Sample Question Paper on Direct Tax Exam for CA Final

Sample Papers for Direct Tax: CA Final Exam

Considered to be one of the most difficult exams conducted in India, CA Final exam is scheduled to commence on May 2, 2016. Institute of Chartered Accountants of India (ICAI) will be conducting the Direct Tax paper of CA Final exam on May 14, 2016.

CA Final is the last leg of Chartered Accountancy examinations. Any candidate who had cleared both the groups of IPCC in the last six months of article-ship is eligible to appear for the CA Final examination.

In this article, you can go through sample questions for Direct Tax paper of CA Final exam. The maximum marks, candidates can secure in this same paper is 100 marks. It is compulsory for all candidates to attempt Question-1 of the exam. Apart from that, aspirants need to attempt any five questions. Working notes should form part of the answer.

Q 1. Hyper Ltd., engaged in diversified activities, earned a net profit of Rs 14,25,000 after debit/credit of the following items to its profit and loss account for the year ended on 31.3.2016:

Interest on deposit credited to buyers on 31.3.2016 for advance received from1,00,000 them, on which TDS was deducted and deposited on 31.7.2016

Part B: Items credited to Profit and Loss Account

Long term capital gain on sale of equity shares on which securities transaction3,60,000 tax was paid

The company provides the following additional information:

Depreciation includes ? 1,50,000 on account of revaluation of fixed assets.

Depreciation allowable as per Income-tax Rules is ? 2,80,000.

Brought forward Business Loss/Unabsorbed Depreciation:

You are required to:

Compute the total income of the company for the assessment year 2016-17 giving the reasons for treatment of items and

Examine the applicability of section 115JB of the Income-tax Act, 1961, and compute book profit and the tax credit to be carried forward. (20 Marks)

Q 2. ILT Limited is engaged in manufacturing pipes and tubes. The profit and loss account of the company for the year ended 31st March, 2016 shows a net profit of ? 405 lacs. The following information and particulars are furnished to you. You are required to compute total income of the company for Assessment Year 2016-17 indicating reasons for treatment of each item.

A group free air ticket was provided by a supplier for reaching a certain volume of purchase during the financial year 2015-16. The same is encashed by the company for Rs. 10 lacs in April 2016 and credited to General Reserve Account.

A regular supplier of raw materials agreed for settlement of Rs. 8 lacs instead of Rs. 10 lacs for poor quality of material supplied during the previous year which was not given effect in the running account of the supplier.

Andhra Bank sanctioned and disbursed a term loan in the financial year 2012-13 for a sum of Rs. 50 lacs. Interest of Rs. 8 lacs was in arrear. The bank has converted the arrear interest into a new loan repayable in ten equal instalments. During the year, the company has paid two instalments and the amount so paid has been reduced from Funded Interest in the Balance Sheet.

The company remitted ? 5 lacs as interest to a company incorporated in USA on a loan taken two years ago. Tax deducted under section 195 from such interest has been deposited by the company on 15th July, 2016. The said interest was debited to profit and loss account.

Sandeep, a sales executive stationed at HO at Delhi, was on official tour in Bangalore from 31st May,2015 to 18th June, 2015 and 28th September, 2015 to 15th October, 2015 for the business development. The company has paid Sandeep's salary in cash, from its local office at Bangalore for the month of May, 2015 (payable on 1st June) and September 2015 (payable on 1st October), amounting to ? 25,000 and ? 27,000 respectively (net of TDS and other deduction), as

Sandeep has no bank account at Bangalore. These were included in the amount of “salary” debited to Profit and Loss Account.

The company has contributed ? 50,000 by cheque to an electoral trust and the same stands included under the head "General Expenses".

Guarantee commission of ? 1,85,000 paid to the employee director to the bank or enabling finance to the company.

? 25,00,000 expenditure on replacement of dies & moulds, being part of plant & machinery.

(16 Marks)

Q 3. A) Mr. Ramesh has commenced the operations of manufacture of goods in a factory on 01.04.2015. he employed 125 new workmen during PY 2015-16, which included –

20 Casual Workmen,

10 Workmen employed through Contract Labour,

30 Regular Workmen employed on 01.04.2015,

50 Regular Workmen employed on 01.05.2015 and

15 Regular Workmen employed on 01.07.2015.

Compute the Deduction, available to Mr. A for AY 2016-17, if Wages paid to each workmen at

? 10,000 p.m. & the Profits & Gains from the Manufacture of Goods in the Factory for AY 2016-17 is ? 4.75 Lacs. (6 Marks)

Q.3. B) On 30th June, 2015 Assessing officer issued a notice under section 148 for the AY 2012-13 to reopen the case. Assessee files a return in response to the said notice. During the course of pendency assessee makes an application to the settlement commission for the AY 2012-13. In order to get the immunity from the prosecution & penalty the assessee intends to disclose the facts relating to AY 2011-12 before the settlement commission. The assessee already has filed the return for the said AY u/s 139(1). Can the assessee do so ? (3 Marks)

Q.3. C) Z Plc (UK) holds 25 % equity share capital in Y Pte (Singapore). Y Pte invested 100 mn $ in shares of various Indian companies. The total value of asset of Y Pte is $ 15 mn as on the valuation date. During the Py 2015-16 Z Plc transfer the shares of Y Pte on which it earns gain of £ 80,000. Discuss the taxability of the gain arising from transfer of shares of Y Pte in the hands of Z Plc. (Relevant exchange rate 1$ = Rs. 25, 1 £ = Rs. 60) (7 Marks)

Q 4. A ): Whether the income derived by the company from letting out property is to be treated as income from business if the main object of the MOA of the company contains acquiring & leasing the properties & during the year all income received was from letting out of the property ? Decide with the help of relevant case law. (4 Marks)

Q. 4 B) Can repair and renovation expenses incurred by a company in respect of premises leased out by a shareholder to the company having substantial interest in the company, be treated as deemed dividend? Decide with the help of the relevant case law. (4 Marks)

Q. 4 C) : Is recording of satisfaction and quantification of escaped income a pre-condition for issuing notice under section 148 after 4 years from the end of the relevant assessment year? Decide with the help of recent case law in this regard. (4 marks)

Q. 4 D ): Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an international transaction, has to be made by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant. Clarification is required as to whether rollback has to be requested for all four years or applicant can choose the years out of the block of four years. (4 marks)

Q 5. A) : X Ltd from India is a subsidiary of Y Ltd India. Y Ltd India has entered into an agreement with Z PTE of Singapore by virtue of which: 

a)  X Ltd would supply to Z PTE auto components @ Rs 1000 per component

b)  Z PTE would in turn supply the component to Y Ltd in India @ Rs 1500 per component.

The Assessing officer identifies the circular flow of goods and siphoning of profits in Singapore and invokes the provisions of Sec 92 on both X Ltd and Y Ltd. The assessee argues that the transactions are between unrelated parties since Z PTE is not an associated enterprise for both X Ltd and Y Ltd. Discuss. (4 Marks)

Q.5. B) : Examine the following transactions and discuss whether the transfer price declared by the following assessees, who have exercised a valid option for application of safe harbour rules, can be accepted by the Income-tax Authorities – (6 Marks)

Q 5 C ): ABC is an investment fund. There are 20 unitholders. X is one of the unitholder holding 1 unit. For the PY 2015-16, ABC reports the following income

After payment of income tax, the entire post tax income is distributed to unitholder. Income of X other than from fund is a bank interest of ? 24.6 Lac. Find out the net income & the tax liability of ABC under the following situation :

 i) Situation I : ABC is an Indian Co

 ii) Find out the net income & the tax liability of X also                               (6 Marks)

Q 6. A) : Tani purchased a land at a cost of ? 10 lakhs in the financial year 1982-83 and held the same as her capital asset till 31st March, 2012. Tani started her real estate business on 1st April, 2012 and converted the said land into stock-in-trade of her business on the said date, when the fair market value of the land was ? 150 lakhs.

She constructed 20 flats of equal size; quality and dimension. Cost of construction of each flat is ? 8 lakhs. Construction was completed in December, 2015. She sold 15 flats at ? 20 lakhs per flat between January, 2016 and March, 2016. Remaining 5 flats were held in stock as on 31st March, 2016.

She invested ? 50 lakhs in bonds issued by Rural Electrification Corporation Ltd. on 31st March, 2016.

Compute the amount of chargeable capital gain and business income in the hands of Tani arising from above transactions for Assessment Year 2016-17 indicating clearly the reasons for treatment for each item. Cost Inflation Index: FY 1982-83 109; FY 2012-13 852: FY 2015-16 1089.

(9 Marks)

Q 6 B. ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent establishment in India, has set up a liaison office in Mumbai in April, 2015 in compliance with RBI guidelines to look after its day to day business operations in India, spread awareness about the company’s products and explore further opportunities. The liaison office takes decisions relating to day to day routine operations and performs support functions that are preparatory and auxiliary in nature. The significant management and commercial decisions are, however, in substance made by the Board of Directors at Sweden. Determine the residential status of ABC Inc. for A.Y.2016-17. (3 Marks)

Q 6 C. : What are the circumstances when an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, enabling the Commissioner to exercise revisionary jurisdiction under section 263(1)? (4 Marks)

Q 7. A) Discuss the correctness or otherwise of the following statements –

(i) All co-operative banks are exempted from the requirement to deduct tax at source on interest on time deposits credited/paid to its members.

(ii) Interest on recurring deposits are not subject to tax deduction at source.

(6 Marks)

Q 7 B. Arif is a resident of both India and another foreign country in the previous year 2014-15. He owns immovable properties (including residential house) in both the countries. He earned income of Rs. 50 lacs from rubber estates in the foreign country during the financial year 2014-15. He also sold some house property situated in foreign country resulting in short-term capital gain of Rs. 10 lacs during the year. Arif has no permanent establishment of business in India. However, he has derived rental income of Rs.6 lacs from property let out in India and he has a house in Lucknow where he stays during his visit to India.

The Article 4 of the Double Taxation Avoidance Agreement between India and the foreign country where Arifis a resident, provides that “where an individual is a resident of both the Contracting States, then he shall be deemed to be resident of the Contracting State in which he has permanent home available to him. If he has permanent home in both the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests)”.

You are required to state with reasons whether the business income of Arif arising in foreign country and the capital gains in respect of sale of the property situated in foreign country can be taxed in India. (5 Marks)

Q 7 C). Fearless General Finance & Investment Limited, a residuary non-banking company, is accepting public deposit, issued deposit certificate and repaid back after some period of time along with interest, under different schemes run by it. Following transactions were noted from their books of account :

(i) Mr. A, an individual, has deposited Rs. 15,000 on 1^st May, 2012 for 48 months in cheque and another ? 15,000 on 30^th June, 2015 in cash to purchase a new certificate of 48 months tenure.

(ii) Mr. A has applied for premature withdrawal against both the certificates and the company has paid him ? 16,500, by a bearer cheque, against principal and interest on 23^rd March, 2016, due against his first certificate (purchased in 2012) and ? 15,500 in cash on 25^th March, 2016, against the second certificate.

Discuss the violation of income tax provision if any and consequential penalty for each transaction. Will it make any difference if the certificates were held jointly with Mrs. A, wife of Mr. A, while repaying back in cash or bearer cheque? (5 Marks)

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