Topic wise Test Papers of CA Final - Direct Tax – MAY/NOV-24 Exams

Topic: PGBP

Total Marks: 55 Marks

Time Allowed: 100 minutes

Answers:

Part-A Multiple Choice Questions

1. Answer : C
2. Answers :
(i) C
(ii) D
(iii) B
(iv) C
(v) C
3. Answer
(i) D
(ii) A
(iii) C
(iv) C
(v) B
4. Answer: C
5. Answer: D

Part- B Descriptive Questions

Solution 1:

Computation of total income of Parik hospitality Ltd. For the A.Y.2024-25

Particular Amount (`)

Profits and Gains from Business and Profession

Profit as per Statement of profit and loss 1,52,00,000

Add: Items debited but to be considered separately or to be

disallowed

(a) Payment to middleman for purchase of crab etc. in an amount 30,000

exceeding `10,000

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Particular Amount (`)

[U/s 40A(3), disallowance is attracted in respect of expenditure for

which cash payment exceeding `10,000 is made on a day to a person.
Payment of `25,000 to fishermen for purchase of crab etc. is covered
by exception under Rule 6DD. However, payment of `30,000 to
middlemen for purchase of crab etc. is not covered under the
exception - CBDT Circular 10/2008 dated 5/12/2008].

(b) Contribution towards employees’ pension scheme in excess of 10% 50,000

of salary disallowed u/s 40A(9) [Contribution to the extent of 10%
of salary (basic salary + dearness allowance, if it forms part of pay
for retirement benefits) is allowable as deduction u/s 36(1)(iva). In
this case, it is presumed that dearness allowance forms part of pay
for retirement benefits]

(c) Payment to transport contractor without deduction of tax at source

[Since the contractor opts for presumptive taxation u/s 44AE and
furnished a declaration to this effect, tax is not required to be
deducted at source u/s 194C in respect of payment to transport Nil
contractor].

(d) Expenses on foreign travel of two directors for a collaboration 10,00,000

agreement which failed to materialize

[Where expenditure is incurred for a project not related the existing

business and the project was abandoned without creating a new asset,
the expenses are capital in nature as per Mc Gaw-Ravindra
Laboratories (India) Ltd. (1994) (Guj.). Brewery project is not
related to the existing business of running three star hotels]

(e) Fees paid to directors without deducting tax at source [30% of `1 30,000 11,10,000
lakh] [Disallowance@30% would be attracted u/s 40(a)(ia) for non-
deduction of tax at source from director’s remuneration on which tax
is deductible u/s 194J]

1,63,10,000

Less: Items credited but to be considered separately/Expenditure to

be allowed
(i) Profit on sale of plot of land to 100% subsidiary 12,00,000
[Short-term capital gains arises on sale of plot of land held for less
than 24 months. However, in this case, since the transfer is to a 100%
subsidiary company and the subsidiary company is an Indian
company, the same would not constitute a transfer for levy of capital
gains tax as per section 47(iv).
Since this amount has been credited to the statement of profit and
loss, the same has to be deducted for computing business income).
(ii) Depreciation 5,00,000
[Depreciation allowable under the Income-tax Act, 1961 is `15 lakhs
whereas the depreciation as per books of account debited to the
statement of profit and loss is `10 lakhs. Hence, the additional
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 Test Papers of CA Inter - Direct Tax - MAY/NOV-23 Exams — Answers 3

Particular Amount (`)

amount of `5 lakhs has to be deducted while computing business
income]
(iii) Additional compensation received from State Government [Since the 10,00,000
additional compensation has been received pursuant to an interim
order of the Court, the same would be deemed as income chargeable
to tax under the head “Capital Gains” in the year of final order as per
section 45(5). Since the compensation has been credited to the
statement of profit and loss, the same has to be deducted while
computing business income]
(iv) Dividend received from foreign company [Dividend received from
foreign company is taxable under the head “Income from other
sources”. Since the said dividend has been credited to the statement
5,00,000
of profit and loss, the same has to be deducted while computing
business income]
(v) Interest paid during the year [Conversion of unpaid interest into loan 2,00,000
shall not be construed as payment of interest for the purpose section
43B. The amount of unpaid interest converted into a new loan will
be allowable as deduction only in the year in which such converted
loan is actually paid. Since `2 lakhs has been paid in the P.Y.2023-
24, the same is allowable as deduction]
(vi) Purchases omitted to be recorded in the books [Since the purchase 2,00,000 36,00,000
is made in March, 2024 (i.e., P.Y.2023-24), in respect of which bill
of `2 lakhs received on 31.3.2024 has been omitted to be recorded
in the books in that year, it has to be deducted to compute the
business income [Kedarnath Jute Manufacturing Company Ltd.
(1971) (SC)]. It is logical to assume that the company is following
mercantile system of accounting].
Income under the head “Profits and Gains of Business or Profession” 1,27,10,000

Income from Other Sources

Dividend received from foreign company [Dividend received from a

foreign company is chargeable to tax under the head “income from other 5,00,000
sources”.]

Gross total Income 1,32,10,000

Less: Deduction under Chapter VI-A 5,00,000

Deduction u/s 80M in respect of inter-corporate dividends [to the
extent of dividend distributed by it on or before the due date
specified u/s 139(1) of filing return of income
Total Income 1,27,10,000

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Solution 2:
Computation of total income of Organic Ltd. for the A.Y.2024-25

Particulars Amount (`)

Profits and Gains from Business and Profession
Net profit as per profit and loss account 4,50,00,000
Add: Items debited but to be considered separately or to be
disallowed
- Depreciation provided on straight line basis (Note 1) 30,00,000
- Disallowance u/s 40A(3) for payment exceeding `10,000
made in cash for purchases and expenditure (Note 2) 18,00,000
- Disallowance u/s 40A(3) for cash payment exceeding
`35,000 in a day to transport operators for hiring of lorry 1,10,000
(Note 3)
- Expenditure on scientific research on in- house approved
research and development facility (100% deduction -
allowed since already debited to P&L, no further
adjustment required)
- Expenditure on earning dividend from foreign company not 50,000
deductible (Note 4)
- Tax has not been deducted on the GST component of Nil
professional charges paid to consultant (Note 5)
- Disallowance u/s 40A(2) for excess payment to related 5,00,000
person (Note6)
- Employee’s contribution to EPF (Note 7) 3,50,000
- Employer’s contribution to EPF (Note 8) Nil
- Donations to electoral trust and registered political party 2,00,000 60,10,000
(Note 10)
5,10,10,000
Less: Items credited but to be considered separately or to be
allowed/permissible expenditure and allowances
- Depreciation allowable under the Income- tax Act, 1961 48,00,000
(Note 1)
- Dividend received from foreign company to be considered
under the head “Income from other sources” (Note 4) 6,00,000 54,00,000
4,56,10,000
Add: Recovery of bad debts credited in reserve but chargeable u/s 1,50,000
41(4) (Note 9)
Profits and gains from business and profession 4,57,60,000

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 Test Papers of CA Inter - Direct Tax - MAY/NOV-23 Exams — Answers 5

Particulars Amount (`)

Income from Other Sources
Dividend from foreign company (Note 4) 6,00,000 6,00,000
Gross total income 4,63,60,000
Less: Deduction under Chapter VI-A U/s 80GGB [Donation to 1,25,000
registered political party] (Note 10)
Total Income 4,62,35,000
Notes:
1. Depreciation provided in the accounts on straight line basis (i.e., `30 lakhs) has to be added back
and depreciation calculated as per Income-tax Rules, 1962 (i.e. `48 lakhs) is allowable as deduction
u/s 32.
As per second proviso to section 43(1), the expenditure for acquisition of asset, in respect of which
payment to a person in a day exceeds `10,000 has to be ignored for computing actual cost, if such
payment is made otherwise than by way of A/c payee cheque/ bank draft or ECS. Accordingly,
depreciation on second hand machinery purchased on 23.10.2023 is not allowable since the
payment is made otherwise than by A/c payee cheque/A/c payee draft/ ECS to a person in a day.
No adjustment is required to be made since depreciation in respect of such plant and machinery is
not included in the depreciation given.
2. Cash payments exceeding `10,000 in a day attracts disallowance u/s 40A(3). However, Rule 6DD
provides for certain exceptions, which includes, inter alia, payments is made for the purchase of
agricultural produce. Therefore, cash payment of `5.5 lakhs for the purchase of agricultural produce
would not attract disallowance u/s 40A(3). However, cash payment of `6 lakhs made on 17-01-
2024 due to demand of supplier would attract disallowance u/s 40A(3), since the same is not
covered under any of the exceptions laid out in Rule 6DD.
3. In respect of cash payments to transport operators, a higher limit of `35,000 per day is permissible.
Therefore, cash payment of `25,000 on 10-6-2023 would not attract disallowance u/s 40A(3).
However, cash payments of `70,000 and `40,000 on 25.8.2023 and 10.02.2024, respectively, would
attract disallowance u/s 40A(3) since the same exceeds `35,000 per day in cash.
4. Dividend received by an Indian company from a foreign company is taxable under income from
other sources and no expenditure would be allowable in respect of such dividend except interest on
loan taken for investment in shares.
Since such dividend has been credited to the profit and loss account, the same has to be reduced
for computing income under the head “Profits and gains of business or profession”. Likewise,
`50,000, representing expenditure for earning dividend income, which has been debited to profit
and loss account, should be added back for computing business income.
5. Professional charges have been debited to profit and loss account. It is stated that tax has not been
deducted on the GST component of professional charges.
In respect of professional charges, CBDT Circular No.23/2017 dated 19.7.2017 clarifies that if in
terms of the agreement/contract between the payer and the payee, the GST component comprised
in the amount payable to a resident is indicated separately, tax shall be deducted at source on the
amount paid/payable without including such GST component.
In this case, the GST component is indicated separately in the agreement/contract between the
company and the consultant, tax is required to be deducted at source on the professional charges
without including such GST component. Therefore, no disallowance is attracted for non- deduction
of tax at source on the GST component.
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6 Test Papers of CA Inter - Direct Tax - MAY/NOV-23 Exams — Answers
6. ABC Ltd. is a related person u/s 40A(2), since the directors of the Organic Ltd. have substantial
interest in ABC Ltd. Therefore, excess payment of `5 lakh to ABC Ltd. for purchase of goods
would attract disallowance u/s 40A(2).
7. Employees’ contribution to PF deposited after the due date mentioned under the PF Act is not
allowable as deduction as per section 36(1)(va).
Further, Explanation 2 provides that - For the removal of doubts, it is hereby clarified that the
provisions of section 43B shall not apply and shall be deemed never to have been applied for the
purposes of determining the “due date” under this clause.
8. As per section 43B, employers’ contribution to EPF is allowable as deduction since the same has
been deposited on or before the ‘due date’ of filing of return u/s 139(1). Since the same has been
debited to profit and loss account, no further adjustment is necessary.
9. Recovery of a debt which was earlier written off u/s 36(1)(vii) and was allowed as deduction is
chargeable to tax u/s 41(4) in the year of such recovery. Accordingly, the amount of `1.5 lakhs has
to be added to income despite the fact that the same was credited by the company in a reserve
account.
10. Donation to an electoral trust and a registered political party is not an allowable expenditure u/s 37
since it is not laid out wholly or exclusively for the purposes of business or profession. Hence, the
same has to be added back while computing business income.
However, donation made by a company to an electoral trust or registered political party is allowable
deduction u/s 80GGB from gross total income, subject to the condition that payment is made
otherwise than by way of cash. Since the donation to electoral trust is made in cash, the same does
not qualify for deduction u/s 80GGB. However, donation of `1.25 lakh by cheque to a registered
political party would be eligible for deduction u/s 8OGGB.

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