Final Course

(Revised Scheme of Education and Training)

Study Material
(Modules 1 to 4)
Paper 7
Direct Tax Laws and
International Taxation
Part – I: Direct Tax Laws
[As amended by the Finance Act, 2021]
Assessment Year 2022-23

Module – 1
(Relevant for May, 2022 and
November, 2022 examinations)

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This study material has been prepared by the faculty of the Board of Studies. The objective of the
study material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarifications or have any suggestions for further
improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the study material has not been specifically discussed by the Council of the
Institute or any of its Committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Edition : October, 2021

Website : www.icai.org

E-mail : [email protected]

Committee/ : Board of Studies

Department

ISBN No. :

Price (All Modules) : `

Published by : The Publication Department on behalf of The Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002, India.

Printed by :

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BEFORE WE BEGIN …

Revised Scheme of Education and Training: Bridging the competence gap

The role of a chartered accountant is evolving continually to assume newer responsibilities in a
dynamic environment. There has been a notable shift towards strategic decision making and
entrepreneurial roles that add value beyond traditional accounting and auditing. The causative
factors for the change include globalisation leading to increase in cross border transactions and
consequent business complexities, significant developments in information and technology and
financial scams underlining the need for a stringent regulatory set up. These factors necessitate an
increase in the competence level of chartered accountants to bridge the gap in competence acquired
and competence expected from stakeholders. Towards this end, the scheme of education and
training is being continuously reviewed so that it is in sync with the requisites of the dynamic global
business environment; the competence requirements are being stepped up to enable aspiring
chartered accountants to acquire the requisite professional competence to take on new roles.
Concurrent Practical Training along with academic education: Key to achieving the desired
level of Professional Competence
Under the Revised Scheme of Education and Training, at the Final Level, you are expected to
apply the professional knowledge acquired through academic education and the practical exposure
gained during articleship training in addressing issues and solving practical problems. The
integrated process of learning through academic education and practical training should also help
you inculcate the requisite technical competence, professional skills and professional values,
ethics and attitudes necessary for achieving the desired level of professional competence.
Direct Tax Laws: Dynamic Subject Area
Direct Tax Laws is one of the dynamic subjects of the chartered accountancy course. The subject
“Direct Tax Laws and International Taxation” at the Final level is divided into two parts, namely, Part
I: Direct Tax Laws for 70 marks and Part II: International Taxation for 30 marks. Part I: Direct tax
laws comprises of the law and procedures under the Income-tax Act, 1961. The direct tax laws of the
country undergo significant changes every year with the passing of the annual Finance Act. Apart
from these significant amendments ushered in every year through the Finance Act, notifications and
circulars are also issued from time to time by the Central Board of Direct Taxes (CBDT), the statutory
authority in charge with the administration of direct taxes, to implement the provisions of the Act and
clarify issues regarding the meaning and scope of certain provisions. Further, decisions are
pronounced by various Courts interpreting the provisions of tax laws.
With increased cross border transactions and the whole world virtually becoming one market, there
is a need for chartered accountants to enhance their knowledge base in international taxation.
Countries across the globe are entering into tax treaties to avoid double taxation of a single
transaction. In a highly advanced IT enabled business scenario where an entity operates from
many establishments spread throughout the globe, chartered accountants have to be well versed
with the nuances of international taxation to be able to give an informed and correct advice and

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ensure compliance with tax laws. Ìn order to equip CA students to acquire competence in this
highly specialized subject area, there is a dedicated part (i.e., Part II) on International Taxation for
30 marks in Paper 7 - Direct Tax Laws and International Taxation.
The relevant Finance Act and Assessment Year
This Study Material is based on the provisions of direct tax laws, as amended by the Finance Act,
2021 and the significant notifications, circulars issued and other legislative amendments made
upto 31st October, 2021. The computational problems have been solved on the basis of the
provisions of direct tax laws applicable for A.Y.2022-23. The Study Material is, therefore, relevant
for May 2022 and November, 2022 examinations. In this Study Material, the amendments made by
the Finance Act, 2021 and the significant notifications and circulars issued between 1.11.2020 and
31.10.2021 are indicated in italics/bold italics.
The significant circulars and notifications issued between 1.11.2021 and 30.4.2022, relevant for
November, 2022 examination would be webhosted as Statutory Update for November, 2022
examination in the BoS Knowledge Portal on the Institute’s website www.icai.org. Likewise, the
Judicial Update containing latest significant court rulings relevant for November, 2022
examination, not covered in this Study Material, would also be webhosted at the BOS Knowledge
Portal.
Read the Bare Act & Rules along with Study Material
At the Final level, along with the Study Material, students are also advised to read the Income-tax
Act, 1961 and Income-tax Rules, 1962, available at the website of the income-tax department
www.incometaxindia.gov.in. This will help understand the language of law and sequence of sections
and rules. The circulars and notifications issued by CBDT, the income-tax return forms, important
provisions relating to firms, companies, trusts, FAQs etc. are also available at this website. Students
are advised to visit the income-tax department’s website and enhance their knowledge.
Framework of Chapters: Uniform Structure comprising of specific components
Efforts have been made to present the complex direct tax laws in a lucid manner. Care has been
taken to present the chapters in a logical sequence to facilitate easy understanding by the
students. The Study Material has been divided into four modules for ease of handling by students.
The first three modules are on direct tax laws and the fourth module is on international taxation.
Each chapter of the Study Material has been structured uniformly and comprises of the following
components:
Components of About the component
each Chapter
1 Learning Learning outcomes which you need to demonstrate after learning each
Outcomes topic have been detailed in the first page of each chapter. Demonstration
of these learning outcomes would help you achieve the desired level of
technical competence
2 Content The concepts and provisions of direct tax laws and international taxation
are explained in a student-friendly manner with the aid of

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examples/illustrations/diagrams/flow charts. Diagrams and Flow charts

would help you understand and retain the concept/ provision learnt in a
better manner. Examples and illustrations would help you understand the
application of concepts/provisions. These value additions would, thus,
help you develop conceptual clarity and get a good grasp of the topic.
3 Significant The summary of recent significant select Supreme Court and High Court
Select Cases rulings have been tabulated at the end of each chapter capturing the gist
of the Court decisions interpreting the provisions of tax laws.
In addition, case laws (including recent case laws) also form part of the
discussion of topics in the content as well as in the questions and answers
in “Test Your Knowledge” component.
4 Test Your The questions and answers at the end of each chapter would help you to
Knowledge analyse the provisions of direct tax laws and international taxation and
apply the same in problem solving, thus, sharpening your application
skills. In effect, these questions would test your ability to analyse and
apply the concepts/provisions learnt in solving problems and addressing
issues.

We hope that these student-friendly features in the Study Material improves your learning curve
and sharpens your analytical and interpretational skills.

Happy Reading and Best Wishes!

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PAPER – 7 : DIRECT TAX LAWS AND INTERNATIONAL TAXATION

(One paper ─ Three hours –100 Marks)

Part I : Direct Tax Laws (70 Marks)

Objective:
To acquire the ability to analyze and interpret the provisions of direct tax laws and recommend
solutions to practical problems.
Contents:
Law and Procedures under the Income-tax Act, 1961,
1. Basis of charge, residential status, income which do not form part of total income, heads of
income, income of other persons included in assessee’s total income, aggregation of income,
set-off and carry forward of losses, deductions from gross total income, rebates and reliefs
2. Special provisions relating to companies and certain persons other than a company 1
3. Provisions relating to charitable and religious trust and institutions, political parties and
electoral trusts

4. Tax Planning, Tax Avoidance & Tax Evasion

5. Collection & Recovery of Tax, Refunds

6. Income-tax Authorities, Procedure for assessment, Appeals and Revision

7. Settlement of Tax Cases 2, Penalties, Offences & Prosecution

8. Liability in Special Cases 3

9. Miscellaneous Provisions and Other Provisions 4

1 Including firms, LLPs, Trusts, AOPs, BOIs, Securitsation Trusts, Business Trusts, Investment
Fund etc.
2 To be now read as “Dispute resolution”

3 Representative assessees, Executors etc.

4 The entire income-tax law is included at the Final level. Any residuary provision under the
Income-tax Act, 1961, not covered under any of the above specific provisions or under Part II:
International Taxation would be covered under “Other Provisions”. Further, if any new Chapter is
included in the Income-tax Act, 1961, the syllabus will accordingly include the provisions relating
thereto.

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Part II: International Taxation (30 Marks)

Objective:

To develop an understanding of the concepts, principles and provisions of International Taxation

and acquire the ability to apply such knowledge to make computations and to address application-
oriented issues.

Contents:

1. Taxation of international transactions and Non-resident taxation

(i) The provisions under the Income-tax Act, 1961, including

a) Specific provisions relating to Non-residents

b) Double Taxation Relief

c) Transfer Pricing & Other Anti-Avoidance Measures

d) Advance Rulings
(ii) Equalisation levy
2. Overview of Model Tax Conventions – OECD & UN

3. Application and interpretation of Tax Treaties

4. Fundamentals of Base Erosion and Profit Shifting

Note: If any new legislation(s) are enacted in place of an existing legislation(s), the syllabus will
accordingly include the corresponding provisions of such new legislation(s) in the place of the
existing legislation(s) with effect from the date to be notified by the Institute. Similarly, if any
existing legislation(s) on direct tax laws ceases to be in force, the syllabus will accordingly exclude
such legislation(s) with effect from the date to be notified by the Institute.

Further, the specific inclusions/exclusions in any topic covered in the syllabus will be effected by
way of Study Guidelines every year, if required. Specific inclusions/exclusions in a topic may also
arise due to additions/deletions made every year by the Annual Finance Act.

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CONTENTS

PART I : DIRECT TAX LAWS

MODULE – 1
Chapter 1 : Basic Concepts
Chapter 2 : Residence and Scope of Total Income
Chapter 3 : Incomes which do not form part of Total Income
Chapter 4 : Salaries
Chapter 5 : Income from House Property
Chapter 6 : Profits and Gains of Business or Profession
Chapter 7 : Capital Gains
Chapter 8 : Income from Other Sources

MODULE – 2
Chapter 9 : Income of Other Persons included in assessee’s Total Income
Chapter 10 : Aggregation of income; set-off, or carry forward and set-off, of Losses
Chapter 11 : Deductions from Gross Total Income
Chapter 12 : Assessment of Various Entities
Chapter 13: Assessment of Charitable or Religious Trusts or Institutions, Political Parties and
Electoral Trusts
Chapter 14 : Tax Planning, Tax Avoidance & Tax Evasion
MODULE – 3
Chapter 15 : Deduction, Collection and Recovery of tax
Chapter 16 : Income-tax Authorities

Chapter 17 : Assessment Procedure

Chapter 18 : Appeals and Revision
Chapter 19 : Dispute Resolution

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Chapter 20 : Penalties
Chapter 21 : Offences and Prosecution

Chapter 22: Liability in Special Cases

Chapter 23 : Miscellaneous Provisions

PART II: INTERNATIONAL TAXATION

MODULE – 4
Chapter 1 : Transfer Pricing & Other Anti-Avoidance Measures
Chapter 2: Non-resident Taxation
Chapter 3 : Double Taxation Relief
Chapter 4 : Advance Rulings
Chapter 5 : Equalisation levy
Chapter 6 : Application and Interpretation of Tax Treaties
Chapter 7 : Fundamentals of Base Erosion and Profit Shifting
Chapter 8 : Overview of Model Tax Conventions

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DETAILED CONTENTS: MODULE - 1

CHAPTER 1 – BASIC CONCEPTS

Learning Outcomes ............................................................................................................................ 1.1

Contents:
1.1 Overview of Income-tax law in India ....................................................................................... 1.2
1.2 Important definitions ............................................................................................................... 1.9
1.3 Previous year and Assessment year .................................................................................... 1.23
1.4 Charge of Income-tax ........................................................................................................... 1.28
1.5 Rates of Tax ........................................................................................................................ 1.29
1.6 Surcharge ............................................................................................................................. 1.36

1.7 Rebate of up to ` 12,500 for resident individuals having total income of

up to ` 5 lakh [Section 87A].................................................................................................. 1.48
Significant Select Cases ....................................................................................................... 1.49
Test Your Knowledge ............................................................................................................ 1.51

CHAPTER 2 – RESIDENCE AND SCOPE OF TOTAL INCOME

Learning Outcomes ............................................................................................................................ 2.1

Contents:

2.1 Residential status [Section 6] ................................................................................................. 2.2

2.2 Scope of total income ........................................................................................................... 2.10
Test Your Knowledge ....................................................................................................................... 2.15

CHAPTER 3 - INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Learning Outcomes ............................................................................................................................ 3.1

Contents:
3.1 Introduction ............................................................................................................................. 3.2
3.2 Incomes not included in total income [Section 10] .................................................................. 3.5

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3.3 Tax Holiday for units established in

Special Economic Zones [Section 10AA].............................................................................. 3.36
3.4 Restrictions on allowability of expenditure [Section 14A] ...................................................... 3.45
Significant Select Cases................................................................................................................... 3.47
Test Your Knowledge ....................................................................................................................... 3.48

CHAPTER 4-SALARIES

Learning Outcomes ............................................................................................................................ 4.1

Contents:
4.1 Introduction ........................................................................................................................... 4.2
4.2 Basis of charge (Section 15) ................................................................................................... 4.4
4.3 Salary, Perquisite and Profits in lieu of salary (Section 17) .................................................... 4.5
4.4 Deductions from salary ......................................................................................................... 4.71
4.5 Relief under section 89 .............................................................................................. 4.73
4.6 Salary from United Nations Organisation .................................................................... 4.76
Significant Select Cases ................................................................................................. 4.77
Test Your Knowledge ....................................................................................................................... 4.78

CHAPTER 5 – INCOME FROM HOUSE PROPERTY

Learning Outcomes ............................................................................................................................ 5.1

Contents:
5.1 Chargeability [Section 22] ....................................................................................................... 5.2
5.2 Conditions for chargeability .................................................................................................... 5.2
5.3 Composite rent ...................................................................................................................... 5.3
5.4 Income from house property situated outside India ................................................................ 5.4
5.5 Determination of Annual Value [Section 23] ........................................................................... 5.5
5.6 Deductions from Annual Value [Section 24] ......................................................................... 5.10
5.7 Computation of “Income from house property”
for different categories of property ........................................................................................ 5.14

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5.8 Inadmissible deductions [Section 25].................................................................................... 5.24

5.9 Provision for arrears of rent and unrealized
rent received subsequently [Section 25A]............................................................................. 5.24
5.10 Treatment of income from co-owned property [Section 26] .................................................. 5.25
5.11 Deemed ownership [Section 27] ........................................................................................... 5.27
Significant Select Cases ................................................................................................. 5.29
Test Your Knowledge ....................................................................................................................... 5.31

CHAPTER 6 – PROFITS AND GAINS OF BUSINESS OR PROFESSION

Learning Outcomes ............................................................................................................................ 6.1

Contents:
6.1 Meaning of ‘Business’ and ‘Profession’ ................................................................................. 6.2
6.2 Method of Accounting ............................................................................................................ 6.3
6.3 Income chargeable under this head [Section 28] .................................................................. 6.17
6.4 Speculation business ............................................................................................................ 6.20
6.5 Computation of Profits and Gains from business
or profession [Section 29] ..................................................................................................... 6.22
6.6 Admissible deductions .......................................................................................................... 6.23
6.7 Inadmissible deductions [Section 40].................................................................................. 6.117
6.8 Expenses or payments not deductible
in certain circumstances [Section 40A] ............................................................................... 6.128
6.9 Profits chargeable to tax [Section 41] ................................................................................. 6.134
6.10 Other provisions.................................................................................................................. 6.135
6.11 Compulsory maintenance of accounts [Section 44AA] ....................................................... 6.149
6.12 Audit of accounts of certain persons
carrying on business or profession [Section 44AB] ............................................................ 6.153
6.13 Special provisions for computing profits and gains
of business on presumptive basis [Section 44AD/44ADA/44AE] ........................................ 6.155
6.14 Method of computing deduction in the case of business
re-organization of Co-operative Banks [Section 44DB]....................................................... 6.162

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6.15 Computation of business income in cases where income

is partly agricultural and partly business in nature .............................................................. 6.167
Significant Select Cases................................................................................................................. 6.170
Test Your Knowledge ..................................................................................................................... 6.178

CHAPTER 7- CAPITAL GAINS

Learning Outcomes ............................................................................................................................ 7.1

Contents:
7.1 Introduction ............................................................................................................................. 7.2
7.2 Capital Asset........................................................................................................................... 7.2
7.3 Short-term and long-term capital assets ................................................................................. 7.6
7.4 Transfer: What its means? [Section 2(47)] ........................................................................... 7.12
7.5 Scope and year of chargeability [Section 45]........................................................................ 7.13
7.6 Capital gains on distribution of assets by
companies in liquidation [Section 46].................................................................................... 7.22
7.7 Capital gains on buyback of shares or securities [Section 46A] ........................................... 7.23
7.8 Important definitions ............................................................................................................. 7.25
7.9 Transactions not regarded as transfer [Section 47] .............................................................. 7.28
7.10 Withdrawal of exemption in certain cases............................................................................. 7.45
7.11 Mode of computation of capital gains (Section 48) ............................................................... 7.47
7.12 Ascertainment of cost in specified circumstances [Section 49]............................................. 7.55
7.13 Cost of acquisition [Section 55]............................................................................................. 7.65
7.14 Cost of improvement [Section 55] ......................................................................................... 7.75
7.15 Computation of capital gains in case of
depreciable assets [Section 50 & 50A] ................................................................................. 7.77
7.16 Capital gains in respect of slump sale [Section 50B] ............................................................ 7.81
7.17 Deemed full value of consideration for computing capital
gains [Section 50C, 50CA & 50D] ......................................................................................... 7.88
7.18 Advance money received [Section 51].................................................................................. 7.91
7.19 Exemption of capital gain...................................................................................................... 7.94

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7.20 Reference to Valuation Officer [Section 55A] ..................................................................... 7.113

7.21 Tax on Short term capital gains tax in respect of equity
share/units of an equity oriented fund /unit of a business Trust [Section 111A] ................ 7.114
7.22 Tax on long term capital gains [Section 112] ...................................................................... 7.115
7.23 Tax on long term capital gains on certain assets [Section 112A]................................... 7.117
7.24 Surplus on sale of shares and securities - whether taxable as capital gains
or business income? [Circular No. 06/2016, dated 29-2-2016] ................................... 7.124
Significant Select Cases................................................................................................................. 7.126
Test Your Knowledge ..................................................................................................................... 7.132

CHAPTER 8-INCOME FROM OTHER SOURCES

Learning Outcomes ............................................................................................................................ 8.1

Contents:
8.1 Introduction ............................................................................................................................. 8.2
8.2 Incomes chargeable under this head [Section 56] .................................................................. 8.2
8.3 Applicable rate of tax in respect of casual income [Section 115BB] ..................................... 8.28
8.4 Deductions allowable [Section 57] ........................................................................................ 8.28
8.5 Deductions not allowable [Section 58] .................................................................................. 8.30
8.6 Deemed income chargeable to tax [Section 59] ................................................................... 8.31
8.7 Method of accounting [Section 145]...................................................................................... 8.31
Significant Select Cases................................................................................................................... 8.32
Test Your Knowledge ....................................................................................................................... 8.36

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