Suggested Answers to Questions PDF

 SUGGESTED ANSWERS TO QUESTIONS SECTION – A 1. (i) (C) (ii) (D) (iii) (A) (iv) (B) (v) (B) (vi) (B) (vii) (D) (viii) (C) (ix) (D) (x)...

 SUGGESTED ANSWERS TO QUESTIONS SECTION – A 1. (i) (C) (ii) (D) (iii) (A) (iv) (B) (v) (B) (vi) (B) (vii) (D) (viii) (C) (ix) (D) (x) (B) (xi) (A) (xii) (A) SECTION – B 2. (a) Income chargeable under the head “Profits and gains of business or profession” of Radhe Private Ltd. For the AY 2023-24 = D 11,25,000 2. (b) (i) Tax liability C 1,53,440 (ii) Tax liability D 1,92,400 3. (a) Power of Survey under section 133B The income-tax authority (being Joint Commissioner, Assistant Director, Deputy Director, Assessing Officer, authorized Inspector) may, for the purpose of collecting any information, which may be useful for, or relevant to the purposes of this Act: a) Enter into —  Any building or place within the limits of the area assigned to such authority; or  Any building or place occupied by any person in respect of whom he exercises jurisdiction, -where a business or profession is carried on. Require any proprietor, employee or any other person who may at that time and place be attending or helping in such business or profession to furnish such information as may be prescribed. Time for Entrance: An Income-tax authority may enter into such place only during the hours at which such place is open for the conduct of business or profession. Restriction on Income-tax Authority An income-tax authority shall not remove any books of account or other documents, cash, stock or other valuable article or thing. Therefore, in the light of above provisions,  The assessee is located within the jurisdiction of the AO; hence there is no fault on this score; 1   Entering the business premises of the assessee during the business hours is valid, and  Taking custody of books of accounts by AO is restricted. So, AO cannot take custody of books of accounts of M/s Ravindar Enterprises. 3. (b) Advance ruling (i) Time limit for withdrawal of Advance ruling As per section 245Q, an application for advance ruling can be withdrawn within 30 days from the date of the application. Hence Hats LLP cannot withdraw on 14.04.2023, the application filed by it on 12.01.2023. (ii) Advance ruling seeking determination of FMV of a property – validity The Board for Advance Ruling (BAR) has been conferred certain powers in respect of admitting an application filed before it. It is specifically stated that BAR cannot admit an application seeking determination of he FMV of any property. Hence it is not possible for Hats LLP to seek advance ruling in this regard. 3. (c) Ascertaining existence of AE (i) Where one enterprise holds directly or indirectly not less than 26% of the voting power (equity shares in the case of company) at any time during the previous year in the other enterprise they are deemed associated enterprises. In this case, Brearly Ltd, UK had 27% of voting power up to January, 2022 in Federicks (P) Ltd. After private placement of shares by Federicks (P) Ltd, the shareholding of Brearly Ltd got reduced to 23%.If the shareholding at any time during the previous year was not less than 26% of the voting power they are deemed to be associated enterprises. In this case, for fraction of the year the shareholding was 27% i.e. from April, 2021 to January, 2022. Therefore, they are deemed AEs. (ii) Clive Inc. USA has 60% share in Gower Ltd of UK (not less than 26%). The company Gower Ltd has 40% voting rights in Crowe Ltd. The relationship between Gower Ltd and Grower Ltd is that of AE. However, the indirect voting rights of Clive Inc. in Crowe Ltd is 60% of 40% (held by Gower Ltd) which is 24%. Therefore, Clive Inc. and Crowe Ltd are not deemed to be associated enterprises. [Section 92A (2) (a) not satisfied] (iii) When the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise and the price and conditions relating thereto are decided by such other enterprise, they are deemed to be PEs. In this case, Kapil Ltd is the exclusive wholesale distributor of medicines in India manufactured by Greig Ltd of UK. The price and other conditions are decided by Greig Ltd. Therefore, they are deemed to be associated enterprises. [Section 92A(2)(i)] 4. (a) Additions which would be treated as under-reported income. They are five additions to the income returned by Harshal Ltd. Each of the additions which would be falling in the category of under-reported income needs to be verified. Estimated disallowance by Assessing Officer: As per section 270A(6)(c) where the assessee has estimated the disallowance of expenditure and the Assessing Officer has estimated higher amount, then such disallowance of expenditure on estimate basis is not liable for penalty as under-reporting of income. Estimated income by assessee, enhanced by Assessing Officer: 2 Where the assessee has estimated the income and the Assessing Officer has also estimated but higher amount such addition is not liable for penalty as under-reporting of income. Failure to explain the nature of expenditure: Where the assessee could not explain the nature of expenditure then such amount when added to the income of the assessee it amounts to under-reporting of income. Increase in income due to ALP: Where any addition is made in conformity with the ALP determined by the TPO and the assessee has maintained information and documents and declared the international transaction under Chapter X, it is not to be treated as under-reported income. Incorrect claim of depreciation: Where the assessee has claimed depreciation excessively such excess claim of expenditure would tantamount to under-reporting of income. Seeking immunity from penalty in respect of under-reported Income: The assessee in respect of whom addition is made and such addition is treated as under-reported income must use section 270AA which is as under: The assessee must pay the tax and interest as per the order of assessment within the period specified in the notice of demand. The assessee must not make an appeal against the aforesaid assessment order. The application for immunity from penalty in Form 68 must be filed within one month from the end of the month in which the said order was received. The Assessing Officer shall on fulfillment of the aforesaid conditions and after the expiry of the period of filing the appeal to CIT (Appeals), grant immunity from imposition of penalty under section 270A and initiation of proceedings under sections 276C /276CC where no proceedings for levy of penalty under section 270A was initiated due to mis-reporting of income. The Assessing Officer shall within one month from the end of the month in which the application for waiver of penalty is received, pass an order accepting or rejecting such application. The order so passed in this regard is final. 4. (b) Amount liable for disallowance under section 92B (EBITDA) The amount of EBITDA is Rs. 11.50 crore. The amount eligible for deduction shall be 30% of EBITDA being Rs. 3.45 crore. The interest determined as ALP is Rs. 5.50 crore. The interest liable for disallowance would be Rs. 2.05 crore. Quantum od secondary adjustment The amount of interest debited in the books Rs. 7 crore. The amount of interest allowable in view of ALP is Rs. 5.50 crore. The excess interest is liable for secondary adjustment. The secondary adjustment = Rs. 1.50 crore. Additional income-tax in lieu of secondary adjustment: When the assessee could not repatriate the amount of secondary adjustment from the non-resident AE it can pay tax @ 20.9664%. In such case, no secondary adjustment is required. The amount of tax payable would be = Rs.31,44,960. 5. (a) Tax liability of Chaturvedi for the A.Y. 2023-24 Regular Provision Sec.115BAC Total Income 5,40,000 9,50,000 Tax thereon 20,500 67,500 Add: HEC @ 4% 820 2,700 21,320 70,200 3 5. (b) Undisclosed foreign asset under the Black Money Act Rs. in lakhs The amount of undisclosed asset value 180.00 Tax thereon @ 30% 54.00 Time limit for assessment 2 years from the end of the financial year in which the notice under section 10 was issued. Notice issued in June, 2022 and therefore the time limit for completion of assessment under the Black Money Act would be 31st March, 2025. 5. (c) Meaning of PE: Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Once a PE exists, the income of the PE would be chargeable to tax as business income of the foreign company. (a) Establishing a branch in India would amount to location of PE in India. (b) Incorporating a subsidiary company in India would not lead to location of PE in India if the subsidiary company carries on business as a legal entity separate from the parent company located outside India. (c) Opening a liaison office by obtaining permission from RBI would not lead to location of PE in India. However, if the liaison office breaches the conditions issued in the permission of RBI then it would turn into PE. (d) Appointing an exclusive agent to market the products with the terms and conditions of trade decided by foreign company, then being a dependent agent, would lead to location of PE in India. (e) Locating a machinery in India with supervisor (employee of foreign company) even if located within the premises of Indian tenant company would lead to location of PE in India. 6. (a) Issues in demerger (i) Transfer of undertaking under a scheme of demerger by an Indian company to a resulting Indian company is not regarded as transfer as per section 47(vib). Therefore, the transaction of demerger is tax neutral both for Parikshit Ltd and Kota Ltd. (ii) When a shareholder transfers shares on demerger held in an Indian company to the resulting Indian company is not a transfer as per section 47(vic). Therefore, the transfer of shares by Burman of Parikshit Ltd in exchange for shares of Kota Ltd will not lead to any capital gain in his hands. (iii) Subsequent sale of shares of Kota Ltd by Burman is liable for Long-term capital gain ` 20,07,000 Note: As per section 2(42A)(g), in the case of capital asset being shares in an Indian company which become property in consideration of a demerger, there shall be included the period for which the shares in demerged company were held by the assessee. (iv) Sale of shares of resulting company by the shareholder of the demerged company will not have any tax implication in the hands of both demerged company and resulting company. 6. (b) Interest on delayed remittance of Equalisation Levy (EL) = C 20,400 Levy of Penalty Penalty for failure to pay tax is Rs.100 per day during which the failure continues subject to maximum of the amount failed to pay. Penalty for failure to furnish quarterly statement is liable for penalty of Rs.100 for every day during which the failure continues. Hence, the penalty would be Rs.7,200 (section 171(b) of the Finance Act, 2016) 4 6. (c) Deciding the most appropriate method for determination of ALP and computation of ALP When the prices charged between comparable transactions of which one is controlled and the other is uncontrolled and where the price could be adjusted between the transactions, Comparable Uncontrolled Price Method (CUP) would be the most appropriate method. Purchase price of mobile phone sold by unrelated party 12,000 Adjustment for functional differences: Add: Quantity discount - difference 500 Credit period interest @2% on Rs.12,000 240 Cost of warranty 260 Arm‟s length price 13,000 Purchase price from AE 15,000 Amount to be added per unit 2,000 No. of units purchased from AE 24000 units @ Rs.2000 = Rs. 480 lakhs is the amount to be adjusted. 7. (a) (i) Power to withhold refund: An Assessing Officer may, for reasons to be recorded in writing and with the previous approval of PCIT / CIT, withhold the refund due to the assessee under section 143(1) up to the date on which the assessment under section 143(3) is made. This power to withhold refund could be made where the Assessing Officer is of the opinion that the grant of refund is likely to adversely affect the Revenue. (ii) Enquiry before issuing notice under section 148: The Assessing Officer shall, before issuing any notice under section 148 (a) Conduct an enquiry, if required, with the prior approval of the specified authority (as referred to in section 151), with respect to the information which suggest that the income chargeable to tax has escaped assessment; (b) Provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, not being less than 7 days but not exceeding 30 days as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted in (a) above. (b) Consider the reply furnished by the assessee and decide on the basis of material available on record including reply of the assessee whether or not it is a fit case to issue notice under section 148, by passing an order, with the approval of the specified authority, within 1 month from the end of the month in which the reply is received by him or where no such reply is furnished by the assessee, within one month from the end of the month in which time or extended time allow to furnish a reply expires. (iii) Interest under section 234C for deferment of advance tax = D 39,390 7. (b) Net tax liability after relief under section 91 C 2,73,679 5  SECTION C 8. (a) Unexplained cash credit Issue involved The issue involved is whether the AO is correct in his contention that the onus is on the assessee to prove the credit worthiness of the lender, even where the lender accepts he had lent the money in question to the assessee. Provisions applicable Section 68 brings to tax any sum found credited in the books of an assessee, where the assessee does not offer explanation about the nature and source thereof, or the explanation offered by him is not found satisfactory by the Assessing Officer. Analysis For a cash credit not to be treated as income, the assessee should  Not only prove the identity of the lender and  The genuineness of the transaction, but also  Prove the source for the lender, or in other words, the credit worthiness of the lender or that the lender had the means to lend such amount to the assessee.  Mere confirmation by the lender that he had lent the amount in question to the assessee will not suffice. A specific amendment has been introduced in this regard to section 68B. Conclusion The contention of the AO is hence valid and if Vishal is unable to prove the credit worthiness of Gautham, the AO will be justified in making the addition under section 68B. 8. (b) Advance Pricing Agreement (i) APA will apply from the previous year in which it was entered into and 4 years forward. Thus, it will apply for the AY 2023-24 and four assessment years in future, i.e., 2024-25, 2024- 26, 2026-27 and 2027-18. (ii) Prima facie, the rollback will apply for 4 years backward, i.e. 2022-23, 2021-22, 2020-21 and 2019-20. Thus, it cannot be applied for AY 2018-19. Rollback is not applicable where the return of income (ROI) has been filed beyond the „due date‟ specified in section 139(1) or when it has the effect of reduction of the total income returned/assessed. For the AY 2022-23, the ROI has been filed beyond the „due date‟ and hence the rollback provisions will not apply. For the AY 2020-21, if the APA is applied, the same will result in reduction of the total income, hence the rollback cannot be pressed into service. Rollback will be applicable for the other two years. (iii) For the AY 2023-24, the assessee has not yet filed the ROI. Hence in the ROI to be filed, Arati Ltd can apply the APA and compute the ALP in accordance with the same. For the AY 2019-20 and 2021-22, Arati Ltd has to furnish a modified return. The modified return has to be filed within a period of 3 months from the end of the month in which the agreement was entered into i.e., on or before 30th April, 2023. ___________________________ 6