Mock Test Paper - 1

Question 1

1) a) The following details are furnished to you :

ABC pvt ltd has 4 shareholders (A,B,C,D) with each holding equal voting right.

B/F business losses of A.Y 2016 -17 is Rs 5 lakhs and UAD is Rs 3 lakhs.

It gives loan to Mr A of Rs 20 lakhs on 1-06-2016. The accumulated profits of the Co. was Rs 15 lakhs
at the time of disbursing the loan.

On 30-09-2016, ABC pvt ltd amalgamated with XY pvt ltd ( X & Y have equal voting right before
amalgamation ). The voting right of the shareholders in the amalgamated co. are as follows
A : 10% ; B : 10% ; C : 10% ; D : 10% ; X : 30% ; Y : 30%

Expenses on amalgamation was Rs 5 Lakhs.

Bad debts of Rs 2 lakhs written off by ABC pvt ltd in A.Y 15-16 was recovered by XY pvt ltd on
01-03-2017.

The business income (computed) excluding the above information of XY pvt ltd was Rs 10 lakhs.

Mr A who has acquired the shares of ABC pvt ltd on 01-06-2015 for Rs 1.5 lakhs transfers the shares
of XY pvt ltd on 01-03-2017for Rs 3.5 lakhs to Mr E for Rs 3 lakhs. (CII for F.Y 2015-16 : 1081 & for
F.Y 2016-17 : 1125)

Discuss the tax implications in the hands of XY pvt ltd & Mr A.

[10 marks]
Solution:
Tax implication in the hands of XY pvt Ltd

1. Sec 72A : B/f business loss & unabsorbed depreciation of the amalgamating co. shall be deemed
to be the loss & depreciation of the amalgamated co & shall be allowed to be c/f if the
conditions as laid therein is satisfied.
2. Sec 79: Sec 79 provides that in case of a closely held co., no loss incurred in the p.y shall be c/f &
set off against the income of the subsequent p.y unless the shares carrying atleast 51% of the
voting power of the co. are beneficially held on the last day of the p.y in which the loss is sought
to be set off, by the shareholders, who beneficially held the shares carrying atleast 51% of the
voting power on the last day of the p.y in which the losses was incurred. The regulation of
sec 79 applies only in respect of b/f business loss & not on UAD.
3. In the given situation we assume that the conditions laid down in sec 72A is satisfied. However,
since subsequent to the amalgamation the combined voting power of A,B,C & D has reduced
below 51% therefore the business loss of ABC pvt ltd for A.y 16-17 shall not be allowed in the

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 hands of XY pvt ltd. However the UAD shall be allowed to be adjusted in terms of sec 72A as the
restriction of sec 79 does not extend to UAD.
4. Computation of total income of XY pvt ltd
Particulars Rs
Business Income (Computed) 10,00,000
(-) Amalgamtion expenses (1/5th) u/s 35DD (1,00,000)
(+) Recovery of bad debts by successor assesse where the
deduction was allowed to the predecessor assesse cannot be NIL
chargeable as income u/s 41(4) held by SC in PK Kaimal
(-) UAD of amalgamating co. allowed as deduction u/s 72A (3,00,000)
Total Income 6,00,000

Tax Implication in the hands of Mr A:

1. Sec 2(22)(e) would be attracted as the loan is given by ABC pvt ltd, a co. in which public
are not substantially interested to Mr A, who is the beneficial owner of the shares
holding not less then 10% of voting power. However the deemed dividend u/s 2(22)(e) is
restricted upto the accumulated profits of the co. Thus in the present case deemed
dividend u/s 2(22) (e) is Rs 15 lakhs.
2. Mr A has received the shares of XY pvt ltd on account of amalgamation. As per FA 2016,
shares received by individual on amalgamation is not subject to tax u/s 56(2)(vii).
3. CG on transfer of shares of XY pvt ltd:
POH less then 2 years (1-06-15 to 1-3-17) & thus its a short term capital asset (FA
2016)
FVC - Rs 3.5 Lacs
Less : COA - Rs 1.5 Lacs
STCG - Rs 2 Lacs

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 1) b) Determine the value of the securities held as stock-in-trade for the year ended 31.03.2017
Particulars Cost (Rs.) NRV (Rs.) Contention Contention
of assessee of AO
Shares
a. RIL 100 75 75
b. ICICI Bank 120 150 120
c. Tata Steel 140 120 120
d. Marico Ltd. 200 190 190
Total 560 535 505 535
Debentures
a. HUL 150 160 150
b. MARICO 105 90 90
c. HINDALCO 125 135 125
d. RIL 220 230 220
Total 600 615 585 600
Grand Total 1160 1150 1090 1135
The assessee contended that valuation of closing stock should be made individual security wise.
However, the AO contended that valuation would be done category wise. Examine the correctness
of the claim.
[4 marks]
Solution:
1. ICDS VIII requires that securities held as stock-in-trade to be valued at lower of cost or NRV. Further,
such comparison has to be done category-wise and not individual security wise.
2. Supreme Court in case of UCO Bank Ltd. v.CIT 240 ITR 355, held that it is not proper to take into
account anticipated profit. The requirement in ICDS VIII is in deviation with this as valuation of
security category-wise results in decrease in the value of some securities being absorbed by the
anticipated profits.
3. Accordingly, the contention of AO is correct and the securities shall be valued at Rs. 1, 135

1) c) A securitisation trust has following incomes for the P.Y. 2016-17:

a) Interest income: 5 Lakhs
b) Dividend income: 7 Lakhs
c) Short term capital gains: 15 Lakhs
Discuss the tax consequences of the above income in the hands of securitisation trust and the investors,
Assuming that the trust has distributed 5 Lakhs to the investor Assume the investor is a) resident
individual b) resident company c) foreign company
[6 marks]
Solution:
Taxability in the hands of the securitization trust: Exempt u/s 10(23DA)

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 Although, the securitisation trust will have to deduct TDS on income distributed to the investors u/s
194LBC
i.e. on Rs. 5 lakhs @25% + Surcharge+ CESS
Note: In absence of information it is assumed that investors here mean Individuals/HUF
Taxability in the hands of Investors: The income of Rs. 5 Lakhs would be taxable in the hands of
investor in the same proportion as it is in the hands of securitization trust i.e. in the ratio of 5:7:15
1. Interest income: Rs. 5 Lakhs x 5/27 = Rs. 92,593 @ Normal slab rates applicable to individuals
2. Dividend income: Rs. 5 Lakhs x 7/27 = Rs. 1,29,630 Exempt
3. Short term capital gains: Rs. 5 Lakhs x 15/27 = Rs. 2,77,778 @ Normal slab rates applicable to
individuals

Question 2

2) a) Mr Peter a technocrat and an NRI till F.Y 15-16 returns to India for permanent settlement on 1-6-
16. Following details are furnished :

1. He owns a residential house property in Chennai which he sold on 30-04-16. The house property
was acquired on 2011-12 for Rs 80 lakhs & its sold for Rs 1.25 crores. He invests the partial sale
proceeds towards acquiring the shares of the company which is incorporated on 01-06-16. The
company engaged in design and manufacture of solar equipments. He owns 80% of equity
shares in the new company. The design of solar equipments of various dimensions is made Mr.
Peter & the company obtained the intellectual property in such design in the name of Mr. Peter.
The co. invests Rs 16 cr in new eligible plant & machinery on 31-12-16.
2. Being the true & 1st inventor for the invention Mr peter receives Rs 25 lakhs on 01-02-2017 from
imparting information containing the working of various solar equipment design prepared.
3. Mr peter applies for housing loan on 1-5-2016 which was sanctioned for Rs 30 lakhs on 15-5-16.
The house property was acquired by him on 31-10-16 for Rs 49 lakhs. Interest paid by him was
Rs 2,35,000.
4. Mr peter was staying in rented accommodation from 1-06-16 till 31-10-16. Rent paid by him was
Rs 8,000 p.m.
5. He holds securities of foreign co. (which he acquired when he was staying abroad) from which
interest accrued and received by him outside India was Rs 2 lakh.
6. Rent received from giving furniture on hire Rs 6 lakhs.
7. Further he had invested in the debentures of indian co. while he was an NRI on 1-1-14 for Rs 10
lakhs. The said debentures were transferred on 1-11-16 for Rs 18 lakhs. Further the interest on
said debentures earned during P.Y 16-17 was Rs 1 lakh. The TTBR & SR was as follows:

Date TTBR TTSR

1-1-14 48 49
1-11-16 54 55

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 8. Mr Peter wants to avail the benefit of chapter XIIA in A.Y 17-18. Compute his total income & tax
liability for A.y 17-18. [CII of 2011-12 785 & 2016-17 1125]

[16 marks]

Solution:

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Question 3:

3) a) During the P.Y. 2016-17, Mr. Roy, an Indian citizen was in India for 195 days. He has also been
resident of India in last 10 years During the P.Y.2016-17, he was also a resident of Australia. As per
Article 4 of India-Australia DTAA
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)

He has permanent home in both India & Australia. He has earned in Australia 6 Lakhs as other income.
His family stays in India. He also derived rental income of 3,25,000 from property let out in India.
During the year, he paid 32,000 through credit card to insure health of his non-resident mother aged
82 years not dependent on him.

As per India-Australia DTAA the income would be taxable in country where it is earned and not in the
other country, but would be included for computation of tax rate in such other country. Rate of tax in
Australia is 20%.

A) Determine the residential status as per tie-breaker rules and compute the tax liability of Mr. Roy.

B) Also, compute the tax liability of Mr. Roy assuming there is no DTAA.

[8 marks]

Solution:

i) During the previous year 2016-2017 Mr. Roy was a resident & ordinary resident since he had
stayed in India for more than 183 days during P.Y., and has been resident for last 10 Yrs.
ii) He is also a tax resident of Australia.
iii) Where an individual is a resident of 2 countries, then the residency has to be determined as
per tie breaker rules under the tax treaty.
iv) Mr. Roy has permanent home in both countries. Accordingly his resident status is to be
determined based on centre of vital interest.
v) Family of Mr. Roy is in India and accordingly, Mr. Roy has personal & economic relations
closer to India & Accordingly, as per tie - breaker rules, Mr. Roy will be resident of India.

A) India has DTTA with Australia

Computation of tax payable by Mr. Roy for A.Y 2017-2018

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 Particulars Amount

Rental income from property let out in India 3,25,000

(-) standard deduction @ 30% u/s 24(a) (97,500)

Gross total income 2,27,500

(-) chapter VI A deduction
U/s 80D for medical premium paid (25000)
(Mr. Roy would not be entitled for deduction
of 30,000 even if his mother is 82 years old
, since the higher limit of deduction of
30,000 is available in respect of an individual
who is of age of 60 years or more and
Resident of India during P.Y)
2,02,500
Other income earned in Australia 6,00,000

Taxable Income 8,02,500

Tax on Total Income
Upto 2,50,000 NIL
2,50,000 - 5,00,000 @ 10% 50,000
5,00,000 - 8,02,500 @ 20% 60,500 85,500
Add: Cess @ 3% 2,565

Tax Payable ----(1) 88,065

Average Tax Rate in India 10.97%

(88,065/8,02,500) x 100

Tax Liability:
As per DTAA with Australia, the income earned in foreign country would not be taxable in
India, but it has to be included in the total income only for computation of tax rate.
Accordingly, Mr. Roy would be liable to pay tax only on income earned in India @ 10.97% &
not on the foreign income.

Indian Income = 2,27,500 25,000 = 2,02,500

Tax @ 10.97% on 2,02,500 = 22,214
Rounded off to 22,210
B) India has not DTAA with Australia
Computation of Tax Payable by Mr. Roy for A.Y. 2017-18

Particulars Amount
Tax on both foreign & Income
(as computed in (A1) above) 88,065
Less: Relief U/s 91 on Foreign income

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 600,000 @ 10.97% (65,820)
(lower of average Indian tax rate (10.97%) or
foreign tax rate (20%))
Tax Payable 22,245

Note: Assessee shall be allowed relief U/s 91 if all the following conditions are fulfilled:-
a) Assessee is resident in India during the relevant P.Y.
b) Income accrues/arises to him outside India during that P.Y.
c) Such income is not deemed to accrue/arise in India during that P.Y.
d) The foreign income has been subjected to income tax in the foreign country in the hands
of the assessee & the assessee has paid tax on such income in the foreign country.
e) There is no DTAA U/s 90 with that country
Accordingly, Mr. Roy would be eligible for relief U/s 91 since all the conditions are satisfied.

3) b) Discuss the correctness or otherwise of the following statements:

(i) The provisions of MAT u/s 115JB are not applicable to all foreign companies

(ii) Units set up in International Financial Services Center (IFSC) are entitled to special tax concessions

[4 marks]
Solution:
(i) The statement is not correct.
The Finance Act, 2016 has inserted Explanation 4 to section 115JB with retrospective effect from
1.4.2001 to provide for non-applicability of levy of MAT under 115JB on foreign companies
subject to satisfaction of certain conditions:
(I) Whether the foreign company is resident of a country or a specified territory with which
India has a DTAA under section 90(1) or the Central Government has adopted any
agreement between specified associations for double taxation relief under section
90A(1), it should not have a permanent establishment in India in accordance with the
provisions of such Agreement.
(II) Where the foreign company is a resident of country with which India does not have an
agreement of the nature referred in clause (i) above, it should not be required to seek
registration under any law for the time being in force relating to companies.
The provision of MAT under section 115JBwould not be attracted in case of such foreign
companies satisfying these conditions.
Further, in the case of any foreign company (not satisfying the above conditions for non-
applicability of MAT), amount of income accruing or arising 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 profit and loss account and the income-tax payable thereon in
accordance with the provisions of the Act, other than the provisions of Chapter XII-B, is at the
rate less than the rate of 18.5%, shall be reduced while computing book profits.
Thus, since the non applicability of MAT is either subject to fulfillment of the prescribed
condition, and in other cases (i.e., cases where MAT is applicable), non- applicability is restricted

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 to only specified income, the statement that the provisions of section 115JB are not applicable
in the case of foreign companies is not correct.
(ii) The statement is correct.
(1) Exemption for STT and CTT: With effect from 1.6.2016, securities transaction tax is not
leviable in respect of taxable securities transactions entered into by any person on a
recognized stock exchange located in an International Financial Service Center (IFSC) where
the consideration for such transaction is paid or payable in foreign currency.
Likewise, commodities transaction tax is not leviable in respect of taxable commodities
transactions entered into by any person on a recognized association located in unit of IFSC
where the consideration for such transaction is paid or payable in foreign currency.
(2) Exemption of LTCGs on sale of securities, even if STT is not paid: Long term capital gains in
respect of income arising from transaction undertaken in foreign currency on a recognized
stock exchange located in an International Financial Service Center would be exempt under
section 10(38) even though securities transaction tax is not paid in respect of such
transactions.
(3) Concessional rate of tax on short term capital gains, even if STT is not paid: Short capital
gains arising from transaction undertaken in foreign currency ona recognized stock
exchange located in an International Financial Currency Service Center would be taxable at
the concessional rate of 15% under section 111A even though securities transaction tax is
not paid in respect of such transactions.
(4) Concessional Rate of MAT: In case of a Company, being a unit located in an International
Financial Service Center and deriving its income solely in convertible foreign exchange, the
minimum alternate tax under section 115JB shall be chargeable at the rate of 9% instead of
18.5%.
(5) Exemption from tax on distributed profits: In case of a company being a unit located in an
International Financial Service Center, deriving income solely in convertible foreign
exchange, there would be no tax on any amount declared, distributed or paid by such
company, by way of dividends (whether interim or otherwise) on or after 1st April, 2017 out
of its current income, either in the hands of the company or the person receiving such
dividend.
3) c) Mr. A is an executive director of ABC Pvt. Ltd. Further he holds 75% equity shares in the company.
He has let out his commercial property to the company for monthly rent. The company incurred 2.51
crores towards construction and improvement of factory premises which was used by it for the purpose
of its business. The AO held that the amounts spent by the company towards repairs and renovation is
taxable in the hands of Mr. A as:

a) Deemed dividend U/s 2(22)(e); or

b) Perquisite

Is the contention of the AO valid? (4 Marks)

Solution:

The facts of the case are similar to the case of CIT v. Vir Vikram Vaid (2014) 367 ITR 365 (Bom)

Analysis of the case:

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a) Deemed dividend:

i. No money had been paid by way of advance or loan to the shareholder who has substantial
interest in the company.
ii. Further, the amount spent was towards repairs and renovation of the premises owned by the
assessee but occupied by the company as lessee. There is no dispute that the company had
taken on rent the aforesaid premises.
iii. The expenditure incurred by virtue of repairs and renovation on the premises cannot be
brought within the definition of advance or loan given to the shareholder having substantial
interest in the company, though he is the owner of the premises.

b) Perquisite:

iv. It cannot be treated as payment by the company on behalf of the shareholder or for the individual
benefit of such shareholder. If held in such manner, it is a mere assumption not tenable in law.

Conclusion:

The High Court, accordingly, held that the repair and renovation expenses in respect of premises
occupied by the company cannot be treated as deemed dividend in the hands of shareholder being the
owner of the building. Accordingly, applying the ratio decendi of the case, repair and renovation
expenses in respect of premises occupied by the company cannot be treated as deemed dividend in
the hands of Mr. A.

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Question 4

4) a) Examine the following transactions and discuss whether the transfer price declared by the
following assessees, who have exercised a valid option for application of safe harbour rules, can be
accepted by the Income-tax Authorities-

Aggregate
value of
Declared
Sr transactions Operating
Assessee International transaction Operating
No. entered into Expense
Margin
in the
P.Y.2016-17

1 C & Co., a Provision of contract R & D services 100 crore 20 crore 70 crore
partnership firm relating to development of internet
registered under technology, to XYZ & Co., a foreign
the Partnership firm, which holds 12% interest in C &
Act, 1932 Co.
2 D Ltd., an Indian Provision of contract R &D services 50 crore 9 crore 30 crore
company relating to generic pharmaceutical
drug, to ABC Inc., a foreign company
which guarantees 15% of the total
borrowings of D Ltd.

In all the above cases, it may be assumed that the Indian entity which provides the services assumes
insignificant risk. It may also be assumed that the foreign entities referred to above are non-resident in
India.

Would your answer change, if in any of the cases mentioned above, the foreign entity is located in a
notified jurisdictional area?

[6 marks]
Solution:
1. XYZ & Co. & C & Co are deemed to be AEs as the condition of one enterprise, being a
foreign firm, holding not less than 10% interest in another enterprise, being an Indian firm, is
satisfied. Therefore, provision of contract R & D services relating to software development by
C & Co., an Indian firm, to XYZ& Co., a foreign firm, is an international transaction between
AEs, and consequently, the provisions of transfer pricing are attracted in this case.
C & Co. should have declared an operating profit margin of not less than 30% in relation to
operating expense, to be covered within the safe harbour rules. However, since C & Co. has
declared an operating profit margin of only 28.57% (i.e. 20/70 x 100), the same is not in
accordance with the circumstances mentioned in Rule 10TD. Hence, it is not binding on the
income-tax authorities to accept the transfer price declared by C & Co.

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 2. ABC Inc., a foreign company, guarantees 15% of the total borrowings of D Ltd., an Indian
company. Since ABC Inc. guarantees not less than 10% of the total borrowings of D Ltd., ABC Inc.
and D Ltd. are deemed to be associated enterprises. Therefore, provision of contract R & D
services relating to generic pharmaceutical drug by D Ltd., an Indian company, to ABC Inc., a
foreign company, is an international transaction b e tw e en associated enterprises, and
consequently, the provisions of transfer pricing are attracted in this case.
Provision of contract R & D services in relation to generic pharmaceutical drug is an eligible
international transaction. Since D Ltd. is providing such services to a non - resident associated
enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee.
Irrespective of the aggregate value of transactions entered into in the P.Y. 2016-17, D Ltd.
should have declared an operating profit margin of not less than 29% in relation to
operating expense, to be covered within the scope of safe harbour rules. In this case, since D
Ltd. has declared an operating profit margin of 30% (i.e. 9/30 x 100), the same is in accordance
with the circumstances mentioned in Rule 10TD. Hence, the income tax authorities shall accept
the transfer price declared by D Ltd. in respect of such international transaction.

4) b) Balance sheet of A Pvt Ltd:

Particulars Amount ()
Liabilities
Equity share capital 2,00,000
Reserves and surplus 6,50,000
Assets
Cash 8,25,000
P&L A/c (Dr Balance) 25,000

On 01/04/16, A Pvt Ltd gives loan of 2,00,000 to Mr X holding 11% voting power. On 02/04/16, Mr X
repays the loan to the company.
On 31/07/16, A Pvt Ltd gives a loan of 2,00,000 to a firm in which Mr Z is a partner and holds a
substantial interest. Mr Z holds 20% voting power in A Pvt Ltd as on the date of loan.
On 30/09/16, A Pvt Ltd gives a loan of 3,00,000 to its supervisor having salary of 4,000 p.m., who
in turn advanced the said amount of loan to Mr P, who holds 70% of the paid up capital of A Pvt Ltd.

Discuss the taxability u/s 2(22)(e) in the hand of the shareholders.

[6 marks]
Solution:
As per Section 2(22)(e), payment made by a closely held company of any sum by way of advance or
loan to a shareholder holding not less than 10% of the voting power of the company as on the date
when such loans or advances are made or to any concern in which such shareholder has
substantial interest at any time during the previous year or to any person on behalf of such
shareholder shall be deemed to be dividend in the hands of such shareholder.
Accumulated Profits = Reserves and surplus P&L A/c (Dr Balance)
= Rs. 6,50,000 Rs. 25,000 = Rs. 6,25,000

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 Loan given to Mr X on 01/04/16
Mr X holds 11% of voting power. Therefore, any loan and advances to him will attract the
provisions of
Section 2(22)(e).
For Company A Pvt Ltd In the hands of Mr X
Accumulated Profits = Rs. 6,25,000 Rs. 2,00,000 = Loan of Rs. 2,00,000 will be taxable as deemed
Rs. 4,25,000. dividend u/s 2(22)(e).
[Repayment of loan shall have no relevance and
will not be added back to the accumulated profits]
Loan given to a firm in which Mr. Z is a partner and holds substantial interest on 31/07/16
A Pvt Ltd gave loan to a firm in which Mr Z is a partner and holds a substantial interest. Mr Z holds
20% voting power in the company as on the date of loan. Therefore, any loan and advances to the
concern will attract the provisions of Section 2(22)(e) and will be taxable in the hands of such
shareholder.
For Company A Pvt Ltd In the hands of Mr Z
Accumulated Profits = Rs. 4,25,000 Rs. 2,00,000 = Loan of Rs. 2,00,000 will be taxable as deemed
Rs. 2,25,000. dividend u/s 2(22)(e).
Loan given to supervisor, who in turn advanced the said amount of loan to Mr P on
30/09/16
A Pvt Ltd gave loan to its supervisor who in turn advanced the said amount of loan to Mr P,
who holds
70% of the paid up capital of the company; It shall be construed as the amount given to the benefit of
Mr. P and will be treated as deemed dividend chargeable u/s 2(22)(e) in the hands of Mr P [L.
Alagusundaram Chettair v CIT (2001) (SC)].

For Company A Pvt Ltd In the hands of Mr Z

Accumulated Profits = Rs. 2,25,000 Rs. 2,25,000 = Loan of Rs. 3,00,000 restricted to the amount of
NIL accumulated profit i.e. Rs. 2,25,000 will be taxable
as deemed dividend under section 2(22)(e).

4) c) PP Inc, a UK company sets up a liaison office in India to look after its day to day business operations
in India and to identify market opportunities in India. The liaison office takes decisions relating to day to
day routine operations and performs support functions that are preparatory and auxiliary in nature. The
key management and commercial decisions are in substance made by the board of directors in UK.
Determine the residential status of PP Inc for AY 2017-18. Also comment whether the liaison office
would constitute business connection or permanent establishment of PP Inc in India.
[4 marks]
Solution:

PP Inc has only liaison office in India through which it carries out its daily business operations in India
and identify market opportunities in India. The place where decisions relating to day to day routine
operations are taken and support function that are preparatory or auxiliary in nature are performed are
not relevant in determining POEM.

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Further, the key management and commercial decisions are taken outside India and BOD is also outside
India. Accordingly, PP Inc, being a foreign company, is a non-resident for AY 2017-18, since its POEM is
based outside India.
Liaison Office maintained solely for carrying on preparatory & auxiliary services & not undertaking
commercial, trading or Industrial activity do not constitute business connection in India.

Question 5:

5) a) Mr. Hitarth purchases the following property

Stamp Original
Stamp duty
duty value COA of
Purchase value on
on property Date of
price registration
Agreement agreement Date of to seller original
Seller [Amount date
date date registration before purchase
( In [Amount
[Amount agreement by seller
Lakhs)] ( In
( In date ( In
Lakhs)]
Lakhs)] Lakhs)
June 1, August 30 01/01/2014
Clover 40* 42 49
2016 10,2016
August 5, December 20 02/10/2014
Richard 60** 70 75
2016 2, 2016

* 1 Lakh is paid by cheque on June 1, 2016 and 39 Lakhs paid on August 5, 2016.
** 10 Lakhs was paid by cheque on 7th August, 2016 and 50 Lakhs paid on December, 2016.
Discuss the taxability in the hands of Mr. Hitarth, Clover and Richard. Assume that Clover & Richard are
not dealer in property and have held the property as capital asset.
[6 marks]
Solution:
In the hands of Mr. Hitarth
For the property purchased from Clover, since part of the consideration is paid on the date of
agreement. Consequently, stamp duty value on the date of agreement will be considered.
The excess of stamp duty value (as on date of agreement) over purchase price is Rs. 2 Lakhs which is
taxable u/s 56(2)(vii)(b) in the P.Y. in which the property is received.
If possession is given during the P.Y. 2016-17, Rs. 2 Lakhs will be taxable in the P.Y. 2016-17. Cost of
acquisition in his hands will be Rs. 42 Lakhs.

For the property purchased from Richard, since part of the consideration is not paid on/before the
date of agreement. Consequently, stamp duty value on the date of registration will be considered.
The excess of stamp duty value (as on date of registration) over purchase price is Rs. 15 Lakhs which
is taxable u/s 56(2)(vii)(b) in the P.Y. in which the property is received.
If possession is given during the P.Y. 2016-17, Rs. 15 Lakhs will be taxable in the P.Y. 2016-17. Cost of
acquisition in his hands will be Rs. 75 Lakhs.

In the hands of Clover

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 Capital Gain (Since, not dealer in property, income would be taxable under capital gains and not under
PGBP)
As per FA 2016, if the Whole or part of consideration is paid by cheque/bank draft or ECS through a
bank A/c on or before the date of agreement, SDV as on date of agreement shall be taken. Therefore,
in the instant case, since, the part consideration is paid in cheque on/before the date of agreement i.e.
June 1, 2016, SDV as on date of agreement shall be taken.
Particulars Amount
Full value of consideration (U/s 50C) 42,00,000
(-) Cost of Acquisition 30,00,000
SHORT TERM CAPITAL GAIN 12,00,000

In the hands of Richard

Capital Gain (Since, not dealer in property, income would be taxable under capital gains and not under
PGBP)
As per FA 2016, if the Whole or part of consideration is paid by cheque/bank draft or ECS through a
bank A/c on or before the date of agreement, SDV as on date of agreement shall be taken. Therefore,
in the instant case, since, the part consideration is not paid in cheque on/before the date of agreement
i.e. August 5, 2016, SDV as on date of registration shall be taken.
Particulars Amount
Full value of consideration (U/s 50C) 75,00,000
(-) Coat of Acquisition 20,00,000
SHORT TERM CAPITAL GAIN 55,00,000

5) b) Mr. Raj invested into gold bonds under the two different schemes, the details of which are given as
under:

Particulars Sovereign Gold Bond Scheme, Gold Monetisation Scheme,

2015 (Scheme I) 2015 (Scheme II)
No. of units purchased on 1st 100 units for 10 Lakhs 50 units for 6 Lakhs
Jan, 2016
Redeemed into physical gold on 50 units 30 units
31st Aug, 2016 Received physical gold worth Received physical gold worth
8 Lakhs 4 Lakhs
Transferred bonds on 31 50 units for 12 Lakhs
st
20 units for 7 Lakhs
March, 2017
Interest earned during 1 Lakh 70,000
P.Y.2016-17
Compute the taxable income of Mr. Raj for the P.Y. 2016-17.

[6 marks]
Solution:

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 Particulars Sovereign Gold Bond Scheme, Gold Monetisation Scheme,
2015 (Scheme I) 2015 (Scheme II)
Interest Taxable Exempt U/s 10(15)(vi)
Capital Asset u/s 2(14) Yes No
Capital Gain on Redemption Exempt U/s 47 (viic) Exempt
Transfer Taxable Exempt ( Not Capital Asset)

Capital Gain on transfer of Sovereign Gold Bonds

Particulars Amount (in Lakhs)
Fair Value Cost 600
(-) Cost of Acquisition (50 x 10L) 500
Capital Gain 100
Interest 1
TAXABLE INCOME 101

5) c) Whether the high court has the power to review its own order? [4 Marks]

Solution:

The Supreme Court in Meghalaya steels Ltd. (2015) has held as under:

The power of review is inherent as per the constitution of India.

Such power is essentially to prevent miscarriage of justice or to correct grave errors committed
by it.
Sec. 206A(7) states that all provisions that would apply in relation to appeals in the code of civil
procedures (CPC) would also apply to appeals U/s 260A.
That does not in any manner suggest-
- Either that the other provisions of the CPC are excluded
- OR the HC inherent jurisdiction is affected in any manner.

Question 6:

6)a) Daimler Ltd an Indian company is a subsidiary of Daimler Pte Singapore. Daimler India has sold raw
material amounting to 7,000 units at 9,200/unit to Daimler Pte. Daimler Ltd. has also sold similar raw
material to other unrelated enterprises. The details of the comparables are provided below. Compute
the Arms Length Price (ALP) and determine whether Daimler Ltd. has supplied the raw material at ALP.
The total income of Daimler Ltd. during the P.Y.2016-17 was 9,00,000. [Assume Comparable
Uncontrolled Price (CUP) method as the most appropriate method].

Comparable Unrelated Parties Price for P.Y.2016-17 Price for P.Y.2015-16

Reyant Ltd. 8,990/unit 9,800/unit
Ciaz Ltd. 9,400/unit 10,000/unit

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 Shivam Ltd. 8,400/unit 10,000/unit
Ariham Ltd. 11,000/unit 9,690/unit
Rihan Ltd. No transaction 8,980/unit
Divam Ltd. 10,000/unit 11,100/unit
Duke Ltd. 10,990/unit 6,000/unit
Super Ltd. 9,900/unit 8,790/unit
Christler Ltd. 10,330/unit 7,980/unit

[8 marks]
Solution:
1. Associated Enterprise:
In this case, Daimler Ltd. is a subsidiary of Daimler Pte. Accordingly, both are associated
enterprises within the meaning of Section 92A.

2. International transaction:
Sale of goods to a non-resident associated enterprise would fall within the meaning of
international transaction. Accordingly, the provisions of transfer pricing would apply and the price
is required to be computed with regard to Arms length price (ALP).
3. Assumptions:
a. Assuming, Daimler India is tested
party.
b. Company has not entered into safe harbour and APA
provisions.
4. Determination of ALP:
a. As per third proviso to Section 92C(2) of the Income-tax Act, 1961, if more than 1 price is
determined by using most appropriate method, then ALP shall be computed by applying the
range concept.
b. As per rule 10CA of Income-tax Rules, range concept would apply only if the number of
comparables is 6 or more than 6.
c. Since, in the instant case there are 8 comparables available, the range concept would
apply.
5. Use of multiple year data:
In the instant case, CUP method is used, the concept of multiyear data would not apply.
Accordingly, only the data of the current year i.e. P.Y. 2016-17 is to be considered. Data pertaining
to P.Y. 2015-16 is irrelevant.
6. ALP as per Range Concept:
Step 1: Arrange the dataset in the ascending order:
Sr. No Comparable Price for P.Y. 2016-17

1 Shivam Ltd. Rs. 8,400/unit

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 2 Reyant Ltd. Rs. 8,990/unit
3 Ciaz Ltd. Rs. 9,400/unit
4 Super Ltd. Rs. 9,900/unit
5 Divam Ltd. Rs. 10,000/unit
6 Christler Ltd. Rs. 10,330/unit
7 Duke Ltd. Rs. 10,990/unit
8 Ariham Ltd. Rs. 11,000/unit

Step 2: Determine the 35th and 65th percentile:

i. The data place of 35th percentile = 8*35% = 2.8
Since, this is not whole number, the next number shall be taken i.e. 3. Therefore, the value at
3 rd place is Rs. 9,400/unit.

ii. The data place of 65th percentile = 8*65% = 5.2

Since, this is not whole number, the next number shall be taken i.e. 6. Therefore, the value at
6 th place is Rs. 10,330/unit.
Accordingly, the ALP range is between Rs. 9,400/unit Rs. 10,330/unit.
However, the transaction price is Rs. 9,200/unit and is not within the ALP range.
Step 3: Determine the median:
The data place of the median, i.e., 50th percentile = 8*50% = 4
Since, this is whole number, average of prices at 4th and 5th place shall be taken, i.e.,
(Rs. 9,900 + Rs. 10,000)/2 =Rs. 9,950/unit
Therefore, ALP shall be Rs. 9,950/unit.
Step 4 : Adjustment to Transfer Price:
Since, the transfer price is lower than ALP, adjustment of Rs. 750/unit (Rs. 9,950-Rs. 9,200) is required.

Computation of adjusted total income:

Particulars Amount (Rs.)

Total income 9,00,000
Add: TP adjustment (7000 units* Rs. 750/unit) 52,50,000
Total Income as determined 61,50,000

6)b) Mr A acquired house property from a builder. The details of the same are as follows:

House property : Lease hold land cost Rs 10 Lakhs ; House property Constructed : Cost Rs 8 lakhs on such
lease hold land. (Separate agreement was entered in respect of the same from the builder.)

1. Date of agreement 11-06-13

2. Date when the property was registered : 11-09-15
3. Date of conversion of lease hold land to free hold land : 1-03-16
4. Date of sale of property : 1-1-17

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 5. Sale consideration : Land Rs 15 lakhs & Building Rs 12 lakhs

Further in respect of the entire consideration the assesee purchased a house property in the name of his
wife.

Compute the amount of Capital Gains [8 marks]

Solution:
Computation of Capital Gains
Particulars Amount Amount
( in Lakhs) ( in Lakhs)
For Land : (11/06/2013 01/01/2017) (Note 1)
Full Value Consideration (assuming greater than stamp
duty value U/s 50C) 15,00,000
(-) Indexed Cost of Acquisition [10L x (1125/939)] 11,98,083
(-) Indexed Cost of Improvement (Note 2) NIL
Long Term Capital Gain on Land (A) 3,01,917
For Building : (11/06/2013 01/01/2017) (Note 1)
Full Value Consideration (assuming greater than stamp
duty value U/s 50C) 12,00,000
(-) Indexed Cost of Acquisition [8L x (1125/939)] 9,58,466
Long Term Capital Gain on Building (B) 2,41,533
Total Long Term Capital Gain (A + B) 5,43,450
(-) Exemption U/s 54 - (Note 3) (2,41,533)
TAXABLE LONG TERM CAPITAL GAIN 3,01,917

Note:
1) The Madras High Court in S.K.Jeyashankar case has held the right to the property flows from the
date of agreement. Further fact that the property was registered in another date& the
possession was given on the later date, does not take away the fact that the right was created at
the time of the agreement. Hence in the present case the capital asset under consideration is a
long term in nature.
2) The Allahabad High Court in Smt. Rama Rani Kala case has held that conversion of the right of
the lessee from leasehold to freehold is only by way of improvement of her rights over the
property which he / she has enjoyed. Accordingly in determining the period of holding, the date
from original acquisition of asset being the lessee shall be considered. The question does not
provides the cost of the improvement (i.e. for conversion) and hence not considered.
3) The Delhi High Court in Kamal Wahals case has held that Section 54 does not require purchase
of a new residential house property in the name of the assessee himself. It only require to
purchase or construct a residential house. Hence, property purchased in the name of his wife
will qualify for the exemption U/s 54/54F.

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