CA FINAL

DIRECT TAX LAWS & INTERNATIONAL TAXATION

DIRECT TAX Chapter -3

Total Marks 40

Q-1

ABX Limited is engaged in the manufacturing of pipes and tubes. The profit and loss account
of the company for the year ended 31st March 2024 shows a net profit of Rs.500 lakhs.
Compute the total income of the company for Assessment Year 2024-25, indicating reasons
for the treatment of each item. Assume that the company has not opted for special provisions
under section 115BAA or 115BAB.

(i) A group free air ticket was provided by a supplier for reaching a certain volume of purchase
during the financial year 2023-24. The same is encashed by the company for Rs.12 lakhs in
April 2023 and credited to the General Reserve Account.

(ii) A regular supplier of raw materials agreed for settlement of 7 lakhs instead of 9 lakhs for
poor quality of material supplied during the previous year, which was not given effect in the
running account of the supplier.

(iii) Zenith Bank sanctioned and disbursed a term loan in the financial year 2020-21 for a sum
of 60 lakhs. Interest of 8 lakhs was in arrears. The bank has converted the arrear interest into
a new loan repayable in 10 equal instalments. During the year, the company has paid 2
instalments, and the amount so paid has been reduced from Funded Interest in the Balance
Sheet.

(iv) The company remitted Rs.6 lakhs as interest to a company incorporated in Canada on a
loan taken 2 years ago. Tax deducted under section 195 from such interest has been
deposited by the company on 20th August 2024. The said interest was debited to the profit
and loss account.

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(v) Rahul, a sales executive stationed at HO at Mumbai, was on official tour in Chennai from
5th June 2023 to 28th June 2023 and 10th October 2023 to 25 th October 2023 for business
development. The company has paid Rahul's salary in cash, from its local office at Chennai for
the month of June 2023 (payable on 1st July) and October 2023 (payable on 1st November),
amounting to 55,000 and 50,000 respectively (net of TDS and other deductions), as Rahul has
no bank account at Chennai. These were included in the amount of “salary” debited to Profit
and Loss Account.

(vi) The company has contributed Rs.75,000 by account payee cheque to an electoral trust,
and the same stands included under the head "General Expenses."

(8 Marks)

Q-2

XYZ Ltd., a company in which the public is substantially interested, is engaged in the business
of growing and manufacturing coffee in India. For the previous year ended 31.03.2023, its
composite business profits before allowing deduction u/s 33AB is 75,00,000. On 01.09.2023,
it deposited a sum of 12,00,000 in the Coffee Development Account. During the previous year
2021-22, XYZ Ltd. had incurred a business loss of 15,00,000, which has been carried forward.
On 25.01.2024, it withdrew 11,00,000 from the deposit account, which is utilized as under:

Rs. 7,00,000 for the purchase of a non-depreciable asset as per the scheme specified.

Rs. 2,50,000 for the purchase of machinery to be installed in the office premises.

Rs. 1,50,000 was spent for the purpose of the scheme on 5.4.2024.

(i) You are required to determine the business income of XYZ Ltd. and the tax consequences
that may arise from the above transactions in the A.Y. 2024-25.

(ii) What will be the consequence if the asset which was purchased for 7,00,000 is sold for
9,00,000 in April 2024?

(8 Marks)

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Q-3

Sun India Ltd engaged in manufacturing activity furnishes the following details:

Net Profit as per Profit and Loss Account Rs. 50,00,000/-

(a) Depreciation charged to Profit and Loss Account is Rs. 16,00,000/-

(b) Depreciation as per Income Tax Act, 1961 amount to Rs. 28,00,000/- which includes the
following: Depreciation rate meant for Computers has been adopted for

(i) Accessories like printers and scanners and

(¡i) EPABX. The written down value of these as on 01.04.2023 is given below:

(i) Printers and Scanners Rs.50,000

(ii) EPABX Rs.200,000

Assume that there were no additions during the year.

(c) It incurred Rs.2,50,000 /- as expenditure for public issue of shares. The public issue could
not materialize on account of non-clearance by SEBI. This amount is charged to Profit and Loss
Account.

(d) It incurred expenditure of 2,00,000/- towards issue of debentures. This amount has been
capitalised on the books

(e) The company paid Rs. 1,00,000/- as compounding fee for violations in the pollution control
regulations. This has been charged as revenue expenditure.

(f) The company lost cash of 125,00,000/- due to theft when it was withdrawn from bank and
taken to administrative office. It is not insured and hence, fully charged as revenue
expenditure.

(g) Rs.5,00,000/- was spent during the year towards permitted CSR activities as per 135 of the
Companies Act, 2013. This is charged to Profit and Loss Account.

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(h) It paid Rs. 1,00,000/- to commodity broker for commodity transactions at MCX. The
amount was debited to Profit and Loss Account and no tax was deducted at source on this
payment.

(i) It paid Rs. 50,000/- to an electoral trust by cash and Rs. 1,00,000/- by cheque to a registered
political party. Both these are debited to Profit and Loss Account.

Compute the total income of the company for A.Y. 2024-25. Give reason in brief for Treatment
of each of the above items. Ignore MAT provisions & provisions of section 115BAA.

(8 Marks)

Q-4

R. Ltd. was engaged in the business of manufacturing and trading activities. The company was
declared a sick industrial company and as a part of a restructuring programme, a part of the
term loan for purchase of machinery and cash credit and interest was waived. The Assessing
officer was of the view that the waiver of loans and interest amounted to remission or
cessation of liability and was taxable u/s 41(1) of the Income-tax Act, 1961. Give your views
on the correctness of the action of the Assessing Officer

(4 Marks)

Q-5

P. Ltd. issued debentures in the previous year 2023-24, which were to be matured at the end
of 5 years. The debenture holder was given an option of one time upfront payment of ` 60
per debenture on account of interest which was to be immediately paid by the company. As
per the option exercised by the debenture holders, company paid interest upfront to them in
the first year itself and the same was claimed as deduction in the return of the company. But
in the accounts, the interest expenditure was shown as deferred expenditure to be written
off over a period of 5 years. During the course of assessment, the Assessing Officer spread

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the upfront interest paid over a period of five year term of debentures and allowed only one-
fifth of the amount in the previous year 2023-24. Examine the correctness of the action of
Assessing Officer.

(4 Marks)

MCQ’s Question

1. "Dynamic Traders Ltd." is engaged in multiple businesses, including speculative activities.

The company incurred a loss in its speculative business during the previous year. Explain the
implications of speculative business losses and their treatment as per the provisions of the
Income-tax Act, 1961.

a) The speculative business losses can be set off against profits from any other business
carried on by Dynamic Traders Ltd.
b) Speculative business losses are distinct and separate, and they cannot be set off against
profits from any other business except speculative business.
c) The speculative business losses can be carried forward and set off against any business
profits in the subsequent year.
d) Speculative business losses can be set off against both speculative and non-speculative
business profits.

2. As per ICDS IX on Borrowing Costs, which of the following statements is correct regarding
the treatment of borrowing costs for the acquisition, construction, or production of a
qualifying asset?

a) Borrowing costs are only capitalized if funds are borrowed specifically for the qualifying
asset.
b) All borrowing costs, whether specific or general, are capitalized for qualifying assets.
c) Borrowing costs are capitalized only for tangible assets, not for intangible assets.
d) Capitalization of borrowing costs is not required if the qualifying asset can be produced
within 12 months.

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3. XYZ Ltd., a company engaged in international trade, enters into a forward contract to hedge
its foreign exchange exposure. Which Income Computation and Disclosure Standards (ICDS)
would govern the accounting treatment for this derivative instrument, and under what
conditions?

a) ICDS I
b) ICDS III
c) ICDS V
d) ICDS VI

4. ABC Ltd., a company engaged in international transactions, receives interest, royalty, and
fees for technical services from a non-resident. Does the Income Computation and Disclosure
Standards (ICDS) apply to the computation of these incomes, considering they are liable to
tax on a gross basis under section 115A of the Income Tax Act?

a) No, ICDS is not applicable to these incomes.

b) ICDS applies, but only for computation on a net basis.
c) Yes, ICDS provisions apply for computation on a gross basis.
d) ICDS applies, but only for computation on a gross basis if specified conditions are met.

(4×2= 8 Marks)

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