CA FINAL FR TEST SERIES (NEW) APNA MENTOR TEST SERIES- NOV 2021

Direct Tax
Test Paper-1
Capital Gain, Income from Other sources,
Income which do not form part of total income

Duration: 1 Hour Suggested Answer Marks: 30

Question 1 (1 Marks)

Mr. Shyam purchased 300 shares in ABC Ltd. on 12.1.2017 at a cost of Rs. 2,500 per share. The
Fair Market Value (FMV) of the share as on 31.1.2018 is Rs. 1,800. Mr. Shyam sold all the shares of
ABC Ltd. on 15.7.2020 for Rs. 3,200. Mr. Shyam’s brother Mr. Ravi purchased 600 shares in Tapti
Ltd. on 25.1.2017 at a cost of Rs. 1,900 per share. The FMV of the share as on 31.1.2018 is Rs.
2,400. Mr. Ravi sold all the shares of Tapti Ltd. on 31.1.2021 for Rs. 1,700 per share. What is the
chargeable capital gains on sale of shares of ABC Ltd. and Tapti Ltd. in the hands of Mr. Shyam and
Mr. Ravi, respectively, for A.Y.2021-22, assuming that STT was paid at the time of acquisition and
sale?
a) Long-term capital gains of Mr. Shyam Rs. 2,10,000; Long-term capital loss of Mr. Ravi Rs.
4,20,000
b) Long-term capital gains of Mr. Shyam Rs. 4,20,000; Long-term capital loss of Mr. Ravi Rs.
4,20,000
c) Long-term capital gains of Mr. Shyam Rs. 4,20,000; Long-term capital loss of Mr. Ravi Rs.
1,20,000
d) Long-term capital gains of Mr. Shyam Rs. 2,10,000; Long-term capital loss of Mr. Ravi Rs.
1,20,000

Answer 1 (1 Marks)

(d)
(Long term capital gain of Mr. Shyam 2,10,000 Long term capital loss of Mr. Ravi 1,20,000)

Question 2 (1 Marks)

Ms. Himanshi and Ms. Dvani, Indian citizens residing in California since the year 2010, visit India
for 60 days every year. On 1.3.2021, Ms. Himanshi transferred to Ms. Dvani in California, for
consideration of dollar equivalent to Rs 15 lakhs, rupee denominated bonds (issued outside India)
of X Ltd., a company incorporated in India, which were acquired by her on 1.3.2019 for a price of

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dollar equivalent to Rs 10 lakhs. What are the capital gains tax implications of such transfer in the
hands of Ms. Himanshi?
a) Ms. Himanshi is liable to capital gains tax on long-term capital gains arising on transfer of rupee
denominated bonds; indexation benefit is not available.
b) Ms. Himanshi is liable to capital gains tax on long-term capital gains arising on transfer of rupee
denominated bonds; indexation benefit is available.
c) Ms. Himanshi is liable to capital gains tax on short-term capital gains arising on transfer of
rupee denominated bonds.
d) There is no capital gains tax implication in the hands of Ms. Himanshi in respect of this
transaction.

Answer 2 (1 Marks)

(d)
There is no capital gains tax implication in the hands of Ms. Himanshi in respect of this transaction;
(Transfer of Rupee Denominated bond of an Indian company by a non-resident to another non-
resident outside India is exempt)

Question 3 (1 Marks)

In October, 2015, Mr. Raman, an Indian citizen who is a non-resident, bought 500 Global Depository
Receipts (GDRs) of Alpha Limited, India, issued in accordance with the notified scheme of the Central
Government against the company’s initial issue of shares in foreign currency. In January, 2021, he sold
300 GDRs outside India to Mr. Joe, a citizen and resident of a country outside India and 200 GDRs to Mr.
Kamal, a Resident but not ordinarily resident in India. What are the tax consequences of such sale
transaction under the Income-tax Act, 1961?
(a) Capital gains arising on sale of 500 GDRs shall be subject to tax @20% with indexation
benefit in India
(b) No capital gains would arise on sale of 500 GDRs in India, since the GDRs are purchased in
foreign currency
(c) No capital gains would arise on sale of 300 GDRs, but capital gains arising on sale of 200
GDRs shall be taxed in India @10% without indexation benefit
(d) No capital gains would arise on sale of 300 GDRs, but capital gains arising on sale of 200
GDRs shall be taxed @20% with indexation benefit in India

Answer 3 (1 Marks)

(C)
No capital gains would arise on sale of 300 GDRs, but capital gains arising on sale of 200 GDRs shall
be taxed in India @10% without indexation benefit

Question 4 (2 Marks)

Mr. Rohit and Mr. Guha sold their residential house property in Pune forRs. 3 crore and Rs. 4 crore,
respectively, in January, 2021. The house property was purchased by them 25 months back. The
indexed cost of acquisition is Rs. 1 crore and Rs. 1.75 crore, respectively. Mr. Rohit purchased two

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residential flats, one in Delhi and one in Agra for Rs. 70 lakhs and Rs. 80 lakhs, respectively, in April,
2021. On the same date, Mr. Guha also purchased two residential flats, one in Mumbai and the other
in Pune, for Rs. 80 lakhs and Rs. 75 lakhs, respectively. Both of them invested Rs. 30 lakhs in bonds
of NHAI in March, 2021 and Rs. 30 lakhs in bonds of RECL in April, 2021. What is the income taxable
under the head “Capital Gains” for A.Y.2021-22 in the hands of Mr. Rohit and Mr. Guha?

(a) Rs. 70 lakhs and Rs. 95 lakhs, respectively

(b) Rs. 60 lakhs and Rs. 85 lakhs, respectively
(c) Nil and Rs. 95 lakhs, respectively
(d) Nil and Rs. 20 lakhs, respectively

Answer 4 (2 Marks)

(d)
Nill And 95Lakhs, respectively

Question5 (1 Marks)

P is a salaried employee. On 01.06.2020, he gets a gift of house property situated in Mumbai

(stamp duty value Rs 80,00,000) from Q. On 02.08.2020, P gets a gift of house property in a small
town near Pune (stamp duty value Rs 50,000) from R. On 03.09.2020, P also gets a gift of house
property in a small town near Kanpur in Uttar Pradesh from R, the stamp duty value of which is Rs
1,00,000. What will be the tax implications in the hands of P, Q and R, assuming that they are not
related to each other?

a). Rs 81,00,000 shall be chargeable to tax in the hands of P as income from other sources and
capital gains shall arise in the hands of Q and R respectively on account of transfer of capital asset.
b). Rs 80,00,000 shall be chargeable to tax in the hands of P as income from other sources and
capital gains shall arise in the hands of Q on account of transfer of capital asset.
c) Rs 81,00,000 shall be chargeable to tax in the hands of P as income from other sources and no
capital gains shall arise in the hands of Q and R respectively as gift does not constitute “transfer”.
d). Rs 81,50,000 shall be chargeable to tax in the hands of P as income from other sources and no
capital gains shall arise in the hands of Q and R respectively as gift does not constitute “transfer”.

Answer 5 (1 Marks)

(c)
Rs 81,00,000 shall be chargeable to tax in the hands of P as income from other sources and no
capital gains shall arise in the hands of Q and R respectively as gift does not constitute “transfer”
(Stamp Duty value greater than 50,000 shall be chargeable to tax under head IFOS in the hands of
transferee)

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Question 6 (1 Marks)

What is effective Tax rate on certain domestic manufacturing companies registered or set up after
01.10.2019?
a). 22.00% u/s 115 BAB
b). 25.168% u/s 115 BAA
c) 15.00 % u/s 115 BAB
d). 17.16% u/s 115 BAB

Answer 6 (1 Marks)

(d)
17.16% u/s 115 BAB

Question 7 (5 Marks)

ABC and Co. (firm) had sold all its assets and liabilities as a slump sale on 31-03-2021 to
SVPC & Co. (firm) for a lump sum consideration of ₹ 600 lakhs.
The statement of affairs of ABC & Co. as on 31-03-2021 is as below:

Liabilities ₹(in Assets ₹(in lakhs)

lakhs)
Capital 1,627 Fixed Assets
Unsecured Loans 25 Plant & Machinery at 250
WDV
Bank Borrowing 500 Land (At Revalued 1,200 1,450
figure)
Sundry Creditors 80 Current Assets:
Sundry Debtors 380
Cash & Bank 2
Balances
Loans & Advances 150
Closing Stock 250 782
2,232
Total Total 2,232
Additional Information:
(1) Cost of land in March 2010 was ₹ 100 lakhs.
(2) WDV of Plant & Machinery u/s 43(6) was ₹ 200 lakhs.
(3) Cost Inflation Index for the financial year 2009-10 was 148 and for 2020-21 is 301.
(4) Stock is overvalued by 10%
Compute capital gain arising from slump sale and tax on such gain.

Answer 7 (5 Marks)

.As per section 50B, any profits and gains arising from the slump sale effected in the previous year
shall be chargeable to income-tax as capital gains arising from the transfer of capital assets and shall
be deemed to be the income of the previous year in which the transfer took place.
If the assessee owned and held the undertaking transferred under slump sale for more than 36
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months before slump sale, the capital gain shall be deemed to be long-term capital gain.
In this case, it is assumed that the undertaking was set up in March 2010, being the period in which
land was acquired. Hence, the resultant capital gain on slump sale is a long-term capital gain.
However, as per section 50B(2), indexation benefit is not available in case of slump sale.

Computation of Capital Gain arising from slump sale and tax on such gain

Particular ₹ in lakhs
Slump sale consideration 600.00
Less: Cost of acquisition (net worth) [See Working Note below] 454.27
Long-term capital gain 145.73
Income-tax @ 20% (under section 112) 29.146
Add: Surcharge@12%, since total income exceeds ₹1 crore. 3.498
32.644
Add: Health & Education cess@4% 1.306
Total tax liability 33.950

Working Note: Computation of Net worth of the undertaking

Particular ₹in lakhs

WDV of block of assets (Plant & Machinery) as per section 43(6)] 200.00
Book value of non-depreciable assets
- Land (Revaluation not to be considered) 100.00
- Sundry Debtors 380.00
- Cash & Bank Balance 2.00
- Loans & Advances
150.00
- Closing Stock (₹ 250 lakhs – ₹ 22.73 lakhs, being the amount of 227.27 859.27
over- valuation i.e., 10/110 × ₹ 250) [See Note below]
1059.27
Less: Liabilities
- Unsecured Loans 25.00
- Bank Borrowing 500.00
- Sundry Creditors 80.00
605.00
Net worth 454.27
Note: Book value of assets (other than depreciable assets) has to be considered for the purpose of
arriving at the net worth. Stock has to be valued at lower of cost or net realizable value as per AS 2
and this is the value to be reflected in the Balance Sheet of an entity. For this reason, the effect of
over-valuation of stock has been removed while computing the net worth of the undertaking

Question 8 (4 Marks)

An enterprise engaged in manufacturing of steel balls discontinued its activities and decided to lease out
its factory building, plant and machinery and furniture from 1.4.2020 on a consolidated lease rent of Rs.
50,000 per month. Compute the income for Assessment Year 2021-22 of the assessee from following
information:
(i)                  Interest received on deposits 1,00,000

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(ii)                Brokerage paid on hundi loan taken 2,000

(iii)              Interest paid on hundi and other loans which were
75,000
given as deposits on interest to other
(iv)              Expenses incurred on repairs of building, plant and
15,000
machinery
(v)               Fire insurance premium of plant and machinery and
12,000
furniture
(vi)              Depreciation for the year 1,47,500
(vii)            Legal fees paid to an advocate for drafting and
1,500
registering the lease agreement
(viii)          Factory licence fees paid for the year 1,000
(ix)              There is unabsorbed depreciation of Rs. 2,75,000 of
the Assessment Years 2019-20 and 2020-21.  
Interest paid in (iii) above includes an amount of Rs. 25,000 remitted to a non-resident outside India on
which tax was not deducted at source

Answer 8 (4 Marks)

The income derived from leased assets shall be chargeable to tax as 'Income from other sources'
under section 56(2)(iii) but the computation thereof shall be made after allowing deductions specified
under sections 30, 31 and 32 subject to section 38. This is as per the provisions of section 57(ii) and
57(iii).
Computation of income under the head “Income from other sources”

Particulars Rs Rs
(A) Lease Rent for 12 months @ Rs. 50,000 p.m. 6,00,000
Less: Expenses and deductions allowable under section 57(ii)
& 57(iii):
Repairs 15,000
Fire Insurance Premium 12,000
Legal expenses for drafting of lease agreement 1,500
Factory Licence fee 1,000
Depreciation for the year 1,47,500
Unabsorbed depreciation of earlier assessment years –
eligible for deduction (Note 1) 2,75,000 4,52,000
1,48,000
(B) Interest on Deposits 1,00,000
Less: Expenses allowable under section 57(i)
Brokerage Rs. 2,000
Interest on hundi loans (Note 2) Rs. 50,000 52,000 48,000
Total Income 1,96,000
Unabsorbed depreciation of Rs. 2,75,000 pertains to earlier assessment years. The unabsorbed
depreciation shall form part of the current year depreciation and can be set off against any other head
of income. Accordingly, the amount of Rs. 2,75,000 is adjustable/ allowed to be set off against 'Income
from other sources'.
Since deposits are made by investing amount received on hundi and other loans, the interest on hundi
and other loans would be eligible for deduction from the income arising on such deposits.
However, interest paid to non-resident is not eligible for deduction as the tax has not been deducted at

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source.
Question 9 (4 Marks)

Ram, purchased on 18.6.2007, house property for ₹ 22,00,000 which was sold to A on 18.10.2020 for
₹ 38,75,000. The sub-registrar, at the time of registration of sale deed, charged stamp duty on ₹
60,00,000 which was paid by the buyer.
The Assessing Officer while assessing for capital gain referred the matter to the valuation officer as per
the request of vendor. The Valuation Officer determined the value of property at
₹ 55,00,000 on the date of transfer. Ram seeks your advice on the following:
(i) On what value the Assessing Officer could compute capital gain chargeable to tax?
(ii) The amount of capital gain on which Ram is required to pay capital gains tax. (The CII for F.Y.
2007-08 is 129 and of F.Y. 2020-21 is 301).

Answer 9 (4 Marks)

(i)According to section 50C, the Assessing Officer can refer the property to the valuation officer, only
when the following two conditions are satisfied:
(a) The value fixed by the stamp valuation authority is not disputed in appeal or revision etc.
(b) The assessee claims before the Assessing Officer that the value adopted or assessed by the
stamp valuation authority exceeds the fair market value (FMV) of the property as on the date of
transfer.
In the instant case, though the assessee paid the stamp duty as fixed by the stamp valuation
authorities, he had requested the Assessing Officer to refer the property to the Valuation Officer
for valuation. The value determined by the Valuation Officer is less than the value adopted by the
stamp valuation authority. Therefore, such value only could be adopted for computing chargeable
capital gains.
(ii) The amount on which the assessee is required to pay capital gains tax will be as under:-
Sale consideration of the house property under section
50C(1) ₹ 55,00,000
Less: Indexed cost of acquisition ₹22,00,000 × 301/129 ₹ 51,33,333
Long term capital gain ₹ 3,66,667

Question 10 (3 Marks)

The land owned by Gopal was acquired by NHAI in the year 2013 and since then the litigation was
going on for enhancement of compensation. The issue was resolved on 11.09.2020 and the court
ordered finally to make payment to Gopal of the enhanced compensation and the following
amounts for interest on such enhanced compensation:

Financial Amount (₹ )
Year
2017-2018 1,15,000
2018-2019 2,25,500
2019-2020 3,75,000
2020-2021 2,14,500
Explain the provisions of the Act and also work out the amount of interest and the assessment year in
which the same shall be taxed.

Answer 10 (3 Marks)

Clause (b) of section 145A provides that the interest received by an assessee on compensation

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or on enhanced compensation shall be deemed to be the income for the year in which it is received,
irrespective of the method of accounting followed by the assessee.
Clause (viii) inserted in section 56(2) provides that income by way of interest received on
compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed
as “Income from other sources” in the year in which it is received.
Clause (iv) inserted in section 57 allows a deduction of 50% of such income. It is further clarified
that no other deduction would be allowable under any other clause of section 57 in respect of such
income.
Therefore, the entire interest income of ₹ 9,30,000 received by Gopal for the different years would
be taxable under the head “Income from other sources” in the year of receipt i.e., P.Y.2020- 21 (A.Y.
2021-22):-

Particulars ₹
Interest on enhanced compensation taxable under section 56(2) 9,30,000
(viii)
Less: Deduction under section 57(iv) @ 50% 4,65,000
Interest chargeable under the head “Income from other 4,65,000
sources”

Question11 (3 Marks)

XYZ Ltd. furnishes you the following information for the year ended 31.3. 2021:

Particulars Rs. (in lacs)

Total turnover of Unit A located in Special Economic Zone 120
Profit of the business of Unit A 45
Export turnover of Unit A 60
Total turnover of Unit B located in Domestic Tariff Area (DTA) 225
Profit of the business of Unit B 25
Compute deduction under section 10AA for the A.Y. 2021-22, assuming that Y Ltd. Commenced
operations in SEZ and DTA in the year 2016-17.

Answer 11 (3 Marks)

100% of the profit derived from export of articles or things or services is eligible for deduction under
section 10AA, since F.Y.2020-21 falls within the first five year period commencing from the year of
manufacture or production of articles or things or provision of services by the Unit in SEZ. As per
section 10AA(7), the profit derived from export of articles or things or services shall be the amount
which bears to the profits of the business of the undertaking, being the Unit, the same proportion as
the export turnover in respect of articles or things or services bears to the total turnover of the
business carried on by the undertaking.
Deduction under section 10AA

= Profit of the business of Unit A x Export turnover of Unit A

Total turnover of untit A

= 45 lakh x 60 Lakhs = 22.5 Lakh

120 Lakhs

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Note – No deduction under section 10AA is allowable in respect of profits of business of Unit B
located in DTA. .

Question12(A) (4 Marks)

Pawan is in business of manufacturing customized kitchen equipments. He is also the Managing

Director and held nearly 65% of the paid-up share capital of Aarav (P) Ltd. A substantial part of the
business of Pawan is obtained through Aarav (P) Ltd. For this purpose, Aarav (P) Ltd. passed on the
advance received from its customers to Pawan to execute the job work entrusted to him.

The Assessing Officer held that the advance money received by Pawan is in the nature of loan given by
Aarav (P) Ltd. to him and accordingly is deemed dividend within the meaning of provisions of section
2(22)(e) of the Income-tax Act, 1961. The Assessing Officer, therefore made the addition by treating
advance money as deemed dividend.

Examine whether the action of the Assessing Officer is tenable in law.

OR

Question12(B) (4 Marks)

MNO (P) Ltd. is a company in which the public are not substantially interested. K is a shareholder of the
company holding 15% of the equity shares. The accumulated profits of the company as on 1.10.2020
amounted to Rs. 10,00,000. The company lent Rs. 1,00,000 to K by an account payee bank draft on
1.10.2020. The loan was not connected with the business of the company. K repaid the loan to the
company by an account payee bank draft on 30.3.2021. Examine the effect of the borrowal and
repayment of the loan by K on the computation of his total income for the assessment year 2021-22.

Answer 12 (A) (4 Marks)

As per section 2(22)(e), in case a company, not being a company in which the public are substantially
interested, makes payment of any sum by way of advance or loan to a shareholder holding not less than
10% of voting power/share capital of the company, then, the payment so made shall be deemed to be
dividend in the hands of such shareholder to the extent to which the company possesses accumulated
profits.
In the present case, Pawan is holding 65% of the paid-up capital of Aarav (P) Ltd. Aarav (P) Ltd. has
passed on advance received from its customers to Pawan for execution of job work entrusted to Pawan.
Since Aarav (P) Ltd. is not a company in which public are substantially interested, the applicability of the
provisions of section 2(22)(e) in respect of such transaction has to be examined. In CIT v.
Rajkumar (2009) 318 ITR 462 (Del.), it was held that trade advance given to the shareholder which is in
the nature of money transacted to give effect to a commercial transaction, would not amount to deemed
dividend under section 2(22)(e). The Delhi High Court ruling in CIT v. Ambassador Travels (P) Ltd.
(2009) 318 ITR 376 also supports the above view.

In the present case, the payment is made to Pawan by Aarav (P) Ltd. for execution of work is in the
course of commercial business transaction and therefore, it cannot be treated as deemed dividend under
section 2(22)(e). Hence, the action of the Assessing Officer is not tenable in law.
Note – This can also be answered on the basis of Circular No. 19/2017, dated 12.06.2017. The CBDT has,
in its circular clarified that it is a settled position that trade advances, which are in the nature of
commercial transactions, would not fall within the ambit of the word 'advance' in section 2(22)(e) and
therefore, the same would not to be treated as deemed dividend. Since, the payment is made to Pawan
by Aarav (P) Ltd. for execution of work is in the course of commercial business transaction and
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therefore, the advance cannot be treated as deemed dividend under section 2(22)(e). Hence, the action
of the Assessing Officer is not tenable in law.

OR
Answer 12 (B) (4 Marks)

As per section 2(22)(e), any payment by a company, in which the public are not substantially interested,
by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding
not less than 10% of the voting power, shall be treated as dividend to the extent to which the company
possesses accumulated profits.
In the instant case, MNO (P) Ltd. is a company in which the public are not substantially interested. The
company has accumulated profits of Rs. 10,00,000 on 1.10.2020. The loan given by the company to K
was not in the course of its business. K holds more than 10% of the equity shares in the company.
Therefore, assuming that K has voting power equivalent to his shareholding, section 2(22)(e) comes into
play. Deemed dividend of Rs. 1,00,000 under section 2(22)(e) would be taxable in the hands of Mr. K at
normal rate of tax.
Under section 2(22)(e), the liability arises the moment the loan is borrowed by the shareholder and it is
immaterial whether the loan is repaid before the end of the accounting year or not. Therefore, the
repayment of loan by K to the company on 30.3.2021 will not affect the taxability of the sum of Rs.
1,00,000 as deemed dividend.
(ii) Casual Income [Section 56(2)(ib)]
Casual income means income in the nature of winning from lotteries, crossword puzzles, races including
horse races, card games and other games of any sort, gambling, betting etc. Such winnings are
chargeable to tax at a flat rate of 30% under section 115BB and tax is deductible at source@30% on such
income in case it exceeds Rs. 10,000.
(iii) Consideration received in excess of FMV of shares issued by a closely held company to be treated
as income of such company, where shares are issued at a premium [Section 56(2)(viib)]
a) Section 56(2)(viib) brings to tax the consideration received from a resident person by a company,
other than a company in which public are substantially interested, which is in excess of the fair market
value (FMV) of shares.
b) Such excess is to be treated as the income of a closely held company taxable under section 56(2)
under the head “Income from Other Sources”, in cases where consideration received for issue of shares
exceeds the face value of shares i.e. where shares are issued at a premium i.e., (Issue price of share –
FMV of such share) x No. of shares.
c) Fair market value of the shares shall be the higher of, the value as may be –
(1) determined in accordance with the prescribed method3; or
(2) substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its
assets on the date of issue of shares.
For the purpose of computation of FMV, the value of assets would include the value of intangible assets
being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature.

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