Question Paper — January 2021

Question Paper
PAPER – 4: TAXATION (January 2021)
Working notes shall form part of the respective answers.
All questions pertaining to income-tax relate to assessment year 2023-24,
unless stated otherwise in the question.

Question 1
Mr. Krishna (aged 65 years), a furniture manufacturer, reported a profit of ` 5,64,44,700 for
the previous year 2022-23 after debiting/crediting the following items:
Debits:
1. ` 20,000 paid to a Gurudwara registered u/s 80G of the Income-tax Act, in cash where
no cheques are accepted.
2. ` 48,000 contributed to a university approved and notified u/s 35(1)(ii) to be used for
scientific research.
3. Interest paid ` 1,67,000 on loan taken for purchase of E-vehicle on 15-05-2022 from a
bank. The E-vehicle was purchased for the personal use of his wife.
4. His firm has purchased timber under a forest lease of ` 20,00,000 for the purpose of
business.
Credits:
1. Income of ` 4,00,000 from royalty on patent registered under the Patent Act received
from different resident clients. No TDS was needed to be deducted by any of the
clients.
2. He received ` 3,00,000 from a debtor which was written off as bad in the year 2018-19.
Amount due from the debtor (which was written off as bad) was ` 5,00,000, out of which
tax officer had only allowed ` 3,00,000 as deduction in computing the total income for
assessment year 2019-20.
3. He sold some furniture to his brother for ` 7,00,000. The fair market value of such
furniture was ` 9,00,000.
Other information :
1. Depreciation in books of accounts is computed by applying the rates prescribed under
the Income tax laws.
2. Mr. Krishna purchased a new car of ` 12,00,000 on 1st September, 2022 and the same
was put to use in the business on the same day. No depreciation for the same has been
taken on car in the books of account.

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3. Mr. Krishna had sold a house on 30th March, 2020 and deposited the long term capital
gains of ` 25,00,000 in capital gain account scheme by the due date of filing return of
income for that year. On 1st March, 2023, he sold another house property in which he
resided for ` 1 crore. He earned a long term capital gain of ` 50,00,000 on sale of this
property. On 25th March, 2023, he withdrew money out of his capital gain account and
invested ` 1 crore on construction of one house.
4. Mr. Krishna also made the following payments during the previous year 2022-23
- Lump-sum premium of ` 30,000 paid on 30th March, 2023 for the medical policy
taken for self and spouse. The policy shall be effective for five years i.e. from 30th
March, 2023 to 29th March, 2028.
- ` 8,000 paid in cash for preventive health check-up of self and spouse.
Compute the total income and tax payable by Mr. Krishna for the assessment year 2023-24.
Ignore provision of section 115BAC.
(14 Marks)
Answer
Computation of total income of Mr. Krishna for A.Y. 2023-24
Particulars ` ` `
20B I Income from business or profession
Net profit as per profit and loss account 5,64,44,700
Add: Items of expenditure debited but not
allowable while computing business income
1. Donation to Gurudwara in cash [not
allowable as deduction since it is not
incurred wholly and exclusively for
business purpose. Since the amount is
already debited, the same has to be added
back while computing business income]
20,000
2. Interest on loan taken for purchase of e-
vehicle [Interest on loan for purchase of e-
vehicle for personal purpose is not allowed
as deduction from business income since the
same is not incurred wholly and exclusively
for business purpose. Since it is already
debited, the same has to be added back
while computing business income] 1,67,000
3. Sale of furniture to brother at less than FMV
[The provisions of section 40A(2) are not
applicable in case of sale transaction, even
if the same is to a related party. Therefore,
no adjustment is necessary in respect of
difference of ` 2 lakh] - 1,87,000
5,66,31,700
Less: Items of income credited but not
taxable or taxable under any other head
of income
4. Royalty on patent [Not taxable as business
income since Mr. Krishna is engaged in
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Particulars ` ` `
manufacturing business. Since the amount is
already credited to profit and loss account,
the same has to be reduced while computing
business income]
5. Bad debt recovered [Actual bad debt is ` 2 4,00,000
lakhs i.e., ` 5 lakhs less ` 3 lakh, being the
amount of bad debt recovered. Bad debt
written off is ` 3 lakhs. Bad debt recovered
to the extent of ` 1 lakh being excess of bad
debt recovered over actual bad debt would
be deemed to be business income. Since the
entire ` 3 lakhs is credited to the profit and
loss account, ` 2 lakhs has to be reduced]
2,00,000 6,00,000
5,60,31,700
Less: Allowable expenditure
6. Contribution to a university approved and
notified u/s 35(1)(ii) for scientific research
[Eligible for deduction @100%. Since,
100% of the expenditure is already debited
to profit and loss account, no adjustment is -
made]
7. Depreciation on car [` 12 lakh x 15%, since
put to use for more than 180 days in the
P.Y.2022-23]
1,80,000
5,58,51,700
II Capital Gain
Long term capital gain on sale of house property
Less: Exemption under section 54 [Since whole 50,00,000
amount of long term capital gain is invested in
construction of house within the stipulated time
limit.]
[Capital gain of ` 25 lakhs in capital gain
account scheme is not taxable in P.Y. 2022-23,
since the same is withdrawn and invested in 50,00,000 -
construction of house within the stipulated time
limit. The remaining amount of `75 lakhs
invested in construction of house is eligible for
exemption u/s 54, subject to a maximum of
`50 lakhs being long-term capital gain on sale
of house property during the P.Y.2022-23]
III Income from Other Sources
Royalty on patent [Taxable as “income from 4,00,000
other sources”, since he is engaged in business
of manufacturing furniture]
Gross Total Income 5,62,51,700

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Particulars ` ` `
Less: Deduction under Chapter VI-A
Deduction under section 80D
- Mediclaim premium for self and spouse [In 5,000
case of lump sum premium for medical
policy, deduction is allowed for equally for
each relevant previous years. [` 30,000/6
years, being relevant previous years in
which the insurance is in force]
- Preventive health check up of self and 5,000 10,000
spouse [Preventive health check up paid in
cash allowed to the extent of ` 5,000]
Deduction under section 80EEB 1,50,000
[Since the loan is sanctioned by Bank during the
P.Y. 2022-23, interest on loan taken for
purchase of e-vehicle is allowed to the extent of
` 1,50,000]
Deduction under section 80G
[Donation of ` 20,000 to Gurudwara not -
allowable as deduction since amount exceeding
` 2,000 paid in cash]
Deduction under section 80RRB [Deduction
in respect of royalty on patent registered under
the Patent Act subject to a maximum of ` 3
lakh]
Total income 3,00,000 4,60,000
5,57,91,700
Computation of tax liability of Mr. Krishna for A.Y.2023-24
Particulars ` `
Tax on total income of ` 5,57,91,700
Upto ` 3,00,000 Nil
` 3,00,001 – ` 5,00,000 [@5% of ` 2 lakh] 10,000
` 5,00,001 – ` 10,00,000 [@20% of ` 5,00,000] 1,00,000
` 10,00,001- ` 5,57,91,700 [@30% of ` 5,47,91,700] 1,64,37,510 1,65,47,510
Add: Surcharge @ 37%, since total income exceeds
` 5,00,00,000 61,22,579
2,26,70,089
Add: Health and education cess@4% 9,06,803
Total tax liability 2,35,76,892

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Particulars ` `
Less: TCS u/s 206C(1) @ 2.5% on ` 20 lakh i.e., timber 50,000
TCS u/s 206C(1F)@1% of ` 12 lakh i.e., sale of 12,000
motor car where consideration exceeds ` 10 lakh
TDS u/s 194-IA@1% of ` 1 crore i.e., sale of
immovable property where consideration is ` 50
lakh or more 1,00,000 1,62,000
Tax payable 2,34,14,892
Tax payable (rounded off) 2,34,14,890

Question 2
(a) Examine TDS/TCS implications in case of following transactions, briefly explaining
provisions involved assuming that all the payees are residents; state the rate and
amount to be deducted, in case TDS/TCS is required to be deducted/collected.
(i) On 1.5.2022, Mr. Brijesh made three fixed deposits of nine months each of ` 3 lakh
each, carrying interest @ 9% with Mumbai Branch, Delhi Branch and Chandigarh
Branch of CBZ Bank, a bank which had adopted CBS. These Fixed Deposits mature
on 31.01.2023.
(ii) Mr. Marwah, aged 80 years, holds 6½% Gold Bonds, 1977 of ` 2,00,000 and 7%
Gold Bonds 1980 of ` 3,00,000. He received yearly interest on these bonds on
28.02.2023.
(iii) M/s AG Pvt. Ltd. took a loan of ` 50,00,000 from Mr. Haridas. It credited interest of `
79,000 payable to Mr. Haridas during the previous year 2022-23. M/s AG Pvt. Ltd. is
not liable for tax audit during previous years 2021-22 and 2022-23.
(iv) Mr. Prabhakar is due to receive ` 6 lakh on 31.3.2023 towards maturity proceeds of
LIC policy taken on 1.4.2019, for which the sum assured is ` 5 lakhs and the annual
premium is ` 1,40,000. (8 Marks)

(b) Mr. Xavier, an Indian resident individual, set up an unit in Special Economic Zone (SEZ)
in the financial year 2018-19 for production of Mobile Phones. The unit fulfills all the
conditions of section 10AA of the Income-tax Act, 1961.
During the financial year 2021-22, he has also set up a warehousing facility in a district of
Tamil Nadu for storage of agricultural produce. It fulfills all the conditions of section 35AD.
Capital expenditure in respect of warehouse amounted to ` 93 lakhs (including cost of land
` 13 lakhs). The warehouse became operational with effect from 1st April, 2022 and the
expenditure of ` 63 lakhs was capitalized in the books on that date.
Further details relevant for the financial year 2022-23 are as follows :
Particulars `
Profit from operation of warehousing facility before claiming deduction 1,10,00,000
under section 35AD
Net Profit of SEZ (Mobile Phone) Unit 50,00,000

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Particulars `
Export sales of SEZ (Mobile Phone) Unit 90,00,000
Domestic Sales of SEZ (Mobile Phone) Unit 60,00,000
Compute income tax (including AMT under 115JC) payable by Mr. Xavier for Assessment
Year 2023-24. (6 Marks)
Answer
(a) (i) CBZ Bank has to deduct tax at source @10% under section 194A, since the aggregate
interest on fixed deposit with the three branches of the bank is ` 60,750 [3,00,000 x 9% x 3 x
9/12], which exceeds the threshold limit of ` 40,000.
Since CBZ Bank has adopted core banking solution (CBS), the aggregate interest
credited/paid by all branches has to be considered.
Tax to be deducted at source = ` 60,750 x 10% = ` 6,0751
(ii) Tax @10% under section 193 is to be deducted on interest on 6½ Gold Bonds, 1977 and 7%
Gold Bonds 1980, since the nominal value of the bonds held by Mr. Marwah i.e., ` 5,00,000
exceed ` 10,000.
Interest on 6½ Gold Bonds, 1977 = ` 2,00,000 x 6.5% = ` 13,000 Interest on 7% Gold Bonds
1980 = ` 3,00,000 x 7% = ` 21,000 Tax to be deducted at source = ` 34,000 x 10% = ` 3,400
(iii) M/s AG Pvt. Ltd. has to deduct tax at source @10% under section 194A, since the interest on
loan payable is ` 79,000 which exceeds the threshold limit of ` 5,000. M/s AG Pvt. Ltd.,
being a company, has to deduct tax at source irrespective of the fact that it is not liable to tax
audit during P.Y. 2021-22 and 2022-23.
Tax to be deducted at source = ` 79,000 x 10% = ` 7,900
(iv) Since the annual premium exceeds 10% of sum assured in respect of a policy taken after
31.3.2012, the maturity proceeds of ` 6 lakhs due on 31.3.2023 are not exempt under section
10(10D) in the hands of Mr. Prabhakar. Therefore, tax is required to be deducted @5% under
section 194DA on the amount of income comprised therein i.e., on ` 40,000 [` 6,00,000,
being maturity proceeds - ` 5,60,000, being the amount of insurance premium paid.
Tax to be deducted at source = ` 40,000 x 5% = ` 2,000
(b) Computation of total income and tax liability of Mr. Xavier for A.Y. 2023-24 (under the
regular provisions of the Act)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 50,00,000
Less: Deduction under section 10AA 30,00,000
[50,00,000 x 90,00,000/1,50,00,000 x 100%, since it is 5th year of
manufacturing]
Business income of SEZ unit chargeable to tax 20,00,000
Profit from operation of warehousing facility 1,10,00,000

1 Alternatively, in the absence of information about p.a., the amount of interest can also be worked out as ` 81,000
[3,00,000 x 9% x 3] and the tax to be deducted thereon would be ` 81,000 x 10% = ` 8,100.
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Particulars ` `
Less: Deduction u/s 35AD [Deduction@100% in respect of the 80,00,000
expenditure incurred prior to the commencement of its operations
and capitalized in the books of account on 1.4.2022. Deduction is
not available on expenditure incurred on acquisition of land] [` 93
lakhs – ` 13 lakhs]
Business income of warehousing facility chargeable to tax 30,00,000
Total Income 50,00,000
Computation of tax liability
Tax on ` 50,00,000 13,12,500
Add: Health and Education cess@4% 52,500
Total tax liability 13,65,000
Computation of adjusted total income and AMT of Mr. Xavier for A.Y. 2023-24
Particulars ` `
Total Income (as computed above) 50,00,000
Add: Deduction under section 10AA 30,00,000
80,00,000
Add: Deduction under section 35AD 80,00,000
Less: Depreciation u/s 32 [On building@10% of ` 80 lakhs1] 8,00,000 72,00,000
Adjusted Total Income 1,52,00,000
Alternate Minimum [email protected]% 28,12,000
Add: Surcharge@15% (since adjusted total income > 4,21,800
` 1 crore)
32,33,800
Add: Health and Education cess@4% 1,29,352
Total tax liability 33,63,152
Tax Liability (Rounded off) 33,63,150
Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus
surcharge@15% and cess@4%. Therefore, the tax liability is ` 33,63,150.

1 Assuming the capital expenditure of ` 80 lakhs is incurred entirely on building.

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AMT Credit to be carried forward under section 115JEE
`
Tax liability under section 115JC 33,63,150
Less: Tax liability under the regular provisions of the Income-tax 13,65,000
Act, 1961
19,98,150
Note: In the third para of the question, there is a difference between the figure of capital expenditure
incurred in respect of warehouse i.e., ` 93 lakhs (including cost of land ` 13 lakhs) and the figure of
capital expenditure capitalised in the books on 1.4.2022 i.e., ` 63 lakhs. It appears to be a
typographical error, due to which the main solution has been worked out considering ` 93 lakhs as
the amount capitalised in the books on 1.4.2022.
However, alternative answers have been worked out below considering ` 63 lakhs (being the figure
as printed in the question paper) as the amount capitalised in the books on 1.4.2022. In Alternative 1,
it has been assumed that the amount of `63 lakhs capitalised on 1.4.2022 does not include cost of
land. In Alternative 2, it has been assumed that the amount of ` 63 lakhs capitalised on 1.4.2022
includes cost of land.
Alternative 1 (The amount of ` 63 lakhs capitalized on 1.4.2022 does not include cost of land)
Computation of total income and tax liability of Mr. Xavier for A.Y. 2023-24 (under the regular
provisions of the Act)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 50,00,000
Less: Deduction u/s 10AA 30,00,000
[50,00,000 x 90,00,000/1,50,00,000 x 100%, since it is
5th year of manufacturing]
Business income of SEZ unit chargeable to tax 20,00,000
Profit from operation of warehousing facility1 1,10,00,000
Less: Deduction u/s 35AD [Deduction@100% in respect of the 63,00,000
expenditure incurred prior to the commencement of its operations
and capitalized in the books of account on 1.4.2022. It is assumed
that the capitalized expenditure of ` 63 lakhs does not include cost
of land]
Business income of warehousing facility chargeable to tax 47,00,000
Total Income 67,00,000

1 Since the question mentions ` 1,10,00,000 as the profit from operation of warehousing facility before claiming
deduction u/s 35AD, it is assumed that said figure of profit is after providing depreciation u/s 32 on ` 17 lakhs, being
the amount of capital expenditure not capitalized as on 1.4.2022 less cost of land (i.e., ` 93 lakhs – ` 63 lakhs = ` 30
lakhs – ` 13 lakhs (cost of land) = ` 17 lakhs).
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Particulars ` `
Computation of tax liability
Tax on ` 67,00,000 18,22,500
Add: Surcharge @10% 1,82,250
20,04,750
Add: Health and Education cess@4% 80,190
Total tax liability 20,84,940
Computation of adjusted total income and AMT of Mr. Xavier for A.Y. 2023-24
Particulars ` `
Total Income (as computed above) 67,00,000
Add: Deduction under section 10AA 30,00,000
97,00,000
Add: Deduction under section 35AD 63,00,000
Less: Depreciation u/s 32 [On building @10% of `63 6,30,000 56,70,000
lakhs1]
Adjusted Total Income 1,53,70,000
Alternate Minimum [email protected]% 28,43,450
Add: Surcharge@15% (since adjusted total income > 4,26,518
` 1 crore)
32,69,968
Add: Health and Education cess@4% 1,30,799
Total tax liability 34,00,767
Tax Liability (Rounded off) 34,00,770
Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus
surcharge@15% and cess@4%. Therefore, the tax liability is ` 34,00,770.
AMT Credit to be carried forward under section 115JEE
`
Tax liability under section 115JC 34,00,770
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 20,84,940
13,15,830

1 Assuming the capital expenditure of ` 63 lakhs is incurred entirely on building.

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Question Paper — January 2021
Alternative 2 (The amount of `63 lakh capitalized includes cost of land)
Computation of total income and tax liability of Mr. Xavier for A.Y. 2023-24 (under the regular
provisions of the Act)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 50,00,000
Less: Deduction u/s 10AA 30,00,000
[50,00,000 x 90,00,000/1,50,00,000 x 100%, since it
is 5th year of manufacturing]
Business income of SEZ unit chargeable to tax 20,00,000
Profit from operation of warehousing facility1 1,10,00,000
Less: Deduction u/s 35AD [Deduction@100% in respect of the 50,00,000
expenditure incurred prior to the commencement of its
operations, and capitalized in the books of account on 1.4.2022.
Deduction is not available on expenditure incurred on acquisition
of land. It is assumed that the capitalized expenditure includes `
13 lakhs of land] [` 63 lakhs – ` 13 lakhs]
Business income of warehousing facility chargeable to 60,00,000
Tax
Total Income 80,00,000
Computation of tax liability
Tax on ` 80,00,000 22,12,500
Add: Surcharge @10% 2,21,250
24,33,750
Add: Health and Education cess@4% 97,350
Total tax liability 25,31,100
Computation of adjusted total income and AMT of Mr. Xavier for A.Y. 2023-24
Particulars ` `
Total Income (as computed above) 80,00,000
Add: Deduction under section 10AA 30,00,000
1,10,00,000
Add: Deduction under section 35AD 50,00,000
Less: Depreciation u/s 32 [On building @10% of 5,00,000 45,00,000
` 50 lakhs2]
Adjusted Total Income 1,55,00,000

1 Since the question mentions ` 1,10,00,000 as the profit from operation of warehousing facility before claiming
deduction u/s 35AD, it is assumed that said figure of profit is after providing depreciation u/s 32 on ` 30 lakhs, being
the amount of capital expenditure not capitalized as on 1.4.2022 (` 93 lakhs – ` 63 lakhs).
2 Assuming the capital expenditure of ` 50 lakhs is incurred entirely on building.
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 Question Paper — January 2021
Particulars ` `
Alternate Minimum Tax @18.5% 28,67,500
Add: Surcharge@15% (since adjusted total income 4,30,125
> ` 1 crore)
32,97,625
Add: Health and Education cess@4% 1,31,905
Total tax liability 34,29,530
Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus
surcharge@15% and cess@4%. Therefore, the tax liability is ` 34,29,530.
AMT Credit to be carried forward under section 115JEE
`
Tax liability under section 115JC 34,29,530
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 25,31,100
8,98,430

Question 3
(a) Rajesh was employed in Axis Ltd., Mumbai. He received a salary of ` 45,000 p.m. from
1.04.2022 to 20.09.2022. He resigned and left for Dubai for the first time on 28.09.2022
and got monthly salary of rupee equivalent of ` 90,000 from 1.10.2022 to 31.03.2023.
His salary for October to December was credited in his Mumbai bank account directly
and the salary for January to March 2023 was credited in his Dubai bank account.
The cost of his air tickets to Dubai costing ` 1,50,000 was funded by her sister staying in
London. The cost of his initial stay at Dubai costing ` 40,000 was funded by one of his
friends staying in Delhi.
He further received interest of ` 10,500 on his fixed deposits and ` 7,500 on his savings
a/c with his Mumbai bank. He also paid LIC Premiums of ` 15,000 for self, ` 10,000 for
spouse and ` 25,000 for dependent mother aged 71 years.
Compute taxable income of Mr. Rajesh for the Assessment Year 2023-24. (7 Marks)
(b) Mr. Hari aged 57 years is a resident of India. He provides you the following details of his
incomes pertaining to F.Y. 2022-23.
- Interest on Non-Resident (External) Account maintained with
State Bank of India as per RBI stipulations - ` 3,55,000
- Interest on savings bank account maintained
with State Bank of India - ` 8,000
- Interest on Fixed Deposits with Punjab National Bank -` 40,000
He seeks your advice on his liability to file return of income as per Income-tax Act, 1961
for the Assessment Year 2023-24.
What will be your answer, if he has incurred ` 4 lakhs on travel expenses of his newly
married son and daughter in law's honeymoon in Canada? (4 Marks)

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Question Paper — January 2021
(c) Income deemed to accrue or arise in India to a non-resident by way of interest, royalty
and fee for technical services is to be taxed in India irrespective of territorial nexus.
Examine the correctness or otherwise of the given statement. (3 Marks)
Answer
(a) In case of an Indian citizens leaving India for employment during the relevant previous year, the
period of their stay during that previous year for being treated as a resident of India must be 182
days or more.
During the previous year 2022-23, Mr. Rajesh, an Indian citizen, was in India for 181 days only
(i.e., 30+31+30+31+31+28 days). Thereafter, he left India for employment purposes.
Since he does not satisfy the minimum criteria of 182 days, he is a non-resident for the A.Y.
2023-24.
A non-resident is chargeable to tax in respect of income received or deemed to be received in
India and income which accrues or arises or is deemed to accrue or arise to him in India. Hence,
salary for January to March 2023, which was credited in his Dubai bank account for services
rendered in Dubai, would not be taxable in the hands of Mr. Rajesh.
Computation of taxable income of Mr. Rajesh for A.Y. 2023-24
Particulars Amount (`)
Salary
Salary from 1.4.2022 to 20.9.2022 [45,000 x 5 + 45,000 x 20/30] 2,55,000
Salary from 1.10.2022 to 31.12.2022 [90,000 x 3] 2,70,000
Gross Salary 5,25,000
Less: Standard deduction u/s 16(ia) 50,000
Net Salary 4,75,000

Income from Other Sources

Interest on fixed deposits 10,500
Interest on Savings account 7,500 18,000
Gross Total Income 4,93,000
Less: Deduction under Chapter VI-A
- Deduction under section 80C 25,000
LIC premium for self and spouse [LIC premium for mother is not allowed
for deduction]
- Deduction under section 80TTA 7,500
[Interest on savings account with Mumbai bank]
4,60,500
Total Income
Working Notes –
1. Cost of his air tickets to Dubai costing ` 1,50,000 funded by his sister is not taxable under
section 56(2)(x) in the hands of Mr. Rajesh, since “sister” is a relative.
2. Cost of initial stay at Dubai costing ` 40,000 funded by his friend is also not taxable under
section 56(2)(x), since the amount does not exceed `50,000.
(b) An individual is required to furnish a return of income under section 139(1) if his total income or
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 Question Paper — January 2021
the total income of any other person in respect of which he is assessable under this Act during the
previous year exceeded the maximum amount which is not chargeable to income-tax.
Computation of total income of Mr. Hari for A.Y. 2023-24
Particulars `
Income from other sources
Interest earned from Non-resident (External) Account ` 3,55,000 [Exempt
u/s 10(4)(ii), since he is maintaining the said account as per RBI stipulations] NIL
Interest on savings bank account 8,000
Interest on fixed deposit with Punjab National Bank 40,000
Gross Total Income 48,000
Less: Deduction u/s 80TTA (Interest on saving bank account) 8,000
Total Income 40,000
Since the total income of Mr. Hari for A.Y.2023-24, is less than the basic exemption limit of `
2,50,000, he is not required to file return of income for A.Y.2023-24.
However, if he has incurred expenditure exceeding ` 2 lakhs for himself or any other person for
travel to a foreign country, he would be required to file a return of income, even if his total
income does not exceed the basic exemption limit. Since he has incurred expenditure of ` 4 lakhs
on foreign travel of his newly married son and daughter in law in the F.Y. 2022-23, he has to
mandatorily file his return of income for A.Y. 2023-24 on or before the due date under section
139(1).
(c) Income by way of interest, royalty or fees for technical services which is deemed to accrue or
arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1) shall be included in the total
income of the non-resident, whether or not –
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.
In effect, the income by way of fees for technical services, interest or royalty, from services utilized
in India would be deemed to accrue or arise in India in case of a non-resident and be included in his
total income, whether or not such services were rendered in India.
Therefore, the given statement that income deemed to accrue or arise in India to a non- resident by
way of interest, royalty and fees for technical services is to be taxed irrespective of territorial nexus,
is correct.

Question 4
(a) During the previous year 2022-23, following transactions took place in respect of Mr.
Raghav who is 56 years old.
(i) Mr. Raghav owns two house properties in Mumbai. The details in respect of these
properties are as under -
House 1 Self- House 2 Let-
occupied out
Rent received per month Not applicable ` 60,000
Municipal taxes paid ` 7,500 Nil

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House 1 Self- House 2 Let-

occupied out
Interest on loan (taken for purchase of ` 3,50,000 ` 5,00,000
property)
Principal repayment of loan (taken from HDFC ` 2,00,000 ` 3,00,000
bank)
(ii) Mr. Raghav had a house in Delhi. During financial year 2013-14, he had transferred
the house to Ms. Vamika, daughter of his sister without any consideration. House
would go back to Mr. Raghav after the life time of Ms. Vamika. The transfer was
made with a condition that 10% of rental income from such house shall be paid to
Mrs. Raghav. Rent received by Ms. Vamika during the previous year 2022-23 from
such house property is ` 5,50,000.
(iii) Mr. Raghav receives following income from M/s M Pvt. Ltd. during P.Y. 2022-23:
• Interest on Debentures of ` 7,50,000; and
• Salary of ` 3,75,000. He does not possess the adequate professional
qualification commensurate with the salary received by him.
Shareholding of M/s M Pvt. Ltd. as on 31.3.2023 is as under -
Equity shares Preference shares
Mr. Raghav Nil Nil
Mrs. Raghav 2% 25%
Mr. Jai Kishan
(brother of Mrs. Raghav) 98% 75%
(iv) Mr. and Mrs. Raghav forms a partnership firm with equal share in profits. Mr. Raghav
transferred a fixed deposit of ` 1 crore to such firm. Firm had no income or expense
other than the interest of ` 9,00,000 received from such fixed deposit. Firm
distributed the entire surplus to Mr. and Mrs. Raghav at the end of the year.
(v) Mr. Raghav holds preference shares in M/s K Pvt. Ltd. He instructed the company to
pay dividends to Ms. Geetanshi, daughter of his servant. The transfer is irrevocable
for the life time of Geetanshi. Dividend received by Ms. Geetanshi during the
previous year 2022-23 is ` 3,00,000.
(vi) Other income of Mr. Raghav includes
- Interest from saving bank account of ` 2,00,000
- Cash gift of ` 75,000 received from daughter of his sister on his birthday.
Compute the total income of Mr. Raghav for the Assessment Year 2023-24. (8 Marks)
(b) Discuss the taxability of the following transactions giving reasons, in the light of relevant
provisions, for your conclusion.
Attempt any two out of the following three parts:
(i) Mr. Rajpal took a land on rent from Ms. Shilpa on monthly rent of ` 10,000. He sub-
lets the land to Mr. Manish for a monthly rent of ` 11,500. Manish uses the land for
grazing of cattle required for agricultural activities. Mr. Rajpal wants to claim
deduction of ` 10,000 (being rent paid by him to Ms. Shilpa) from the rental income
received by it from Mr. Manish.

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 Question Paper — January 2021
(ii) Mr. Pratham, a non-resident in India, received a sum of ` 1,14,000 from Mr. Rakesh,
a resident and ordinarily resident in India. The amount was paid to Pratham on
account of transfer of right to use the manufacturing process developed by Pratham.
The manufacturing process was developed by Mr. Pratham in Singapore and Mr.
Rakesh uses such process for his business carried on by him in Dubai.
(iii) Mr. Netram grows paddy on land. He then employs mechanical operations on grain
to make it fit for sale in the market, like removing hay and chaff from the grain,
filtering the grain and finally packing the rice in gunny bags. He claims that entire
income earned by him from sale of rice is agricultural income not liable to income-
tax since paddy as grown on land is not fit for sale in its original form.
(3 x 2 = 6 Marks)
Answer
(a) Computation of Total Income of Mr. Raghav for A.Y. 2023-24
Particulars Amount Amount
(`) (`)
Salary Nil
[Since Mrs. Raghav along with her brother holds shares carrying
100% voting power in M/s M Pvt. Ltd., they have a substantial
interest in the company. Since Mr. Raghav is working in the
same company without any professional qualifications
commensurate with his salary, the salary of ` 3,75,000 received
by him would be included in the hands of Mrs. Raghav.
Income from house property
House 1 [Self-occupied]
Net annual value -
Less: Interest on loan [upto `2,00,000] 2,00,000 (2,00,000)
House 2 [Let out]
Gross annual value1 [`60,000 x 12] 7,20,000
Less: Municipal taxes -
Net annual value 7,20,000
Less: Deductions from Net Annual Value
(a) 30% of Net Annual Value 2,16,000
(b) Interest on loan 5,00,000 4,000
House in Delhi [Since Mr. Raghav receives direct or indirect
benefit from income arising to his sister’s daughter,
Ms. Vamika, from the transfer of house to her without
consideration, such income is to be included in the total income
of Mr. Raghav as per proviso to section 62(1), even though the
transfer may not be revocable during lifetime of Ms. Vamika’s]

1 Rent receivable has been taken as the gross annual value in the absence of other information.
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Question Paper — January 2021

Particulars Amount Amount

(`) (`)
Gross Annual Value1 5,50,000
Less: Municipal taxes -
Net Annual Value 5,50,000
Less: Deductions from Net Annual Value
(a) 30% of Net Annual Value 1,65,000
(b) Interest on loan - 3,85,000
1,89,000
Profits and gains from business or profession
Share of profit from firm [Exempt u/s 10(2A)] -
Exempt income cannot be clubbed
Income from other sources
Dividend on preference shares 3,00,000
[Taxable in the hands of Mr. Raghav
as per section 60, since he transferred the income, i.e.,
dividend, without transferring the asset, i.e., preference shares]
Interest on debentures 7,50,000
Interest from saving bank account 2,00,000
Cash gift [Taxable, since sum of money exceeding
` 50,000 is received from his niece, who is not a relative
as per section 56(2)] 75,000 13,25,000
Gross Total Income 15,14,000
Less: Deduction under Chapter VI-A
Deduction under section 80C [Principal repayment of 1,50,000
loan ` 5 lakh, restricted to ` 1,50,000]
Deduction under section 80TTA [Interest from
savings bank account] 10,000 1,60,000
Total Income 13,54,000
(b) (i) The rent or revenue derived from land situated in India and used for agricultural purposes
would be agricultural income under section 2(1A)(a). Therefore, rent received from sub-
letting of the land used for grazing of cattle required for agriculture activities is agricultural

1 Rent receivable has been taken as the gross annual value in the absence of other information.
326 CA Bhanwar Borana
 Question Paper — January 2021
income. The rent can either be received by the owner of the land or by the original tenant
from the sub-tenant.
Accordingly, rent received by Mr. Rajpal from Mr. Manish for using land for grazing of
cattle required for agricultural activities is agricultural income exempt u/s 10(1). As per
section 14A, no deduction is allowable in respect of exempt income.
(ii) Consideration for transfer of right to use the manufacturing process falls within the definition
of royalty. Income by way royalty payable by Mr. Rakesh, a resident and ordinarily resident,
is not deemed to accrue or arise in India in the hands of Mr. Pratham as per section
9(1)(vi)(b), since royalty is payable in respect of right used for the purposes of a business
carried on by Mr. Rakesh outside India i.e ., in Dubai.
(iii) The income from the process ordinarily employed to render the produce fit to be taken to the
market would be agricultural income under section 2(1A)(b)(ii). The process of making the
rice ready from paddy for the market may involve manua l operations or mechanical
operations, both of which constitute processes ordinarily employed to make the product fit
for the market.
Accordingly, the entire income earned by Mr. Netram from sale of rice is agricultural income.

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