CONTENTS
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
PART I: DIRECT TAX LAWS (70 Marks)
Chapter No. Chapter Name Page No.
1 Basic
... [Show More] Concepts 1.1 – 1.4
2 Residence and Scope of Total Income 2.1
3 Incomes which do not form part of Total Income 3.1 – 3.10
6 Profits and Gains of Business or Profession 6.1 – 6.82
7 Capital Gains 7.1 – 7.38
8 Income from Other Sources 8.1 – 8.15
9 Income of Other Persons included in assessee Total Income 9.1 – 9.9
10 Set-off and Carry forward of Losses 10.1 – 10.10
11 Deductions from Gross Total Income 11.1 – 11.22
12 Assessment of Various Entities 12.1 – 12.33
13 Charitable Trusts, Political Parties and Electoral Trusts 13.1 – 13.27
14 Tax Planning, Tax Avoidance & Tax Evasion 14.1 – 14.11
15 Deduction, Collection and Recovery of Tax 15.1 – 15.36
16 Income-tax Authorities 16.1 – 16.5
17 Assessment Procedure 17.1 – 17.19
18 Appeals and Revision 18.1 – 18.8
19 Settlement of Tax Cases 19.1 – 19.6
20 Penalties 20.1 – 20.10
21 Offences and Prosecution 21.1 – 21.2
22 Liability in Special Cases 22.1 – 22.4
23 Miscellaneous Provisions 23.1 – 23.7
PART II: INTERNATIONAL TAXATION (30 Marks)
1 Transfer Pricing 1.1 – 1.20
2 Non-resident Taxation 2.1 – 2.40
3 Double Taxation Relief 3.1 – 3.19
4 Advance Rulings 4.1 – 4.4
5 Equalisation Levy 5.1 – 5.6
6 Application and Interpretation of Tax Treaties 6.1 – 6.5
7 Fundamentals of BEPS 7.1 – 7.6
8 Overview of Model Tax Conventions 8.1 – 8.2
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
PART - I
DIRECT TAX LAWS
(70 Marks)
CHAPTER - 1
Basic Concepts
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.1
Section A – ICAI Study Material Questions
Question 1
Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to accept
briefs only for paying his taxes and making charities with the fees received on such briefs. In a
particular case, he agreed to appear to defend one company in the Supreme Court on the condition
that he would be provided with ₹ 5 lacs for a public charitable trust that he would create. He
defended the company and was paid the sum by the company. He created a trust of that sum by
executing a trust deed. Decide whether the amount received by Mr. Bhargava is assessable in his
hands as income from profession.
Answer
In the instant case, the trust was created by Mr. Bhargava himself out of his professional income.
The client did not create the trust. The client did not impose any obligation in the nature of a trust
binding on Mr. Bhargava. Thus, there is no diversion of the money to the trust before it became
professional income in the hands of Mr. Bhargava. This case is one of application of professional
income and not of diversion of income by overriding title. Therefore, the amount received by Mr.
Bhargava is chargeable to tax under the head “Profits and gains of business or profession”.
Question 2
XYZ Ltd. took over the running business of a sole-proprietor by a sale deed. As per the sale deed,
XYZ Ltd. undertook to pay overriding charges of ₹ 15,000 p.a. to the wife of the sole-proprietor in
addition to the sale consideration. The sale deed also specifically mentioned that the amount was
charged on the net profits of XYZ Ltd., who had accepted that obligation as a condition of purchase
of the going concern. Is the payment of overriding charges by XYZ Ltd. to the wife of the soleproprietor in the nature of diversion of income or application of income? Discuss.
Answer
This issue came up for consideration before the Allahabad High Court in Jit & Pal X-Rays (P.) Ltd. v.
CIT (2004) 267 ITR 370 (All). The Allahabad High Court observed that the overriding charge which
had been created in favour of the wife of the sole-proprietor was an integral part of the sale deed
by which the going concern was transferred to the assessee. The obligation, therefore, was
attached to the very source of income i.e. the going concern transferred to the assessee by the sale
deed. The sale deed also specifically mentioned that the amount in question was charged on the net
profits of the assessee-company and the assessee-company had accepted that obligation as a
condition of purchase of the going concern. Hence, it is clearly a case of diversion of income by an
overriding charge and not a mere application of income.
Question 3
MKG Agency is a partnership firm consisting of father and three major sons. The partnership deed
provided that after the death of father, the business shall be continued by the sons, subject to the
condition that the firm shall pay 20% of the profits to the mother. Father died in March, 2020. In
the previous year 2020-21, the reconstituted firm paid ₹ 1 lakh (equivalent to 20% of the profits)
to the mother and claimed the amount as deduction from its income. Examine the correctness of
the claim of the firm.
Basic Concepts
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.2
Answer
The issue raised in the problem is based on the concept of diversion of income by overriding title,
which is well recognised in the income-tax law. In the instant case, the amount of ₹ 1 lakh, being
20% of profits of the firm, paid to the mother gets diverted at source by the charge created in her
favour as per the terms of the partnership deed. Such income does not reach the assessee-firm.
Rather, such income stands diverted to the other person as such other person has a better title on
such income than the title of the assessee. The firm might have received the said amount but it so
received for and on behalf of the mother, who possesses the overriding title. Therefore, the
amount paid to the mother should be excluded from the income of the firm. This view has been
confirmed in CIT vs. Nariman B. Bharucha & Sons (1981) 130 ITR 863 (Bom).
Question 4
Anand was the Karta of HUF. He died leaving behind his major son Prem, his widow, his
grandmother and brother’s wife. Can the HUF retain its status as such or the surviving persons
would become co-owners?
Answer
In the case of Gowli Buddanna v. CIT (1966) 60 ITR 293, the Supreme Court has made it clear that
there need not be more than one male member to form a HUF as a taxable entity under the Incometax Act, 1961. The expression “Hindu Undivided Family” in the Act is used in the sense in which it is
understood under the personal law of the Hindus.
Under the Hindu system of law, a joint family may consist of a single male member and the widows
of the deceased male members and the Income-tax Act, 1961 does not mandate that it should
consist of at least two male members. Therefore, property of a joint Hindu family does not cease to
belong to the family merely because the family is represented by a single co-parcener who
possesses the right which an owner of property may possess.
Therefore, the HUF would retain its status as such.
Question 5
Mr. C borrowed on Hundi, a sum of ₹ 25,000 by way of bearer cheque on 11-09-2020 and repaid the
same with interest amounting to ₹ 30,000 by account payee cheque on 12-10-2020. The Assessing
Officer (AO) wants to treat the amount borrowed as income during the previous year. Is the action
of AO valid?
Answer
Section 69D provides that where any amount is borrowed on a hundi or any amount due thereon is
repaid otherwise than by way of an account-payee cheque drawn on a bank, the amount so
borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the
amount for the previous year in which the amount was so borrowed or repaid, as the case may
be.
In this case, Mr. C has borrowed ₹ 25,000 on Hundi by way of bearer cheque. Therefore, it shall be
deemed to be income of Mr. C for the previous year 2020-21. Since the repayment of the same
along with interest was made by way of account payee cheque, the same would not be hit by the
provisions of section 69D. Therefore, the action of the Assessing Officer treating the amount
borrowed as income during the previous year is valid in law.
Basic Concepts
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.3
Question 6
The Assessing Officer found, during the course of assessment of a firm, that it had paid rent in respect
of its business premises amounting to ₹ 60,000, which was not debited in the books of account for
the year ending 31.3.2021. The firm did not explain the source for payment of rent. The Assessing
Officer proposes to make an addition of ₹ 60,000 in the hands of the firm for the assessment year
2021-22. The firm claims that even if the addition is made, the sum of ₹ 60,000 should be allowed as
deduction while computing its business income since it has been expended for purposes of its
business. Examine the claim of the firm.
Answer
The claim of the firm for deduction of the sum of ₹ 60,000 in computing its business income is not
tenable. The action of the Assessing Officer in making the addition of ₹ 60,000, being the payment of
rent not debited in the books of account (for which the firm failed to explain the source of payment)
is correct in law since the same is an unexplained expenditure under section 69C. The proviso to
section 69C states that such unexplained expenditure, which is deemed to be the income of the
assessee, shall not be allowed as a deduction under any head of income. Therefore, the claim of the
firm is not tenable.
Basic Concepts
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.4
Section B – Additional Questions
Question 7
MNO Limited is engaged in manufacturing activities. It received liquidated damages of ₹ 10 lakh from
supplier of machinery due to delay in supply of machinery. State, with reasons whether or not the
income by way of liquidated damages is a revenue receipt subject to income-tax.
Answer
The issue under consideration in this case is whether the liquidated damages received by a company
from the supplier of machinery for delay in supply of machinery is revenue in nature.
On this issue, the Apex Court, in the case of CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422, held
that such liquidated damages were directly and intimately linked with the procurement of a capital
asset which lead to delay in coming into existence of the profit- making apparatus. It was not a
receipt in the course of profit earning process. Therefore, the amount received by the assessee
towards compensation for sterilization of the profit earning source, not in the ordinary course of
business, is a capital receipt in the hands of the assessee.
Applying the rationale of the above Apex Court ruling in this case, the income by way of liquidated
damages of ₹ 10 lakh received by MNO Ltd. from the supplier of machinery is a capital receipt.
Question 8
In the course of scrutiny assessment of Mr. X, the Assessing Officer, on the basis of information
available with him, sought an explanation for the source of the expenditure of ₹ 20 lakhs incurred on
the wedding of his daughter. The said expenditure was neither recorded in the books of account
maintained nor was the explanation offered by Mr. X satisfactory. What are the consequences?
Answer
If any expenditure is incurred by an assessee in any financial year in respect of which he is not able to
offer explanation about the source of such expenditure or the explanation offered by him is not
satisfactory in the opinion of the Assessing Officer, then the amount of such unexplained expenditure
may be deemed as income of the assessee for such financial year as per section 69C.
Therefore, in this case the expenditure of ₹ 20 lakhs incurred by Mr. X on the wedding of his
daughter may be deemed as income of Mr. X as per section 69C.
Further, such unexplained expenditure which is deemed as the income of Mr. X shall not be allowed
as deduction under any head of income.
Where the total income of Mr. X includes such unexplained expenditure of ₹ 20 lakhs, which is
deemed as his income under section 69C, such deemed income would be taxed at the rate of 60% as
per section 115BBE (plus surcharge 25%, education cess@4%)
Further, no basic exemption or allowance or expenditure shall be allowed to Mr. X under any
provision of the Income-tax Act, 1961 in computing such deemed income.
CHAPTER - 2
Residence and Scope of Total Income
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 2.1
ALL QUESTIONS OF THIS CHAPTER ARE COVERED IN
CHAPTER 2 NR TAXATION (PART II – INTERNATIONAL
TAXATION)
CHAPTER - 3
Incomes which do not form part of Total Income
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 3.1
Section A – ICAI Study Material Questions
Question 1
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
30% of sugarcane produce is sold for ₹ 10 lacs, and the cost of cultivation of such sugarcane is ₹ 5
lacs. The cost of cultivation of the balance sugarcane (70%) is ₹ 14 lacs and the market value of the
same is ₹ 22 lacs. After incurring ₹ 1.5 lacs in the manufacturing process on the balance sugarcane,
the sugar was sold for ₹ 25 lacs. Compute B’s business income and agricultural income.
Answer
Computation of Business Income and Agriculture Income of Mr. B
Particulars Business
Income
Agricultural Income
(₹) (₹) (₹)
Sale of Sugar
Business income
Sale Proceeds of sugar 25,00,000
Less: Market value of sugar (70%) 22,00,000
Less: Manufacturing exp. 1,50,000
1,50,000
Agricultural income
Market value of sugar (70%) 22,00,000
Less: Cost of cultivation 14,00,000
Sale of sugarcane
8,00,000
Agricultural Income
Sale proceeds of sugarcane (30%) 10,00,000
Less: Cost of cultivation 5,00,000
5,00,000
13,00,000
Question 2
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the
market for ₹ 30 lacs. The cost of growing rubber plants is ₹ 10 lacs and that of manufacturing latex
is ₹ 8 lacs. Compute his total income.
Answer
The total income of Mr. C comprises of agricultural income and business income.
Total profits from the sale of latex = ₹ 30 lacs – ₹ 10 lacs – ₹ 8 lacs = ₹ 12
lacs. Agricultural income = 65% of ₹ 12 lacs = ₹ 7.8 lacs
Business income = 35% of ₹ 12 lacs = ₹ 4.2 lacs
Incomes which d [Show Less]