Direct Tax Laws

& International
Taxation

Mock Test Paper

Series

by
CA. Durgesh Singh

For CA Final Examination

June, 2020

( Contact for more details

9779430034 )
 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

Mock Test – 4
(Profits & Gains from Business or Profession, Set off and Carry Forward of
Losses, ICDS)
Key Instructions:
1) Read the questions very carefully.
2) For descriptive questions, the answers should be in line
with the specific question asked and the marks allocated.
3) Check the time taken for each question.
4) Notes/working notes should be attached suitably.
5) Figures on the right indicate the marks.
6) If you want to download this question paper then do the
same from telegram channel
http://t.me/cadurgeshsingh
7) Highlighted Questions in pink shade are for New
Syllabus students only.
8) For answers and solution video download DSTC
Mobile Application from Google Play Store and
Contact for more details at 9779430034.

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

Multiple Choice Questions M

X Ltd., a company engaged in the business of manufacturing and not opted for provisions of section 1
Q I 115BAA, paid Rs.2 lakh to IISc, Bangalore (an approved and notified institution) for scientific
. research. It also incurred capital expenditure of Rs.12 lakh (including cost of acquisition of land
Rs.5 lakh) on in-house research and development facility as approved by the prescribed authority.
1 The deduction under section 35 for A.Y.2020-21 would be;

a) Rs.9,00,000
b) Rs.13,50,000
c) Rs.14,00,000
d) Rs.10,00,000
Y Ltd. purchased computers of the value of Rs.10 lakhs in November, 2019 and installed the same in 1
II its office. The depreciation allowable under section 32 for A.Y.2020-21 is respect of the same is:

a) Rs.6 lakhs
b) Rs.3 lakhs
c) Rs.4 lakhs
d) Rs.2 lakhs
Mr. Arvind, engaged in the business of wholesale trade, has a turnover of Rs.90 lakhs for P.Y.2018- 1
III 19 and Rs.210 lakhs for P.Y.2019-20. In the P.Y.2019-20, he paid salary of Rs.3 lakhs to Mr. Hari, a
resident, without deduction of tax at source and commission of Rs.51 lakhs to Mr. Rajesh, a resident,
without deduction of tax at source. The disallowance under section 40(a)(ia) while computing
business income of A.Y.2020-21 would be –

a) Rs.54,00,000
b) Rs.16,02,000
c) Rs.15,30,000
d) Nil
Which of the following can be treated as "profits derived from" business or undertaking to qualify 1
IV for deduction under section 80-IB?
(i) Transport subsidy
(ii) Duty drawback receipts
(iii) interest subsidy
(iv) power subsidy

a) Only (ii)
b) (ii) & (iii)
c) (i), (iii) & (iv)
d) All the above
ABC Ltd., an Indian company engaged in manufacture of steel, has incurred expenditure on 1
V advertisement in a souvenir of a political party. Which of the following statements are correct?

a) Such expenditure is allowable as deduction while computing its business income.

b) Such expenditure is not allowable as deduction while computing its total income.
c) Such expenditure is not allowable as deduction while computing its business income but is
allowable as deduction from gross total income.
d) Such expenditure is neither allowable as deduction from business income nor allowable as
deduction from gross total income.
ABC Ltd., an Indian company commenced business on 1.2.2020. It incurred preliminary expenses of 1
VI Rs.35 lakhs during the period from 1.4.2019 to 31.1.2020. The cost of the project is Rs.5 crore. The

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

following are the details as on 31.3.2020: Issued Share Capital - Rs.3 crore; Share Premium - Rs.50
lakhs; Debentures - Rs.1 crore; Long-term borrowings - Rs.2 crore. The deduction under section 35D
for P.Y.2019-20 is –

a) Rs.5 lakhs
b) Rs.6 lakhs
c) Rs.6.50 lakhs
d) Rs.7 lakhs
Himalaya Ltd. is an eligible start-up engaged in eligible business. Its gross total income included 1
VII profits of Rs.25 lakhs from such business. The Assessing Officer made disallowance of Rs.3 lakhs
under section 40(a)(ia) and of Rs.2 lakhs under section 43B. The deduction allowable under section
80-IAC would be –

a) Rs.25 lakhs
b) Rs.28 lakhs
c) Rs.30 lakhs
d) Rs.20 lakhs
Mr. Hari has income of Rs.52 lakhs under the head “Profits and gains of business or profession”. One 1
VIII of his businesses is eligible for deduction@100% of profits under section 80-IB for A.Y. 2020-21. The
profit from such business included in the business income is Rs.20 lakhs. The tax payable by Mr. Hari
(rounded off), assuming that he has no other income during the P.Y.2019-20, is –

a) Rs.8,03,400
b) Rs.10,89,950
c) Rs.9,90,860
d) Rs.11,00,530
Delta Limited is engaged in growing and manufacturing rubber in India. It commenced its 1
IX operations from 1st April, 2019. It acquired plant and machinery (second hand), factory building
and furniture at a cost of Rs.62 lakhs, Rs.37 lakhs and Rs.8 lakhs, respectively, in the P.Y. 2019-20 by
way of ECS through bank account. Assuming that all the assets were put to use for more than 180
days during the P.Y. 2019-20, you are required to compute the written down value of each block as
on 1st April, 2020.

a) Rs.52.70 lakhs; Rs.33.30 lakhs & Rs.7.20 lakhs

b) Rs.58.75 lakhs; Rs.35.71 lakhs & Rs.7.72 lakhs
c) Rs.58.28 lakhs;Rs.35.52 lakhs & Rs.7.68 lakhs
d) Rs.59.675 lakhs; Rs.36.075 lakhs & Rs.7.8 lakhs
Which of the following individuals would be entitled to opt for presumptive taxation schemes under 1
X the Income- tax Act, 1961 for A.Y.2020-21?
(i) A retail trader having turnover of Rs.2 crore during the previous year 2019-20
(ii) A practising CA having gross receipts of Rs.92 lakhs during the previous year 2019-20.
(iii) A wholesale trader having turnover of Rs.1.96 crore during the previous year 2019-20
(iv) A doctor having gross receipts of Rs.50 lakhs during the previous year 2019-20
(v) Individual owning 8 goods carriages as on 1.4.2019. He sold 2 goods carriages on 1.5.2019
and purchased 4 goods carriages on 1.7.2019

a) Only (iii)
b) (iii) & (v)
c) (i), (iii), (iv) & (v)
d) (i), (ii), (iii), (iv) & (v)

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

M/s. Atlanta Airlines, incorporated as a company in USA, operated its flights to India and vice versa 1
XI during the year 2019-20 and collected charges of Rs.280 crores for carriage of passengers and
cargo, out of which Rs.100 crores were received in US Dollars for the passenger fare from Atlanta to
Delhi. Out of Rs.100 crores, US dollars equivalent to Rs.40 crores is received in India. The total
expenses for the year on operation of such flights were Rs.11 crores. The effective rate of income-tax
applicable on total income of M/s. Atlanta Airlines is –

a) 42.432%
b) 43.68%
c) 43.26%
d) 42.024%
Benefit of presumptive taxation under the Income-tax Act, 1961 would not be available to Akash, a 1
XII non-resident, in A.Y. 2020-21, in respect of the related Indian income, if he is engaged in the
business of –

a) Operation of ships
b) Operation of Aircraft
c) Civil construction in connection with an approved turnkey project
d) Plying, hiring or leasing of goods carriages
M/s Beautiful Homes, an interior decorator proprietorship concern, submitted the following details 2
XIII of three years immediately preceding the P.Y. 2019-20.
Previous Year Gross Receipts Income from Total Income
Profession
2016-17 Rs. 1,39,000 Rs. 91,000 Rs. 3,10,000

2017-18 Rs. 2,02,000 Rs. 1,35,000 Rs. 4,07,000

2018-19 Rs. 3,85,000 Rs. 2,49,000 Rs. 6,83,000

Comment upon the applicability of section 44AA and Rule 6F regarding the maintenance of books of
account and documents for P.Y. 2019-20

a) The assessee is required to maintain books of account as per section 44AA(1) as interior
decorator is a notified profession and consequentially under Rule 6F also
b) The assessee is not required to maintain books of account as per section 44AA(1) and hence not
covered under Rule 6F
c) The assessee is required to maintain books of account as per section 44AA(1),but, is exempted
under Rule 6F since his gross receipts do not exceed Rs.1,50,000 in P.Y. 2016-17
d) Rule 6F shall be applicable, even though assessee does not meet the criteria for gross
receipts/income from business/total income, as the case may be, as per section 44AA
Zinc Ltd. owns the following assets on 01.04.2019: 2
XIV Assets Rate of WDV on
Depreciation 01.04.2019
Plant A 15% 4,05,000
Plant B 15% 1,95,000
On 10.06.2019, the company acquires Plant C for Rs. 20,000 (rate of depreciation is 15%). The
company sells the following assets during the previous year 2019-20:
Assets Sale Expenses on
consideration transfer
Plant A 2,00,000 12,000
Plant B 3,72,000 -
Plant C 85,000 200

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

Determine the amount of depreciation and capital gains for the A.Y. 2020-21 in the hands of Zinc
Ltd. Further, is it possible for Zinc Ltd. to avoid tax on capital gains?

a) Depreciation: Nil and Short term capital gain: Rs.24,800. Further, it is not possible for Zinc Ltd.
to avoid tax on capital gains.
b) Depreciation: Rs.93,000 and Short term capital gain: Rs.1,17,800. Further, it is not possible for
Zinc Ltd. to avoid tax on capital gains.
c) Depreciation: Nil and Short term capital gain: Rs. 24,800. Further, Zinc Ltd. can avoid tax on
capital gains if it purchases another plant (eligible for depreciation @15%) during the previous
year 2019-20 of Rs. 24,800 or more.
d) Depreciation: Rs. 93,000 and Short term capital gain: Rs.1,17,800. Further, Zinc Ltd. can avoid
tax on capital gains if it purchases another plant (eligible for depreciation @15%) during the
previous year 2019-20 of Rs.1,17,800 or more
Mr. X took a loan from SBI on 31.03.2011 of Rs.10,00,000. During previous year 2019-20, interest 2
XV actually paid on such loan was Rs.1,00,000. However, the amount of interest unpaid on such loan
from 01.04.2011 upto 31.03.2020 is Rs.2,00,000. As Mr. X was making continuous defaults in
making payment of interest, a restructuring arrangement was entered wherein the unpaid interest
was converted into Funded Interest Term Loan (FITL) which is shown separately from the original
loan and no interest is chargeable on FITL. This converted interest is to be paid 4 annual equal
installments from 01.04.2022. Mr. X is of the view that for A.Y. 2020-21, the following deductions
shall be allowed to him while computing his business income:
• Interest of Rs.1,00,000 on original principal of Rs.10,00,000.
• Converted interest of Rs.2,00,000.
Whether X’s view is correct?

a) Correct, total deduction of Rs.3,00,000 shall be allowed to Mr. X in A.Y. 2020-21.

b) Incorrect, no deduction shall be allowed to Mr. X in A.Y. 2020-21.
c) Partially correct, interest of Rs.1,00,000 shall be fully allowed, however, proportionate amount
of converted interest for the period 01.04.2019 to 31.03.2020 shall be allowed.
d) Incorrect, only deduction of Rs.1,00,000 shall be allowed to Mr. X in A.Y. 2020-21
The total turnover of Sunshine Ltd. during the financial year 2019-20 was Rs.10 crore. It is liable to 2
XVI get its accounts audited u/s 44AB of the Income-tax Act, 1961 by 30.09.2020. However, due to some
disputes between the directors, process of audit of accounts u/s 44AB will not be completed by
30.09.2020. Directors of the company have approached you to know the consequences of not
complying with the provisions of Section 44AB. Which of the following are the consequences of the
said non-compliance?

a) Fine may be charged, which shall be lower of Rs.1,50,000/- or 0.5% of the total turnover.
b) Penalty may be charged, which shall be lower of Rs.1,50,000/- or 0.5% of the total turnover.
c) Fine as per option (a) and imprisonment of directors responsible for the non-compliance.
d) Penalty as per option (b) and imprisonment of directors responsible for the non-compliance
A Pvt. Ltd., an Indian company, is engaged in the business of generation of power. It installed a 2
XVII Wind Power Project on 30.04.2016 and claimed a deduction of 100% of profits derived from
generation of power in A.Y. 2017-18, 2018-19 and A.Y. 2019-20 u/s 80-IA of the Income-tax Act,
1961. During the previous year 2019-20, A Pvt. Ltd. got amalgamated with B Pvt. Ltd. which is also
an Indian company. Determine whether B Pvt. Ltd. shall be eligible to take deduction in respect of
profits/gains from generation of power u/s 80-IA? If yes, then for how many assessment years?

a) Yes, B Pvt. Ltd. shall be eligible to take deduction in respect of profits/gains from generation of
power u/s 80-IA for the unexpired period of 7 consecutive assessment years
b) Yes, B Pvt. Ltd. shall be eligible to take deduction in respect of profits/gains from generation of

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

power u/s 80-IA for a fresh period of 10 consecutive assessment years.

c) No, B Pvt. Ltd. shall not be eligible to take deduction in respect of profits/gains from generation
of power u/s 80-IA as deduction u/s 80-IA is not allowed at all to an amalgamated company.
d) No, B Pvt. Ltd. shall not be eligible to take deduction in respect of profits/gains from generation
of power u/s 80-IA as deduction u/s 80-IA is not allowed to an amalgamated company if the
amalgamation has taken place on or after 01.04.2007
During the P.Y. 2019-20, R & Partners, a partnership firm, purchased the following assets on 2
XVIII 05.05.2019:
 Machine A for Rs.10,00,000 (Rs.5,00,000 paid in cash and balance transferred through
NEFT)
 Machine B for Rs.5,00,000 (Rs.2,00,000 paid through a bearer cheque and balance amount
paid through account payee cheque)
 Machine C for Rs.8,00,000 (Rs.3,00,000 paid through account payee bank draft and balance
amount paid in cash)
 Machine D for Rs.7,00,000 (whole amount transferred through RTGS)
For Machine B, a cash subsidy of Rs.50,000 was received by the firm from the Government. Compute
the total amount of actual cost of the block of machinery in the hands of the firm.

(a) Rs.29,50,000
(b) Rs.18,00,000
(c) Rs.17,50,000
(d) Rs.19,50,000
Z Ltd. purchased a plant for Rs.50,00,000 (depreciation rate: 15%) on 20.05.2019. Before 2
XIX commencement of the commercial production, expenses of Rs.50,000 were incurred by Z Ltd. for
trial run of the plant. What will be the treatment of the expenditure incurred on the said trial run
as per the provisions of ICDS-V which deals with tangible fixed assets?

a) The expenditure of Rs.50,000 is required to be capitalized as the commercial production has not
commenced.
b) The expenditure of Rs.50,000 can be claimed as a revenue expenditure by the company.
c) The expenditure of Rs.50,000 has to be treated as deferred revenue expenditure.
d) No treatment has been provided in ICDS-V in relation to expenditure incurred on trial run by an
assessee
Z Ltd., a company providing telecommunication service, obtains a telecom license on 01.04.2018 for 2
XX a period of 10 years which ends on 31.03.2028 (license fee being Rs.27 lakh). Find out the amount of
deduction allowable to Z Ltd. in respect of such license fee during the A.Y. 2020-21 if the entire
amount of license fee is paid on 01.04.2019.

a) Nil
b) Rs.27 lakh
c) Rs.3 lakh
d) Rs.2.7 lakh
Ms. Neha is a working partner in Ramaiya & Associates. As per the terms of the partnership deed, 2
XXI she is paid a fixed monthly salary of Rs.39,800. In this case, salary of Rs.39,800 shall be charged to
tax in the hands of Neha in which head of income and to what extent?

a) Salaries
b) Profits and gains of business or profession, to the extent of amount allowed to the Firm u/s
40(b).
c) Profits and gains of business or profession, to the extent of amount not allowed to the Firm u/s
40(b).

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

d) Income from other sources

Written down value of 4 machines at the beginning of the previous year 2019-20 forming part of 2
XXII block of assets carrying 15% rate of depreciation was Rs.6,00,000. The following 3 machines of the
same block were bought (not included in WDV above):
Machines Date of Date when put to Cost (Rs.)
Purchase use
A 5.1.19 14.1.2020 50,000
B 5.4.19 15.5.19 1,00,000
C 15.5.19 31.1.2020 2,00,000
Four machines of this block (other than those which were acquired and put to use for less than 180
days) were sold for Rs.4,00,000. Calculate the depreciation for A.Y. 2020-21. Ignore additional
depreciation.

a) Rs.67,500
b) Rs.82,500
c) Rs.60,000
d) Rs.63,750
At the time of computation of taxable income of Star Pvt. Ltd., its tax consultant found that the 2
XXIII company won a lottery of Rs.5 crore on 20.12.2019. Apart from the lottery receipt, there were no
other receipts in the hands of the company during the year 2019-20. The company follows
mercantile system of accounting. The tax consultant was of the view that the income of the
company for A.Y. 2020-21 shall be computed as per the provisions of ICDS IV which deals with
Revenue Recognition. In light of these facts, which of the following statements is true?

a) The view of the tax consultant is correct as for computing the business income or income from
other sources, any revenue is to be recognized as per the provisions of ICDS IV.
b) The view of the tax consultant is incorrect as ICDS IV is not applicable on recognition of lottery
receipts.
c) The view of the tax consultant is correct as for any person following mercantile system of
accounting, all ICDS are to be mandatorily followed for computing income.
d) The view of the tax consultant is incorrect as ICDS are not applicable for FY 2019-20
PQ Ltd. is a company having two units – Unit P carries on specified business of setting up and 2
XXIV operating warehousing facility for storage of agricultural produce and Unit Q carries on
specified business of setting up and operating warehousing facility for storage of edible oil. Unit P
commenced operations on 1.4.2018 and claimed deduction of Rs.120 lakhs incurred in April, 2018
on purchase of two buildings for Rs.70 lakhs and Rs.50 lakhs (for operating warehousing facility
for storage of agricultural produce) under section 35AD for A.Y.2019-20. However, in March,
2020, Unit P transferred its building costing Rs.70 lakhs to Unit Q. What are the tax implications
of such transfer in the hands of PQ Ltd.?
(i) Rs.70 lakhs would be deemed as business income in the hands of PQ Ltd. for A.Y.2020-21
(ii) Rs.63 lakhs would be deemed as business income in the hands of PQ Ltd. for A.Y.2020-21
(iii) Actual cost of building for computing depreciation for P.Y.2019-20 would be Rs.70 lakhs
(iv) Actual cost of building for computing depreciation for P.Y.2019-20 would be Rs.63 lakhs
Which of the above statements are correct?

a) (i) and (iii) above

b) (i) and (iv) above
c) (ii) and (iii) above
d) (ii) and (iv) above
XYZ Ltd. engaged in the business of manufacture of steel, claimed deduction under section 80-IB 2
XXV on the profits and gains of business which included transport subsidy, interest subsidy and power

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

subsidy received from the Government and duty drawback receipts. XYZ Ltd. contended that all the
above receipts are profits derived from the business of the industrial undertaking and are hence,
eligible for deduction under section 80-IB. Is the contention of XYZ Ltd. correct?

a) Yes; transport subsidy, interest subsidy, power subsidy and duty drawback are profits derived
from the business of the industrial undertaking and hence, eligible for deduction under section
80-IB.
b) No; none of the above receipts can be treated as profits “derived” from the business of the
industrial undertaking and hence, deduction under section 80-IB cannot be claimed in respect of
any such receipt.
c) No; transport subsidy, interest subsidy and power subsidy received from Government are
profits derived from the business of the industrial undertaking and hence, eligible for deduction
under section 80-IB. However, duty drawbacks belong to the category of ancillary profits and
hence, deduction under section 80-IB cannot be claimed in respect of such receipt.
d) No; transport subsidy, interest subsidy and power subsidy received from Government are
ancillary profits and hence, deduction under section 80-IB cannot be claimed in respect of
such receipts. However, duty drawbacks are profits derived from the business of the industrial
undertaking and hence, deduction under section 80-IB can be claimed in respect of such receipt
Shipcargo Inc., a company based in Netherlands operating its ships to and fro Cochin port, 2
XXVI collected freight of Rs.85 lakhs, demurrage of Rs.5 lakhs and handling charges of Rs.2 lakhs in
respect of goods shipped at Cochin port. It incurred expenses of Rs.35 lakhs during the year for
operating its fleet. In respect of goods shipped at Rotterdam, Netherlands, it received Rs.50 lakhs in
India. Its tax liability (rounded off) for the A.Y.2020-21 is –

a) Rs.4,21,200
b) Rs.4,43,040
c) Rs.3,12,000
d) Rs.1,77,840
A Inc. and B Inc., incorporated in Country A and Country B, respectively, whose place of effective 2
XXVII management is also in the said countries, are engaged in the business of operation of ships and
aircraft, respectively. The details of receipts etc. during the P.Y.2019-20 are as follows
Particulars A Inc. B Inc.
Amount paid/payable in Mumbai on account of carriage of
passengers:
Shipped from Mumbai port to port in Country A From Rs.20 lakhs Rs.15 lakhs
Mumbai airport to airport in Country B
Amount paid/payable in Country A/B on account of carriage of
passengers:
Shipped from Mumbai port to port in Country A From Rs.5 lakhs
Mumbai airport to airport in Country B Rs.4 lakhs
Amount received/deemed to be received in India on account of
carriage of passengers:
Shipped from port in Country A to Mumbai port From airport Rs.7 lakhs
in Country B to Mumbai airport Rs.8 lakhs
Amount received/deemed to be received in Country A/B on
account of carriage of passengers:
Shipped from port in Country A to Mumbai port From airport Rs.22 lakhs
in Country B to Mumbai airport Rs.18 lakhs
Profit (pertaining to Indian operations) computed as per books Rs.2.20 Rs.1.20
of account maintained by A Inc. and B Inc., after providing the lakhs lakhs
deductions under the Income-tax Act, 1961

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

The profits and gains of business of A Inc. and B Inc. chargeable to tax in India under the Income-
tax Act, 1961 for A.Y.2020-21 is-

a) Rs.2.20 lakhs and Rs.1.20 lakhs, respectively, provided the books of accounts are audited under
section 44AB of the Income-tax Act, 1961
b) Rs.2.025 lakhs and Rs.1.15 lakhs, respectively
c) Rs.2.40 lakhs and Rs.1.35 lakhs, respectively
d) Rs.2.70 lakhs and Rs.3.375 lakhs, respectively
Mr. A who is the tax consultant of X Pvt. Ltd. is computing the income from business of the company 2
XXVIII for A.Y. 2018-19 for determining the tax liability. X Pvt. Ltd. is not liable for tax audit u/s 44AB
during the said year. While computing the business income under the normal provisions of the
Income-tax Act, 1961, Mr. A has duly considered the provisions of the Income Computation and
Disclosure Standards (“ICDS”) wherever applicable. However, Mr. A is confused regarding the
applicability of ICDS while computing book profits for determining the MAT liability of the company
u/s 115JB. Advise Mr. A regarding the same.

a) Provisions of ICDS will not apply while computing “book profits” for the purposes of MAT as
ICDS are applicable only for computation of income under the regular provisions of the Income-
tax Act, 1961.
b) Provisions of ICDS will apply while computing “book profits” for the purposes of MAT as ICDS
are applicable for computing income under the “Profits and gains of business or profession”,
whether computed under the normal provisions or on the basis of book profits under MAT
provisions.
c) Provisions of ICDS will not apply while computing “book profits” for the purposes of MAT as ICDS
are not applicable in the case of an assessee not liable for tax audit.
d) Provisions of ICDS will apply while computing “book profits” for the purposes of MAT as no
exception regarding the same has been carved out in the notification with respect to ICDS
Descriptive Questions
India Green LLP is carrying on two businesses viz. (i) wind power generation; and (ii) solar panels trade and 8
Q. erection. The firm has maintained two separate books of account. The wind power generation was
2 commenced in the financial year 2014-15 and the solar panels trade and erection business in the financial
year 2018-19. The following details are furnished:
i Net Profit from wind generation before deduction under section 80-IA Rs. 55 lakhs.
ii Net Profit from solar panels trade and erection Rs. 30 lakhs before debiting interest on capital and
working partner’s salary.
iii The LLP agreement provides for interest on capital and working partner salary payable only in
respect of solar panels trade and erection. No such payment is permissible out of the income of
wind power generation. The amount of capital of the partners as per partnership agreement in
solar panels trade and erection which is eligible for interest is Rs. 100 lakhs and the LLP agreement
authorizes working partner salary of Rs. 18 lakhs.
iv The LLP has not claimed deduction under section 80-IA so far. There is no unabsorbed depreciation
or business loss brought forward by the LLP from either of the businesses.
v The depreciation on wind mill meant for generation of power claimed so far amounts to Rs. 300
lakhs. The WDV of the wind mill as on 01.04.2019 is to be taken as ‘nil’.
Compute the total income of the LLP for the assessment year 2020-21. Computation should be made in the
manner, most beneficial to the assesse.
ABC & Co. a partnership firm got converted into ABC Co. (P) Ltd. on 01.09.2019. It furnishes you the following 8
Q. details for the year ended 31st March, 2020.
3  Unabsorbed depreciation Rs.15 lakhs relating to assessment year 2014 – 15.
 Business loss Rs. 20 lakhs relating to assessment year 2012-13.

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

 Unadjusted AMT credit Rs.2 lakhs of the assessment year 2019-20.

 Written down value of assets under the Income-tax Act, 1961 [Section 43(6)] :
Plant & Machinery (15%) Rs.20 lakhs (market value Rs. 25 lakhs)
Plant & Machinery cost Rs.50 lakhs – deduction claimed under section 35 AD.
Factory Building (10%) Rs.30 lakhs (market value Rs.50 lakhs)
 Cost of land (acquired in 2010) Rs.50 lakhs (market value Rs.90 lakhs)
 Bad debt written off in assessment year 2015-16 Rs. 8 lakhs. Amount recovered in December 2019
from the debtor Rs.6 lakhs.
Explain the tax treatment of each of the items given above in the hands of the company on the assumption
that all the conditions laid down in section 47(iii) are satisfied.
M/s. ABC Ltd. is engaged in the manufacturing of industrial equipments prepared its financial statements in 4
Q. compliance to the provisions of Companies Act. While computing the taxable income for the assessment year
4 2018-19, arrived with unabsorbed depreciation and missed to file the return of income by the due date as
specified in the provisions of Income Tax Act. In the next assessment year 2020-21 the unabsorbed
depreciation of the assessment year 2018-19 has been adjusted and return was filed within due date. The
Assessing Officer denied to allow the carry forward of depreciation and adjustment as above. Is the Assessing
Officer right in his approach? Explain with reference to provisions of Income Tax Act and decided cases.
Mahavishnu Tea Pvt. Ltd., is engaged in the business of tea as well as development of infrastructural facility 7
Q. (covered by section 35 AD).
5 The company has brought forward business loss of 3 lakhs from tea business and Rs. 4 crores from the
business of infrastructural facility, relating to the AY 2019-20.
During the year ended 31.03.2020, the company has shown a net profit of Rs. 82 lakhs from business of tea in
its books, before current depreciation of Rs. 12 lakhs.
From the infrastructural facility business, it has earned profit of Rs. 2.2 crores.
The company has credited a sum of Rs. 30 lakhs in the share application money on 28- 2-2020, for which it is
unable to explain the source satisfactorily.
Compute the total income of the company for the assessment year 2020-21.
Ms. Janani reports to you that her gross receipt from interior decoration profession carried on by her 6
Q. during the year ended 31-03-2020 is Rs. 47,80,000. Her net income as per income and expenditure
6 account is Rs. 25,00,000 before adjustment of depreciation of Rs. 1,50,000. She did not pay any amount by
way of advance tax during the financial year 2019-20. She has two residential house properties, of which one
is self-occupied for residence and another is let out for the monthly rent of Rs. 15,000 during the financial
year 2019-20.
Is Janani eligible to opt for presumptive tax provisions, if any, under the Income-tax Act, 1961? If so, is it
beneficial for her to opt for such provisions? Advise, assuming that she approached you for consulting on this
matter in April, 2020.
Sigma Ltd., incorporated on 1.4.2017, is a technology enabled eligible start-up engaged in innovation of 4
Q. processes. The company filed its return of income for A.Y.2020-21 after claiming deduction of Rs. 18 lakhs
7 under section 80-IAC. The return was selected for scrutiny. In the assessment, a sum of Rs. 7 lakhs, being
30% of Rs. 21 lakhs, towards payment of fees for professional services was disallowed for non-deduction
of tax at source by invoking section 40(a)(ia). The Assessing Offic er, however, limited the deduction under
section 80-IAC to the original amount claimed by Sigma Ltd. Sigma Ltd. contended that it was eligible for a
higher deduction of Rs. 25 lakhs under section 80-IAC consequent to disallowance under section 40(a)(ia).
Examine the correctness of contention of Sigma Ltd.
Q. Mr. Prem commenced operations of the businesses of setting up a warehousing facility for storage of food 10
grains, sugar and edible oil on 1.4.2019.
8

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

Food Sugar Edible

Particulars grains Oil
Rs. in lakhs
(1) Profits from business (computed) before allowing 125 60 30
deduction under section 35AD/section 32
(2) Capital expenditure on land and building purchased 120 90 75
exclusively for the business (January 2019 - March
2019) and capitalized in the books of account as on
1st April, 2019
(3) Cost of land included in (2) above 75 60 45
(4) Capital expenditure incurred during P.Y.2019-20 on 30 20 10
extension/reconstruction of building purchased and
used exclusively for the business
Compute Mr. Prem’s total income and tax liability for the A.Y.2020-21, assuming that Mr. Prem does not have
any income other than income from the above businesses.
Anamika Builders and Constructions Ltd., a company resident in India is engaged in the business of 14
Q. construction and real estate. Net profit as per profit and loss account is Rs.54,80,000 (prepared in
9 accordance with ICDS) after debiting/crediting the following items:
i Depreciation debited to books Rs.8,47,000.
ii Gross revenue includes Rs.5,00,000 in respect of a service contract for maintenance of the office
building for Nitup Ltd. for the period from 1st March, 2020 to 30th April, 2020. The expenses
incurred on the project till 31-3-2020 amounts to Rs.1,27,000 which is included in other expenses.
iii The amount of employee benefits include a sum of Rs.4,41,000 in respect of bonus payable to
employees. In the previous year 2019-20, the company and its employee's union had a dispute over
payment of bonus. In order to avoid late payment of bonus, the company formed a trust and
transferred the amount of bonus payable to employees to the said trust. The dispute was settled
in the month of November, 2020 and the trust paid the amount of bonus to the employees on 30th
December, 2020;
iv Capital gains on sale of shares in Yara Ltd.Rs.3,77,500.
v In respect of one of its on-going projects, the assessee had made some structural changes contrary
to what was earlier approved by the municipal authorities. Assessee hence paid a sum of Rs.98,000
as regularization fee in respect of such changes made in the construction plan.
vi Other expenses include Rs.1,45,000 as expenditure incurred on CSR.
vii During the previous year 2019-20, the assessee company decided to expand its business and open a
retail petrol out let. Accordingly, a sum of Rs.1,75,000 was deposited with the concerned authority.
However, the assessee could not start this operation and the deposit with the authority was
forfeited. Amount paid for advertisement in political parties' brochure Rs.48,000
viii During the previous year 2019-20, the assessee entered into an agreement with Bat Ltd. As per the
agreement, Bat Ltd. has agreed to not to engage in the business of real estate trading. The assessee
paid Rs.11 lakhs without deduction of tax at source on 1-6-2019 as non-compete fee.

Additional Information:
(i) Depreciation as per Income-tax Act, 1961 Rs.5,14,000. This includes an amount of Rs.78,000 in
respect of fire fighting equipments installed in various business premises/ offices of the assessee.
During the year, as there were no incidence of fire, these equipments were not used.
(ii) On 26th October, out of 5 unsold office spaces in a mall, the assessee converted one such space into
its own office. The fair market value of that space as on that date was Rs.15,00,000. The cost
incurred originally to construct such space was Rs.10,00,000.
(iii) In respect of ongoing construction contracts, there was a claim for escalation of prices, to the tune

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

of Rs.8,50,000. The company had filed a lawsuit in the year 2018. In the previous year 2019-20, the
court gave its judgement in favour of the company. The company has received Rs.2,00,000 till 31-
03-2020. Gross receipt in the profit and loss account includes Rs.2,00,000 in respect of such claims.
(iv) The assessee held 250 shares in Yara Ltd. On 1-4-2017, Y Ltd. allotted bonus shares in the ratio of 1
: 1. The company sold all the shares in Yara Ltd. on 24th September 2019 for Rs.2,050 per share.
The company had acquired the original shares for Rs. 540 on 23-06- 2015. The fair market value of
the shares as at 31st January 2018 was Rs.1,980 per share.
You are required to compute the total income chargeable to tax in the hands of Anamika Builders and
Constructions Ltd., for the Assessment Year 2020-21 giving a brief explanation to each item of additions or
deletions. Ignore provisions of MAT.
In this question for each adjustment 2 marks will be allotted.
Q.
10 Alpha Ltd. is engaged in commercial production of Mineral Oil. It claimed deduction u/s 80IB in respect of
profit and gains derived by it from such business. Its Statement of Profit and Loss for the previous year ended
on for the previous year ended on 31st March, 2020 shows a profit of Rs. 750 lakhs after debiting or crediting
the following items:
(1) Industrial power tariff concession of Rs. 4.80 lakhs, received from Maharashtra State Government
was credited to Statement of profit and loss.
(2) The company had provided Rs. 18 lakhs being sum fairly estimated as payable with reasonable
certainty, to workers on agreement to be entered with the workers union towards periodical wage
revision once in every three years.
(3) Dividend received from -
a) US company - Rs. 12 Lakhs.
b) Gama Limited - Rs. 10,000 on 1,000 equity shares of Rs. 10 each purchased at Rs. 100
per share on 10th October, 2019. The rate of dividend declared is 100%, the record date
being 10th December, 2019. The shares were sold on 1st March, 2020 at Rs. 80 per
share.
c) Subsidiary Indian company credited to Profit and Loss Account Rs. 2,00,000.
d) Foreign company in which the assessee company holds 26% shares Rs. 8 lakhs.
(4) Loss Rs. 17 lakhs, due to destruction of a machine worth Rs. 24 lakhs by fire due to short circuit
and Rs. 3 lakh received as scrap value. The insurance company did not admit the claim of the
company on charge of gross negligence.
(5) Provision for gratuity based on actuarial valuation was Rs. 320 lakhs. Actual gratuity paid debited
to gratuity provision account was Rs. 180 lakhs.
(6) The company has purchased 1000 bales of raw cotton at a price of Rs. 20,000 per bale from M/s.
Omicron, a firm in which majority of the directors of Alpha Ltd. are partners. The firm's normal
selling price of the same material in market is Rs. 18,000 per bale.
(7) Long term capital gain Rs. 3 lakhs on sale of equity shares on which Securities Transaction Tax
(STT) was paid at the time of acquisition and sale.
(8) One-time license fee of Rs. 32 lakh paid to ABC Ltd (an Indian company) for obtaining franchise on
1st June, 2019.
(9) Rs. 32,000 paid to Beta & Co., a goods transport operator, in cash on 31st January, 2020 for
carrying company’s products to the warehouse.
(10) Rent of Rs. 50,000 p.m. received from letting out a part of its office premises. Municipal tax in
respect of the said part of the building is Rs. 8,000 remains unpaid due to court litigation.
(11) Donation for Scientific Research –
a) Rs. 1 lakh, being contribution to a scientific research association approved and notified
under section 35(1)(ii).
b) Rs. 1 lakh to Dalmia Research Centre Ltd. which is engaged in approved scientific research.
(12) Rs. 5 lakh paid to a contractor for repair work at the company’s factory. No tax was deducted on
such payment.

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

(13) Amount received towards Dharmadha by separately mentioning in the sales bills Rs. 7,00,000. This
has not been credited to Profit and Loss Account.
(14) Rs. 10 lakhs was paid towards use of trademark for 10 years in April, 2019. This has been debited
to Profit and Loss Account.
(15) Rs. 5,00,000 was paid towards feasibility study for examining proposals for commencing a textile
business and the project was abandoned.
(16) Rs. 50,000 paid as secret commission to a Government department official, an unidentified person.
The payment has been approved by the Board as a normal trade practice.
(17) Rs. 2 lakhs incurred towards issue of convertible debentures, the debentures being convertible into
equity shares after one year from the date of issue.
(18) Rs. 1 lakh paid to a local gang for rescuing an executive director who was kidnapped.
(19) Non-compete fee paid to –
a) an ex-director Rs. 10,00,000 on 10.12.2019 and no tax was deducted at source.
b) DEF Ltd for not marketing their products in North- Eastern States Rs. 10 lakhs. The non-
complete agreement bars DEF Ltd for a period of 5 years ending 31.03.2024. No tax was
deducted at source on the said payment.
(20) One employee who was employed only upto December 2019 was paid salary ofRs. 5,00,000 and on
which no tax was deducted at source. The whereabouts of the employee is not known and it is not
possible to ascertain whether he has admitted and paid income tax on such salary income.
(21) Rs. 11,50,000 was incurred towards sponsoring of higher studies of a director's son in United
Kingdom.
(22) Rs. 15,00,000 was incurred on glow-sign boards displayed at dealer outlets and on which
depreciation at 15% was claimed.
(23) One factory in Meerut was closed and a sum of Rs. 12,00,000 was paid as retrenchment
compensation to employees on its closure.
(24) The company made cash payment for purchases on 05.06.2019 (bank holiday) Rs. 2,00,000.
(25) A bad debt write off in Financial Year 2016-17 of Rs. 5,00,000 was allowed in the
assessment. Rs. 2,00,000 was recovered this year and is credited to general reserve.
(26) Cash payment of Rs. 80,000 to a transporter on 04.06.2019 and who furnished his PAN.
(27) GST of Rs. 1,50,000 for the Financial Year 2018-19 was paid on 10.02.2020.
(28) Rent paid Rs. 2,40,000 inclusive of GST of Rs. 28,000. Tax was not deducted on the GST on
rent paid.
(29) Expenditure towards alteration of Memorandum of Association for increase in authorized share
capital Rs. 1 lakh. Legal expenses for issue of bonus shares Rs. 5,00,000. Paid Rs. 2 lakhs to
Registrar of Companies as fee for issue of bonus shares.
(30) Donation paid to a political party Rs. 4,50,000 by cheque and Rs. 2,70,000 by cash.
(31) Expenditure incurred towards complying with Corporate Social Responsibility obligation under the
Companies Act, 2013 Rs. 3 lakhs.
(32) A building was constructed on the leasehold land for Rs. 30 lakhs and it was completed on
30.11.2019. The lease agreement is for 3 years and after the lease period, the building must be
handed over to the lessor.
(33) The company introduced VRS scheme during the financial year 2017-18 and paid Rs. 60 lakhs as
VRS compensation. The company transferred the entire unamortized amount of Rs. 24 lakhs to
statement of profit and loss.
(34) Cost of EPABX and mobile phones acquired on 01.06.2019 for use by executives Rs. 10 lakhs.
Depreciation @ 60% was charged in the books.
(35) Compounding fee paid for violation of municipal laws in construction of buildings Rs. 1,20,000.
(36) Royalty from patent developed by the company credited to Statement of profit and loss Rs. 22
lakhs.
(37) The company, during the year has spent Rs. 4 crores towards replacing the existing celling of a
building which was in a very bad state. It debited the same as repair & maintenance.

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 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

(38) The company debited to its profit & loss account a sum of Rs. 6,00,000, being the interest on loan of
Rs. 60,00,000 taken for financing its expansion scheme. The plant and machinery purchased for the
project with the loan were not received during the year and those were still in transit at the end of
the year.

Additional Information:
a) GST Rs. 8 lakhs collected from its customers was paid by the company on the due dates. On an
appeal, the High Court directed the GST department to refund Rs. 3 lakhs to the company. The
company in turn refunded Rs. 2 lakhs to the customers from whom it was collected and the
balance Rs. 1 lakh is still lying under the head "Current Liabilities".
b) The company has obtained a loan of Rs. 2 lakh from Theta Private Limited in which it holds 16%
voting rights. The accumulated profits held by Theta Private Limited on the date of loan were Rs.
0.50 lakh.
Compute the total income for AY 2020-21.
Examine the taxability in light of the following grants received in light of ICDS and provisions of Act: 2
Q. a. Amount received towards power subsidy with a stipulation that the same is to be adjusted in the
11 electricity bills
b. Amount received from CG for the industrial promotion and expansion of capacity of plant
RS Pvt Ltd, a Company engaged in BPO services, has set up a unit in rural sector. The state government has 2
Q. agreed to provide subsidy for generating rural employment amounting to Rs. 20 lakhs in a phased manner
12 for 2 years. The said Company has credited to Profit & Loss Account a sum of Rs. 10 lakhs and fulfilled the
conditions.
Whether the treatment provided is in accordance with ICDS-VII?
The following are the details pertaining to M/s. Aravali, a partnership firm, for the year ended 31-3-2020: 7
Q. (i) Gross total income of Rs. 600 lakhs, which includes a profit of Rs. 550 lakhs from an undertaking
13 engaged in an irrigation project.
(ii) The profits of the undertaking are eligible for deduction under section 80-IA. This is the third year
and the deduction available is Rs. 510 lakhs.
(iii) The firm has undertaken “specified domestic transactions” referred to in section 92BA during the said
year and has to obtain a report from an accountant under section 92E and furnish such report.
Since M/s. Aravali wishes to seek opinion of tax consultants in relation to certain issues before filing its return
of income, it is planning to file its return of income only in the month of March, 2021. Advise M/s. Aravali
the right course of action. You may ignore interest under section 234A, 234B, 234C and 234F while making
your computations in support of your advice.

14
 CA Final Direct Tax Laws and International Taxation (Paper – 7) Mock Test Series - 4

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