0079 C TP
MCQ-0080 D TP
MCQ-0081 D AAR
MCQ-0082 A AAR
MCQ-0083 C AAR
MCQ-0084 B AAR
MCQ-0085 D AAR
MCQ-0086 -- 500,000 APA
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MCQ-0087 -- REDUCING THE INCOME

MCQ-0088 -- PROFIT SPLIT METHOD
MCQ-0089 -- 1 CR Rule 10D
MCQ-0090 -- NIL 270A
MCQ-0091 D 115AC
MCQ-0092 A 115A
MCQ-0093 B Tax Rate
MCQ-0094 C 9
MCQ-0095 B 10
MCQ-0096 C AAR
MCQ-0097 A AAR
MCQ-0098 D AAR
MCQ-0099 C AAR
MCQ-0100 A 9
MCQ-0101 True TDS on specified interest is upon payment basis 195 Prov
195(2) Person making payment to NR may apply and
Partly
MCQ-0102 however 195(7) CBDT may notify class of persons to 195
True
make application.
Partly Interest paid by resident is deemed to accrue or arise in
MCQ-0103 9
True India except it related to business out side India.
MCQ-0104 B BM act
MCQ-0105 A BM act
MCQ-0106 C BM act
MCQ-0107 C BM act
MCQ-0108 D DTAA
MCQ-0109 B DTAA
MCQ-0110 A DTAA
MCQ-0111 B DTAA
MCQ-0112 D Eq Levy
MCQ-0113 C GAAR
MCQ-0114 False Tax authority is civil court for the limited purpose BM Act
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Equilisation levy applies only when NR do not have PE

MCQ-0115 False Eq Levy
in India
Foreign company will be resident based on POEM
concept. However for taxation purpose tax rates will
Partly
MCQ-0116 apply to foreign company irrespective of its residential 6, 195, TDS
Correct
status. However for dividend tax purpose only domestic
companies are covered.
MCQ-0117
MCQ-0118
MCQ-0119
MCQ-0120
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C.A. Kalpesh Sanghavi International Taxation Theory - P a g e | F62-A. 1
In order to enable various countries to enter into treaties, which are standardized to some extent, Organization
for Economic Cooperation and Development (OECD) and the United Nations (UN) have developed certain
Model Tax Treaties. These treaties can be used by various countries as a starting point in their negotiations with
other countries. While these Models are not legally binding .they have been extensively used by various
countries as a reference point while entering into Tax Treaties. In some cases, they have been incorporated
verbatim or with minor changes. However, in other cases, countries have made suitable changes in the draft
model according to their economic environment and commercial and tax considerations.
The significant model conventions have been briefly discussed hereunder :
OECD Model – The emergence of present form of OEDC Model Convention can be traced back to 1927, when
the Fiscal Committee of the League of Nations prepared the first draft of Model Form applicable to all countries.
In 1946 the model convention was published in Geneva by the Fiscal Committee of U.N.Social & Economic
Council and later by the Organisation for European Economic Co-operation (O.E.E.C.) in 1963. However, in
1961, the Organisation for Economic Co-operation and Development (O.E.C.D.) was established, with
developed countries as its members, to succeed the O.E.E.C.,and OECD approved the draft presented to the
OEEC, In 1977, the final draft was prepared in the present form which has been revised several times; the latest
being in the year 2017.
is essentially a model treaty between two developed nations. This model advocates the residence
principle, i.e., it lays emphasis on the right of state of residence to tax the income.
in 1968, the United Nations set up an Adhoc Group of Experts from various developed and developing
countries to prepare a draft model convention between developed and developing countries. In 1980,
this Group finalised the UN Model Convention in its present form. It has further been revised a number
of times, the latest being in the year 2017.
The Un Model is a compromise between the source principle and the residence principle. However, it gives
more weight to the source principle as against the residence principle of the OECD Model. UN Model is
designed to encourage flow of investments from the developed countries to developing countries. It takes into
account sharing of tax-revenue with the country providing capital.
The United Nations Model Convention seeks to be balanced in its approach. As a corollary to the principle of
taxation at source, the Articles of the Convention are based on a recognition by the source country that
(a) Taxation of income from foreign capital should take into account expenses allocable to the earnings of the
income so that such income is taxed on a net basis.
(b) Taxation should not be so high as to discourage investment and
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(c) It should take into account the appropriateness of the sharing of revenue with the country providing the
capital.
In addition, the United Nations Model Convention embodies the idea that it would be appropriate for the
residence country to extend a measure of relief from double taxation through either a foreign tax credit or an
exemption, as is also the case with the OECD Model Convention.
this Model Convention is used by the United States while entering into tax treaties with various countries.
The US Model Convention has been revised in the year 2016.
These Models have a significant influence on international treaty practice, and have important common
provisions. The similarities between these Models highlight the areas of consistency. The areas of divergence
indicate some critical differences in approach or emphasis which need special focus. These differences are
mainly in relation to the taxing rights which would be available to a country under domestic law and the extent
to which any country should forego, under a bilateral tax treaty, in order to avoid double taxation and encourage
investment.
OECD UN US
Applied by the United

Model Convention States
Model Convention between developed
between developed and developing
countries-Advocates country- More
Residence Principle emphasis on Source
Principle
Excllusive to US
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Title and Preamble to the Model Conventions

The title of the UN Model Convention reads as follows :
“Convention between (State A) and (State B) for the elimination of double taxation with respect to
taxes on income and capital and the prevention of tax avoidance and evasion”
There is now a specific reference to “the prevention of tax avoidance and evasion “ in the title to emphasize its
significance in the Model Convention.
The preamble to the UN Model Convention reads as follows :
“(State A) and (State B),
Desiring to further develop their economic relationship and to enhance their cooperation in tax matters,
Intending to conclude a convention for the elimination of double taxation with respect to taxes on income and
on capital without creating opportunities for non-taxation or reduced taxation through tax avoidance or evasion
(including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the
indirect benefit of resident of third States)”
The Title and Preamble to the OECD Model Convention is almost identical to that of the UN Model Convention.
The only minor difference is the reference to “tax evasion and avoidance” in the place of “tax avoidance and
evasion” in the Title and Preamble.
The Preamble now clearly indicates that the UN and OECD Model Conventions do not intend to create
opportunities for non-taxation or reduced taxation through tax avoidance or evasion including through treaty
shopping arrangements.
This language of the Preamble would help ensuring that the provisions of the Conventions are interpreted and
applied to prevent abusive treaty shopping arrangements.
Significant Articles in the Model Conventions
Over the years, both Model Conventions have seen a lot of convergence and the language is identical in
quite a few Articles. However, there are key differences in approach and language in some Articles which
will be the focus of our discussion, in the section below.
The jurisdiction or country of residence of the taxpayer is referred to as the Residence State and the jurisdiction
or country where the source of income is located is referred to as the Source State.
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The OECD and UN Model Convention would apply to persons who are resident of one or both of the
Contracting States.
For the purposes of these Conventions, income derived by or through an entity or arrangement that is treated as
wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be
income of a resident of a Contracting State. However, the same would be treated as income only to the extent
that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.
Example
State A and State B have concluded a treaty identical to the Model Tax Convention. State A considers that an
entity established in State B is a company, and taxes that entity on interest that it receives from a debtor resident
in State A. Under the domestic law of State B, however, the entity is treated as a partnership, and the two
members in that entity, who shares equally all its income, are each taxed on half of the interest. One of the
members is a resident of State B and the other one is a resident of a country with which States A and B do not
have a treaty. The paragraph provides that in such case, half of the interest shall be considered, for the purposes
of Article 11, to be income of a resident of State B.
Note-The above example forms part of the Commentary to the UN Model Tax Convention.
With the exception of benefits granted under certain Articles of these conventions, these Convention would
not affect the taxation, by a Contracting State, of its resident.
The OECD and UN Conventions would apply to taxes on income and on capital imposed on behalf of a
Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they
are levied.
Taxes on income and on capital cover all taxes imposed on total income, on total capital, or on elements of
income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on
the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
The existing taxes to which the Conventions would apply in case of each Contracting State are
specified to be mentioned.
The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date
of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the
Contracting States shall notify each other of significant changes made to their tax law.
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A taxpayer has to demonstrate that he is a resident of one or both Contracting States to be able to gain
access to a tax treaty and avail the benefits thereunder.
The concept of resident of a Contracting State’ has various functions and assumes significance in the following
three scenarios :
- In determining a convention’s scope of application;
- In solving cases where double taxation arises as a consequence of double residence;
- In solving cases where double taxation arises as a consequence of taxation in the state of residence and
also in the state of source of income.
As per paragraph 1 of the UN Model Convention, the term “resident of a Contracting State” means any person
who, under the laws of that State, is liable to tax therin by reason of his domicile, residence, place of
incorporation, place of management or any other criterion of a similar nature, and also includes that State and
any political subdivision or local authority therof. This term, however, does not include any person who is liable
to tax in that State in respect only of income from sources in that State or capital situated therin.
Paragraph 1 of the OECD Model Convention is worded on similar lines. However, it does not contain reference
to place of incorporation.
Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States,
then his status shall be determined as follows:
(a) He shall be deemed to be a resident only of the State in which he has a permanent home available
to him; if he has a permanent home available to him in both States, he shall be deemed to be a
resident only of the State with which his personal and economic relations are closer (centre of
vital interests);
(b) If the State in which he has his centre of vital interests cannot be determined, or if he has not a
permanent home available to him in either State, he shall be deemed to be a resident only of the
state in which he has an habitual abode;
(c) If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident
only of the State of which he is a national;
(d) If he is a national of both States or of neither of them, the competent authorities of the Contracting
States shall settle the question by mutual agreement.
As per paragraph 3 of this Article, where by reasons of the provisions of paragraph 1, a person other than an
individual is a resident of both Contracting States, the competent authorities of the Contracting States shall
endeavour to determine by mutual agreement, the Contracting States of which such person shall be deemed to
be a resident for the purposes of the Convention. They shall do so having regard to its place of effective
management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the
absence of such mutual agreement, such person shall not be entitled to any relief or exemption from tax provided
by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities
of the Contracting States.
The situation of dual residence may arise in case of companies in case where one Contracting State attaches
importance to the place of incorporation and the other State to the place of effective management. The tie-
breaker rule traditionally has been ‘place of effective management’. Even India has used place of effective
management in some of its treaties. In the latest update by OECD and UN, this has changed to a case by case
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approach considering the number of tax avoidance cases involving dual resident companies. Determination
under the case by case approach will be requested by the concerned taxpayer through Article 25 (Mutual
Agreement Procedure). Competent authorities will then rely on a range of factors to resolve the question of dual
residency.
The last sentence of paragraph 3 of this Article provides that in the absence of mutual agreement, the taxpayer
would not be entitled to any relief or exemption from tax provided by this Convention except to the extent and
in such manner as may be agreed upon by the competent authorities of the Contracting States. This will not,
however, prevent the taxpayer from being considered a resident of each Contracting State for purposes other
than granting treaty reliefs or exemptions to that person.
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The concept of “permanent Establishment” (PE), defined in Article 5, has considerable importance as business
profits (Article 7) of an enterprise cannot be taxed by a source State unless it proves the existence of PE.
The comparable term to PE under the Indian tax law is “business connection” [Section 9(1) (1)].
Generally speaking, the concept of “business connection” is wider than PE and hence, a business connection
may exist even without a PE, but the absence of a “business connection” may indicate absence of a PE.
As the PE concept gives the Source State the right to tax, it is an important Article for developing countries.
Hence, the UN Model Convention varies from the OECD Model Convention in the following respects:
 As per Article 5(3)(a) of the OECD Model Convention, a building site or construction or installation
project constitutes a PE if it lasts more than twelve months. The UN Models Convention is wider as it
covers “assembly and installation project” and “supervisory” activities in connection thereto and requires
the activity in question to continue only for six months.
 Article 5(3)(b) of the UN Model makes a specific reference to Service PE which is absent in the OECD
Model. Article 5(3)(b) of the UN Model reads as follows-
“The furnishing of services, including consultancy services, by an enterprise through employees or other
personnel engaged by the enterprise for such purpose, but only if activities of that nature continue within
a Contracting State for a period or periods aggregating more than 183 days in any 12 months period
commencing or ending in the fiscal year concerned”.
In the absence of a Service PE reference in OECD Model, the presence has to be ascertained through
general principles under Article 5(1).
 Article 5(1) states the “basic rule” for a PE and express the primary meaning of PE. The definition of PE
in Article 5 does not use the qualifying words” unless the context otherwise requires”. As such, the
definition needs to be followed in all cases unless specifically excluded.
Paraphrasing Article 5(1), a PE exists if the following conditions are satisfied cumulatively:
o There is an “enterprise”.
o Such enterprise is carrying on a “business”.
o There is a “place of business”,
o Such place of business is at the disposal of the enterprise (may be owned/rented but must be one
which the enterprise has the effective power to use);
o The place of business is “fixed”, that is, it must be established at a distinct place with a certain
degree of permanence.
The business of the enterprise is carried on wholly or partially through this fixed place of business. A
PE does not exist unless all the aforesaid conditions are satisfied.
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 As per Article 5(2), the term “permanent establishment” includes especially :

(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.
 Agency PE under OECD and UN Models targets activities done by a dependent agent of the enterprise
in the Source State. The recent update expands the definition of dependent agent PE to include instance
when an agent habitually concludes contracts, or habitually plays the principal role leading to the
conclusion of contracts routinely concluded without material modification by the enterprise.
 The UN Model Convention has an additional Article 5(6) relating to insurance which is absent in OECD
Model.
As per this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance,
be deemed to have a permanent establishment in the other Contracting State if it collects premiums in
the territory of that other State or insures risks situated therein through a person.
In the absence of similar Article in the OECD Model, a PE of an insurance Enterprise has to be
determined in accordance with provisions of Article 5(1) or 5(2) of the OECD model.
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Business profits of an enterprise can only be taxed by the Residence State. Right of Source State to tax
business profits of an enterprise only exists if a PE exists in its jurisdiction.
As per the approach under the OECD Model Convention once a PE is proven, the Source State can tax only
such profits as are attributable to the PE. The UN Model Convention amplifies this attribution principle by a
limited Force of Attraction rule (FOA).
The FOA rule implies that when a foreign enterprise sets up a PE in State of Source, it brings itself within the
fiscal jurisdiction of that State (State of Source) to such a degree that profits that the enterprise derives from
Source State of Source, whether through the PE or not, can be taxed by it (State of Source State).
As per Article 7 of the un Model Convention, if the enterprise carries on business in the other
Contracting State through a PE, the profits of the enterprise may be taxed in the other State but only
so much of them as is attributable to :
(a) That PE;
(b) Sales in that other State of goods or merchandise of the same or similar kind as those sold
through that PE; or
(c) Other business activities carried on in that other State of the same or similar kind as those
effected through that PE.
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Paragraph 1 of this Article provides the right to Residence State to tax interest. Paragraph 2, however, also
confers right to the Source State to tax interest. Generally, the interest is taxed in the Source State at a given rate
on gross basis. However, if the beneficial owner of the interest is a resident of the other Contracting State, the
tax so charged cannot exceed a specified percentage of the gross amount of the interest. The OECD Model
specifies the percentage as 10%, but the UN Model leaves this percentage to be established through bilateral
negotiations.
It may be noted that the definition of interest in both the models viz. OECD and UN Model is similar in that it
essentially means income from debt claims of every kind, whether or not secured by mortgage and whether or
not carrying a right to participate in the debtor’s profits, and in particular, income from government securities
and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or
debentures. Penalty charges for late payment are not regarded as interest for the purpose of this Article.
This Article provides the right of Contracting States to tax income from royalty.
Key differences between the two Models are as follows :
 As per the OECD Models, royalties arising in Source State and beneficially owned by resident of the
Residence State are taxable only in Residence State. However, the UN Model provides that royalties
may be taxed in the Residence State. Hence, the UN model departs from the principle of exclusive right
to tax provides to Residence State in the OECD Model. Thus, under the UN Model, the Source State may
also tax royalties. However, if the beneficial owner is a resident of the Residence State, the tax charged by
the Source State cannot exceed the specified percentage of the gross amount of royalties. This specified
percentage is to be established through bilateral negotiations.
 The definition of ‘royalties’ under the OECD Model does not include the following : (a) rental for films or
tapes used for radio or television broadcasting and (b) equipment rentals like rentals for industrial,
commercial or scientific equipment.
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India is a pioneer of the FTS concepts which was added to the Income-tax Act, 1961 since 1976. Some of our
tax treaties do contain a specific provision for FTS.
In its 2017 update, the UN Model has inserted a specific article pertaining to Fees for Technical Services (FTS).
There is no specific reference to FTS in the OECD Model.
Paragraph 1 of Article 12A provides that the FTS may be taxed in the Residence State but does not provide that
the FTS is exclusively taxable in the Residence State.
Paragraph 2 establishes the right of the country in which FTS arises to tax in accordance with its
domestic law, subject to the limitation on the maximum rate of tax, if the beneficial owner is a resident of the
other Contracting State. The maximum rate of tax is to be established through bilateral negotiations.
FTS is defined as payments for managerial, technical or consultancy services but excluded payment to an
employee, payment for teaching in an educational institution or for teaching by an educational institution,
payments by an individual for services for personal use. Management involves application of knowledge, skill
or expertise in the control or administration of the conduct of a commercial enterprise or organization. Technical
involves the application of specialized knowledge, skill or expertise with respect to a particular art, science,
profession or occupation. Fees received for services provided by regulated professions such as law, accounting,
architecture, medicine, engineering would constitute FTS. The ordinary meaning of “consultancy” involves the
provision of advice or services of a specialized nature.
An example of FTS can be seen from the following facts : R Company is a financial institution resident in
State R. R Company provides a wide variety of financial services to its customers, including acceptance
of deposits, extension of credit, guarantees, foreign exchange, negotiable instruments. R Company’s
business is conducted primarily in State R, but it also has clients in other countries, including State S.
State R and State S have a tax treaty which contains an article akin to Article 12A. Payments received for
services provided by a financial institution would constitute FTS if the services involve use of knowledge,
skill and expertise to provide research, analysis or advice to a specific client related to particular
circumstances. This has to be distinguished from provision of non-specialized services such as payment
and transmission services, debit and credit card services, etc.
This is the most commonly used Article and it provides for the taxation of income arising from transfer of a
capital asset, including transfer of shares. The right to tax income from capital gains may be exclusively
with the Residence State, or shared between the Residence and Source States.
The Article does not specify what is a capital gain and how is to be computed, this being left to the
applicable domestic law. The Article contains rules for taxation of gains made from alienation of different
assets such as immovable property, immovable property forming part of a PE, ships and aircrafts, etc. In respect
of shares, both Models have been updated and are identical. Rights are conferred to the Source State if more
than 50 percent of the value of shares during the preceding 365 days is derived from immovable property in
such Source State.
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Article 14 is only present now in the UN Model. It was deleted from the OECD Model on 29-4-2000 on the
basis of OECD Report (2000) on “Issues Related to Article 14 of the OECD Model Tax Convention”. The Effect
of deletion of Article 14 is that income derived from Professional Services etc., is now dealt with as
‘Business Profits’ (Article 7) under the OECD MC.
This Article deals with the taxation of income derived by a person for professional or specified services which
are offered in the Source State through some presence. This article on Independent personal services in the UN
Model states as under :
1) Income derived by a resident of a contracting State in respect of professional services or other activities of
an independent character shall be taxable only in that State except in the following circumstances,
when such income may also be taxed in the other Contracting State :
a. If he has a fixed base regularly available to him in the other Contracting States for the purpose of
performing his activities; in that case, only so much of the income as is attributable to that fixed base
may be taxed in that other Contracting State; or
b. If his stay in the other Contracting State is for a period or periods amounting to or exceeding in
the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year
concerned; in that case, only so much of the income as is derived from his activities performed in
that other State may be taxed in that other State.
2) The term “professional services” includes especially independent scientific, literary, artistic, educational or
teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists
and accountants.
Thus, the Article covers independent activities involving professional skills rendered by individuals on a
principal to principal basis. The meaning of the term “professional services” is illustrated by some examples of
typical liberal professions. The enumeration has an explanatory character only and is not exhaustive. It excludes
industrial and commercial activities that are covered under the Article on Business Profits. Likewise,
professional services while in employment which are covered under the Article on Dependent Personal Services,
e.g. a physician serving as a medical officer in a factory. Income of Artists, Athletes and Sportsmen, etc. is not
covered by this Article. Also, income from Fees from Technical Services is also not covered.
This Article deals with taxation of items of income which are not specifically taxable under any other specific
Article. Key differences are as under:
 OECD approach envisages that the exclusive right to tax is with the Residence State. UN Model contains an
additional paragraph, Article 21(3), which provides that Source State may also tax other income.
 Article 21(2) of both OECD and UN Model provides that for income effectively connected with a PE
maintained in a Contracting State by a resident of the other Contracting State, taxation is governed by the
provisions of Article 7 (Business Profits). Additionally, UN Model provides that if the aforesaid income is
effectively connected with a fixed base situated in a Contracting State by a resident of the other Contracting
State, taxation would be governed by the provisions of Article 14 (Independent personal services).
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In many cases, the application of tax treaty may result into double taxation for tax payers. In such a case, in
order to provide relief to such tax payers, Article 23A and 23B which contains provisions relating to elimination
of double taxation have to applied. Article 23A and 23B provide for the mechanism through which tax
credit/exemption may be available in the Residence State for taxes deducted in the Source State.
The OECD and UN Model Conventions specify two approaches- Exemption method (Article 23A) and Credit
method (Article 23B). Under the exemption method, tax exemption may be available in the Residence State.
Under the credit method, tax credit may be available in the Residence State for taxes deducted in the Source
State. These methods are not mutually exclusive and there may be cases where a treaty may adopt exemption
method for certain types of income and credit method for other incomes.
The double taxation referred to here, is juridical double taxation, meaning the same income or capital
is taxable in the hands of the same person by more than one State. It does not thus, encompass situations
of economic double taxation, i.e. where two different persons are taxable in respect of the same income or
capital. If two States wish to solve problems of economic double taxation, they must do so in bilateral
negotiations.
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There may be a situation wherein a tax payer may believe that the treatment accorded by either or both
Contracting States is not in accordance with the provisions of the tax treaty. In such a case, there is a need
for dispute resolution which is addressed by this Article. This Article requires competent authorities of
both countries to endeavour to resolve the conflict by engaging in bilateral negotiations.
The UN Model convention provides two alternatives- Alternative A and Alternative B, for the article on Mutual
Agreement Procedure which were introduced in 2011. Under OECD Model the taxpayer may make a request
to either Contracting State while UN Model (Alternative A) contemplates taxpayer going to Residence State
or the country of his nationality. Alternative B of UN model Article 25 contemplates reference to an
arbitration process as part of the Mutual Agreement Procedure. The decision arrived at, through the process
is binding unless a person directly affected does not accept it.
Key difference between the OECD Model Convention (Article 25) and UN Model Convention (Article 25B –
Alternative B) are as follows : -
 Article 25B(5) of the UN Model provides that an arbitration may be initiated if the competent
authorities are unable to reach an agreement on a case within three years from the presentation of
that case. However, Article 25(5) of the OECD Model provides a time limit of two years from the
date when all the information required by the competent authorities in order to address the case need
to be provided to both competent authorities.
 Article 25B(5) of the UN Model provides that arbitration must be requested by the competent
authority of one of the Contracting States. Once such a request is made, the taxpayer will be notified.
However, as per Article 25(5) of the OECD Model, arbitration must be requested in writing by the
person who initiated the case.
 Article 25B(5) of the UN Model allows the competent authorities to depart from the arbitration
decision if they agree to do so within six months after the decision has been communicated to them.
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In order to complete tax cases, a country may require certain information which may be available with the treaty
partner. Article 26 provides for the information which may be exchanged and the manner in which such
a request has to be made. The purpose of Article 26 is to facilitate effective exchange of information between
Contracting States. From the perspective of many developing countries, Article 26 is particularly important not
only for curtailing cross-border tax evasion and avoidance, but also to curtail the capital flight that is often
accomplished through such evasion and avoidance.
The OECD and UN Model Conventions are similar with respect to this Article. A Contracting State cannot be
expected to provide confidential financial information to another Contracting State unless it has confidence that
the information will not be disclosed to unauthorized persons. A Contracting State can avoid the exchange of
information obligations by showing that the information pertains to communication between an attorney and his
client which is protected from disclosure under domestic law. However, lack of interest or use in such
information cannot form the basis for a Contracting State to not co-operate with the exchange of information
obligations.
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Question 1
Explain briefly the significant difference the UN and OECD Model Tax Convention.
Answer
OECD Model is essentially a model treaty between two developed nations whereas UN Model is a model
convention between a developed country and a developing country.
Further, OECD Model advocates the residence principle, i.e., it lays emphasis on the right of state of residence
to tax the income, whereas the UN Model is a compromise between the source principle and residence principle,
giving more weight to the source principle as against the residence principle.
Question 2
When does it become necessary to apply the tie-breaker rule? Discuss the manner of application of the tie-
breaker rule.
Answer
Every jurisdiction, in its domestic tax law, prescribes the mechanism to determine residential status of a person.
If a person is considered to be resident of both the Contracting States, relief should be sought from Article 4 of
the Tax treaty. A series of tie-breaker rules are provided in Paragraph 2 Article 4 of Model Convention to
determine single state of residence for an individual.
The tie-breaker rule would be applied in the following manner:
I. The first test is based on where the individual has a permanent home. Permanent home would mean a
dwelling place available to him at all times continuously and not occasionally and includes place taken
on rent for a prolonged period of time.
II. If that test is inconclusive for the reasons that the individual has permanent home available to him in
both Contracting States, he will be considered a resident of the Contracting State where his personal and
economic relations are closer, in other words, the place where lies his centre of vital interests. Thus,
preference is given to family and social relations, occupation, place of business, place of administration
of his properties, political, cultural and other activities of the individual.
III. Paragraph (2) establishes a secondary criterion for two quite distinct and different situations :
 The case where the individual has a permanent home available to him in both Contracting States
and it is not possible to determine in which one he has his centre of vital interests;
 The case where the individual has a permanent home available to him in neither Contracting
State.
In the aforesaid scenarios, preference is given to the Contracting State where the individual has
an habitual abode.
IV. If the individual has habitual abode in both Contracting States or in neither of them, he shall be treated
as a resident of the Contracting State of which he is a national.
V. If the individual is a national of both or neither of the Contracting States, the matter is left to be
considered by the competent authorities of the respective Contracting States.
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Question 3
Explain the meaning of “interest” and “fees for technical services” under the UN Model Convention.
Answer
As per Article 11 of the UN Model Convention, “Interest” essentially means income from debt claims of every
kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s
profits, and in particular, income from government securities and income from bonds or debentures, including
premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment are not
regarded as interest for the purpose of this Article.
As per Article 12A of the UN Model Convention, “Fees for technical services” is defined as payments for
managerial, technical or consultancy services but excludes payment to an employee, payment for teaching in an
educational institution or for teaching by an educational institution, payment by an individual for services for
personal use.
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C.A. Kalpesh Sanghavi International Taxation Theory - P a g e | F62-B. 1
Article 38(1) of the International Court of Justice provides that the court shall apply the following in deciding
on a particular matter-
International Convention(s) [general or particular]
-establishing rules expressly recognised by the contesting states
International Customs
-serving as evidence of general practice accepted as law
General principles
-recognised by civilised nations
Judicial decisions and teachings of highly qualified publicists of various
nations
-serving as subsidiary means for determination of rules of law
Success of any law depends upon the manner in which it is interpreted and administered. In order to interpret
any law or agreement, one needs to understand the philosophy of law which has been kept in mind at the time
of passing such law in a country or at the time of forming an agreement between the two countries on a particular
aspect. This gives rise to the principles of public international law (example-U.N. principles on business and
human rights).
Tax has been a consequence of business for several hundreds of years; some of the principles would definitely
have their bearing on the manner in which law is passed. International tax law has evolved so that conflict of
national interests can be resolved (double taxation being the primary issue).
Source(s) of International Tax Law
S. No. Source Particulars relating to the source/origin
(1) Multilateral For example, the Vienna Convention on Law of Treaties
international agreements (VCLT)
(2) Double Taxation DTAAs may be comprehensive or otherwise. It is to be noted
Avoidance Agreement that along with the DTAA, it is the protocols, memorandum
(DTAA) of understanding, and exchange of information, etc. forming
part of the DTAA which enables interpretation of DTAA.
(3) Customary international For example, principles of law recognised by civilized nations
law and general in their national legal systems, customary law and judicial
principles of law decisions and the practices of international organizations.
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Customary international law is the aspect of international law

that derives from customs and convention. Along with general
principles of law and treaties, customs is also considered by
the International Court of Justice, jurists, the United Nations,
and its member states to be among the primary sources of
international law. The vast majority of the world’s
governments accept, in principle, the existence of customary
international law, although there are many differing opinions
as to what rules are contained therein.
The taxability of a foreign entity in any country depends upon two distinct factors, namely, whether it is doing
business with that country or in that country. Internationally, the term used to determine the jurisdiction for
taxation is “connecting factors”. There are two types of connecting factors, namely, “Residence” and “source”.
It means a company can be subject to tax either on its residence link or its source link with a country. Broadly,
if a company is doing business with another country (i.e. host/source country), then it would be subject to tax in
its home country alone, based on its residence link. However, if a company is doing business in a host/source
country, then, besides being taxed in the home country on the basis of its residence link, it will also be taxed in
the host country on the basis of its source link.
Residence < > Source
Jurisdictional double taxation

When source rules overlap, double taxation may arise i.e. tax is imposed by two or more countries as per their
domestic laws in respect of the same transaction, income arises or is deemed to arise in their respective
jurisdictions. This is known as “jurisdictional double taxation”.
In order to avoid such double taxation, a company can invoke provisions of Double Taxation Avoidance
Agreements (DTAAs) (also known as Tax Treaty or Double Taxation Convention DTC) with the host/source
country, or in the absence of such an agreement, an Indian company can invoke provisions of section 91,
providing unilateral relief in the event of double taxation.
Example
Company ICO is a resident of India. It has set up a branch in UK. Here, India would be the country of
residence for ICO, whereas UK would be the country of source. UK would tax the profits earned by the
branch of ICO located in UK, whereas ICO would be taxed on worldwide basis in India, including profits
of its UK branch. However, ICO can claim relief in respect of taxes paid in UK while filing its tax return
in India under the Indo-UK Double Taxation Avoidance Agreement.
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If, instead of UK, ICO has a branch in a state with which India does not have tax treaty, then it can claim
unilateral relief under section 91 of the Income-tax Act, 1961 in respect of taxes paid by its branch in that
state.
Economic double taxation
Economic double taxation happens when the same transaction, item of income or capital is taxed in two or more
state but in hands of different person (because of lack of subject identity)
Example
When one state attributes an income/capital to its legal owner whereas the tax law of other state attribute
it in the hands of the person in possession or having economic control over the income, it leads to
economic double taxation.
Yet another classic example is tax on distributed surplus by a company which is taxed in the hands
of the company distributing such surplus, while the other jurisdiction taxes the said income from
distribution in the hands of the shareholder, thus leading to double taxation of the same income
albeit in the hands of different persons.
(1) Definition of “Treaty”

a. Article 2 of Vienna Convention on Law of treaties, 1969 defines a “treaty” as an international
agreement concluded between States in written form and governed by international law, whether
embodied in a single instrument or in two or more related instruments and whatever its particular
designation.
(2) Role of Tax Treaties
“Treaty” represent various compromises agreed upon by the respective Contracting States depending
upon the economic expediency of a particular country.
Tax, in the country of source is considered as a cost, whereas the same is an obligation in the country
of residence. Therefore, there is need to achieve tax efficiency. Double Tax Avoidance Agreements
come into play to mitigate hardship caused by subjecting the same income to double taxation.
Tax Treaties attempt to eliminate double taxation and try to achieve balance and equity. They aim at
sharing of tax revenues by the concerned states on a rational basis. Tax treaties do not always succeed
in eliminating Double Taxation, but contain the incidence to a tolerable level.
(3) Types of DTAAs
a. Types of DTAAs
i. Limited DTAAs
ii. Comprehensive DTAAs
b. Limited DTAAs are those which are limited to certain types of incomes only. E.g., DTAA
between India and Pakistan is limited to shipping and aircraft profits only.
c. Comprehensive DTAAs are those which cover almost all types of incomes covered by any model
convention. Many a time, a treaty also covers wealth tax, gift tax, surtax, etc.
(4) Directive Principles set out in the Indian Constitution
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In the Indian context, Article 51 of the Indian Constitution has, inter alia, set out some directive
principles which must be followed by the State in the context of International agreements and
relationships. It has been provided that-
The State shall endeavour to –
a. Promote international peace and security;
b. Maintain just and honourable relations amongst nations;
c. Foster respect for international law and treaty obligations in the dealing of organised people with
one another; and
d. Encourage settlement of international disputes by arbitration.
It is pertinent to note that entries 10 and 14 of List 1 of the Seventh Schedule to the Constitution
of India confer the power on Parliament to legislate treaties with foreign countries. Further, this
power of Parliament has been delegated to the Central Government vide sections 90 and 90A of
the Income-tax Act, 1961.
(5) Need for tax treaties
The concept of source and residence prevailing in a majority of the countries is the root cause of
double taxation. Hence, there is a need to have tax treaties in force. In addition to allocating the
taxing rights and eliminating double taxation, there are various other important considerations as
mentioned below:
 Ensuring non-discrimination between resident and non-residents
 Resolution of disputes arising on account of different interpretation of tax treaty by the treaty
partner.
 Providing assistance in the collection of the fair and legitimate share of tax.
i. Allocating taxing rights
ii. Assisting in collection of fair and legitimate share of tax
iii. Resolution of dispute on account of different treaty interpretation
iv. Ensuring non-discrimination between residents and non-residents
v. Elimination of double taxation
vi. Need for tax Treaties
Further, in addition to above, there are some other principles which must be considered by countries
in their tax system –
I. Equity and fairness : Same income earned by different taxpayers must be taxed at the same
rate regardless of the source of income.
II. Neutrality and efficiency: Neutrality factor provides that economic processes should not be
affected by external factors such as taxation. Neutrality is two-fold.
a) Capital export neutrality and
b) Capital import neutrality (CIN).
Capital export neutrality (CEN) PROVIDES THAT BUSINESS DECISION MUST NOT
BE AFFECTED BY TAX FACTORS BETWEEN THE COUNTRY OF RESIDENCE AND
THE TARGET COUNTRY; whereas CIN provides that the level of tax imposed on non-
residents as well as the residents must be similar.
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III. Promotion of mutual economic relation, trade and investment : In some cases, it is observed
that avoidance of double taxation is not the only objective. The other objective may be to
give impetus to a country’s overall economic growth and development.’
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Basic Principles of Interpretation of a treaty

Principles or rules of interpretation of a tax treaty would be relevant only where terms or words used in treaties
are ambiguous, vague or are such that different meanings are possible. If words are clear or unambiguous, then
there is no need to resort to different rules for interpretation.
Prior to the Vienna Convention, treaties were interpreted according to the customary international law. Just as
each country’s legal system has its own canons of statutory construction and interpretation, likewise, several
principles exist for the interpretation of treaties in customary international law. We have already discussed, the
some of the rules of interpretation of Vienna Convention on law of Treaties.
Some of the important principles of Customary International law in interpretation of tax treaties are as follows:
(1) Golden Rule – Objective Interpretation : Ideally any term or word should be interpreted keeping its
objective or ordinary or literal meaning in mind. The term has to be interpreted contextually.
Words and phrases are in the first instance to be construed according to their plain and natural meaning.
However, if the grammatical interpretation would result in an absurdity, or in marked inconsistency with
other portions of the treaty, or would clearly go beyond the intention of the parties, it should not be
adopted?
(2) Subjective Interpretation : Under this approach, the terms of a treaty are to be interpreted
according to the common intention of the contracting parties at the time the treaty was
concluded. The intention must be ascertained from the words used in the treaty and the context thereof.
In Abdul Razak A. Meman’s case, the Authority for Advanced Rulings [the AAR] relied on the speeches
delivered by the Finance Ministers of India as well as UAE to arrive at the intention of parties in signing
the India-UAE Tax Treaty.
(3) Teleological or Purposive Interpretation: In this approach the treaty is to be interpreted
so as to facilitate the attainment of the aims and objectives of the treaty. This approach is also
known as the ‘object and purpose’ method.
In case of Union of India v. Azadi Bachao Andolan, the Supreme Court of India observed that “the
principles adopted for interpretation of treaties are not the same as those in interpretation of statutory
legislation. The interpretation of provisions of an international treaty, including one for double taxation
relief, is that the treaties are entered into at a political level and have several considerations as their
bases.”
The Apex Court also agreed with the contention of the Appellant that “the preamble to the Indo-
Mauritius DTAA recites that it is for ‘encouragement of mutual trade and investment’ and this aspect of
the matter cannot be lost sight of while interpreting the treaty”.
(4) The Principle of Effectiveness: According to this principle, a treaty should be interpreted
in a manner to have effect rather than make it void.
This principle, particularly stressed by the Permanent Court of International Justice, requires that the
treaty should be given an interpretation which ‘on the whole’ will render the treaty ‘most effective and
useful’, in other words, enabling the provisions of the treaty to work and to have their appropriate effects.
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(5) Principle of Contemporanea Expositio : A treaty’s terms are normally to be interpreted

on the basis of their meaning at the time the treaty was concluded. However, this is not a universal
principle.
In Abdul Razak A. Meman’s case [2005] 276 ITR 306, the AAR observed that “there can be little doubt
that while interpreting treaties, regard should be had to material contemporanea exposition, which means
that a statute is best explained by following the construction put upon it by judges at the time it was
made, or soon after. This proposition is embodied in Article 32 of the Vienna Convention, referred to
above, and is also referred to in the decision of the Hon’ble Supreme Court in K.P. Varghese v.
ITO[1981] 131 ITR 597”.
(6) Liberal Construction : It is a general principle of construction with respect to treaties that they
shall be liberally construed so as to carry out the apparent intention of the parties.
In John N. Gladden v. Her Majesty the Queen, the principle of liberal interpretation of tax treaties was
reiterated by the Federal Court, which observed : “Contrary to an ordinary taxing statute a tax treaty or
convention must be given a liberal interpretation with a view to implementing the true intentions of the
parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be
defeated or frustrated in so far as the particular item under consideration is concerned.”
The Court further recognised that “we cannot expect to find the same nicety or strict definition as in
modern documents, such as deeds, or Acts of parliament, it has never been the habit of those engaged in
diplomacy to use legal accuracy but rather to adopt more liberal terms.”
(7) Treaty as a whole – Integrated Approach : A treaty should be construed as a whole and effect
should be given to each word which would be construed in the same manner wherever it occurs.
Any provision should not be interpreted in isolation; rather the entire treaty should be read as a whole to
arrive at its object and purpose.
(8) Reasonableness and consistency : Treaties should be given an interpretation in which
the reasonable meaning of words and phrases is preferred, and in which a consistent meaning is
given to different portions of the instrument. In accordance with the principles of consistency, treaties
should be interpreted in the light of existing international law.
An important aspect to be noted regarding the rules of interpretation is that they are not rules of law and
are not to be applied like the rules enacted by the legislature in an Interpretation Act.
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A wide range of extrinsic material is permitted to be used in interpretation of tax treaties. According to
Article 32 of the Vienna Convention the supplementary means of interpretation include the preparatory work of
the treaty and the circumstances of its conclusion.
According to Prof. Starke one may resort to following extrinsic aids to interpret a tax treaty provided that clear
words are not thereby contradicted :
(1) Interpretative Protocols, Resolutions and committee Reports, setting out agreed
interpretations;
(2) A subsequent agreement between the parties regarding the interpretation of the treaty or the
application of its provisions [Art. 31(3) of the VCLT];
(3) Subsequent conduct of the state parties, as evidence of the intention of the parties and their
conception of the treaty;
(4) Other treaties, in pari materia (i.e., relating to the same subject matter), in case of doubt.
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If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more elaborative or
clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while
applying provisions of a treaty Y?
The views of the Indian Judiciary are, however, not consistent in this respect. There are contradictory
judgements by Indian courts/tribunal in this regard.
International Article/Essays/Reports
International Article/Essays/Reports are referred as extrinsic aid for interpretation of tax treaties. Like,
in case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP). The High Court obtained “useful
material” through international articles.
Cashiers published by International Fiscal Association (IFA), Netherlands
“Cahiers de Droit Fiscal International” is the main publication of the IFA, which is published annually and deals
with two major topic each year. Cahiers were relied upon in case of Azadi Bachao Andolan’s (supra) case by
the SC.
Protocol
Protocol is like a supplement to the treaty. In many treaties, in order to put certain matters beyond doubt,
there is a protocol annexed at the end of treaty, which clarifies borderline issues.
A protocol is an integral part of a tax treaty and has the same binding force as the main clauses therin.
Protocol to India France treaty contains the Most Favoured Nation Clause. Thus, one must refer to protocol
before arriving at any final conclusion in respect of any tax treaty provision.
MFN clause is usually found in Protocols and Exchange of Notes to DTCs. Under this clause a country agrees
to extend the benefits to the residents of the other country, which it had (first country) promised to the residents
of third country. It tries to avoid discrimination between residents of different countries.
Normally, the benefits under this clause is restricted to a specific group like OECD countries or developing
countries. The nature of benefits under MFN clause could either be application of lower rate of tax or narrowing
the scope of the income liable to tax or allowing higher deduction in respect of executive and general
administrative expenses of head office.
Preamble
Preamble to a tax treaty could guide in interpretation of a tax treaty. In case of Azadi Bachao Andolan,
the Apex Court observed that ‘the preamble to the Indo-Mauritius Double Tax Avoidance Convention (DTAC)
recites that it is for the ‘encouragement of mutual trade and investment’ and this aspect of the matter cannot
be lost sight of while interpreting the treaty’. These observations are very significant whereby the Apex Court
has upheld ‘economic considerations’ as one of the objectives of a Tax Treaty.
Mutual Agreement Procedure [MAP]
MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more authentic
than other aids as officials of both countries are in possession of materials/documents exchanged at the time of
signing the tax treaty which would clearly indicates the object or purpose of a particular provision. Successful
MAPs also serve as precedence in case of subsequent applications.
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Interpretation of any statute, more so international tax treaties requires that we follow some rules of
interpretation. Commentaries are one of the important rules of interpretation of tax treaties.
There are two commentaries available – one by OECD and the other by UN, based on their respective models.
OECD Commentary is authentic and revised from time to time. UN Commentary is by and large based on OECD
commentary. UN commentary was published in 1980 and has been revised from time to time. One can refer to
the commentaries for interpretation and application of various provision contained in a DTAA.
Views expressed in the commentaries carry great authority. Where Contracting States adopt the text of the
Article as per OECD Model convention without any change, and if these countries happen to be OECD
Countries, the OECD commentary is directly applicable. In case of a DTAA between developed and developing
countries, normally UN model is followed. UN Model and UN Commentary both being largely based on OECD
Model and Commentary respectively, OECD Commentary is also quite helpful in interpretation of treaties based
on UN Model.
OECD Model Commentary has been widely used in interpretation of tax treaties. The Commentary on the
OECD Model Convention states that: “the Commentaries have been cited in the published decisions of
the courts of the great majority of Member countries. In many decisions, the Commentaries have
been extensively quoted and analysed, and have frequently played a key role in the judge’s
deliberations.”
The OECD has framed a model convention to guide countries to draft DTAAs. In the Azadi Bachao Andolan
case, the Supreme Court has made reference to the OECD convention while interpreting terms used in DTAA.
Both UN and OECD Model Commentaries are a great help in interpretation of tax treaties. Their importance in
interpretation of tax treaties can hardly be over emphasized. OECD, however, plays a greater role in providing
standardized or systematized approach in interpretation of tax treaties.
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In CIT v. Vishakhapatnam Port Trust’s case [1983] 144 ITR 146, the Andhra Pradesh High Court observed that,
“in view of the standard OECD Models which are being used in various countries, a new area of genuine
‘international tax law’ is now in the process of developing. Ant person interpreting a tax treaty must now
consider decisions and rulings worldwide relating to similar treaties. The maintenance of uniformity in
the interpretation of a rule after its international adoption is just as important as the initial removal of
divergences. Therefore, the judgements rendered by courts in other countries or rulings given by other tax
authorities would be relevant.”
In the under-noted cases, foreign court cases have extensively been quoted for interpretation of treaty provisions
:
Union of India v. Azadi Bachao Andolan
CIT v. Vishakhapatnam Port Trust
Abdul Razak A. Meman’s case
Whenever a reference is made in a treaty to the provisions of domestic tax laws for assigning meaning to a
particular term, a question often arises what meaning to be assigned to the said term –the one which prevailed
on the date of signing a tax treaty or the one prevailing on the date of application of a tax treaty.
There are two views on the subject, namely, Static and Ambulatory.
Meaning of a term (not defined in the treaty) as per the domestic law
Static approach
Meaning at the time the treaty was signed
Ambulatory approach
Meaning at the time of application of treaty provisions
In general, Model Commentaries favour ambulatory approach, however with one caution and that is ambulatory
approach cannot be applied when there is a radical amendment in the domestic law thereby changing the sum
and substance of the term.
India-Australia Treaty, in Article 3(2) adds the expression “from time to time in force” to provide for an
“ambulatory” interpretation.
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The International Law Commission initiated the work on Vienna Convention on law of Treaties in the year
1949 which was completed in the year 1969. It came into force in the year 1980. Further, as of January, 2018,
it was ratified by 116 Countries.
Since tax treaty is a part of international law, its interpretation should be based on certain set of
principles and rules of interpretation. The Vienna Convention on Law of Treaties provides the basic rules
of interpretation of any international agreement (including a tax treaty). Therefore, it would be worthy to
understand some of the Article of the Vienna Convention of Law of Treaties which would help appreciate
the manner of application and interpretation of tax treaties.
Principles enunciated in the Vienna Convention on Law of Treaties

Article Article Heading Principle enunciated
No.
26 Pacta Sunt Servanda (in Every treaty in force is binding upon the parties and must be
good faith) followed by them in good faith.
28 Non-retroactivity of Unless a different intention appears from the treaty or is

treaties Otherwise established, treaty provisions do not bind a party in
relation to any act or fact which took place or any situation which
ceased to exist before the date of the entry into force of treaty with
respect to that party.
In other words, unless otherwise provided, treaties cannot have
retrospective application.
29 Territorial Scope of Unless a different intention appears from the treaty or is otherwise
Treaties established, a treaty is binding upon each party in respect of its
entire territory.
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31 General Rule of 
-A treaty shall be interpreted in good faith in accordance
interpretation with the ordinary meaning to be given to the terms thereof
in the context and in the light of its object and purpose.
 the context for the purpose of interpretation of a treaty
shall comprise, in addition to the text, including its
preamble and annexure
a) Any agreement relating to the treaty which was
made between all the parties in connection with the
conclusion of the treaty;
b) Any instrument which was made by one or more
parties in connection with the conclusion of the
treaty and accepted by the other parties as an
instrument related thereto.
 the following shall be taken into account, together with the
context in that :
a) Any subsequent agreement between the parties
regarding the interpretation of the treaty or the
application of its provisions;
b) Any subsequent practice in the application of the
treaty which establishes the agreement of the
parties regarding its interpretation;
c) Any relevant rules of international law applicable
to relation between the parties.
 A special meaning shall be given to a term if it is
established that the parties so intended.
32 Supplementary means Recourse may be had to supplementary means of interpretation,
of interpretation including the preparatory work of the treaty and the circumstances
of its conclusion, in order to confirm the meaning resulting from
the application of Article 31, or to determine the meaning when
the interpretation according to Article 31 :
(a) Leaves the meaning ambiguous or obscure; or
(b) Leads to a result which is manifestly absurd or
unreasonable.
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33 Interpretation of  When a treaty has been authenticated in two or more

Treaties Authenticated languages, the text is equally authoritative in each
in two or more language, unless the treaty provides or the parties agree
languages that, in case of divergence, a particular text shall prevail.
 A version of the treaty in a language other than the one of
those in which the text was authenticated shall be
considered an authentic text only if the treaty so provides
or the parties so agree.
 The term of the treaty are presumed to have the same
meaning in each authentic text.
 Except where a particular text prevails in accordance with
paragraph 1, when a comparison of the authentic texts
discloses a difference in meaning which the application of
Article 31 and 32 does not remove, the meaning which best
reconciles the texts, having regard to the object and
purpose of the treaty, shall be adopted.
34 General Rule regarding A treaty does not create either obligations or right for a third State
third states without its consent
42 Validity and  The validity of a treaty or of the consent of a State be

Continuance in force of bound by a treaty may be impeached only through the
treaties application of the Convention
 The termination of a treaty, its denunciation or the
withdrawal of a party, may take place only as a result of
the application of the provisions of the treaty or of the
Convention. The same rule applies to suspension of the
operation of a treaty.
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60 Termination or  A material breach of a bilateral treaty by one of the parties

Suspension of the entitles the other to invoke the breach as a ground for
operation of a treaty as a terminating the treaty or suspending its operation in whole
consequence of a breach or in part.
 A material breach of a multilateral treaty by one of the
parties entitles :
a) the other parties by unanimous agreement to
suspend the operation of the treaty in whole or in
part or to terminate it either :
 In the relations amongst themselves and the
defaulting State, or
 As between all the parties;
b) A party specially affected by the breach to invoke
it as a ground for suspending the operation of the
treaty in whole or in part in the relations between
itself and the defaulting State ;
c) Any party other than the defaulting State to invoke
the breach as a ground for suspending the operation
of the treaty in whole or in part with respect to itself
if the treaty is of such a character that a material
breach of its provisions by one party radically
changes the position of every other party with
respect to further performance of its obligations
under the treaty.
 A material breach of a treaty, for the purposes of this
Article, consists in:
a) A repudiation of the treaty not sanctioned by the
Convention; or
b) The violation of a provision essential to the
accomplishment of the object or purpose of the
treaty.
 The foregoing paragraphs are without prejudice to any
provision in the treaty applicable in the event of a breach.
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61 Supervening  A party may invoke the impossibility of performing

impossibility of provision of a treaty as a ground for terminating or
performance withdrawing from it, if the impossibility results from the
permanent disappearance or destruction of an object
indispensable for the execution of the treaty. If the
impossibility is temporary, it may be invoked only as a
ground for suspending its operation.
 -Impossibility of performance may not be invoked by a
party as a ground for terminating, withdrawing from or
suspending the operation of a treaty if the impossibility is
the result of a breach by that party either of an obligation
under the treaty or of any other international obligation
owned to any other party thereto.
62 Fundamental change of  A fundamental change of circumstances which has

circumstances occurred with regard to those existing at the time of the
conclusion of a treaty, and which was not foreseen by the
parties, may not be invoked as a ground for terminating or
withdrawing from the treaty unless-
a) The existence of those circumstances constituted
an essential basis of the consent of the parties to be
bound by the treaty; and
b) The effect of the change is radically to transform
the extent of obligations still to be performed under
the treaty.
 A fundamental change of circumstances may not be
invoked as a ground for terminating or withdrawing from
a treaty-
a) if the treaty establishes a boundary; or
b) If the fundamental change is the result of a breach
by the party invoking it either of an obligation
under the treaty or of any other international
obligation owed to any other party to the treaty.
 If, under the foregoing paragraphs, a party may invoke a
fundamental change of circumstances as a ground for
terminating or withdrawing from a treaty it may also
invoke the change as a ground for suspending its
operation.
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64 Emergence of new If a new peremptory norm of general international law emerges,

peremptory norm of any existing treaty which is in conflict with that norm becomes
general international void and stands terminated
law
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Question 1
What do you mean by double taxation? Discuss the connecting factors which lead to Double taxation.
Answer
The taxability of a foreign entity in any country depends upon two distinct factors, namely, whether it is doing
business with that country or in that country. Internationally, the term used to determine the jurisdiction for
taxation is “connecting factors”. There are two types of connecting factors, namely, “Residence” and “source”.
It means a company can be subject to tax either on its residence link or its source link with a country. Broadly,
if a company is doing business with another country (i.e. host/source country). Then it would be subject to tax
in its home country alone, based on its residence link. However, if a company is doing business in a host/source
country, then, besides being taxed in the home country on the basis of its residence link, it will also be taxed in
the host country on the basis of its source link.
 Jurisdictional double taxation: Accordingly, when source rules overlap, double taxation may arise i.e.
tax is imposed by two or more countries as per their domestic laws in respect of the same transaction,
income arises or is deemed to arise. In their respective jurisdictions. This is known as “jurisdictional
double taxation”.
In order to avoid such double taxation, a company can invoke provisions of Double Taxation Avoidance
Agreements (DTAAs) (also known as Tax Treaty or Double Taxation Convention-DTC) with the
host/source country, or in the absence of such an agreement, an Indian company can invoke provisions
of section 91 of the Income-tax Act, 1961, providing unilateral relief in the event of double taxation.
 Economic double taxation : ‘Economic double taxation’ happens when the same transaction, item of
income or capital is taxed in two or more states but in hands of different person (because of lack of
subject identity)
Question 2
“In addition to allocating the taxing rights and elimination of double taxation, there are various other important
considerations while entering into tax treaty”. Elucidate.
Answer
In addition to allocating the taxing rights and elimination of double taxation, there are various other important
considerations while entering into a tax treaty, as mentioned below:
 Ensuring non-discrimination between resident and non-residents
 Resolution of disputes arising on account of different interpretation of tax treaty by the treaty partner.
 Providing assistance in the collection of the fair and legitimate share of tax.
Further, in addition to above, there are some other principles which must be considered by countries in their tax
system-
(1) Equity and fairness: same income earned by different taxpayers must be taxed at the same rate regard
less of the source of income.
(2) Neutrality and efficiency: Neutrality factor provides that economic processes should not be affected
by external factors such as taxation. Neutrality is two-fold.
(a) Capital export neutrality and
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(b) Capital import neutrality (CIN)

Capital export neutrality (CEN) provides that business decision must not be affected by tax
factors between the country of residence and the target country; whereas CIN provides that the
level of tax imposed on non-residents as well as the residents must be similar.
(3) Promotion of mutual economic relation, trade and investment: In some cases, it is observed that
avoidance of double taxation is not the only objective. The other objective may be to give impetus
to a country’s overall economic growth the development.
Question 3
What is the General Rule of Interpretation under Vienna Convention of Law of Treaties?
Answer
Article 31 of Vienna Convention of Law of Treaties contains the General Rule of Interpretation. It lays down
that following general rule of interpretation:
 A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the
terms thereof in the context and in the light of its object and purpose.
 The context for the purpose of interpretation of a treaty shall comprise, in addition to the text, including
its preamble and annexure
a. Any agreement relating to the treaty which was made between all the parties in connection with
the conclusion of the treaty:
b. Any instrument which was made by one or more parties in connection with the conclusion of the
treaty and accepted by the other parties as an instrument related thereto.
 The following shall be taken into account, together with the context in that:
a. Any subsequent agreement between the parties regarding the interpretation of the treaty or the
application of its provisions;
b. Any subsequent practice in the application of the treaty which establishes the agreement of the
parties regarding its interpretation;
c. Any relevant rules of international law applicable to relation between the parties.
 A special meaning shall be given to a term if it is established that the parties so intended.
Question 4
What are the Extrinsic Aids to interpretation of a tax treaty?
Answer
A wide range of extrinsic material is permitted to be used in interpretation of tax treaties. According to Article
32 of the Vienna Convention the supplementary means of interpretation include the preparatory work of the
treaty and the circumstances of its conclusion.
According to Prof. Starke one may resort to the following extrinsic aids to interpret a tax treaty provided that
clear words are not thereby contradicted:
(1) Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations;
(2) A subsequent agreement between the parties regarding the interpretation of the treaty or the application
of its provisions [Art. 31(3) of the VCLT];
(3) Subsequent conduct of the state parties, as evidence of the intention of the parties and their conception
of the treaty;
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(4) Other treaties, in pari material (i.e., relating to the same subject matter), in case of doubt.
Provision in Parallel Tax Treaties
If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more elaborative or
clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while
applying provisions of a treaty Y?
However, the views of the Indian Judiciary are not consistent in this respect. There are contradictory judgements
by Indian courts/tribunal in this regard.
International Article/ Essays/Reports
International Article/Essays/Reports are referred as extrinsic aid for interpretation of tax treaties. Like, in case
of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), the High Court obtained “useful material”
through international articles.
Cashier published by International Fiscal Association (IFA), Netherlands
“Cashiers de Droit Fiscal International” is the main publication of the IFA, which is published annually and
deals with two major topics each year. Cashiers were relied upon in case of Azadi Bachao Andolan’s (supra)
case by the SC.
Protocol
Protocol is like a supplement to the treaty. In many treaties, in order to put certain matters beyond doubt, there
is a protocol annexed at the end of the treaty, which clarifies borderline issues.
A protocol is an integral part of a tax treaty and has the same binding force as the main clauses therein.
Protocol to India France treaty contains the Most Favoured Nation Clause. Thus, one must refer to protocol
before arriving at any final conclusion in respect of any tax treaty provision.
Preamble
Preamble to a tax treaty could guide in interpretation of a tax treaty. In case of Azadi Bachao Andolan, the Apex
Court observed that ‘the preamble to the Indo-Mauritius Double Tax Avoidance Convention (DTAC) recites
that it is for the ‘encouragement of mutual trade and investment’ and this aspect of the matter cannot be lost
sight of while interpreting the treaty’. These observation are very significant whereby the Apex Court has upheld
‘economic considerations’ as one of the objectives of a tax treaty.
Mutual Agreement Procedure [MAP]
MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more authentic
than other aids as officials of both countries are in possession of materials/documents exchanged at the time of
signing the tax treaty which would clearly indicate the object or purpose of a particular provision. Successful
MAPs also serve as precedence in case of subsequent applications.
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C.A. Kalpesh Sanghavi International Taxation Theory - P a g e | F62-C. 1
Impact of Globalisation
Globalisation has benefited our domestic economic economies, boosted trade and increased foreign direct
investments in many countries. The unrestricted movement of capital and labour, the shift of manufacturing
bases from high-cost to low-cost locations, the gradual removal of trade barriers, technological and
telecommunication developments, and the ever-increasing importance of managing risks and of developing,
protecting and exploiting intellectual property, have had an important impact on the way cross-border activities
take place. In this way, it accelerated growth, created jobs and fostered innovation. Globalisation is not new,
but the pace of integration of national economies and markets has increased substantially in recent
years. It has a significant impact on a country’s corporate income tax regimes.
Growth of E- Commerce and consequent aggressive tax planning
Way back in 1920s, the League of Nations recognised that the interaction of domestic tax systems can lead to
double taxation with adverse effects on growth and global prosperity. Globally, countries concur on the need to
eliminate double taxation and the need to achieve this on the basis of accepted international laws that are clear
and predictable, giving certainty to both governments and business. International tax law is, therefore, a
pillar in facilitating the development of the global economy. With the economy, the enterprises also
became more globally integrated. Multi-national enterprises (MNE) now represent a significant proportion of
global GDP. Further, intra-firm trade comprises of a growing proportion of overall trade. Also, the increasing
significance of the service component of the economy, and of digital products which are deliverable over the
Internet, has made it much easier for businesses to locate many productive activities in geographic locations that
are distant from the physical location of their customers. These developments have been accompanied by the
increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the
boundaries of acceptable tax planning, thus, encouraging MNEs to minimise their tax burden by resorting to
aggressive tax planning.
Adverse Effects of BEPS
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and
mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations
where there is little or no real activity but the taxes are low, resulting in little or no overall corporate
tax being paid. This has become a critical issues since governments have to cope with less revenue and a higher
cost to ensure compliance. Moreover, BEPS undermines the integrity of the tax system, as reporting of low
corporate taxes is considered to be unfair. In developing countries, the lack of tax revenue leads to significant
under-funding of public investment that could help foster economic growth. Further, when tax laws permit
businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing
activities are conducted, other taxpayers, especially individual taxpayers in that jurisdiction bear a greater share
of the burden. This gives rise to tax fairness issues on account of individuals having to bear a higher tax burden.
Also, enterprises that operate only in domestic markets, including family-owned business or new innovative
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businesses, may have difficulty competing with MNEs that have the ability to shift their profits across borders
to avoid or reduce tax. Fair competition is harmed by the distortions induced by BEPS.
Need for international collaboration to protect tax sovereignty of its
countries
Taxation is at the core of countries sovereignty, but the interaction of domestic tax laws in certain cases leads
to gaps and frictions. While developing their domestic tax laws, sovereign states may not adequately take into
consideration the effect of other countries’ laws. The interaction of separate sets of laws enforced by sovereign
countries causes frictions, including potential double taxation for corporations operating in many countries. It
also causes gaps, in cases where corporate income is untaxed, both in the country of source and in the country
of residence, or is taxed only at nominal rates. In the domestic context, coherence is generally achieved through
a principle of matching- a payment that is deductible by the payer is usually taxable in the hands of the recipient,
unless explicitly exempted. There is no similar principle of coherence at the international level, which leaves
considerable scope for arbitrage by taxpayers, though sovereign states have united to ensure coherence in a
narrow field, namely to prevent double taxation. BEPS relates primarily to instances where the interaction of
different tax rules leads to double non-taxation. It also relates to arrangements that achieve no or low taxation
by shifting profits away from the jurisdictions where the activities creating those profits take place. International
standards have tried to reduce these frictions in a manner that respects tax sovereignty; however, gaps still
remain. Therefore, there is a need for countries to collaborate on tax matters so that they are able to get their due
share of taxes.
In the background of the above repercussions, in February 2013, the OECD published a report on “Addressing
Base Erosion and Profit Shifting” iterating the need for analyzing the issue of tax base erosion and profit
shifting by global corporations. The OECD followed it up with publishing draft Action Plan on Base Erosion
and Profit Shifting (BEPS Action Plan) in July 2013 which came to final fruition in October 2015. The BEPS
action plan identifies fifteen actions to address BEPS in a comprehensive manner and sets a deadline to
implement those actions.
The Action Plans were structured around three fundamental pillars viz.:
(1) Reinforcing of ‘substance’ requirements in existing international standards;
(2) Alignment of taxation with location of value creation and economic activity; and
(3) Improving transparency and tax certainty.
A brief classification of the various action plans based on the fundamental pillars is as under:
Action 1 : Address the tax challenges of the digital economy
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Coherence Substance Transparency

Action 2: Neutralize the effects Action 6: Prevent tax treaty Action 11: Establish
of hybrid mismatch abuse methodologies to collect and
arrangements analyse data on BEPS
Action 3: Strengthen controlled Action 7: Prevent the artificial Action 12: Require taxpayers to
foreign company rules avoidance of permanent disclose their aggressive tax
establishment status planning arrangements
Action 4: Limit base erosion via Action 8: Consider transfer Action 13: Re-examine transfer
interest deductions and other pricing for intangibles pricing documentation
financial payments
Action5: Counter harmful tax Action 9: Consider transfer Action 14: Make dispute
practices more effectively pricing for risks and capital resolution mechanisms more
effective
Action 10: Consider transfer
pricing for other high-risk
transactions
Action 15: Develop a multilateral instrument

Coherence Substance Transparency
Domestic tax systems are Present tax laws must be Greater transparency and
coherent –tax deductible modified: To align tax with improved data: Pre-requisites to
payments by one person results substance. evaluate the impact and
in income inclusions by the Domestic and international tax magnitude of BEPS.
recipient. laws should ideally relate to both
income and the economic
activity that generates it.- since
at times, tax treaty and transfer
pricing facilitate the separation
of taxable profits from value-
creating activities, such as
through shell companies that
have little or no economic
substance.
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International coherence in Concerns in the area of transfer Taxpayers to report their

corporate income taxation – A pricing should be addressed aggressive tax planning
prerequisite to complement the within the prevalent system : arrangements and rules about
standards that prevent double these area include returns related transfer pricing documentation,
taxation with a new set of to over-capitalisation, risk and breaking down the information
standards designed to avoid intangible assets. Specific rules, on a country-by-country basis:
double non-taxation either within or beyond the arm’s Assist governments identify risk
length principle, may be required areas and focus their audit
for this purpose. strategies.
Making dispute resolution
mechanisms more effective: To
provide business with greater
certainty and predictability
An unprecedented amount of interest and participation has been witnessed by OECD with more than sixty
countries, both OECD members and G-20 countries, being directly involved as a part of technical groups in the
development of congruent international tax standards.
The summary explanatory statement indicates the level of political commitment by OECD, G20 and other States
involved in the 2015 work to the various reports. The OECD has iterated the following terms to indicate the
commitment by various participant countries:
New minimum standard – New minimum standard implies application of a new rule to be
implemented by all states, since non-implementation may result in negative spill overs (including adverse impact
of competitiveness) on other countries. Each of the four BEPS minimum standards [namely, Action 5,6,13 and
14] is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level
playing field. All members of the Inclusive Framework on BEPS commit to implementing the minimum
standards, and commit to participating in the peer review.
Revision of a standard which already exists – Existing standards have been updated and
will be implemented but with the caveat that all BEPS participants have not endorsed the underlying standards
on tax treaties or transfer pricing; and
Best practice - A best practise is not a standard but optional recommendation for states to follow.
Guidance based on best practices will support those countries proposing to act in the areas of mandatory
disclosure initiatives or controlled foreign company (CFC) LEGISLATION.
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Digital economy: Dissolving link between income-producing activity and physical location
At present, in the digital domain, business may be conducted without regard to national boundaries and may
dissolve the link between an income-producing activity and a specific location. Hence, business in digital
domain doesn’t actually occur in any physical location but instead takes place in “cyberspace.” Given the rise
of e-commerce, an entire digital economy has emerged in the last decade. Since there is a concept of
“intangibility” attached to the digital model of business, tax authorities often faced challenges rightly bringing
to tax the profits earned from a digital business. To address the same, the first action plan of the BEPS
project was developed by the OECD which outlines the methods and principles based on which
physical and digital economies can be taxed at par. Before the same, physical locations of the servers of
such digital businesses were considered to establish the tax jurisdiction in which the profits of digital businesses
could be taxed. However, it was observed that servers were therefore placed in tax efficient jurisdictions, even
though the main income generation and customers were from other jurisdictions.
Taxation issues in E-Commerce

These new business models have created new tax challenges. The typical taxation issues relating to e-commerce
are:
(1) The difficulty in characterizing the nature of payment and establishing a nexus or link between a
taxable transaction, activity and a taxing jurisdiction,
(2) The difficulty of locating the transaction, activity and identifying the taxpayer for income tax
purposes.
The digital business, thus, challenges physical presence-based permanent establishment rules. If permanent
establishment (PE) principles are to remain effective in the new economy, the fundamental PE components
developed for the old economy i.e., place of business, location, and permanency must be reconciled with the
new digital reality.
OECD Recommendations under Action Plan 1 of BEPS project
The OECD has recommended several options to tackle the direct tax challenges which include:
 Modifying the existing Permanent Establishment (PE) RULE TO PROVIDE WHETHER AN
ENTERPRISE ENGAGED IN FULLY DE-MATERIALIZED digital activities would constitute a
PE, if it maintained a significant digital presence in another country’s economy.
 A virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise
maintains a website on a server of another enterprise located in jurisdiction and carries on
business through that website
 Imposition of a final withholding tax on certain payments for digital goods or services provided
by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain
digital transactions received by a non-resident from a resident or from a non-resident having PE
IN OTHER CONTRACTING STATE.
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Taking into consideration the potential of new digital economy and the rapidly evolving nature of business
operations, it becomes necessary to address the challenges in terms of taxation of such digital transactions.
Indian Taxation Regime
Insertion of chapter VIII in the Finance Act, 2016 on Equalisation Levy to address this challenge
In order to address the challenges of the digital economy, Chapter VIII of the Finance Act, 2016, titled
“Equalisation Levy”, provides for an equalisation levy of 6% of the amount of consideration for specified
services received or receivable by a non-resident not having permanent establishment in India, from a resident
in India who carries out business or profession, or from a non-resident having permanent establishment in India.
Meaning of “Specified Service”
(1) Online advertisement;
(2) Any provision for digital advertising space or any other facility or service for the
purpose of online advertisement;
Specified Service also includes any other service as may be notified by the Central Government.
Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy
shall be made if the aggregate amount of consideration for specified services received or receivable by a non-
resident from a person resident in India or from a non-resident having a permanent establishment in India does
not exceed Rs 1 lakh in any previous year.
“Significant economic presence” to constitute “business connection”
The scope of provisions of section 9(1)(i), prior to amendment by the Finance Act, 2018, were restrictive as it
essentially provided for physical presence based nexus rule for taxation of business income of the non-resident
in India. Explanation 2 to the said section which defines “business connection” was also narrow in its
scope since it limited the taxability of certain activities or transactions of non-resident to those carried out
through a dependent agent. Therefore, emerging business models such as digitized businesses, which do not
require physical presence of itself or any agent in India, were not covered within the scope of section 9(1)(i).
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In view of the above, the Finance Act, 2018 has amended section 9(1)(i) to provide that ‘significant economic
presence’ in India shall also constitute ‘business connection’. For this purpose, “significant economic presence”
means-
Transaction/activity Condition
(i) Any transaction in respect of any goods, The aggregate of payments arising from such
services or property carried out by a non- transaction or transactions during the
resident in India including provision of previous year exceeds the amount as may be
download of data or software in India prescribed
(ii) Systematic and continuous soliciting of its The users would be of such number as may
business activities or engaging in interaction be prescribed.
with users in India through digital means
Notes:
(i) Only so much of income as is attributable to such transactions or activities shall be deemed
to accrue or arise in India.
(ii) Such transactions or activities shall constitute significant economic presence in India,
whether or not the agreement for such transactions or activities is entered in India or whether
or not the non-resident has a residence or place of business in India or renders services in
India.
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Before understanding what Action Plan 2 recommends, we must understand what a hybrid mismatch is.
Hybrid Mismatch Arrangement: Meaning
A. Elements of hybrid mismatch arrangements
Hybrid mismatch arrangements generally use one or more of the following underlying elements:
 Hybrid entities: Entities that are treated as transparent for tax purposes in one country and as
non-transparent in another country.
 Dual residence entities: Entities that are resident in two different countries for tax purposes.
 Hybrid instruments: Instruments which are treated differently for tax purposes in the countries
involved, most prominently as debt in one country and as equity in another country.
 Hybrid transfers: Arrangements that are treated as transfer of ownership of an asset for one
country’s tax purposes but not for tax purposes of another country, which generally sees a
collateralised loan.
Effects of hybrid mismatch arrangements

In terms of the results hybrid mismatch arrangements aim at achieving, they generally fall within one of
the following categories:
 Double deduction schemes: Arrangements where a deduction related to the same contractual
obligation is claimed for income tax purposes in two different countries.
 Deduction / no inclusion schemes: Arrangements that create a deduction in one country,
typically a deduction for interest expenses, but avoid a corresponding inclusion in the taxable
income in another country.
 Foreign tax credit generators: Arrangements that generate foreign tax credits that arguably
would otherwise not be available, at least not to the same extent, or not without more
corresponding taxable foreign income.
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A hybrid mismatch is an arrangement that:

 Exploits a difference in the tax treatment of an entity or an instrument
 Under the laws of two or more tax jurisdictions to achieve double non-taxation
Hybrid mismatch arrangements are sometimes used to achieve unintended double non-taxation or long-term tax
deferral in one or more of the following ways –
Hybrid mismatch arrangements
 Creation of two deductions for a single borrowal
 Generation of deductions without corresponding income inclusions
 Misuse of foreign tax credit
 Participation exemption regimes
Specific country laws that allow taxpayers to opt for the tax treatment of certain domestic and foreign entities
may aid hybrid mismatches. It may not be easy to find out which country has in fact lost tax revenue, since the
laws of each country involved have been complied with; however, there is a reduction of the overall tax paid by
all parties involved as a whole, which ultimately has an adverse effect on competition, economic efficiency,
transparency and fairness.
Recommended general amendments are as follows:
A rule denying transparency to entities where the non-resident investors’ resident country treats the
entity as opaque;
Example
Let us say, X Co., a parent company in country X indirectly holds Y Co., an operating company in
country Y. between X Co. and Y Co. is a hybrid entity that is treated as transparent or disregarded for
country X tax purpose and as non-transparent for country Y tax purposes. X Co. holds all or almost all
equity interest in the hybrid entity which in turn holds all or almost all equity interest in Y Co. The hybrid
entity borrows money from a third party and the loan is used to invest equity into Y Co (or to buy the
shares in Y Co. from either another company of the same group or from an unrelated third party). The
hybrid entity pays interest on the loan. Except for interest, the hybrid entity does not claim any other
significant deduction and does not have any significant income.
With respect to Country Y for tax purposes, Hybrid Entity is subject to corporate income tax. Its interest
expenses can be used to offset other country Y group companies’ income under the country Y group tax
relief regime. On the other hand, country X treats the hybrid entity as transparent or disregarded, with
the result that its interest expenses are allocated to X Co., which deduct the interest expense to offset
unrelated income. The net effect is that there are two deductions for the same contractual obligation in
two different countries.
Therefore, by virtue of rule denying transparency to an entity which is treated as opaque in the subsidiary
company’s country, the double deduction can be avoided.
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Country X Country Y
X & co (Parent Company) Y & co (subsidiary)
As per law of Country X subsidiary is a As per law of country Y, subsidiary is non
transparent company and dis-regarded for tax transparent and normally taxable.
purposes.
Borrows money to invest in shares of Subsidiary.
Interest is allowed as deduction. Interest could be allowed as deduction in group
tax relief regime.
A rule denying an exemption or credit for foreign underlying tax for dividends that are deductible by the
payer;
Example
N Co, a company resident in country N is funded by M Co., a company resident in country M with an
instrument that qualifies as equity in country M but as debt in country N. A payment made under the
instrument would be deductible as interest expense for N Co. under country N tax law. The
corresponding receipts are treated as exempt dividends under the tax laws of country M. Consequently,
deduction is available under the tax laws of country N without a corresponding income inclusion in
country M.
Therefore, by virtue of rule denying an exemption or credit for foreign underlying tax for dividends that
are deductible by the payer, exemption of such income in country M would not be possible.
Country X Country Y
Convertible Debentures treated as debt Convertible debentures treated as equity.
Interest expense is allowed. Dividend income is not taxable as per law of that
country.
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A rule denying a foreign tax credit for withholding tax where that tax is also credited to some other entity;
and Amendments to CFC and similar regimes attributing local shareholders the income of foreign entities
that are treated as transparent under their local law.
Treaty changes – Action Plan 2 recommends a new provision in the case of income earned by a transparent
entity. As per the new provision, treaty benefits will only be afforded to so much of the income of the entity as
the income of a resident of that State. A specific or general saving rule is proposed so that a State can tax a
resident entity generally unrestricted by treaty.
Anti-hybrid rules – The report further issued a series of dedicated domestic anti-hybrid rules which would
work in two stages. The primary rules would deny deductions to payers in situations where either
(1) Those payments will not be included in the recipient’s ordinary income, or
(2) The same amount is being simultaneously deducted by another entity.
Treatment of Branch mismatches: 2017 Report

Branch mismatches arise where the ordinary rules for allocating income and expenditure between the branch
and head office result in a portion of the net income of the taxpayer escaping the charge to taxation in both the
branch and residence jurisdiction. These branch mismatches occur where two jurisdictions take a different view
as to the existence of, or the allocation of income or expenditure between, the branch in head office of the same
taxpayer.
Unlike hybrid mismatches, which result from conflicts in the legal treatment of entities or instruments, branch
mismatches are the result of differences in the way the branch and head office account for a payment made by
or to the branch. The 2017 report identifies five basic types of branch mismatch arrangements that give rise to
one of three types of mismatches:
Three types of mismatches
 Deduction/no inclusion outcomes
 Indirect deduction/no inclusion outcomes
 Double deduction outcomes
The 2017 report includes specific recommendations for improvements to domestic law intended to reduce the
frequency of branch mismatches as well as targeted branch mismatch rules which adjust the tax consequences
in either the residence or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing any
of the other tax, commercial or regulatory outcomes.
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Shifting investment income and passive income to subsidiaries in low tax or no tax jurisdictions: Deferral of
home country taxation
Under the tax laws of several countries, a shareholder of a corporation is not taxed on the corporation’s income
until the income is distributed as a dividend. Therefore, it was common for publicly traded companies to form
foreign subsidiaries in tax havens and shift “portable” income to those subsidiaries. Generally, income shifted
were mainly investment income (interest and dividends) and passive income (rents and royalties), as well as
sales and services income involving related parties. Tax in parent country on this income was avoided until the
tax haven country paid a dividend to the shareholding company. This dividend could be avoided indefinitely by
loaning the earnings to the shareholder without actually declaring a dividend.
Many countries (where global multi-nationals are based) have high tax rates as compared to certain other
countries, which used their low tax rates as a means of attracting inward investment. As a result, when dividends
were repatriated from these lower tax countries, the recipient generally suffered additional tax on those profits.
Therefore, many companies have a tendency to leave the profits from these low-taxed subsidiaries offshore,
with the objective of deferring home country taxation.
Obviously, Government were disturbed that multinationals based in their countries kept large amounts
of profits offshore. In order to address this issue, governments in various countries have introduced
legislation aimed at eliminating the benefits of deferral, by currently taxing income in the parent country
even when the income has not been repatriated or remitted to that country. These rules are generally
referred to as Controlled Foreign Corporation (CFC) rules.
CFC Rules: Addressing BEPS
Controlled foreign company (CFC) rules respond to the risk that taxpayers with a controlling interest in a foreign
subsidiary can strip the base of their country of residence and, in some cases, other countries by shifting income
into a CFC. Without such rules, CFCs provide opportunities for profit shifting and long-term deferral of taxation.
The OECD Final Report does not propose a minimum standard for controlled foreign company (CFC) regimes.
However, OECD regards CFC rules as being important in tackling BEPS and has made a series of best practice
recommendations in relation to the ‘building blocks’ of an effective CFC regime. The major reason why the
OECD was unable to provide more than best practice was fundamental disagreement over the policy of CFC
regimes, in particular whether states should use the regime to protect other states’ tax bases from earnings
stripping.
 At present, there are no CFC rules in the Income-tax Act, 1961;
 CFC rules formed part of the proposed Direct Tax Code.
 CFC regime has been debated over last many years in India and is one of the last remaining concepts from
the DTC to be incorporated in the Income-tax Act, 1961.
 In order to encourage repatriation of profits, section 115BBD provides a concessional tax rate of 15% (gross
basis) on dividends received from a specified foreign company i.e., a foreign company in which the Indian
company holds 26% or more in the nominal value of the equity share capital of the company.
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The OECD is concerned that multinational groups are able to erode their tax base (i.e., reduce their taxable
profits) with interest expense, for example by:
 locating third party debt in high tax countries;
 Using intra-group loans to achieve interest deductions in excess of the group’s actual third
party interest expenses;
 Using related party or third party debt to finance the production of exempt or deferred income.
BEPS Action Plan 4 calls for the development of recommendations for the design of domestic rules to prevent
tax base erosion through the use of interest expense and other financial payments that are economically
equivalent to interest.
Common Approach: Linking an entity’s net interest deduction to its level of economic activity
The mobility and fungibility of money enables multinational groups to achieve favourable tax results by
adjusting the amount of debt in a group entity. The 2015 Report established a common approach which directly
links an entity’s net interest deductions to its level of economic activity, based on taxable earnings before interest
income and expense, depreciation and amortisation (EBITDA).
This approach includes three elements:
A Fixed Ratio Rule

Based on a benchmark net interest/EBITDA ratio
A Group Ratio Rule

This rule allows an entity to deduct more interest expense based on the position of its
worldwide group.
Targeted Rules
These Rules address specific risks
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Section 94B of the Income-tax Act, 1961: Addressing Thin Capitalization
Debt financing of cross-border transactions is often favourable than equity financing for taxpayer. In view of
the above, in line with the recommendations of OECD BEPS Action Plan 4, section 94B has been inserted in
the Income-tax Act, 1961 by the Finance Act, 2017 to provide a cap on the interest expense that can be claimed
by an entity to its associated enterprise. The total interest paid in excess of 30% of its earnings before interest,
taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise for that
previous year, whichever is less, shall not be deductible.
Applicability
The provision is applicable to an Indian company, or a permanent establishment of a foreign company, being
the borrower, who pays interest in respect of any form of debt issued by a non-resident who is an ‘associated
enterprise’ of the borrower. Further the debt is deemed to be treated as issued by an associated enterprise where
it provides an implicit or explicit guarantee to the lender, being a non-associated enterprise, or deposits a
corresponding and matching amount of funds with such lender.
Carry forward of disallowed interest expenditure
The provision allows for carry forward of disallowed interest expense for 8 assessment years immediately
succeeding the assessment year for which the disallowance is first made and deduction against the income
computed under the head “Profits and gains of business or profession” to the extent of maximum allowable
interest expenditure.
Threshold limit
In order to target only large interest payments, it provides for a threshold of interest expenditure of Rs. 1 crore
in respect of any debt issued by a non-resident exceeding which the provision would be applicable. Banks and
Insurance business are excluded from the ambit of the said provisions keeping in view of special nature of these
businesses.
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The Action 5 Report is one of the four BEPS minimum standards. The minimum standard of the Action 5 Report
consists of two parts. One part relates to preferential tax regimes, where a peer review is undertaken to
identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the
potential to unfairly impact the tax base of other jurisdictions. The second part includes a commitment to
transparency through the compulsory spontaneous exchange of relevant information on taxpayer-
specific ruling which, in the absence of such information exchange, could give rise to BEPS concerns.
In India, the Finance Act, 2016 has introduced a concessional taxation regime for royalty income
from patents for the purpose of promoting indigenous research and development and making India
a global hub for research and development. The purpose of the concessional taxation regime is to encourage
entities to retain and commercialise existing patents and for developing new innovative patented products.
Further, this beneficial taxation regime will incentivise entities to locate the high-value jobs associated with the
development, manufacture and exploitation of patents in India.
Section 115BBF of the Income-tax Act, 1961: In line with nexus approach
of BEPS Action 5
The nexus approach has been recommended by the OECD under BEPS Action Plan 5. This approach requires
attribution and taxation of income arising from exploitation of Intellectual property (IP) IN THE
JURISDICTION WHERE SUBSTANTIAL RESEARCH AND DEVELOPMENT (R & D) ACTIVITIES ARE
UNDERTAKEN INSTEAD of jurisdiction of legal ownership. Accordingly, section 115BBF of the Income-
tax Act, 1961 provides that where the total income of the eligible assessee includes any income by
way of royalty in respect of a patent developed and registered in India, then such royalty shall be
taxable at the rate of 10% (plus applicable surcharge and cess). For this purpose, developed means atleast
75% of the expenditure should be incurred in India by the eligible assessee for any invention in respect of which
patent is granted under the Patent Act, 1970.
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Protection against treaty shopping: Minimum Standard

Given the risk to revenues posed by treaty shopping, countries have committed to ensure a minimum level of
protection against treaty shopping (the minimum standard). That commitment will require countries to
include in their tax treaties an express statement that their common intention is to eliminate double
taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or
avoidance, including through treaty shopping arrangements.
Countries will implement this common intention by including in their treaties:
(1) The combined approach of Limitation of Benefits (LOB) and Principal Purpose Test (PPT) rule,
(2) The PPT rule alone, or
(3) The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not
already dealt with in tax treaties.
Indian Tax Regime
LoB clause introduced in India-Mauritius Tax Treaty – On 10th May, 2016, India and
Mauritius has signed a protocol amending the India-Mauritius tax treaty at Mauritius. In the said treaty, for the
first time, it has been provided that gains from the alienation of shares acquired on or after 1.4.2017 in a company
which is a resident of India may be taxed in India. The tax rate on such capital gains arising during the period
from 1.4.2017-31.3.2019 should, however, not exceed 50% of the tax rate applicable on such capital gains in
India. A Limitation of Benefit (LOB) Clause has been introduced which provides that a resident of a
Contracting State shall not be entitled to the benefits of 50% of the tax rate applicable in transition period
if its affairs are arranged with the primary purpose of taking advantage of concessional rate of tax.
Further, a shell or a conduit company claiming to be a resident of a Contracting State shall not be entitled to this
benefit. A shell or conduit company has been defined as any legal entity falling within the meaning of resident
with negligible or nil business operations or with no real and continuous business activities carried out in that
Contracting State. A resident of a Contracting State is deemed to be a shell/conduit company if its expenditure
on operation in that Contracting State is less than Mauritian rupee 15,00,000 or Indian Rs.7,00,000 in the
respective Contracting State as the case may be, in the immediately preceding period of 12 months from the
date the gains arise.
LoB Clause in India Singapore Treaty – On similar lines, India and Singapore has signed a
protocol amending the India-Singapore tax treaty. Capital gains on alienation of shares would be taxable in a
similar manner as laid out in India-Mauritius tax treaty, subject to LoB clause. The transition period benefit is
also similar to that contained in India-Mauritius Tax Treaty. In respect of shares acquired after 1.4.2017 and
sold before 1.4.2019, the expenditure test needs to be met for the 12 month period immediately preceding the
date of transfer.
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This report includes changes to the definition of permanent establishment (PE) in the OECD Model Tax
Convention that will address strategies used to avoid having a taxable presence in a country under tax treaties.
These changes will ensure that where the activities that an intermediary exercises in a country are intended to
result in the regular conclusion of contracts to be performed by a foreign enterprise, that enterprise will be
considered to have a taxable presence in that country unless the intermediary is performing these activities in
the course of an independent business. The changes will also restrict the application of a number of exceptions
to the definition of permanent establishment to activities that are preparatory or auxiliary nature and will ensure
that it is not possible to take advantage of these exceptions by the fragmentation of a cohesive operating business
into several small operations; they will also address situations where the exception applicable to construction
sites is circumvented through the splitting-up contracts between closely related enterprises.
Thus, the following steps have been advocated:
 Reworking exceptions to PE definition – An anti-fragmentation rule to be adopted to aggregate
all activities carried by an enterprise in a state, along with activities undertaken by its closely related
entities undertaking business operation that create tax mismatch and are cohesive in nature. The
above test can also be applied to understand whether the activities undertaken by an enterprise in a
state are ‘preparatory or auxiliary’.
 Analyzing arrangements entered through contractual agreements – A Commissionnaire
arrangement may be broadly defined as an arrangement through which a person sells products in a
State in its own name but on behalf of a foreign enterprise that is the owner of these products.
Through such an arrangement, a foreign enterprise is able to sell its products in a State without
technically having a permanent establishment to which such sales may be attributed for tax purposes
and without, therefore, being taxable in that State on the profits derived from such sales. Since the
person that concludes the sales does not own the products that it sells, that person cannot be taxed
on the profits derived from such sales and may only be taxed on the remuneration that it receives for
its services (usually a commission). Commissionaire arrangements have been a major cause of
concern for tax administrations in many countries.
Note – The Indian Taxation Regime in line with BEPS Action Plan 7 is discussed under the Indian Taxation
Regime in line with BEPS Action Plan 15, discussed later on in this chapter, as the relevant provisions
incorporated in the Income-tax Act, 1961 are in line with both these Action Plans.
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The aforesaid Action plans represent the OECD’s work on transfer pricing which has been a core focus of the
BEPS Action Plans. The specific Action focus on Intangibles, Risk and capital and other high-risk transactions.
These are the hard areas of transfer pricing and are summarized together in the Final Report ‘Aligning Transfer
Pricing Outcomes with Value Creation’.
Clarification and Strengthening of existing standards on transfer pricing
Transfer pricing rules, which are set out in Article 9 of tax treaties based on the OECD and UN Model Tax
Conventions and the Transfer Pricing Guidelines, are used to determine on the basis of the ALP the conditions,
including the price, for transactions within an MNE group. The existing standards in this area have been clarified
and strengthened, including the guidance on the arm;s length principle and an approach to ensure the appropriate
pricing of hard-to-value-intangibles has been agreed upon within the arm’s length principle. The work has
focused on three key areas.
Action Plan Details
8 Addresses transfer pricing issues relating to controlled transactions involving
intangibles, since intangibles are by definition mobile and they are generally difficult-
to-value. Misallocation of the profits generated by valueable intangibles is a significant
cause of BEPS.
9 Contractual allocations of risk are respected only when they are supported by actual
decision-making and thus exercising control over these risks.
10 The action focuses on other high-risk areas, which include:
- The scope for addressing profit allocations resulting from controlled
transactions which are not commercially rational,
- The scope for targeting the use of transfer pricing methods in a way which
results in diverting profits from the most economically important activities of
the MNE group, and
- The use of certain type of payments between members of the MNE group
(such as management fees and head office expenses) to erode the tax
base in the absence of alignment with the value-creation.
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OECD Transfer Pricing Guidelines

In addition, the OECD Transfer Pricing Guidelines released in 2017 provide guidance on the application of
the “arm’s length principle”, which represents the international consensus on the valuation, for income tax
purposes, of cross-border transactions between associated enterprises. In today’s economy where multinational
enterprises play an increasingly prominent role, transfer pricing continue to be high on the agenda of tax
administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not
artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the
economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s
length principle.
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The adverse fiscal and economic impacts of BEPS have been the focus of the OECD/G20 BEPS Project since
its inception. While anecdotal evidence has shown that tax planning activities of some multinational enterprises
(MNEs) take advantage of the mismatches and gaps in the international tax rules, separating taxable profits from
the underlying value-creating activity. The Addressing Base Erosion and profit Shifting report (OECD, 2013)
recognised that the scale of the negative global impacts on economic activity and government revenues have
been uncertain.
Although measuring the scale of BEPS proves challenging given the complexity of BEPS and the serious data
limitations, the fiscal effects of BEPS are significant. BEPS causes other adverse economic effects, including
tilting the playing field in favour of tax-aggressive MNEs, exacerbating the corporate debt bias, misdirecting
foreign direct investment, and reducing the financing of needed public infrastructure.
Indicators of BEPS activity
Six indicators of BEPS activity highlight BEPS behaviour using different sources of data, employing
different metrics, and examining different BEPS channels. When combined and presented as a
dashboard of indicators, they confirm the existence of BEPS, and its continued increase in scale in
recent years.
(1) The profit rates of MNE affiliates located in lower-tax countries are higher than their group’s
average worldwide profit rate. For example, the profit rates reported by MNE affiliates located
in lower-tax countries are twice as high as their group’s worldwide profit rate on average.
(2) The effective tax rates paid by large MNE entities are estimated to be lower than similar
enterprises with only domestic operations – This tilts the playing-field against local businesses
and non-tax aggressive MNEs, although some of this may be due to MNEs’ greater utilisation of
available country tax preferences.
(3) Foreign direct investment (FDI) is increasingly concentrated – FDI in countries with net FDI
to GDP ratios of more than 200% increased from 38 times higher than all other countries in 2005
to 99 times higher in 2012.
(4) The separation of taxable profits from the location of the value creating activity is
particularly clear with respect to intangible assets, and the phenomenon has grown rapidly – For
example, the ratio of the value of royalties received to spending on research and development in
a group of low-tax countries was six times higher than the average ratio for all other countries,
and has increased three-fold between 2009 and 2012.
(5) Royalties received by entities located in these low-tax countries accounted for 3% of total
royalties – This provides evidence of the existence of BEPS, though not a direct measurement of
the scale of BEPS.
(6) Debt from both related and third-parties is more concentrated in MNE affiliates in higher
statutory tax-rate countries. The interest-to-income ratio for affiliates of the largest global MNEs
in higher-tax rate countries is almost three times higher than their MNE’s worldwide third-party
interest-to-income ratio.
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A significant challenge faced by tax authorities worldwide is the lack of timely, comprehensive and
relevant information on aggressive tax planning strategies. Timely access to such information
would facilitate quick response to tax risk through informed risk assessment, audits, or changes to
legislation or regulations. BEPS Action plan 12 recognises the advantages of tools designed to
facilitate the information flow on tax risks to tax administrations and tax policy makers. The
Report provides a modular framework for guidance drawn from best practices for use by countries
without mandatory disclosure rules to design a regime that suits their requirement to get early
information on potentially aggressive or abusive tax planning schemes and their users. The
recommendations in this Report do not represent a minimum standard and countries can decide whether
or not to introduce mandatory disclosure regimes. Where a country opts for mandatory disclosure rules,
the recommendations provide the necessary flexibility to balance a country’s need for better and more
timely information with the compliance burdens for taxpayers. It also sets out specific best practice
recommendations for rules targeting international tax schemes, as well as for the development and
implementation of more effective information exchange and co-operation between tax administrations.
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This report contains revised standards for transfer pricing documentation incorporating a master file, local
file, and a template for country-by-country reporting of revenues, profits, taxes paid and certain
measures of economic activity. The revised standardised approach requires taxpayers to articulate consistent
transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing
and other BEPS risks, make determinations about where audit resources can most effectively be deployed, and,
in the event audits are called for, provide information to commence and target audit enquiries. Country-by-
country reports will be disseminated through an automatic government-to-government exchange
mechanism. The implementation package included in this report sets out guidance to ensure that the reports
are provided in a timely manner, that confidentiality is preserved and that the information is used appropriately,
by incorporating model legislation and model Competent Authority Agreements forming the basis for
government-to-government exchanges of the reports.
Requirements as per OECD report on Action 13 of BEPS Action Plan
The OECD report provides for:
(a) Revised standards for transfer pricing documentation; and
(b) A template for country-by-country reporting of income, earnings, taxes paid and certain measure of
economic activity.
Three-tier structure mandated by BEPS
The BEPS report recommends that countries adopt a standardised approach to transfer pricing documentation;
it mandates the following three-tier structure:-
Document Information
(1) Master File Standardised information relevant for all multinational enterprises (MNE)
group members.
Master file requires MNEs to provide tax administrations with high-level
information regarding their global business operations and transfer pricing
policies. The master file is to be delivered by MNEs directly to local tax
administrations.
(2) Local file Local file requires maintaining of transactional information specific to each
country in detail covering related-party transactions and the amounts
involved in those transactions. In addition, relevant financial information
regarding specific transactions, a comparability analysis and analysis of the
selection and application of the most appropriate transfer pricing method should
also be captured. The local file is to be delivered by MNEs directly to local tax
administrations.
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(3) Country-by- Information relating to the global allocation of the MNE’s income and taxes
country report paid; and Indicators of the location of economic activity within the MNE
group.
CBC report requires MNEs to provide an annual report of economic indicators
viz. the amount of revenue, profit before income tax, income tax paid and
accrued in relation to the tax jurisdiction in which they do business. CBC reports
are required to be filed in the jurisdiction of tax residence of the ultimate parent
entity, being subsequently shared between other jurisdictions through automatic
exchange of information mechanism.
Advantage of the three-tier structure [as per BEPS Report]:

(a) Taxpayer will be required to articulate consistent transfer pricing positions;
(b) Tax administrations would get useful information to assess transfer pricing risks;
(c) Tax administrations would be able to make determinations about where their resources can most
effectively be deployed, and, in the event audits are called for, provide information to commence
and target audit enquiries.
Transfer PRICING PROVISIONS UNDER THE Income-tax Act, 1961
Chapter X of the Income-tax Act, 1961 comprising sections 92 to 92F contain provisions relating to transfer
pricing regime.
Section 92D requires maintenance of prescribed information and document relating to the international
transaction and specified domestic transaction.
Implementation of international consensus in India
India is one of the active members of BEPS initiative and part of international consensus. For the purpose of
implementing the international consensus, a specific reporting regime in respect of CBC reporting and also the
master file has been incorporated in the Income-tax Act, 1961. The essential elements have been incorporated
in the Income-tax Act, 1961 while remaining aspects are being dealt with in detail in the Income-tax Rules,
1962.
Note – Refer to Chapter 3 Transfer Pricing, wherein the following have been discussed at length –
(1) Elements relating to CbC reporting requirement and related matters which have been
incorporated in section 286 of the Income-tax Act, 1961
(2) Maintenance and furnishing of Master file: Consequent provisions incorporated in section
92D of the Income-tax Act, 1961.
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Threshold limit of consolidated group revenue for applicability of CbC

reporting requirement
The CbC reporting requirement for reporting year does not apply unless the consolidated revenues of the
preceding accounting year of the group, based on consolidated financial statement, exceeds a threshold to be
prescribed. The current international consensus is for a threshold of $ 750 million equivalent in local currency.
This threshold for total consolidated group revenue of the international group prescribed under section 286 of
the Income-tax Act, 1961 read with Rule 10DB of the Income-tax Rules, 1962 is Rs. 5,500 crores.
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Objective of measures developed under Action 14 of BEPS

 Minimize the risk of uncertainty
 Minimize unintended double taxation
 Consistent and proper implementation of tax treaties
 Effective and timely resolution of disputes regarding their interpretation or
application through MAP
Eliminating opportunities for cross-border tax avoidance and evasion and the effective and efficient prevention
of double taxation are significant to developing an international tax system that facilitates economic growth and
a buoyant global economy. Countries concur that the measures introduced to address BEPS pursuant to the
BEPS Action Plans should not result in unnecessary uncertainty for compliant taxpayer and in unintended
double taxation. Improving dispute resolution mechanisms is, therefore, a critical component of the work on
BEPS issues.
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In November 2016, over 100 jurisdictions concluded negotiations on the

Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI")
that will swiftly implement a series of tax treaty measures to update
international tax rules and lessen the opportunity for tax avoidance by
multinational enterprises. The MLI already covers 87 jurisdictions and
entered into force on 1st July 2018. Signatories include jurisdictions from
all continents and all levels of development and other jurisdictions are also
actively working towards signature.
MLI’s role in tackling BEPS

Abuse of tax treaties is an important source of BEPS. The MLI helps the fight against BEPS by implementing
the tax treaty-related measures developed through the BEPS project in existing bilateral tax treaties
in a synchronized and efficient manner. These measures will prevent treaty abuse, improve dispute
resolution, prevent the artificial avoidance of permanent establishment status and neutralize the effects of hybrid
mismatch arrangements.
Action 15 of the BEPS Action Plan provides for an analysis of the tax and public international law issues related
to the development of a multilateral instrument to enable countries that wish to do so to implement measures
developed in the course of the work on BEPS and amend bilateral tax treaties.
Formation of ad hoc Group to develop MLI
Based on this analysis, a mandate for the formation of an ad hoc Group to develop a multilateral instrument
on tax treaty measures to tackle BEPs, was approved by the OECD Committee on Fiscal Affairs and endorsed
by the G20 Finance Ministers and Central Bank Governors in February 2015.
In line with Action 15 report, an ad-hoc group was formed with a pre-defined purpose of development of such
Multilateral Instrument (MLI) and that adopted the text of the Convention and accompanying Explanatory
Statement in November 2016. India was part of the Ad Hoc Group of more than 100 countries and jurisdictions
from G20, OECD, BEPS associates and other interested countries, which worked on an equal footing on the
finalization of the text of the Multilateral Convention, starting May 2015. The text of the Convention and the
accompanying Explanatory Statement was adopted by the ad hoc Group on 24th November 2016.
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Signatories to the MLI

Once drafted, the said document was thereafter kept open for signatures from 31 December 2016. In the first
signing ceremony of the MLI on 7th june, 2017, 67 countries have signed the MLI and 9 countries have expressed
their intention to sign the instrument. As on 27th September, 2018, 84 countries have signed the MLI and 6
countries have expressed their intention to sign the instrument.
At the time of signature, signatories submitted a list of their tax treaties in force that they would like to designate
as Covered Tax Agreements (CTAs), i.e. to be amended through the MLI.
The Convention enables all signatories, inter alia, to meet treaty-related minimum standards that were agreed as
part of the Final BEPS package, including the minimum standard for the prevention of treaty abuse under Action
6.
Features of MLI
The Multilateral Convention is, thus, an outcome of the OECD/G20 Project to tackle Base Erosion and Profit
Shifting (the “BEPS Project”) i.e., tax planning strategies that exploit gaps and mismatches in tax rules to
artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little
or no overall corporate tax being paid.
The MLI modifies tax treaties that are “Covered Tax Agreements”. A Covered Tax Agreement is an
agreement for the avoidance of double taxation that is in force between Parties to the MLI and for
which both Parties have made a notification that they wish to modify the agreement using the MLI.
The MLI is a flexible instrument which will modify tax treaties according to a jurisdiction’s policy
preferences with respect to the implementation of the tax treaty-related BEPS measures. The MLI provides for
different types of flexibility:
(1) Jurisdictions can choose amongst alternative provisions in certain MLI articles;
(2) Jurisdictions can choose to apply optional provisions (for instance, the provisions on mandatory
binding arbitration);
(3) Jurisdictions may also choose to reserve the right not to apply MLI provisions (to opt out
through a “reservation”) with respect to all of their Covered Tax Agreements or with respect to
a subset of their Covered Tax Agreements. Jurisdictions only have the possibility to opt out of
provisions that do not reflect a BEPS minimum standard, with the possibility to withdraw their
reservation (and opt in) later.
Amendment of MLI position
The provisional MLI position of each Signatory indicates the tax treaties it intends to cover, the options it has
chosen and the reservations it has made. Signatories can amend their MLI position until ratification. Even
after ratification, parties can choose to opt in with respect to optional provisions or to withdraw reservations.
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The OECD, under BEPS Action Plan 7, reviewed the definition of ‘PE’ with a view to preventing avoidance of
payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or
fragmentation of business activities. In order to tackle such tax avoidance scheme, the BEPS Action plan 7
recommended modifications to Article 5 (5) to provide that an agent would include not only a person who
habitually concludes contracts on behalf of the non-resident, but also a person who habitually plays a principal
role leading to the conclusion of contracts. Similarly Action Plan 7 also recommends the introduction of an anti-
fragmentation rule as per paragraph 4.1 of Article 5 of OECD Model tax conventions, 2017 so as to prevent the
tax payer from resorting to fragmentation of functions which are otherwise a whole activity in order to avail the
benefit of exemption under paragraph 4 of Article 5 of DTAAs.
Further, with a view to preventing base erosion and profit shifting, the recommendations under BEPS Action
Plan 7 have now been included in Article 12 of Multilateral Convention to implement tax Treaty Related
Measures (MLI), to which India is also a signatory. Consequently, these provisions will automatically modify
India’s bilateral tax treaties covered by MLI, where treaty partner has also opted for Article 12. As a
result, the DAPE provisions in Article 5(5) of India’s tax treaties, as modified by MLI, became wider in scope
than the erstwhile provisions in Explanation 2 to section 9(1) (i). Similarly, the antifragmentation rule introduced
as per paragraph 4.1 of Article 5 of the OECD Model Tax Conventions, 2017 has narrowed the scope of the
exception under Article 5(4), thereby expanding the scope of PE in DTAA vis-à-vis domestic provisions
contained in Explanation 2 to section 9(1) (i). In effect, the relevant provisions in the DTAAs became wider in
scope than the domestic law.
However, section 90(2) of the Income-tax Act, 1961 provides that the provisions of the domestic law would
prevail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant
situations, the provisions of the domestic law being narrower in scope are more beneficial than the provisions
in the DTAAs, as modified by MLI, such wider provisions in the DTAAs would become ineffective, unless the
provisions of domestic law are appropriately amended.
In view of the above, section 9(1)(i) has been amended to align the same with the provisions in the DTAA
as modified by MLI so as to make the provisions in the treaty effective. Accordingly, section 9(1)(i) has
been amended by the Finance Act, 2018 to provide that “business connection” shall also include any
business activities carried through a person who, acting on behalf of the non-resident, habitually
concludes contracts or habitually plays the principal role leading to conclusion of contracts by the non-
resident. Such contracts should be-
(1) In the name of the non-resident; or
(2) For the transfer of the ownership of, or for the granting of the right to use, property owned by
that non-resident or that the non-resident has the right to use; or
(3) For the provision of services by that non-resident.
Resources: The discussion on BEPS Action Plans contained in this chapter is essentially based
on the Action Plans developed in the context of the OECD/G20 BEPS Project and available at
the website http;//www.oecd.org/tax/beps-actions.htm ,
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Question 1
What do you understand by base erosion and profit shifting? Describe briefly its adverse effects.
Answer
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in
tax rule to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real
activity but the taxes are low, resulting in little or no overall corporate tax being paid.
Adverse Effects of BEPS:
(1) Governments have to cope with less revenue and a higher cost to ensure compliance.
(2) In developing countries, the lack of tax revenue leads to significant under-funding of public
investment that could help foster economic growth.
(3) BEPS undermines the integrity of the tax system, as reporting of low corporate taxes is
considered to be unfair. When tax laws permit businesses to reduce their tax burden by
shifting their income away from jurisdictions where income producing activities are
conducted, other taxpayers, especially individual taxpayers in that jurisdiction bear a greater
share of the burden. This gives rise to tax fairness issues on account of individuals having to
bear a higher tax burden.
(4) Enterprises that operate only in domestic markets, including family-owned businesses or new
innovative businesses, may have difficulty competing with MNEs that have the ability to shift
their profits across borders to avoid or reduce tax. Fair competition is harmed by the
distortions induced by BEPS.
Question 2
What are the significant OECD Recommendations under Action plan 1 of BEPS? Which recommendation has
been adopted in Indian tax laws?
Answer
The OECD has recommended several options to tackle the direct tax challenges which include:
(1) Modifying the existing Permanent Establishment (PE) rule to provide that whether an
enterprise engaged in fully de-materialized digital activities would constitute a PE, if it
maintained a significant digital presence in another country’s economy.
(2) A virtual fixed place of business PE in the concept of PE i.e., creation of PE when the
enterprise maintains a website on a server of another enterprise located in a jurisdiction and
carries on business through that website.
(3) Imposition of a final withholding tax on certain payments for digital goods or services
provided by a foreign e-commerce provider or imposition of a equalisation levy on
consideration for certain digital transactions received by a non-resident from a resident or
from non-resident having permanent establishment in other contracting state.
Taking into consideration the potential of new digital economy and the rapidly evolving nature of business
operations, it becomes necessary to address the challenges in terms of taxation of such digital transactions.
In order to address these challenges, chapter VIII of the Finance Act, 2016, titled “Equalisation levy”,
provides for an equalisation levy of 6% of the amount of consideration for specified services received or
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receivable by a non-resident not having permanent establishment in India, from a resident in India who carries
out business or profession, or from a non-resident having permanent establishment in India.
Meaning of “Specified Service”:
(1) Online advertisement;
(2) Any provision for digital advertising space or any other facility or service for the purpose of
online advertisement;
Specified Service also includes any other service as may be notified by the Central Government.
Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy
shall be made if the aggregate amount of consideration for specified services received or receivable by a non-
resident from a person resident in India or from a non-resident having a permanent establishment in India does
not exceed Rs. 1 lakh in any previous year.
Question 3
Discuss the provision incorporated in the Income-tax Act, 1961 in line with the OECD recommendations under
Action Plan 4 of BEPS.
Answer
In line with recommendations of OECD BEPS Action Plan 4, new section 94B has been inserted in the Income-
tax Act, 1961, to provide a cap on the interest expense that can be claimed by an entity to its associated enterprise.
The total interest paid in excess of 30% of its earnings before interest, taxes, depreciation and amortization
(EBITDA) OR INTEREST PAID OR PAYABLE TO ASSOCIATED ENTERPRISE FOR THAT PREVIOUS
YEAR, WHICHEVER IS LESS, SHALL NOT BE DEDUCTIBLE.
The provision is applicable to an Indian company, or a permanent establishment of a foreign company, being
the borrower, who pays interest in respect of any form of debt issued by a non-resident who is an ‘associated
enterprise’ of the borrower. Further, the debt is deemed to be treated as issued by an associated enterprise where
it provides an implicit guarantee to the lender, being a non-associated enterprise, or deposits a corresponding
and matching amount of funds with such lender.
The provision allows for carry forward of disallowed interest expense for 8 assessment years immediately
succeeding the assessment year for which the disallowance is first made and deduction against the income
computed under the head “Profits and gains of business or profession” to the extent of maximum allowable
interest expenditure.
In order to target only large interest payments, it provides for a threshold of interest expenditure of Rs. 1 crore
in respect of any debt issued by a non-resident, being an associated enterprise, exceeding which the provision
would be applicable. Banks and Insurance business are excluded from the ambit of the said provisions keeping
in view of special nature of these businesses.
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Question 4
Describe the three tier structure for transfer pricing documentation mandated by BEPS Action Plan 13.
Answer
Action 13 contain a three-tiered standardized approach to transfer pricing documentation which consists of:
(a) Master file: Master file requires MNEs to provide tax administrations with high-level
information regarding their global business operations and transfer pricing policies. The
master file is to be delivered by MNEs directly to local tax administrations.
(b) Local file: Local file requires maintaining of transactional information specific to each
country in detail covering related-party transactions and the amounts involved in those
transactions. In addition, relevant financial information regarding specific transactions, a
comparability analysis and analysis of the selection and application of the most appropriate
transfer pricing method should also be captured. The local file is to be delivered by MNEs
directly to local tax administrations.
(c) Country-by-country (CBC) report: CBC report requires MNEs to provide annual report of
economic indicators viz. the amount of revenue, profit before income tax, income tax paid
and accrued in relation to the tax jurisdiction in which they do business. CBC reports are
required to be filed in the jurisdiction of tax residence of the ultimate parent entity, being
subsequently shared between other jurisdictions through automatic exchange of information
mechanism.
Question 5
Explain the nexus approach recommended by OECD in BEPS Action Plan 5 which has been adopted in the
Income-tax Act, 1961.
Answer
In India, the Finance Act, 2016 has introduced a concessional taxation regime for royalty income from patents
for the purpose of promoting indigenous research and development and making India a global hub for research
and development. The purpose of the concessional taxation regime is to encourage entities to retain and
commercialise existing patents and for developing new innovative patented products. Further, this beneficial
taxation regime will incentivise entities to locate the high-value jobs associated with the development,
manufacture and exploitation of patents in India.
The nexus approach has been recommended by the OECD under BEPS Action Plan 5. This approach requires
attribution and taxation of income arising from exploitation of Intellectual property (IP) in the jurisdiction where
substantial research and development (R&D) activities are undertaken instead of the jurisdiction of legal
ownership. Accordingly, new section 115BBF has been inserted in the Income-tax Act, 1961 to provide that
where the total income of the eligible assessee (being a person resident in India who is the true and first inventor
of the invention and whose name is entered in the patent register as the patentee in accordance with the Patents
Act, 1970 and includes every such person, being the true and the first inventor of the invention, where more
than one person is registered as patentee under Patents Act, 1970 in respect of that patent.) includes any income
by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at
the rate of 10% (plus applicable surcharge and cess). For this purpose, developed means atleast 75% of the
expenditure should be incurred in India by the eligible assessee for any invention in respect of which patent is
granted under the Patents Act, 1970.
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Question 6
What are the ways in which hybrid mismatch arrangements are used to achieve unintended double non-taxation
or long-term tax deferral?
Answer
Hybrid mismatch arrangements are sometimes used to achieve unintended double non-taxation or long-term tax
deferral in one or more of the following ways –
(1) Creation of two deductions for a single borrowal;
(2) Generation of deductions without corresponding income inclusions;
(3) Misuse of foreign tax credit; and
(4) Participation exemption regimes.
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Problem 1 (Business Computation Basics) (Business ID 48)

Particulars Rs. Particulars Rs.

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1 Sundry creditors written off will be income as per the section

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You are required to

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Problem 2 (Business Computation Basics) (Business ID 45)

Particulars Rs. Particulars Rs.

Following additional information is furnished:

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Q-4 In relation to property at Mumbai,

Q-5 In relation to property at Mumbai,

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Q-6 In relation to property at Mumbai,

You are required to

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Problem 3 (Business Computation Basics) (Business ID 46)

Receipts Rs. Payments Rs.

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You are required to

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Problem 4 (Business Computation Basics) (Business ID 47)

Receipts Rs. Payments Rs.

You are required to

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Explanation.—For the purposes of this sub-clause,—

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(iia) any sum paid on account of wealth-tax.

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