FINAL EXAMINATION

ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026

PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)
1) Choose the correct option: [15 x 2 = 30]

(i) A return filed under which of the following sections of the Income Tax Act can be revised under Section
139(5)?
(a) Section 139(1) – Return filed within due date
(b) Section 139(4) – Belated return
(c) Both (a) and (b)
(d) Section 142(1) – Return filed in response to notice

(ii) When an assessee has paid advance tax more than the tax due on the returned income and the return is
filed before the ‘due date’ specified in section 139(1), the refund amount is eligible for interest @
______.
(a) 1% per month
(b) ½% per month
(c) ¾% per month
(d) 1.50% per month

(iii) The minimum percentage of income that must be applied for charitable purposes to claim exemption is:
(a) 70%
(b) 75%
(c) 80%
(d) 85%

(iv) Time limit for rectification under Section 154 is:

(a) 4 years
(b) 2 years
(c) 5 years
(d) 6 years

(v) Penalty for failure to maintain books of accounts as required under Section 44AA is:
(a) ₹25,000
(b) ₹50,000
(c) ₹1,00,000
(d) ₹ 10,000

(vi) Which of the following sections provides deduction for specified investments in tax planning?
(a) Section 80C

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DIRECT TAX LAWS AND INTERNATIONAL TAXATION
(b) Section 10
(c) Section 24
(d) Section 194A

(vii) ICDS are applicable to:

(a) Only companies
(b) Only individuals
(c) All assessees following mercantile system of accounting
(d) Only partnership firms

(viii) An assessee acquired a house property outside India in the previous year 2009-10 for ₹50 lakh. Out of
this investment, ₹20 lakh had already been assessed to tax in earlier years. The asset came to the notice
of the Assessing Officer in FY 2025 (AY 2026-27). The value of the asset in the year 2025-26 is ₹ 1
crore. What will be the amount chargeable to tax under the Black Money Act?
(a) ₹40,00,000
(b) ₹60,00,000
(c) ₹50,00,000
(d) ₹80,00,000

(ix) If a slump sale occurs after holding the undertaking for more than 24 months, the capital gain is treated
as:
(a) Short-term capital gain
(b) Long-term capital gain
(c) Business income
(d) All of the above

(x) Which of the following is not a method for determining Arm’s Length Price?
(a) CUP Method
(b) Resale Price Method
(c) Profit Split Method
(d) Historical Cost Method

(xi) APA provisions are covered under which section of the Income-tax Act?
(a) Section 92A
(b) Section 92C
(c) Section 92CC
(d) Section 94

(xii) Thin Capitalisation rules were introduced in India following recommendations of:
(a) IMF
(b) OECD BEPS Project
(c) World Bank
(d) RBI

(xiii) Which method is commonly used to avoid double taxation under DTAA?
(a) Depreciation method

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ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026
PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION
(b) Credit method
(c) Installment method
(d) Deduction method

(xiv) Which Article of DTAA generally deals with Business Profits?

(a) Article 5
(b) Article 12
(c) Article 7
(d) Article 10

(xv) GAAR is introduced mainly to:

(a) Increase corporate tax rate
(b) Prevent aggressive tax planning
(c) Promote exports
(d) Reduce customs duty

Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
c b d c a a c b b d c b b c b

SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 marks.)
[5 x 14 = 70]

2) (a) A charitable institution registered under section 12AB furnishes the following details for the Previous
Year 2025-26 (A.Y. 2026-27):
Particulars (₹ in Lacs)
(a) Gross receipts from students (educational institution) 60.00
(b) Voluntary contributions (not forming part of corpus) 10.00

Additional Information
1. During the year, the institution applied ₹ 35.00 lacs towards revenue and capital expenditure for
education.
2. The institution wants to accumulate ₹ 20.00 lacs for the construction of a new auditorium. It has
deposited this amount in modes specified u/s 11(5) and furnished the statement in Form 10 to the
Assessing Officer two months prior to the due date of filing the return of income.
Calculate the taxable income of the institution for A.Y. 2026-27.
[7]

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ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026
PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION

(b) M/s. Global Traders provides the following Profit & Loss Account for the year ending 31-3-2026. The
firm has three partners: Leo, Mike, and Neo.
Particulars Amount (₹) Particulars Amount (₹)
To Cost of Goods Sold 65,00,000 By Sales 85,00,000
To Salary to Partners 6,50,000 By Long Term Capital Gain 2,00,000
(Sale of Plot purchased in 2010)
To Interest on Capital @ 10% 1,00,000 By Dividend 10,000
To Donation (Political Party) 25,000
To Municipal Taxes (Shop) 15,000
To Net Profit 14,20,000
87,10,000 87,10,000
Additional Information
• Partners share profits equally.
• Salary is paid only to Leo and Mike (Working Partners). Neo is a sleeping partner.
• The donation was made by cheque to a registered political party.
• Long Term Capital Gain is computed as per provisions of IT Act.
Compute the Total Income and Tax Liability for the A.Y. 2026-27.
[7]
Answer:
(a) Computation of Total Income for A.Y. 2026-27
Particulars ₹
Gross receipts from students 60,00,000
Voluntary contributions 10,00,000
Gross Income 70,00,000
Less: 15% of income eligible for unconditional accumulation (15% of ₹ 70 10,50,000
Lakhs)
Income available for application 59,50,000
Less: Amount applied for charitable purposes (Revenue + Capital) 35,00,000
Shortfall in application 24,50,000
Less: Accumulated u/s 11(2) for specific purpose (Note) 20,00,000
Taxable Income 4,50,000

Note: The institution can accumulate the shortfall u/s 11(2) because it has fulfilled the conditions:
1. Furnished Form 10 stating the purpose (auditorium) and period (not exceeding 5 years).

2. Invested the money in section 11(5) modes.

3. The deduction is allowed to the extent of the amount actually set apart (₹ 20 Lakhs), leaving the
remaining balance (₹ 4.50 Lakhs) taxable.

(b) Computation of Total Income of M/s. Global Traders for the A.Y. 2026-27

Particulars Amount Amount Amount

Profits & gains of Business or Profession

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ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026
PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Net profit as per Profit and Loss Account 14,20,000
Add: Expenditure disallowed but debited in books
Remuneration to partner as per book 6,50,000
Donation to Political Party 25,000 6,75,000
20,95,000
Less: Income taxable under other head
Long Term Capital Gain 2,00,000
Dividend Income 10,000 (2,10,000)
Book Profit 18,85,000
Less: Remuneration allowed to partner 6,50,000 12,35,000
Capital Gains
Long Term Capital Gain (Land) 2,00,000
Income from Other Sources
Dividend Income 10,000
Gross Total Income 14,45,000
Less: Deduction
U/s 80GGC [Donation to political party] 25,000
Total Income 14,20,000

Calculation of Tax Liability

Details Rate Amount (₹)
Tax on LTCG (₹ 2,00,000) 12.5% 25,000
Tax on Balance Income (₹ 12,20,000) 30% 3,66,000
Total Tax 3,91,000
Add: Health & Education Cess 4% 15,640
Net Tax Payable 4,06,640

Working Note: Calculation of allowable remuneration

(a) Remuneration as per IT Act

• 90% of First ₹ 6,00,000: ₹ 5,40,000
• 60% of Balance ₹ 12,85,000: ₹ 7,71,000
• Total Limit: ₹ 13,11,000

(b) Remuneration as per books: ₹ 6,50,000

Allowable Deduction: Lower of (a) or (b) = ₹ 6,50,000

3) (a) Mr. A Naresh, who is neither a director nor has a substantial interest in any company, is offered
employment by Freewheel Ltd., Mumbai with the following two alternatives:
Particulars I II
Basic pay 17,66,000 17,66,000
Bonus 90,000 90,000
Education allowance for 2 children 30,200 -
Education facility for 2 children in school maintained by employer - 30,200
Sweeper allowance 10,000 -
Sweeper facility - 10,000

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DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Entertainment allowance 6,000 -
Club facility - 6,000
Transport allowance for personal use 1,800 pm -
Free car (1200 cc) facility for performing journey between office to - 12,000
home and vice versa (car owned by employer)
Medical allowance 18,000 -
Medical bills reimbursement facility - 18,000
Allowance for gas, electricity and water supply 4,500 -
Free gas, electricity and water supply (bills will be in the name of the - 4,500
employer)
Holiday home allowance 8,000 -
Holiday home facility - 8,000
Lunch allowance 18,000 -
Free lunch (₹ 70 x 200 days + ₹ 80 x 50 days) - 18,000
Diwali gift allowance 7,500 -
Gift on Diwali - 7,500
A rent-free unfurnished home – lease rent 2,40,000 2,40,000
Which of the two alternatives Naresh should opt for on the assumption that both employer and
employee will contribute 10% of salary towards unrecognized provident fund? Suggest the better
alternative.
Interest free loan of ₹ 20,000 will be given to him for purchasing household items. Assume that he
has opted for the old tax regime.
[7]

(b) Sure Success Ltd. wants to acquire an asset costing ₹ 1,00,000. It has two options are available, the
first one is buying the asset by taking a loan repayable in five instalments of ₹ 20,000 each with 14%
interest per annum. The second is leasing the asset for which the annual lease rental charge is ₹
30,000 up to 5 years. The lessor charges 1% as a processing fee in the first year. Assume the internal
rate of return to be 10%. The present value factors are:—

Year 1 2 3 4 5

P/V Factor .909 .826 .751 .683 .621

Assuming that the payments are made at the end of the year, suggest which alternative is better
for the company. The rate of depreciation is 15% while the tax rate is 33.22%.
[7]

Answer:
(a) As both the options are yielding equivalent facilities, hence the option where tax liability can be
minimized is the better choice for the assessee. Accordingly, computation of taxable salary of Naresh
under both options are as under
Particulars Working Option1 Option2

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ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026
PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Details Amount Details Amount
Basic salary 17,66,000 17,66,000
Bonus 90,000 90,000
Allowances
Children education allowance 30,200
Less: Exemption u/s 10(14) 100 x 2 x 12 2,400 27,800
Rule 2BB
Transport allowance 21,600
Less: Exemption u/s 10(14) Nil 21,600
Holiday home allowance 8,000
Medical allowance 18,000
Sweeper allowance 10,000
Entertainment allowance 6,000
Lunch allowance 18,000
Gas, electricity & water 4,500
allowance
Diwali gift allowance 7,500
Perquisites u/s 17(2)
Rent free accommodation
(Being minimum of the
following):
Rent paid by employer 2,40,000 2,40,000
*
10% of salary 1,97,740 1,97,740 1,85,600 1,85,600
Car facility for performing Exempted Nil
journey between office to home
and vice versa
Education facility 30,200
Less: Exempted 24,000 6,200
Interest free loan exempted up Nil Nil
to ₹ 20,000
Sweeper facility 10,000
Club facility 6,000
Holiday home facility 8,000
Medical facility 18,000
Gift 7,500 – 5,000 2,500
Gas, electricity & water 4,500
facility
Free lunch facility (20×200)+(30×50) 5,500
Gross Taxable Salary 21,75,140 21,02,300
Less: Standard Deduction u/s 16(ia) 50,000 50,000
Taxable Salary 21,25,140 20,52,300

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PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION

* Salary for the purpose of -

Particulars Rent free accommodation
Option 1 Option 2
Basic 17,66,000 17,66,000
Bonus 90,000 90,000
Children education allowance 27,800 -
Transport allowance 21,600 -
Holiday home allowance 8,000 -
Medical allowance 18,000 -
Sweeper Allowance 10,000 -
Entertainment allowance 6,000 -
Lunch allowance 18,000 -
Gas, electricity & water allowance 4,500 -
Diwali gift allowance 7,500 -
Total 19,77,400 18,56,000
Note: Contribution to URPF is not taxable.
Conclusion: Option 2 is better.

(b) Cost of Ownership

Year Instalment Interest Depreciation Tax Benefit Net P/V Net
Outflow
(a) (b) (c) (d) = (b+c)*33.22% (a+b-d)
1 20,000 14,000 15,000 9,634 24,366 .909 22,151
2 20,000 11,200 12,750 7,956 23,244 .826 19,210
3 20,000 8,400 10,838 6,391 22,009 .751 16,536
4 20,000 5,600 9,212 4,921 20,679 .683 14,124
5 20,000 2,800 7,830 3,531 19,269 .621 11,965
Total 83,985
It is assumed that salvage value is Nil after 5 years.
Cost of Lease

Year Lease Tax Benefit Net Outflow P/V Net

(a) (b) (a-b)
0 1,000 332 668 1 668
1 30,000 9,966 20,034 .909 18,211
2 30,000 9,966 20,034 .826 16,557
3 30,000 9,966 20,034 .751 15,052
4 30,000 9,966 20,034 .683 13,683
5 30,000 9,966 20,034 .621 12,440
Total 76,611
Since net present value in case of lease is less; hence lease is benefited.

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ANSWERS TO PRACTICE TEST PAPER TERM – JUNE 2026
PAPER – 15 SYLLABUS 2022
DIRECT TAX LAWS AND INTERNATIONAL TAXATION
4) (a) X Ltd. has several undertakings carrying on several businesses. During the year 2025-26, the
company sold one of its undertaking (as it was continuously generating loss since last 5 years) for a lump
sum value of ₹ 300 lacs without assigning value to individual asset and liabilities. The fair market value
of the capital asset of that unit is ₹ 350 lacs. Book value of sundry assets and liabilities of the undertaking
as on the date of sale is as under:
Items Book Value
Land ₹ 50 lacs (Value for the purpose of Stamp duty ₹ 70,00,000)
Machinery ₹ 70 lacs (WDV as per IT Act ₹ 60 lacs)
Furniture ₹ 50 lacs (WDV as per IT Act ₹ 90 lacs)
Stock ₹ 30 lacs
Debtors ₹ 40 lacs
Creditors ₹ 50 lacs
Brokerage on transfer paid @ 5%. Compute capital gain.
[7]

(b) Mr. Crown, a non-resident, gives you the following information for the year ended 31-3-2026
Interest on Government securities (gross) 12,21,000
Dividend on shares of foreign companies received aboard 52,000
Interest from deposits in Indian companies (gross) 30,000
Income from horse races in India 20,000
He has donated a sum of ₹ 2,00,000 to Municipal Corporation of Delhi for promotion of family
planning. He has paid ₹ 20,000 by cheque to New India Assurance Co. for Mediclaim for himself.
He has also spent ₹ 16,000 on medical treatment of his minor son who is physically handicapped.

Compute total income of Mr. Crown for the assessment year 2026-27, assuming that he has opted
for old regime.

[7]
Answer:
(a) Since the undertaking is owned by the company for more than 2 years hence the gain on transfer shall be
liable to long term. Calculation of cost of acquisition (i.e. Net worth)
Particulars Workings Details Amount
Value of asset taken over
Land Book value of non-depreciable assets ₹ 50 lacs
Stock Book value of non-depreciable assets ₹ 30 lacs
Debtors Book value of non-depreciable assets ₹ 40 lacs
Machinery WDV as per I.T. Act ₹ 60 lacs
Furniture WDV as per I.T. Act ₹ 90 lacs ₹ 270 lacs
Less: Value of liabilities taken over
Creditors Book Value ₹ 50 lacs
Net worth (cost of acquisition) ₹ 220 lacs

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Computation of capital gains in the hands of X Ltd. for the A.Y. 2026-27
Particulars Details Amount Amount
Sale Consideration Higher of actual consideration and FMV of 350 lacs
capital assets transferred
Less: Expenses on transfer 5% of ₹ 300 lacs 15 lacs
Net Sale Consideration 335 lacs
Less: Cost of Acquisition Calculated above 220 lacs
Less: Cost of improvement Nil 220 lacs
Long Term Capital Gain 115 lacs

(b) Computation of Total Income of Mr. Crown, a non-resident, for the A.Y.2026-27
Particulars Working Amount Amount
Income from other sources
Dividend from
Foreign company Non-resident Nil
Interest from
Government securities 12,21,000
Indian company deposits 30,000 12,51,000
Casual income
Winning from horse races 20,000
Gross Total Income 12,71,000
Less: Deduction
U/s 80D (Medical insurance) 20,000
U/s 80DD (Handicapped son) Non-resident Nil
U/s 80G (Donation) Note 1,25,100 1,45,100
Total Income 11,25,900
Note: Computation of Deduction u/s 80G
Computation of Adjusted GTI:
Adj. GTI = GTI – Deduction u/s 80CCC to 80U other than 80G
= ₹ 12,71,000 – ₹ 20,000 = ₹ 12,51,000
Qualifying amount for donation = 10% of Adjusted GTI = 10% of ₹ 12,51,000 = ₹ 1,25,100
Deduction: In case of donation to Municipal Corporation for family planning, rate of deduction
is 100% of qualifying amount. Hence, deduction u/s 80G shall be ₹ 1,25,100 (being 100% of ₹
1,25,100).

5) (a) Explain the meaning of “Advance Ruling” under Section 245N(a) of the Income-tax Act and discuss
the matters covered under it.
[7]
(b) A firm furnished its return of income on 30th June, 2026 showing income of ₹ 1,00,000. The return
shows other particulars as follows -
Advance tax ₹ 20,000

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DIRECT TAX LAWS AND INTERNATIONAL TAXATION
TDS ₹ 1,000
The AO passed the assessment order enhancing income by ₹ 5,000 on 29-3-2027. Compute interest u/s
234B.
[7]

Answer:
(a) Advance ruling means:
(i) A determination by the Board for Advance Rulings 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 Board for Advance Rulings 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 Board for Advance Rulings 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 In above cases, 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 Board for Advance Rulings 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 Board for Advance Rulings 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.

(b) Computation of interest u/s 234B

Particulars Amount
Assessed Income 1,05,000
Tax liability before surcharge [₹ 1,05,000 x 30%] 31,500
Add: Health & Education cess @ 4% 1,260
Tax and cess payable 32,760
Less: Tax deducted at source 1,000
Assessed tax 31,760
90% of above 28,584
Advance tax paid 20,000
Since advance tax paid by the firm is less than 90% of assessed tax, sec. 234B is
applicable
Shortfall (Assessed tax less Advance tax paid) 11,760
Rounded off 11,700
Period of default [From April 2026 to March 2027] 12 months
Interest u/s 234B (1% × ₹ 11,700 × 12) 1,404

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6) (a) Explain the provisions relating to Advance Pricing Agreement under Section 92CC of the Income-tax
Act. [7]

(b) Amar, an individual, resident of India, receives the following payments after TDS during the
previous year 2025-26:

(i) Professional fees on 17.08.2025 12,40,000

(ii) Professional fees on 04.03.2026 1,60,000
Both the above services were rendered in country X on which TDS of ₹ 50,000 and ₹ 30,000
respectively have been deducted. He had incurred an expenditure of ₹ 2,00,000 for earning both
these receipts / incomes. His income from other sources in India is ₹ 5,00,000 and he has made
payment of ₹ 70,000 towards LIC. Compute the tax liability of Amar and the relief u/s 91, if any,
for A.Y.2026-27.

[7]
Answer:
(a) Advance Pricing Agreement (APA) is an agreement between a taxpayer and the tax authority that determines in
advance the arm’s length price (ALP) or the method for determining the ALP for international transactions. The
provisions relating to APA are contained in Section 92CC of the Income-tax Act, 1961.
The important provisions are as follows:
1. Agreement by the Board
The Central Board of Direct Taxes (CBDT), with the approval of the Central Government, may enter into an
Advance Pricing Agreement with any person. The agreement determines:
 The arm’s length price, or
 The manner in which the arm’s length price is to be determined for an international transaction to be
entered into by that person.
In case of a non-resident, the agreement may also determine the income attributable to operations carried out in
India as referred to in Section 9(1)(i).

2. Method for Determining Arm’s Length Price

The determination of the arm’s length price may be based on:
 The methods specified under Section 92C, or
 Any other method with suitable adjustments or variations as may be necessary.
3. Determination of ALP as per Agreement
Once an APA is entered into, the arm’s length price of the international transaction must be determined according
to the terms of the agreement.

4. Validity of Agreement
The APA shall be valid for a period not exceeding five consecutive previous years, as specified in the agreement.

5. Binding Nature of Agreement

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The agreement is binding on:
 The person (taxpayer) in whose case the agreement has been entered into, and
 The Commissioner and other income-tax authorities subordinate to him in respect of that person and
transaction.
6. Non-binding in Certain Cases
The agreement will not be binding if there is a change in law or facts that affects the agreement.

7. Agreement Declared Void

The Board may declare the agreement void ab initio with the approval of the Central Government if it is found
that the agreement was obtained by fraud or misrepresentation of facts.

8. Consequences of Void Agreement

If the agreement is declared void:
 All provisions of the Income-tax Act will apply as if the agreement had never been entered into.
 The period between the date of the agreement and the date of the order declaring it void will be excluded
while computing the limitation period under the Act.

9. Rollback Provision
The APA may also provide for determining the arm’s length price for a period not exceeding four previous years
preceding the first year of the agreement, subject to prescribed conditions.

10. APA Scheme

The Board may prescribe a scheme specifying the form, procedure, and other matters relating to Advance Pricing
Agreements.

(b) Computation of total income and tax liability of Mr. Amar for the A.Y. 2026-27

Particulars Amount Amount

Income from profession from foreign 14,00,000
Less: Expenses 2,00,000 12,00,000
Income from profession in India 5,00,000
Gross Total Income 17,00,000
Less: Deduction u/s 80C NA
Total income 17,00,000
Tax on above 1,40,000
Add: Health & Education cess 5,600
Tax and cess payable 1,45,600
Average rate of tax [₹ 1,45,600 / ₹ 17,00,000 x 100] 8.56%
Rate of tax in Country X 16.67%
Relief u/s 91 [8.56%^ of ₹ 12,00,000] 1,02,720
Tax payable (Rounded off u/s 288B) 42,880
^
Relief u/s 91 is available at a lower rate i.e., 8.56%

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7. (a) Compute J Inc. of Korea and CD Ltd, an Indian Company are associated enterprises. CD Ltd
manufactures Cell Phones and sells them to J.K.& F Inc., a Company based in Nepal. During the
year CD Ltd. supplied 2,50,000 Cellular Phones to J Inc. Korea at a price of ₹ 3,000 per unit and
35,000 units to JK & F Inc. at a price of ₹ 5,800 per unit. The transactions of CD Ltd with JK & F
Inc. are comparable subject to the following considerations:
Sales to J Inc. are on FOB basis, sales to JK & F Inc. are CIF basis. The freight and insurance paid
by J Inc. for each unit @ ₹ 700. Sales to JK & F Inc. are under a free warranty for Two Years whereas
sales to J Inc. are without any such warranty. The estimated cost of executing such warranty is ₹ 500.
Since J Inc.’s order was huge in volume, quantity discount of ₹ 200 per unit was offered to it.
Compute the Arm’s Length Price and the subsequent amount of increase in the Total Income of CD
Ltd, if any.
[7]

(b) Explain the provisions relating to computation of interest income pursuant to secondary adjustments
under Rule 10CB.
[7]
Answer:
a) Computation of Arm’s Length Price of Products sold to J Inc. Korea by CD Ltd

Particulars ₹ ₹
Price per Unit in a Comparable Uncontrolled Transaction 5,800
Less: Adjustment for Differences -
(a) Freight and Insurance Charges 700
(b) Estimated Warranty Costs 500
(c) Discount for Voluminous Purchase 200 (1,400)
Arms’s Length Price for Cellular Phone sold to J Inc. Korea 4,400
Computation of Increase in Total Income of CD Ltd
Particulars ₹
Arm’s Length Price per Unit 4,400
Less: Price at which actually sold to J Inc. Korea (3,000)
Increase in Price per Unit 1,400
No. of Units sold to J Inc. Korea 2,50,000
Increase in Total Income of CD Ltd (2,50,000 × ₹ 1,400) ₹ 35 Crores

(b) Rule 10CB of the Income-tax Rules provides the manner of computing interest on excess money that
arises due to secondary adjustment under Section 92CE when such excess money is not repatriated to
India within the prescribed time limit.
1. For the purposes of sec. 92CE(2), the time limit for repatriation of excess money or part thereof shall
be on or before 90 days,—
i. from the due date of filing of return u/s 139(1) where primary adjustments to transfer price has
been made suo-moto by the assessee in his return of income;

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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. in a case where primary adjustment to transfer price is determined by an advance pricing
agreement entered into by the assessee u/s 92CC in respect of a previous year,-
a. from the date of filing of return u/s 139(1) if the advance pricing agreement has been entered
into on or before the due date of filing of return for the relevant previous year;
b. from the end of the month in which the advance pricing agreement has been entered into if the
said agreement has been entered into after the due date of filing of return for the relevant
previous year
iv. from the due date of filing of return u/s 139(1) in the case of option exercised by the assessee as
per the safe harbour rules u/s 92CB; or
v. from the date of giving effect by the Assessing Officer under rule 44H to the resolution arrived at
under mutual agreement procedure, where the primary adjustment to transfer price is determined
by such resolution under a Double Taxation Avoidance Agreement entered into u/s 90 or 90A.
2. The imputed per annum interest income on excess money or part thereof which is not repatriated within
the time limit as per sec. 92CE(1) shall be computed,—
i. at the 1 year marginal cost of fund lending rate of State Bank of India as on 1st of April of the
relevant previous year plus 325 basis points in the cases where the international transaction is
denominated in Indian rupee; or
ii. at 6 months London Interbank Offered Rate as on 30th September of the relevant previous year
plus 300 basis points in the cases where the international transaction is denominated in foreign
currency.
3. The aforesaid interest shall be chargeable on excess money or part thereof which is not repatriated—
a. in cases referred to in sub-rule (1)(i), (iii)(a) and (iv), from the due date of filing of return u/s
139(1);
b. in cases referred to in sub-rule (1)(ii), from the date of the order of Assessing Officer or the
appellate authority, as the case may be;
c. in cases referred to in sub-rule (1)(iii)(b), from the end of the month in which the advance pricing
agreement has been entered into by the assessee u/s 92CC;
d. in cases referred to in sub-rule (1)(v), from the date of giving effect by the Assessing Officer under
rule 44H to the resolution arrived at under mutual agreement procedure.

8. (a)
Following is the profit and loss account of Z Ltd. for the year ended on 31-3-2026
Particulars Amount Particulars Amount
To Raw material consumed 20,00,000 By Sale
To Rent 5,00,000 Export 50,00,000
To Salary & Wages 10,00,000 Domestic 30,00,000
To Depreciation 5,00,000 By Closing Stock 10,00,000
To Provision for contingencies 75,000
To Wealth Tax of earlier year 50,000
To Loss of subsidiary co. 50,000
To Custom Duty 40,000

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To Proposed dividend 1,00,000

To Provision for Income tax 1,05,000
To Net Profit 45,80,000
90,00,000 90,00,000
Additional Information
(1) Interest on bank loan relating to year 2023-24 has been paid during the previous year ₹
1,00,000.
(2) Whole of Custom duty is unpaid.
(3) Company is entitled to get deduction u/s 80G ₹ 1,00,000
(4) For the purpose of Income tax, depreciation is ₹ 4,00,000.
(5) Turnover of the company during the previous year was ₹ 65 crores and it is lifetime highest
turnover achieved by the company.
(6) In past few years, company had suffered losses, following balances are still unabsorbed:
As per Income tax Act As per books of Accounts
Depreciation -- ₹ 3,50,000
Losses ₹ 42,50,000 ₹ 4,00,000
Compute tax liability of the company.
[7]

(b) Explain the meaning of Specified Domestic Transactions under Section 92BA of the Income-tax Act.
[7]

Answer:
(a) Computation of total income of Z Ltd. for the A.Y.2026-27 (as per other provisions of the Act)
Particulars Details Amount
Net profit as per books of accounts 45,80,000
Add: Expenditure disallowed but debited in P/L A/c
Excess Depreciation 1,00,000
Provisions for Contingencies 75,000
Wealth Tax 50,000
Loss of subsidiary company 50,000
Proposed Dividend 1,00,000
Provision for income tax 1,05,000
Unpaid customs duty 40,000 5,20,000
51,00,000
Less: Expenditure allowed but not debited in P/L A/c
Interest on bank loan of earlier years 1,00,000
50,00,000
Less: Brought forward business loss 42,50,000
Gross Total Income 7,50,000
Less: Deduction u/s 80G 1,00,000
Total Income 6,50,000
Computation of Book Profit of Z Ltd. for the A.Y.2026-27
Particulars Details Amount

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Net profit as per books of accounts 45,80,000

Add:
Provision for contingencies 75,000
Loss of subsidiary company 50,000
Proposed Dividend 1,00,000
Provision for income tax 1,05,000
Depreciation 5,00,000 8,30,000
54,10,000
Less:
Depreciation (as assets are not revalued) 5,00,000
Lower of unabsorbed depreciation and brought forward loss (as per 3,50,000 8,50,000
books of account)
Book Profit 45,60,000

Computation of tax liability of Z Ltd.

Particulars Amount
Total income as per other provisions of the Act 6,50,000
Tax on above @ 25% [A] 1,62,500
Book profit u/s 115JB 45,60,000
15% of book profit [B] 6,84,000
Tax [Higher of A & B] 6,84,000
Add: Surcharge [As total income is only ₹ 45,60,000/-, thus, surcharge is not Nil
applicable]
Tax & Surcharge 6,84,000
Add: Health & Education Cess @ 4% 27,360
Tax Liability (Rounded off) 7,11,360

(b) Section 92BA of the Income-tax Act defines Specified Domestic Transactions (SDT). "Specified Domestic
Transaction" in case of an assessee means any of the following transactions, not being an international
transaction, namely:
i. any transaction referred to in sec. 80A;
ii. any transfer of goods or services referred to in sec. 80-IA(8);
iii. any business transacted between the assessee and other person as referred to in sec. 80-IA(10);
iv. any transaction, referred to in any other section under Chapter VI-A or sec. 10AA, to which provisions of
sec. 80-IA(8) or (10) are applicable; or
v. any business transacted between the persons referred to in sec. 115BAB(4);
vi. any business transacted between the assessee and other person4 as referred to in sec. 115BAE(4);
vii. any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum
of ₹ 20 crore.

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