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Mutual Funds – CA Final SFM Study Material is designed strictly as per the latest syllabus and exam pattern.

Mutual Funds – CA Final SFM Study Material

Part – I (Theory)

Question 1.
Discuss briefly the advantages of investing through Mutual Funds. [May 2003, 2007, 2009] [4 Marks]
Answer:
The following are the benefits of investing through mutual fund schemes:
1. Professional Management: The funds are managed by highly skilled and professionally experienced managers with a backup of a research team.

2. Diversification : A small investor cannot hold diversified investment portfolio wdth low level of investible funds. But, he may take advantage of a well-diversified portfolio of securities with the help of mutual fund. It reduces the risk also.

3. Convenient Administration :Now-a-days most of the mutual funds offer services in a demat form which saves the time and also avoids delay in execution of transaction. So, there are no administrative risks of share transfer, etc.

4. High Returns : If we compare mutual fund with other avenues of the investment, then the investor always get higher return in mutual fund.

5. Liquidity : The investment in any mutual fund can be liquidated at any time. In case of open ended funds, the liquidity is provided by direct sales/ repurchase to the mutual fund. On the other hand, the stock exchange, at which the mutual fund is listed, provides liquidity in case of close ended funds.

6. Low Cost of Management: The mutual fund is not allowed to incur the cost beyond prescribed limit of 2.5%. Any cost in excess of this maximum limit is borne by the AMC.

7. Safety : The mutual funds are required to be registered with SEBI and are subject to strict mutual fund regulations. It provides protection to investor.

8. Transparency : The investor gets updated information about the funds. Many mutual funds disclose their portfolio on quarterly or monthly basis to their investors. Even, in case of open ended funds, the NAV is calculated on a daily basis and now published through AMFI in the newspapers.

9. Low transaction cost : The mutual funds uses pooled money from a number of investors due to which, they have advantage of economies of scale. That is why; it is beneficial for the investor as compared to direct investment in capital market which involves higher charges.

10. Flexibility : The investors can easily transfer their holdings from one scheme to another scheme within the same mutual fund. The wide range of schemes launched by different mutual funds provides flexibility to the investor to plan his portfolio.

Question 2.
What are the drawbacks of investments in Mutual Funds? [Nov. 2008] [4 Marks]
Answer:
The following are the disadvantages associated with mutual fund schemes:
1. Difficulty in selection : A common investor faces difficulty in selection of mutual fund out of large number of various schemes of mutual funds. The past performance may not prove to be reliable criterion in all situations.

2. Cost Factor: The entry load (payable at the time of investment) and exit load (payable at the time of leaving) reduce the return of investor. Moreover, the fee paid to Asset Management Company is not related with performance.

3. Different Objectives : The individual objectives of the investor may be different from the objectives of mutual fund. The skilled or professional investors or high net worth individuals may achieve their objectives through direct investment mode.

4. No Guarantee of Return : There is no guarantee of return in case of mutual fund as it depends upon performance of fund only. If it under performs, there are chances of depreciation in value of investment even with depletion of principal amount.

5. Unethical Practices /The investment in mutual funds is subject to risk from unethical practices like selling of holding to sister concern for substantive notional gains so that higher NAY may be disclosed.

Question 3.
Distinguish between Open-ended and close ended schemes. [Nov. 2010, May 2015] [4 Marks]
Answer:
The Mutual funds may be classified as open ended and close ended, on functional basis.
1. Open ended funds : These are the schemes floated by the mutual fund, where the investor can make entry and may exit at any time. The redemption period is indefinite and the capital of the fund is unlimited. These schemes are available for subscription and repurchase on a continuous basis. These funds are most liquid.

2. Closed ended Funds : Under these schemes, the investor can enter into the scheme during Initial Public Offering or from the stock market after the units have been listed. The life of these schemes is limited as after the specified period, the corpus of the closed ended schemes is liquidated. If the investor wants to exit in between, he can do so by selling units in the secondary market, or during repurchase period at his option.

Basis	Open ended fund	Close ended fund
Size of the fund	Unlimited and Flexible	Limited and Fixed
Redemption period	At the option of Investor	Stipulated Maturity Period
Intra-day Trading	Not possible	Possible but expensive
Exit Route	Through fund itself	Through stock exchange, Where listed
Selling Rate	At NAV plus load, if any	Significant Premium/Discount to NAV.

Question 4.
What is Exchange Traded Funds? What are its key features and benefits? [May 2010, Nov. 2013, Nov. 2016] [4 Marks]
Answer:
The exchange traded funds were introduced in US in 1993 and came to India around 2002. ETF is a hybrid product that combines the features of an index mutual fund and stock. It is a portfolio or basket of securities that replicates the composition of indices like Nifty, Sensex etc. It is not a stock or security by itself, but is traded as stock. ETF are listed on the stock exchange and their prices are linked to the underlying index.
The ETF can be bought or sold anytime during the market hours at prices that are expected to be closer to the NAV at the end of the day. The NAV of an ETF is the value of the underlying component of the benchmark index held by the ETF plus all accrued dividends less accrued management expenses.
The following are the benefits of ETF:
(a) Convenient to Trade : The ETF can be purchased/sold on the stock ex-change at any time when the market is open.
(b) Diversification / These funds offer diversification and also the flexibility at the same time.
(c) Short Selling/ One can short sell an ETF, which is not possible with index funds.
(d) Role of Fund Manager: The performance of ETF does not depend on the ability of fund manager.
(e) Convenient to Trade / When the trading starts in market, the investor can easily buy or sell ETF like equity shares at prices which are deemed real time.

Question 5.
Write short note on Money Market Mutual Fund. [Nov. 2011, 2015] [4 Marks]
Answer:
They are majorly debt-oriented schemes, where the main objective is to preserve the capital, easy liquidity and moderate income. The investments are made in short-term instruments which have high safety like, T-Bills, Govern-ment securities, certificate of deposit etc. These are suitable for institutional investors and individuals who have short term surplus funds. As they are for short period, they have lesser risk and are not affected by interest rate fluctuations.

The following are the salient features:

• Money market is that part of financial market which is for short term money.
• These schemes are safe and highly liquid instruments.
• These schemes generally provide high returns and highest safety to the ordinary investors.
• The short term/emergency requirements of various funds are met by such mutual funds.

Question 6.
What are the signals that indicate that it is the time for an investor to exit a mutual fund schemes? [Nov. 2014] [4 Marks]
Answer:
The following are the signals/indicators that investors use as exit criteria from the mutual fund scheme:
1. Under performance of mutual fund : The under performance criterion has two parameters:
(a) FROM INDEX : When the mutual fund consistently under performs its peer group, then it would be better to get out of the scheme. The amount may be invested in the winning schemes of peer group.
(b) FROM PEER GROUP : When the mutual fund consistently under per-forms the broad based index, then it is the high time for the investor to get out of the scheme.

2. Change in objectives : The mutual funds have various schemes with varying objectives. The investor chooses a particular scheme that suits his purpose. As regards indicators to exit, there are two aspects:
(a) OF MUTUAL FUND : Every investor works with his own risk prefer-ences and selects that scheme of the mutual fund which suits his goals. It may be regular income or growth fund. When the mutual fund changes its objective (Like from income to growth fund), then the investor may exit that mutual fund scheme.
(b) OF INVESTOR : When the investor changes his objective of investing in a mutual fund which is no longer beneficial to him, then it is also one of the indicators to exit a scheme.

3. Change in Fund Management /When there is change in the fund manager who handles the scheme and the image or reputation of new entrant is not known, then the investor may exit the mutual fund scheme.

Question 7.
Distinguish between Off-Shore Funds and Asset Management Mutual Funds. [Nov. 2017] [4 Marks]
Answer:
The following are the differences:

Basis	Off-shore Funds	Mutual Funds
Raising of Money	Internationally and investing money domestically (in India).	Domestically as well as investing money domestically (in India).
Number of Investors	Very few.	Very large.
Per Capita investment	It is very high as investors are High Net worth Individuals (HNI).	It is very low as it is meant for retail/ small investors.
Basis of Management	Investment Agreement is basis of management of the fund.	Offer Document is the basis of management of the fund.

Question 8.
Explain the different methods for evaluating the performance of a mutual fund. [Nov. 2019 Old Syllabus] [4 Marks]
Answer:
Methods for evaluating the performance of a mutual fund.
1. Sharpe Ratio
The excess return earned over the risk free return on portfolio to the portfolio’s total risk measured by the standard deviation. This formula uses the volatility of portfolio return. The Sharpe ratio is often used to rank the risk-adjusted performance of various portfolios over the same time. The higher a Sharpe ratio, the better a portfolio’s returns have been relative to the amount of investment risk the investor has taken.
S = \(\frac{\text { Return of portfolio }- \text { Retrun of risk free investment }}{\text { Standard Deviation of Portfolio }}\)

2. Treynor Ratio
This ratio is similar to the Sharpe Ratio except it uses Beta of portfolio instead of standard deviation. Treynor ratio evaluates the performance of a portfolio based on the systematic risk of a fund. Treynor ratio is based on the premise that unsystematic or specific risk can be diversified and hence, only incorporates the systematic risk (beta) to gauge the portfolio’s performance.
T = \(\frac{\text { Return of portfolio }- \text { Retrun of risk free investment }}{\text { Beta of Portfolio }}\)

3. Jensen’s Alpha
The comparison of actual return of the fund with the benchmark portfolio of the same risk. Normally, for the comparison of portfolios of mutual
funds this ratio is applied and compared with market return. It shows the comparative risk and reward from the said portfolio. Alpha is the excess of actual return compared with expected return.

Part – 2 (Numerical Problems: Topic Wise In Chronological Order)

Question 1.
Cinderella Mutual Fund has the following assets in Scheme Rudolf at the close of business on 31st March, 2014.

Company	No. of Shares	Market Price Per Share (Rs.)
Nairobi Ltd.	25,000	20
Dakar Ltd.	35,000	300
Senegal Ltd.	29,000	380
Cairo Ltd.	40,000	500

The total number of units of Scheme ‘Rudolf’ is 10 lacs. The Scheme Rudolf has accrued expenses of Rs. 2,50,000 and other liabilities of Rs. 2,00,000. Calculate the NAV per unit of the Scheme Rudolf. [Nov. 2014] [4 Marks]
Answer:
Calculation of Closing Net Assets

	Rs. in crores
Market Value of Portfolio[Working Note-1]	82.954
(+) Closing cash in hand	2.760
(+) Dividend Accrued	1.950
Total Closing Assets	87.664
(-) Payable on shares	(13.54)
(-) Expenditure incurred  .	(1.76)
Closing Net Assets	72.364

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 4,15,70,000}{10,00,000}\) = Rs. 41.57 per unit

Working Note-1 Computation of Market Value of Investments

Company	No. of Shares	Market Price per share	Total Market Value
Nairobi Ltd.	25,000	20	5,00,000
Dakar Ltd.	35,000	300	1,05,00,000
Senegal Ltd.	29,000	380	1,10,20,000
Cairo Ltd.	40,000	500	2,00,00,000
			4,20,20,000

Question 2.
Calculate the NAV of a regular income scheme on per unit basis of Red Bull mutual fund from the following information:

Particulars	Rs. in crores
Listed shares at cost (ex-dividend)	30
Cash in hand	0.75
Bonds & Debentures at cost (ex-interest)	2.30
Of these, bonds not listed & not quoted	1.0
Other fixed interest securities at cost	2.50
Dividend accrued	0.8
Amount payable on shares	8.32
Expenditure accrued	1.00
Value of listed bonds & debentures at NAV date	10

Additional Information:
(1) Number of units ( Rs. 10 face value) = 30 lakhs
(2) Current realizable value of fixed income securities of face value of Rs. 100 is 106.50.
(3) The listed shares were purchased when index was the Present index is 7100 and 9000.
(4) Unlisted bonds and debentures are at cost. Other fixed interest securities are also at cost. [May 2016] [6 Marks]
Answer:
Calculation of Closing Net Assets

	Rs. in crores
Market Value of Portfolio [Working Note-1] (+) Closing cash in hand (+) Dividend Accrued	51.53 0.75 0.80
Total Closing Assets (-) Payable on shares (-) Expenditure incurred	53.08 (8.32) (1.00)
Closing Net Assets	43.76

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 43.76 \text { crores }}{30 \text { Lakh Units }}\)
= \(\frac{\text { Rs. } 4376 \text { Lakhs }}{\text { 30 Lakh Units }}\) = Rs. 145.87 per unit

Working Note-1 Calculation of Market Value of Portfolio

Particulars	Workings	Rs. in crores
Listed Shares	(30 × 9000)/7100	38.03
Unlisted Bonds (Unquoted)	(at cost)	1.00
Listed Bonds & Debentures	(value is given)	10.00
Other Fixed Interest Securities	Tutorial Note	2.50
		51.53

Tutorial Note:
The current realizable value of fixed income securities has no relevance in the given problem as it is to be valued at cost, as per the instruction given in the question. Had this instruction not been given, then the value would have been calculated as follows:
Value = \(\frac{2.50}{100}\) × 106.5 = Rs. 2.66
The above calculation is based on the assumption that these securities have been purchased at face value.

Question 3.
Based on the following information; determine the NAV of a regular income scheme on per unit basis:

	Rs. in Crores
Listed shares at Cost (ex-dividend) Cash in handBonds and debentures at cost Of these, bonds not listed and quoted Other fixed interest securities at cost	20 1.23 4.3 1 4.5 0 8
Amount payable on shares Expenditure accrued Number of units (Rs. 10 face value)	6.32 0.75 20 lacs
Current realizable value of fixed income
Securities or race value ot Rs. 100 The listed shares were purchased when Index was	106.5 1,000
Present index is	2,300
Value of listed bonds and debentures at NAV date	8

There has been a diminution of 20% in unlisted bonds and debentures other fixed interest securities are at cost. [May 2010] [6 Marks]
Answer:

	Rs. in crores
Market Value of Portfolio [Working Note-1]	59.30
(+) Closing cash in hand	1.23
(+) Dividend Accrued	0.80
Total Closing Assets	61.33
(-) Payable on shares	(6.32)
(-) Expenditure incurred	(0.75)
Closing Net Assets	54.26

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 54.26 \text { crores }}{20 \text { Lakh Units }}\)
= \(\frac{\text { Rs. } 5426 \text { Lakhs }}{20 \text { Lakh Units }}\) = Rs. 271.30 per unit

Working Note-1 Calculation of Market Value of Portfolio

Particulars	Workings	Rs. in crores
1. Listed Shares	(20 × 2300)/1000	46.00
2. Unlisted Bonds (Unquoted)	(1 – 20%)	0.80
3. Listed Bonds & Debentures	(Given value)	8.00
4. Other Fixed Interest Securities	(At cost)	4.50
		59.30

Question 4.
A mutual fund made an issue of 10,00,000 units of Rs. 10 each on January 01, 2008. No entry load was charged. It made the following investments:

50,000 Equity shares of Rs. 100 each @ Rs. 160	Rs. 80,00,000
7% Government Securities	8,00,000
9% Debentures (Unlisted)	5,00,000
10% Debentures (Listed)	5,00,000
	98,00,000

During the year, dividends of Rs. 12,00,000 were received on equity shares, Interest on all types of debt securities was received as and when due. At the end of the year equity shares and 10% debentures are quoted at 175% and 90% respectively. Other investments are at par.
Find out the Net Asset Value (NAV) per unit given that operating expenses paid during the year amounted to Rs. 5,00,000. Also find out the NAV, if the Mutual fund had distributed a dividend of Rs. 0.80 per unit during the year to the unit holders. [Nov. 2009] [8 Marks]
Answer:
(a) Computation of NAV, when dividend is not paid:

	Rs.
Market Value of Portfolio [Working Note-1] (+) Closing cash in hand [Working Note-2] (+) Accrued Income Total Closing Assets (-) Accrued Expenses (-) Other Liabilities	105,00,000 10,51,000 Nil 115,51,000 Nil Nil
Closing Net Assets	115,51,000

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 115,51,000}{10,00,000 \text { Units }}\)
= Rs. 11.55 per unit

(b) NAV, when dividend is paid:
NAV per unit = \(\frac{\text { Rs. } 115,51,000 \text { minus }(10,00,000 \times 0.80)}{10,00,000 \text { Units }}\) = Rs. 10.75 per unit

Working Note – 1 Calculation of Market Value of Investments

Particulars	Workings	Rs.
1. Equity Shares (Quoted at 175% i.e. Rs. 175)	50,000 @ Rs. 175	87,50,000
2. 10% Debentures (Quoted at 90%)	5,00,000 @ 90%	4,50,000
3. 7% Government Securities		8,00,000
4. 9% Unlisted Debentures		5,00,000
Market Value of Investments		1,05,00,000

Working Note – 2 Calculation of cash balance at the end of year

Question 5.
Based on the following data, estimate the Net Asset Value (NAV) on per unit basis of a Regular Income Scheme of a Mutual Fund:

	Rs. (in lakhs)
Listed Equity shares at cost (ex-dividend)	40.00
Cash in hand	2.76
Bonds & Debentures at cost	8.96
Of these, Bonds not listed & not quoted	2.50
Other fixed interest securities at cost	9.75
Dividend accrued	1.95
Amount payable on shares	13.54
Expenditure accrued	1.76

Additional Information:
(1) Current realizable value of fixed income securities of face value of Rs. 100 is Rs. 96.50.
(2) Number of Units (Rs. 10 face value each): 2,75,000
(3) All the listed equity shares were purchased at a time when market portfolio index was 12,500. On NAV date, the market portfolio index is at 19,975.
(4) There has been a diminution of 15% in unlisted bonds and debentures valuation.
(5) Listed bonds and debentures carry a market value of Rs. 7.5 lakhs, on NAV date.
(6) Operating expenses paid during the year amounted to Rs. 2.24 lakhs. Take decimal up to three digits (when expressed in lakhs). [May 2014] [8 Marks]
Answer:
Calculation of Closing Net Assets

	Rs. in crores
Market Value of Portfolio[Working Note-1]	82.954
(+) Closing cash in hand	2.760
(+) Dividend Accrued	1.950
Total Closing Assets	87.664
(-) Payable on shares	(13.54)
(-) Expenditure incurred	(1.76)
Closing Net Assets	72.364

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 72.364 \text { crores }}{2,75,000 \text { Units }}\)
= \(\frac{\text { Rs. } 72.364 \text { Lakhs }}{2.75 \text { Lakh Units }}\) = Rs. 26.3142 per unit

Working Note-1 Calculation of Market Value of Portfolio:

Particulars	Workings	Rs. in crores
Listed Shares	(40 × 19975)/12500	63.920
Unlisted Bonds (Unquoted)	(2.5 – 15%)	2.125
Listed Bonds & Debentures	(Given value)	7.500
Other Fixed Interest Securities	(9.75 × 96.50)/100	9.409
		82.954

Tutorial Note:
(1) The information regarding operating expenses paid has no use since closing cash as well as closing accrued expenses are given.
(2) It has been assumed that the other fixed interest securities have been acquired at their face value.

Question 6.
A Mutual Fund Co. has the following assets under it on the close of business as on :

Company	No. of Shares	1st February 2012 Market price per share (Rs.)	2nd February 2012 Market price per share (Rs.)
L Ltd.	20,000	20.00	20.50
M Ltd.	30,000	312.40	360.00
N Ltd.	20,000	361.20	383.10
P Ltd.	60,000	505.10	503.90

Total No. of Units 6,00,000
(i) Calculating Net Assets Value (NAV) of the Fund as on 1st February, 2012.
(ii) Following information is given:
Assuming one Mr. A, submits a Cheque of Rs. 30,00,000 to the Mutual Fund and the Fund manager of this company purchases 8,000 shares of M Ltd; and the balance amount is held in Bank. In such a case, what would be the position of the Fund?
(iii) Find new NAV of the Fund as on 2nd February 2012. [May 2012] [8 Marks]
Answer:
(i) NAV of the Fund as on 1st February, 2012

Company	No. of Shares	Market Price	Amount (Rs.)
L Ltd.	20,000	20.00	4,00,000
M Ltd.	30,000	312.40	93,72,000
N Ltd.	20,000	361.20	72,24,000
P Ltd.	60,000	505.10	3,03,06,000
			4,73,02,000

NAV = \(\frac{\text { Rs. } 4,73,02,000}{6,00,000}\) = Rs. 78. 84 (rounded Off)

(ii) The revised position of fund after receipt of Cheque from Mr. A:

Company	No. of Shares	Market Price	Amount (Rs.)
L Ltd.	20,000	20.00	4,00,000
M Ltd.	38,000	312.40	1,18,71,200
N Ltd.	20,000	361.20	72,24,000
P Ltd.	60,000	505.10	3,03,06,000
Cash			5,00,800
			5,03,02,000

Cash Balance = 30 Lakhs – (8,000 × 312.40) = Rs. 5,00,800
No. of units of fund = 6,00,000 + \(\frac{R s .30,00,000}{78.84}\) = 6,38,053

(iii) On 2nd February 2012, the NAV of fund will be as follows:

Shares	No. of Shares	Price (2nd Feb.)	Amount (Rs.)
L Ltd.	20,000	20.50	4,10,000
M Ltd.	38,000	360.00	1,36,80,000
N Ltd.	20,000	383.10	76,62,000
P Ltd.	60,000	503.90	3,02,34,000
Cash			5,00,800
			5,24,86,800

NAV as on 2nd February 2012 = \(\frac{R s .5,24,86,800}{6,38,053}\) = Rs. 82.26 per unit
Assumption: It has been assumed that the cheque of Rs. 30 lakhs has been realised on 1st February itself and the fund manager has purchased the units on the same day.

Question 7.
The following information is extracted from Steady Mutual Fund’s Scheme:

Asset Value at the beginning of the month	Rs. 65.78
Annualized return	15%
Distributions made in the nature of Income (per unit)	Re. 0.50
Distributions made in the nature of Capital gain (per unit)	Re. 0.32

You are required to:
1. Calculate the month end net asset value of the mutual fund scheme (limit ^our answers to two decimals).
2. Provide a brief comment on the month end NAV. [Nov. 2012] [5 Marks]
Answer:
1. Calculation of NAV at the end of month:
r = \(\frac{\left(\mathrm{NAV}_{\mathrm{t}}-\mathrm{NAV}_{\mathrm{t-1}}\right)+\mathrm{I}_{\mathrm{t}}+\mathrm{CG}_{\mathrm{t}}}{\mathrm{NAV}}\)
NAV_t = Net Asset Value at time period t
NAV_t-1 = Net Asset Value at time period t-1
I_t = Income at time period t
CG_t = Capital Gain distribution at time prd. t
Given Annual Return = 15%
Monthly Return (r) = 1.25%
Income (I t) = Re. 0.50
Capital Gain (CG t) = Re. 0.32
NAV_t-1 = Rs. 65.78
0 0125 = \(\frac{\left(\mathrm{NAV}_{\mathrm{t}}-\text { Rs. } 65.78\right)+\text { Re. } 0.50+\text { Re. } 0.32}{\text { Rs. } 65.78}\)
0. 82 = NAV_t – Rs. 64.96
NAV_t = Rs. 65.78 2.
2. There is no change in NAV.

Question 8.
A mutual fund that had a net asset value of Rs. 20 at the beginning of the month made income and capital gain distribution of Re. 0.0375 and Re. 0.03 per share respectively during the month, and then ended the month with a net asset value of Rs. 20.06. Calculate monthly return. [May 2010] [5 Marks]
Answer:

	Rs. Unit
Increase in NAV: [NAVt – NAVt-1] i.e. (Rs. 20.06 – Rs. 20.00)	0.0600
Dividend received [It]	0.0375
Capital gain distribution [CGt]	0.0300
Total Return during Holding period	0.1275

Monthly Return on investment = \(\frac{0.1275}{20}\) x 100 = 0.6375%
Alternative Solution:
r = \(=\left[\frac{\left(N A V_t-N A V_{t-1}\right)+I_t+C G_t}{N A V_{t-1}}\right]\)
Where
R= Return on the mutual fund
NAV_t = Net Assets Value at time period t
NAV_t-1 = Net Assets Value at time period t-1
It= income at time period t
CG_t = Capital Gain distribution at time period t
r = \(\left[\frac{(20.06-20)+0.0375+0.03}{20}\right]\) = 0.006375 or 0.6375%

Question 9.
A mutual fund that had a net asset value of Rs. 16 at the beginning of the month made income and capital gain distribution of Re. 0.04 and Re. 0.03 per share respectively during the month, and then ended the month with a net asset value of Rs. 16.08. Calculate monthly and annual rate of return. [June 2009] [4 Marks]
Answer:

	Rs. Unit
Increase in NPV: [NAVt – NAVt-1] ie. (Rs. 16.08 – Rs. 16)	0.08
Dividend received [It]	0.04
Capital gain distribution [CGt]	0.03
Total Return during Holding period (Month)	0.15

Monthly Return on investment = \(\frac{0.15}{16}\) × 100 = 0.9375%
Annual Rate of Return = \(\frac{0.9375}{1}\) × 12 = 11.25%

Alternative Solution:
r = \(\left[\frac{\left(N A V_t-N A V_{t-1}\right)+I_t+G_t}{N A V_{t-1}}\right]\)
Monthly Return (r) = \(\left[\frac{(16.08-16)+0.04+0.03}{16}\right]\) = 0.009375 or 0.9375%
Annual Rate of Return = \(\frac{0.9375}{1}\) × 12 = 11.25%

Question 10.
An investor purchased 300 units of Mutual Fund at Rs. 12.25 per unit on 31st December, 2009. As on 31st December, 2010 he has received Rs. 1.25 as dividend and Re. 1.00 as capital gains distribution per unit.
Required:
(i) The return on the investment if the NAV as on 31st December, 2010 is Rs. 13.00.
(ii) The return on the investment as on 31st December, 2010 if all dividends
and capital gains distributions are reinvested into additional units of the fund at Rs. 12.50 per unit. [May 2011] [8 Marks]
Answer:
(i) Calculation of Holding Period Return

	Rs./Unit
Increase in NPV: [NAVt – NAVt-1] i.e. (Rs. 13.00 – Rs. 12.25)	0.75
Dividend received[It]	1.25
Capital gain distribution[CGt]	1.00
Total Return during Holding period	3.00

Return on investment = \(\frac{3.00}{12.25}\) × 100
= 24.49% p.a. [Since the holding period is 1 year]

(ii) When all dividends and capital gains distributions are reinvested into additional units of the Fund:

Particulars	Calculations	Result
Dividends and Capital Gains per unit	1.25 + 1.00	Rs. 2.25 per unit
Total amount reinvested from 300 units	Rs. 2.25 × 300	Rs. 675
Reinvestment unit Price		Rs. 12.50
Additional units added	Rs. 675/12.50	54 Units
Value of 354 units at the end of the year	354 × 13	Rs. 4,602
Initial Investment	300 × 12.25	Rs. 3,675

Holding Period Return = \(\frac{\text { Value of closing units }- \text { Initial Investment }}{\text { Initial Investment }}\)
\(\frac{R s .4,602-3,675}{3,675}=\frac{R s .927}{3,675}\) = 25.22%

Question 11.
Orange purchased 200 units of Oxygen Mutual Fund at Rs. 45 per unit on 31st December, 2009. In 2010, he received Re.1.00 as dividend per unit and a capital gains distribution of Rs. 2 per unit.
Required:
(i) Calculate the return for the period of one year assuming that the NAV as on 31st December 2010 was Rs. 48 per unit.
(ii) Calculate the return for the period of one year assuming that the NAV as on 31st December 2010 was Rs. 48 per unit and all dividends and capital gains distributions have been reinvested at an average price of Rs. 46.00 per unit. Ignore taxation. [Nov. 2011] [5 Marks]
Answer:
(i) Calculation of Holding Period Return

	Rs./Unit
Increase in NPV: [NAVt NAVt-1] ie. (Rs. 48 – 45)	3.00
Dividend received [It]	1.00
Capital gain distribution [CGt]	2.00
Total Return during Holding period	6.00

Return on investment = \(\frac{6.00}{45}\) × 100
= 13.3396 p.a. [Since the holding period is 1 year]

(ii) When all dividends and capital gains distributions are reinvested into additional units of the Fund:

Particulars	Calculations	Result
Dividends and Capital Gains per unit	1.00 + 2.00	Rs. 3.00 per unit
Total amount reinvested from 200 units	Rs. 3.00 × 200	Rs. 600
Reinvestment unit Price		Rs. 46
Additional units added	Rs. 600/46	13.04 Units
Value of 213.04 units at the year end	213.04 × 48	Rs. 10,225.92
Initial Investment	200 × 45	Rs. 9,000

Holding Period Return = \(=\frac{\text { Value of closing units – Initial Investment }}{\text { Initial Investment }}\)
= \(\frac{R s \cdot 10,225.92-9,000}{9,000}=\frac{R s \cdot 1,225 \cdot 92}{R s .9,000}\) × 100 = 13.62%

Question 12.
SBI mutual fund has a NAV of Rs. 8.50 at the beginning of the year. At the end of the year NAV increases to Rs. 9.10. Meanwhile fund distributes Re, 0.90 as dividend and Re. 0.75 as capital gains.
(i) What is the fund’s return during the year?
(ii) Had these distributions been reinvested at an average NAV of Rs. 8.75 assuming 200 units was purchased originally, what is the return? [Nov. 2017] [5 Marks]
Answer:
(i) Calculation of Holding Period Return

	Rs. Unit
Increase in NPV: [NAVt NAVt-1] ie. (Rs. 9.10-8.50)	0.60
Dividend received [It]	0.90
Capital gain distribution [CGt]	0.75
Total Return during Holding period	2.25

Return on investment = \(\frac{2.25}{8.50}\) × 100
= 26.47% p.a. [Since the holding period is 1 year]

(ii) When all dividends and capital gains distributions are reinvested into additional units of the Fund:

Particulars	Calculations	Result
Dividends and Capital Gains per unit	0.90 + 0.75	Rs. 1.65 per unit
Totai amount reinvested from 200 units	Rs. 1.65 × 200	Rs. 330
Reinvestment unit Price		Rs. 8.75
Additional units added	Rs. 330/8.75	37.71 Units
Value of 237.71 units at the year end	237.71 × 9.10	Rs. 2,163.16
Initial Investment	200 × 8.50	Rs. 1,700

Holding Period Return = \(\frac{\text { Value of closing units – Initial Investment }}{\text { Initial Investment }}\)
= \(\frac{R s \cdot 2,163.16-1,700}{1,700}\) × 100 = \(\frac{R s .463 .16}{R s .1,700}\) × 100 = 27.25%

Question 13.
A mutual fund having 300 units has shown its NAV of Rs. 8.75 and Rs. 9.45 at the beginning and at the end of the year respectively. The Mutual fund has given two Options to the Investors:
(i) Get dividend of Re. 0.75 per unit and capital gain of Re. 0.60 per unit, or
(ii) These distributions are to be reinvested at an average NAV of Rs. 8.65 per unit.
What difference would it make in term of returns available and which option is preferable by the investors? [Nov. 2018] [8 Marks]
Answer:
Option 1: When Dividend and Capital Gain are paid Returns for the year (on per Unit Basis)

Change in Price (9.45 – 8.75)	0.70
Dividend Received	0.75
Capital Gain	0.60
Total Returns in holding period (one year)	₹ 2.05

Holding Period Reward = \(\frac{2.05}{8.75}\) × 100 = 23.43%
Alternatively:

Option 2: When Dividend and Capital Gain are reinvested

Dividend per unit	0.75
Capital Gain per unit	0.60
	1.35

Total Received for 300 units = 1.35 × 300 = t 405
Additional Units Acquired = \(\frac{405}{8.65}\) = 46.82 units
Total units = 300 + 46.82 = 346.82 units

	Beginning of Year	End of Year
Units held	300	346.82
NAV Per Unit	₹ 8.75	₹ 9.45
Total value	₹ 2,625	₹ 3277.45

Holding Period Reward = \(\frac{3,277.45-2,625}{2,625}\) × 100 = 24.85%
Conclusion: Since the Holding Period Reward is more in terms of percentage in option-II (Reinvestment of distributions), the option II is preferable.

Question 14.
The following information is extracted from Steady Mutual Fund Scheme:

Asset value at the beginning of the month	Rs. 65.78
Annualised Return	15%
Distribution made in the nature of the income (Per Unit)	0.50
Distribution made in the nature of the Capital Gain (Per Unit)	0.32

(i) Calculate the month end Net Assets Value of the mutual fund scheme (Limit your answer to two decimal).
(ii) Provide a brief comment on the month end NAV. [Nov. 2012] [5 Marks]
Answer:
(i) Calculation of NAV at the end of the month
r = \(\left[\frac{\left(N A V_t-N A V_{t-1}\right)+I_t+G_{\mathrm{I}}}{N A V_{t-1}}\right]\)
Where
R= 15% p.a. = 1.25% per month
NAV_t =?
NAV_t-1 = Rs. 65.78
I = Rs. 0.50
G_t = Rs. 0.32
0.00125 = \(\left[\frac{\left(\mathrm{NAV}_{\mathrm{t}}-65.78\right)+0.50+0.32}{65.78}\right]\)

On solving the above equation, we get NAV_t = Rs. 65.78
(ii) Comment on month end NAV
There is no change in the value of NAV, as the entire income and gain has been distributed.

Question 15.
A Mutual Fund having 300 units has shown its NAV of Rs. 8.75 and Rs. 9.45 at the beginning and at the end of the year respectively. The Mutual Fund has given two options:
(i) Pay Re. 0.75 per unit as dividend and Re. 0.60 per unit as a capital gain, or
(ii) These distributions are to be reinvested at an average NAV of Rs. 8.65 per unit.
What difference it would make in terms of return available and which option is preferable? [May 2006] [6 Marks]
Answer:
Calculation of Holding Period Return under OPTION I [Income Plan]

	Rs. Unit
Increase in NPV: [NAVt NAVt-1] ie. (Rs. 9.45 – 8.75)	0.70
Dividend received [It]	0.75
Capital gain distribution [CGt]	0.60
Total Return during Holding period	2.05

Return on investment = \(\frac{2.05}{8.75}\) × 100
= 23.43% p.a. [Since the holding period is 1 year]

Under option II, all dividends and capital gains distributions are reinvested into additional units of the Fund @ Rs. 8.65 per unit.

Particulars	Calculations	Result
Dividends and Capital Gains per unit	0.75 + 0.60	Rs. 1.35 per unit
Total amount reinvested from 300 units	Rs. 1.35 × 300	Rs. 405.00
Reinvestment unit Price		Rs. 8.65
Additional units added	Rs. 405/8.65	46.82 Units
Total units at the end after reinvestment	300 + 46.82	346.82
Value of 346.82 units at the year end	346.82 × 9.45	Rs. 3,277.45
Initial Investment	300 × 8.75	Rs. 2,625.00

Holding Period Return = \(\frac{\text { Value of closing units }- \text { Initial Investment }}{\text { Initial Investment }}\)
= \(\frac{R s .3,277.45-2,625.00}{2,625.00}\) × 100 = \(\frac{R s .652 .45}{R s .2,625.00}\) × 10 = 24.85%
Comment: Since, the Holding Period Reward (in terms of percentage) is more under reinvestment plan, the option II is preferable.

Question 16.
A has invested in three Mutual Fund Schemes as per details below:

	MF-A	MF-B	MFC
Date of Investment	1-12-2009	1-1-2010	1-3-2010
Amount of Investment (Rs.)	50,000	1,00,000	50,000
Net Assets value at entry date	Rs. 10.50	Rs. 10.00	Rs. 10.00
Dividend received up to 31-3-2010	Rs. 950	Rs. 1,500	Nil
Net Asset value as at March 31, 2010	Rs. 10.40	Rs. 10.10	Rs. 9.80

Required:
What is the effective yield on per annum basis in respect of each of the above three schemes to Mr. A up to 31-3-2010? [Nov. 2004] [6 Marks]
Answer:
Calculation of units purchased

Particulars	MFA	MFB	MFC
Amount of Investment (Rs.) (A)	50,000	1,00,000	50,000
NAV at entry date (B)	10.50	10	10
No. of units (A)/(B)	4,761.905	10,000	5.000

Calculation of effective yield

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 17.
Mr. Sinha has invested in three Mutual Fund Schemes as per details below: [Nov. 2009] [6 Marks]

	MF-A	MF-B	MFC
Date of Investment	1-12-2008	1-1-2009	1-3-2009
Amount of Investment (Rs.)	5,00,000	1,00,000	50,000
Net Assets value at entry date	Rs. 10.50	Rs. 10.00	Rs. 10.00
Dividend received up to 31-3-2009	Rs. 9,500	Rs. 1,500	Nil
Net Asset value as at March 31, 2009	Rs. 10.40	Rs. 10.10	Rs. 9.80

You are required to calculate the effective yield on per annum basis in respect of each of the three schemes to Mr. Sinha up to 31-3-2009?
Answer:
Calculation of units purchased

Calculation of effective yield

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 18.
TUV Ltd. has invested in three Mutual Fund schemes as per the details given below:

	Scheme X	Scheme Y	Scheme Z
Date of Investment	1-10-2014	1-1-2015	1-3-2015
Amount of Investment (Rs.)	15,00,000	7,50,000	2,50,000
Net Assets value at entry date	Rs. 12.50	Rs. 36.25	Rs. 27.75
Dividend received up to 31-3-2015	Rs. 45,000	Rs. 12,500	Nil
Net Asset value as at March 31, 2015	Rs. 12.25	Rs. 36.45	Rs. 27.55

What will be the effective yield (per annum basis) for each of the above three schemes upto 31st March 2015?
Answer:
Calculation of units purchased

Particulars	MFX(Rs.)	MF Y (Rs. )	MFZ (Rs.)
Amount of Investment (A)	15,00,000	7,50,000	2,50,000
NAV at entry date (B)	12.50	36.25	27.75
No. of units (A)/(B)	1,20,000	20,689.66	9,009

Calculation of effective yield

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 19.
Mr. A has invested in three Mutual Fund (MF) schemes as per the details given below:

Particulars	MF ‘A’	MFB’	MF‘C’
Date of Investment	01-11-2015	01-02-2016	01-03-2016
Amount of Investment (Rs.)	1,00,000	2,00,000	2,00,000
Net Asset Value at entry date (Rs.)	10.30	10.00	10.10
Dividend Received up to 31-3-2016 (Rs.)	2,850	4,500	Nil
NAV as on 31-3-2016 (Rs.)	10.25	10.15	10.00

Assume 1 year = 365 days. Show the amount of rupees up to two decimal points.
You are required to find out the effective yield (up to three decimal points) on per annum basis in respect of each of the above three Mutual Fund (MF) schemes up to 31-3-2016. [Nov. 2016] [5 Marks]
Answer:
Calculation of units purchased

Calculation of effective yield

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 20.
Mr. Suhail has invested in three Mutual Fund Schemes as given below:

Particulars	Scheme A Rs.	Scheme B Rs.	Scheme C Rs.
Date of investment	1-4-2011	1-5-2011	1-7-2011
Amount of investment	12,00,000	4,00,000	2,50,000
Net Asset Value at entry date	10.25	10.15	10.00
Dividend received up to 31-7-2011	23,000	6,000	Nil
NAV as at 31-7-2011	10.20	10.25	9.90

You are required to calculate the effective yield on per annum basis in respect of each of the three Schemes to Mr. Suhail up to 31-7-2011.
Take one year = 365 days.
Show calculations up to two decimal points. [May 2013] [10 Marks]
Answer:
Calculation of units purchased

Particulars	A	B	C
Amount of Investment (x)	12,00,000	4,00,000	2,50,000
NAV at entry date (y)	10.25	10.15	10.00
No. of units (x)/(y)	1,17,073.17	39,408.87	25,000

Calculation of effective yield

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 21.
Ramesh Goyal has invested in three Mutual Funds. From the details given below, find out effective yield on per annum basis in respect of each of the schemes to Ramesh Goyal up to 31.03.2012.

Mutual Fund	X	Y	z
Date of investment	01.12.2011	01.01.2012	01.03.2012
Amount of investment (Rs.)	1,00,000	2,00,000	1,00,000
NAV at the date of investment (Rs.)	10.50	10.00	10.00
Dividend receipt upto 31.03.2012 (Rs.)	1,900	3,000	Nil
NAV as on 31.03,2012 (Rs.)	10.40	10.10	9.80

Answer:
Computation of Net Value Added during the year ended 31.03.2012

Effective yield in %

Question 22.
Mr. Y has invested in three Mutual Fund (MF) schemes as per the following details:

Particulars	MF‘X’	MF‘Y’	MF‘Z’
Amount of Investment (Rs.)	2,00,000	4,00,000	2,00,000
Net Asset Value at the time of purchase (Rs.)	10.30	10.10	10.00
Dividend Received up to 31-3-2018 (Rs.)	6,000	Nil	5,000
NAV as on 31-3-2018 (Rs.)	10.25	10.00	10.20
Effective Yield per annum as on 31-3-2018 (%)	9.66	-11.66	24.15

Assume 1 year = 365 days.
Mr. Y has misplaced the documents of his investment. Help him in finding the date of his original investment after ascertaining the following:
(i) Number of units in each scheme
(ii) Total NAV
(iii) Total Yield and
(iv) Number of days investment held [May 2018] [5 Marks]
Answer:
(i) Calculation of Number of Units in each Scheme

(ii) Calculation of Total NAV on 31.03.2018

(iii) Total Yield

Total Yield = \(\frac{10,068.77}{8,00,000}\) × 100 = 1.2586%

(iv) Determination of Number of days the investment is held:

Tutorial Note: While calculating number of days, the date of investment is taken into account.

Question 23.
Mr. A can earn a return of 16% by investing in equity shares on his own. Now, he is considering a recently announced equity based mutual fund scheme in which initial expenses are 5.5% and annual recurring expenses are 1.5%. How much should the Mutual Fund earn to provide Mr. A return of 16%? [Nov. 2003] [4 Marks]
Answer:
r₁ = Personal earnings of Mr. A = 16%
r₂ = Mutual Funds earnings
r₂ = \(\frac{r_1}{1-\text { initial } \exp \cdot(\%)}\) + recuring exp.(%)

The rate of return the mutual fund should earn (ie. r₂);
r₂ = \(\frac{16 \%}{1-0.055}\) + 1.5% = 16.93 + 1.5 = 18.43%

Question 24.
Mr. X earns 10% on his investments in equity shares. He is considering a recently floated scheme of a Mutual Fund where the initial expenses are 6% and annual recurring expenses are expected to be 2%. How much the Mutual Fund scheme should earn to provide a return of 10% to Mr. X? [June 2009] [2 Marks]
Answer:
r₁ = Personal earnings of Mr. X
r₂ = Mutual Funds earnings
r₂ = \(\frac{r_1}{1-\text { initial } \exp (\%)}\) + recuring exp.(%)
The rate of return the mutual fund should earn (ie. r₂);
r₂ = \(\frac{10 \%}{1-0.06}\) + 2% = 10.64 + 2 = 12.64%

Question 25.
“Mr. Alex, a practicing Chartered Accountant, can earn a return of 15 per cent by investing in equity shares on his own. He is considering a recently announced equity based mutual fund scheme in which initial expenses are 6 per cent and annual recurring expenses are 2 per cent.
(i) How much should the mutual fund earn to provide Mr. Alex a return of 15 per cent per annum ?
(ii) Mr. Alex’s current Annual Professional Income is Rs. 40 Lakhs. His portfolio value is Rs. 50 Lakhs and now he is spending 10% of his time to manage his portfolio. If he spends this time on profession, his profes-sional income will go up in same proportion. He is thinking to invest his entire portfolio into a Multieap Fund, assuming the fund’s NAV will grow at 13% per annum (including dividend).
You are requested to advise Mr. Alex, whether he can invest the portfolio into Multicap Funds ? If so, what is the net financial benefit ? [Nov. 2019 Old Syllabus] [8 Marks]
Answer:
(i) r₁ = Personal earnings of Mr. X
r₂ = Mutual Funds earnings
r₂ = \(\frac{r_1}{1-\text { initial } \exp (\%)}\) + recuring exp.(%)
The rate of return the mutual fund should earn (i.e. r₂);
r₂ = \(\frac{15 \%}{1-0.06}\) + 2.0% = 15.96 + 2 = 17.96%

(ii) Calculation of Return when 100% time is devoted to profession:
Current Income of Mr. Alex = Rs. 40 Lakh He spends 90% time in profession.
Increase in Income by investing 10% remaining time = \(\frac{40}{90}\) × 10
= Rs. 4.44 Lakhs
Total Income from profession (100% time) = Rs. 44.44 Lakhs

Source	90% time to Profession (Existing)	100% time to Profession (Proposed)
Professional Income	Rs. 40 Lakhs	Rs. 44.44 Lakhs
Return from investment in Equity	Rs. 50 Lakhs × 15% = Rs. 7.50 Lakhs	Nil
Return from investment in Mutual Fund	Nil	Rs. 50 Lakhs × 13% = Rs. 6.50 Lakhs
Total	47.5 Lakhs	50.94 Lakhs

∴ Increase in Income (50.94 – 47.5) = Rs. 3.44 Lacs
Therefore, Mr. Alex is advised to invest the portfolio into Multicap Funds and devotes 100% time to his profession.

Question 26.
The unit price of Equity Linked Savings Scheme (ELSS) of a mutual fund is Rs. 10. The public offer price (POP) of the unit is Rs. 10.204 and the redemption price is Rs. 9.80.
Calculate:
(i) Front-end Load
(ii) Back-end Load [May 2018 Old Course] [5 Marks]
Answer:
(i) Calculation of Front-end Load:
Public Offer Price = \(\frac{\text { Net Asset Value }}{1-\text { Front-end load }}\)
10.204 = \(\frac{10}{1-\text { Front-end load }}\)
Therefore,
1 – Front end load = \(\frac{10}{10.204}\) = .9
Front end load = 1 – 0.98 = .02 = 2%

(ii) Calculation of Back-end Load:
Redemption Price = Net Asset Value × (1- Back-end Load)
9.8 = 10 × (1- Back-end Load)
Therefore,
1 – Back end load = \(\frac{9.8}{10}\) = 0.98 10
Back end load = 1- 0.98 = .02 = 2%

Alternative Solution suggested by ICAI
Front End Load = \(\frac{10.204-10.00}{10.00}\) = 0.0204 or 2.04%
Exit Load = \(\frac{10.00-9.80}{10.00}\) = 0.020 or 2.00%

Question 27.
During the year 2017 an investor invested in a mutual fund. The capitai gain and dividend for the year was Rs. 3.00 per unit, which were reinvested at the year-end NAV of Rs. 23.75. The investor had total units of 26,750 as at the end of the year. The NAV had appreciated by 18.75% during the year and there was an entry load of Re. 0.05 at the time when the investment was made.
The investor lost his records and wants to find out the amount of investment made and the entry load in the mutual fund. [Nov. 2018 Old Course] [5 Marks]
Answer:
Calculation of Opening NAV
Closing NAV is Rs. 23.75 and Increase in NAV is 18.75%.
Therefore, if the opening NAV is x, then
x + 0.1875 x = 23.75
x = Rs. 20 Therefore, opening NAV was Rs. 20.

Calculation of Units purchased initially
Let number of units purchased initially = Y
Capital Gain and Dividends distributed = Rs. 3 per unit
Therefore, total Capital Gains = 3Y
Number of new units purchased by re-investment is calculated as follows:
= \(\frac{\text { Capital Gains + Dividends }}{\text { Closing NAV }}=\frac{3 Y}{R s .23 .75}\)
Therefore, total number of units = Y + \(\frac{3 Y}{R s .23 .75}\)
Given total units = 26,750
Y + \(\frac{3 Y}{R s .23 .75}\) = Rs. 23.75
Y = 23,750 units
Original units purchased = 23,750 units
Calculation of Investment made and Entry Load paid
Entry Load = 0.05
Cost Price of each unit at the time of investment = NAV + Entry Load = Rs. 20.00 + 0.05 = 20.05
Total investment = 23,750 Units x Rs. 20.05 = Rs. 4,76,187.50
Entry Load = 23,750 Units × Re. 0.05 = Rs. 1,187.50

Question 28.
On 1-4-2012 ABC Mutual Fund issued 20 lakh units at Rs. 10 per unit. Relevant initial expenses involved were Rs. 12 lakhs. It invested the fund so raised in capital market instruments to build a portfolio of Rs. 185 lakhs. During the month of April 2012 it disposed off some of the instruments costing Rs. 60 lakhs for Rs. 63 lakhs and used the proceeds in purchasing securities for Rs. 56 lakhs. Fund management expenses for the month of April 2012 were Rs. 8 lakhs of which 10% was in arrears. In April 2012 the fund earned dividends amounting to Rs. 2 lakhs and it distributed 80% of the realized earnings. On 30-4-2012 the market value of the portfolio was Rs. 198 lakhs.
Mr. Akash, an investor, subscribed to 100 units on 1-4-2012 and disposed off the same at closing NAV on 30-4-2012. What was his annual rate of earning? [May 2013] [8 Marks]
Answer:
Calculation of Closing Net Assets

	Rs. in Lakhs
Market Value of Portfolio	198.00
(+) Closing cash in hand [Working Note- 1]	0.80
(+) Accrued Income	Nil
Total Closing Assets	198.80
(-) Accrued Expenses	(Nil)
(-) Other Liabilities (Management Expenses)	(0.80)
Closing Net Assets	198.00

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 198.00 \text { Lakhs }}{20 \text { Lakhs Units }}\) = Rs. 9.90 per unit

Calculation of Holding Period Return (Per Unit)

	Rs.Unit
Increase in NPV: [NAVt – NAVt-1] i.e. (Rs. 10.00 – Rs. 9.90)	(0.10)
Dividend received [It Per Unit [1.60 ÷ 20]	0.08
Capital gain distribution [CGt]	0.12
Total Return during Holding period	0.10

Return on investment (Monthly) = \(\frac{0.10}{10}\) × 100
= 1%
Return on investment (Annualized) = \(\frac{1}{1}\) × 12 = 12% p.a.

Working Note-1
Calculation of cash balance at the end of year

Question 29.
A mutual fund raised Rs. 150 lakhs on April 1, 2018 by issue of 15 lakhs units at Rs. 10 per unit. The fund invested in several capital market instruments to build a portfolio of Rs.140 lakhs. Initial expenses amounted to Rs. 8 lakhs. During the month of April, the funds sold certain instruments costing Rs. 44.75 lakhs for Rs. 47 lakhs and used the proceeds to purchase certain other securities for Rs. 41.6 lakhs. The fund management expenses for the month amounted to Rs. 6 lakh of which Rs. 50,000 was in arrears. The fund earned dividends amounting to Rs. 1.5 lakhs and it distributed 80% of the realized earning. The market value of the portfolio on 30th April, 2018 was Rs. 147.85 lakhs.
An investor subscribed to 1000 units on April 1 and disposed it off at closing NAV on 30th April. Determine his annual rate of earnings. [Nov. 2018] [8 Marks]
Answer:
Calculation of Closing Net Assets

NAV per unit = \(\frac{\text { Closing Net Assets }}{\text { Number of Units }}=\frac{\text { Rs. } 147.75 \text { Lakhs }}{15 \text { Lakhs Units }}\) = Rs. 9.85 per unit

Calculation of Holding Period Return (Per Unit)

	Rs. Unit
Increase in NPV: [NAVt – NAVt-1] i.e. (Rs. 10.00 – Rs. 9.85)	(0.15)
Dividend received [It]	0.08
Capital gain distribution [CGt]	0.12
Total Return during Holding period	0.05

Return on investment (Monthly) = \(\frac{0.05}{10}\) × 100 = 0.5%
Return on investment (Annualized) = 0.5 × 12 = 6.0% p.a.

Working Note-1
Calculation of cash balance at the end of year

Question 30.
The following particulars relating to Vishnu Fund scheme:

Particulars relating to each sector are as follows:

Sector	Index on date of
	Purchase	Valuation
Pharmaceutical companies	260	465
Construction industries	210	450
Service sector companies	275	480
IT companies	240	495
Real Estate companies	255	410

The fund has incurred the following expenses:

Consultancy and Management fees	Rs. 480 Lakhs
Office Expenses	Rs. 150 Lakhs
Advertisement Expenses	Rs. 38 Lakhs

You are required to calculate the following:
i. Net Asset Value of the fund
ii. Net asset value per unit
iii. If the period of consideration is 2 years, and the fund has distributed Rs. 3 per unit per year as cash dividend, ascertain the Net return (Annualized).
iv. Ascertain the Expenses ratio. [May 2019][5 Marks]
Answer:
(i) Net Asset Value of the Fund

(ii) Net Asset Value per Unit
NAV per Unit = Net Asset Value of the Fund × No. of Units Outstanding
= ₹ 415.665 Crores × 4.2 Crore Units= ₹ 98.97

(iii) Annualized Return on Fund
(a) Computation of Opening NAV

	Particulars	(₹ in Crore)
1.	Investment in shares (at cost)
	(a) Pharmaceutical companies	79
	(b) Construction industries	31
	(c) Service sector companies	56
	(d) IT companies	34
	(e) Real Estate companies	10
	Particulars	(₹ in Crore)
2.	Investments in Bonds (fixed Income)
	(a) Listed Bonds (8000,14% Bonds of Rs. 15,000 each)	12
	(b) Unlisted Bonds	7
Net Asset Value of the Fund (Opening)		229

Note: Cash and Other Assets are not included because they arise out of investments made in the beginning.

(b) Computation of Opening NAVper Unit
NAV per Unit = Net Asset Value of the Fund No. of Units Outstand-ing
= ₹ 229.00 Crores ÷ 4.20 Crore Units
= ₹ 54.52

(c) Computation of Returns per Unit

Capital Appreciation = Closing NAV per Unit – Opening NAV per	44.45
Unit = ₹ 98.97 – 54.52
Cash Dividend = ₹ 3 × 2 Year	6.00
Total Returns	50.45

(d) Computation of Returns in percentage
NAV per Unit = \(\frac{\text { Return }}{\text { Opening NAV }}\) × 100 = \(\frac{50.45}{54.52}\) × 100 = 92.53%
Return p.a. = Total Return/Period = 92.53% ÷ 2 Years = 46.26%

4. Expense Ratio
(a) Total Expense = Management Advisory Fees ₹ 480 Lakhs + Administration Exp. ₹ 38 Lakhs + Office Expenses ₹ 150 Lakhs = ₹ 668 Lakhs

(b) Average Value of Portfolio
= (Opening Net Asset Value + Closing Net Asset Value) ÷ 2
= (₹ 415.665 Crores + ₹ 229 Crores) ÷ 2
= ₹ 644.665 Crores ÷ 2
= ₹ 322.33 Crores

(c) Expense Ratio = Total Expenses ÷ Average Value of Portfolio
= (₹ 6.68 Crores ÷ ₹ 322.33 Crores) × 100
= 2.07%

(d) Expense Per Unit = Total Expenses ÷ No. of Units = ₹ 6.68 Crores ÷ 4.20 Crores = ₹ 1.59 per unit

Question 31.
Mr. X on 1.7.2012, during the initial public offer of a Mutual Fund (MF) invested Rs. 1,00,000 at Face Value of Rs. 10. On 31.3.2013, the MF declared a dividend of 10% when Mr. X calculated that his holding period return was 115%. On 31.3.2014, MF again declared a dividend of 20%. On 31.3.2015, Mr. X redeemed all his investment which had accumulated to 11,296.11 units when his holding period return was 202.17%.
Calculate the NAV as on 31.03.2013, 31.03.2014 and 31.03.2015. [Nov. 2015] [8 Marks]
Answer:
Calculation of NAV as on 31-3-2013

Original Investment	=	Rs. 1,00,000
Yield for 9 months	=	115%
Market Value of Investments (on 31-3-2013)	=	1,00,000+ 115% 2,15,000
Dividend Paid	=	10% of 1,00,000 Rs. 10,000

NAV would stand reduced to the extent of Dividend Payout.
Therefore, NAV (31-3-2013) = \(\frac{\text { Rs. } 2,15,000-\text { Rs. } 10,000}{10,000 \text { Units }}\) = Rs 20 50

Calculation of NAV as on 31-3-2014

Dividend as on 31.3.2014 = 10,487.80 Units × 10 × 0.2 = Rs. 20,975.60
Units after reinvestment of above dividend = 11,296.11 Units
Increase in units due to reinvestment = 11,296.11 – 10,487.80 = 808.31 Units
Additional units purchased on 31-3-2017 = \(\frac{\text { Dividend Received on 31-3-2014 }}{\text { NAV on 31-3-2014 }}\)
808.31 = \(=\frac{\text { Rs. } 20,975.60}{\text { NAV on } 31-3-2014}\)
Therefore, NAV on 31-3-2014 = \(\frac{\text { Rs. } 20,975.60}{808.31}\) = Rs 25.95

Calculation of NAV as on 31-3-2015

Original Investment	=	Rs. 1,00,000
Holding Period Return (1-7-2012 to 31-3-2015)	=	202.17%
Therefore, Value of Investments on 31-3-2015	=	1,00,000 + 202.17%
	=	Rs. 3,02,170
Number of Units held on 31-3-2015	=	11,296.11 Units

Therefore, NAV on 31-3-2015 = \(\frac{\text { Rs. } 3,02,170}{11,296.11 \text { Units }}\) = Rs. 26.75

Question 32.
Mr. X on 1.7.2000, during the initial offer of some Mutual Fund invested in 10,000 units having face value of Rs. 10 for each unit. On 31.3.2001, the dividend operated by the M.F. was 10% and Mr. X found that his annualized yield was 153.33%. On 31.12.2002, 20% dividend was given. On 31.3.2003, Mr. X redeemed all his balance of 11,296.11 units when his annualized yield was 73.52%. What are the NAVs as on 31.3.2001, 31.12.2002 and 31.3.2003? [Nov. 2006] [6 Marks]
Answer:
This question is similar to Q. 30 (came in Nov. 2015) with the only dif-ference that in this question the annualized yield is given, which needs to be converted into holding period yield, in the following manner:
Yield for 9 months = 153.33 × \(\frac{9}{12}\) = 115%.
The rest of the solution is exactly similar to Q. 30 given before this question.

Question 33.
On 01 -07-2010, Mr. X invested Rs. 50,000 at initial offer in Mutual Funds at a face value of Rs. 10 each per unit. On 31-03-2011, a dividend was paid @ 10% and annualized yield was 120%. On 31-3-2012, 20% dividend and capital gain of Re. 0.60 per unit was given. Mr. X redeemed all his 6271.98 units when his annualized yield was 71.50% over the period of holding.
Calculate NAV as on 31-03-2011, 31-03-2012 and 31-03-2013.
For calculations consider a year of 12 months. [Nov. 2013] [5 Marks]
Answer:
Calculation of NAV as on 31-3-2011

Original Investment	=	Rs. 50,000
Annualized Yield	=	120%
Holding Period (1-7-2010 to 31-3-2011)	=	9 Months
Yield for 9 months 120 X 9/12	=	90%
Market Value of Investments (on 31-3-2011)	=	50,000 + 90% = 95,000
Dividend Paid	=	10% of 50,000 = Rs. 5,000

NAV would stand reduced to the extent of Dividend Payout.

Therefore, NAV (31-3-2011) = \(\frac{\text { Rs. } 95,000-\text { Rs. } 5,000}{5,000 \text { Units }}\) = Rs. 18.00

Calculation of NAV as on 31-3-2013

Dividend as on 31.3.2012 = 5,277.78 Units × 10 × 0.2 = Rs. 10,555.56
Units after reinvestment of above dividend 6,271.98 Units
Increase in units dueto reinvestment = 6,271.98 – 5,277.78 = 994.20 Units
Additional units purchased on 3 1-3-2012 = \(\frac{\text { Dividend Received on 31-3-2012 }}{\text { NAV on } 31-3-2012}\)
994.20 = \(\frac{\text { Rs. } 10,555.56}{\mathrm{NAV} \text { on } 31-3-2012}\)
Therefore, NAV on 3 1-3-2012 = \(\frac{\mathrm{Rs} .10,555.56}{994.20}\) = Rs. 10.62

Calculation of NAV as on 31-3-2013

Therefore, NAV on 31-3-2013 = \(\frac{\mathrm{Rs} \cdot 1,48,312.50}{6271.98 \text { Units }}\) = Rs. 23.65

Question 34.
A reputed financial institution of the country floated a mutual fund having a corpus of Rs. 10 crores consisting of 1 crore units of Rs. 10 each. Mr. Vijay invested Rs. 10,000 for 1,000 units of Rs. 10 each on 1st July 2014. For the financial year ended 31st March 2015, the fund declared a dividend of 10% and Mr. Vijay found that his annualized yield from the fund was 153.33%. The mutual fund during the financial year ended 31st March 2016, declared a dividend of 20%. Mr. Vijay has reinvested the entire dividend in acquiring units of this mutual fund at its appropriate NAV. On 31st March 2017 Mr. Vijay redeemed all his balances of 1129.61 units when his annualized yield was 73.52%.
You are required to find out NAV as on 31st March 2015, 31st March 2016 and 31st March 2017. [Nov. 2017] [8 Marks]
Answer:
Calculation of NAV as on 31-3-2015

Original Investment	Rs. 10,000
Annualized Yield	153.33%
Holding Period (1-7-2014 to 31-3-2015)	9 Months
Yield for 9 months 153.33 × 9/12	115%
Market Value of Investments (on 31-3-2015)	10,000 + 115% – Rs. 21,500
Dividend Paid	10% of 10,000 – Rs. 1,000

NAV would stand reduced to the extent of Dividend Payout.
Therefore, NAV (31-3-2015) = \(\frac{\text { Rs. } 21,500-\text { Rs. } 1,000}{1,000 \text { Units }}\) = Rs. 20.50

Calculation of NAV as on 31-3-2016

Dividend as on 31.3.2016 = 1,048.78 Units × 10 × 0.2 = Rs. 2,097.56
Units after reinvestment of above dividend = 1,129.56
Units Increase in units due to reinvestment = 1,129.61 – 1,048.78 = 80.83 Units
Additional units purchased on 31-3-2016 = \(\frac{\text { Dividend Received on 31-3-2016 }}{\text { NAV on 31-3-2016 }}\)
80.83 = \(\frac{\text { Rs. } 2,097.56}{\text { NAV on } 31-3-2016}\)
Therefore, NAV on 31-3-2016 = \(\frac{\text { Rs. 2,097.5 }}{80.83}\) = Rs. 25.95

Calculation of NAV as on 31-3-2017

Therefore, NAV on 31-3-2017 = \(\frac{{Rs} .30,218}{1129.61 \text { Units }}\) = Rs. 26.75

Question 35.
The following are the data on five mutual funds:

Mutual Fund	Return	Standard Deviation	Beta
A	15	7	1.25
B	18	10	0.75
C	14	5	1.40
D	12	6	0.98
E	16	9	1.50

You are required to compute Reward to Volatility Ratio and rank these port-folios using:
(a) Sharpe Method and
(b) Treynor method
Assuming the risk free rate is 6%. [May 2016] [5 Marks]
Answer:
Sharpe Ratio (S) = \(\frac{\mathrm{R}_{\mathrm{p}}-\mathrm{R}_{\mathrm{f}}}{\alpha_{\mathrm{p}}}\)
Where
R_p = Return on Fund
R_f = Risk-free rate

Treynor Ratio (T) = \(\frac{\mathrm{R}_{\mathrm{p}}-\mathrm{R}_{\mathrm{f}}}{\beta_p}\)
σ = Standard deviation of Fund
β_r = Beta of Fund
The Sharpe ratio indicates the excess return per unit of total risk. It implies that a higher ratio indicates more returns. Therefore, the mutual fund having highest ratio should be ranked first and so on.

Calculation of Sharpe Ratio (Reward to Variability)

The Treynor ratio indicates the excess return per unit of systematic risk. The higher should be preferred and rank should be given accordingly.

Calculation of Treynor Ratio (Reward to Volatility)

Question 36.
The five portfolios of a mutual fund experienced following result during last 10 years periods:

Portfolio	Average annual re­turn %	Standard deviation	Correlation with the market return
A	20.0	2.3	0.8869
B	17.0	1.8	0.6667
C	18.0	1.6	0.600
D	16.0	1.8	0.867
E	13.5	1.9	0.5437

Market risk (σ_m) : 1.2
Market rate of return : 14.3%
Risk free rate : 10.1%
Beta may be calculated only upto two decimal. Rank the portfolio using JENSEN’S ALPHA method. [May 2017] [8 Marks]
Answer:
The Jensen’s Alpha measures the difference between expected return of the portfolio and the required return as per CAPM model. This difference is called as’alpha. If alpha (α) is positive, it indicates that the portfolio is generating good returns.
Alpha (α) = Expected Return – Required return as per CAPM Required return as per CAPM = R_f + p (R_m – R_f)
Since, in this question, Beta (β) is not given; first Beta has to be calculated. The following formula can be used for calculation of Beta (β)
= Co-efficient of correlation between
Standard Deviation of Portfolio Standard Deviation of the market
R_m . R_f = 14.3 – 10.1 = 4.2

Statement of Beta and Jensen Alpha of Portfolio

Question 37.
Five portfolios of a mutual fund experienced following result during last 7 years periods:

Portfolio	Average annual return % [Rp]	Standard deviation [Sp]	Correlation with the market return [r]
A	19.0	2.5	0.840
B	15.0	2.0	0.540
C	15.0	0.8	0.975
D	17.5	2.0	0.750
E	17.1	1.8	0.600

Market risk (σ_m) :1.2
Market rate of return (R_m) : 14.0
Risk free rate (R_f) 9.0
Rank the portfolio using
(a) Sharpe’s Method
(b) Treynor’s Method
(c) Jensen’s Alpha [Practice Question]
Answer:
Let portfolio standard deviation be = σ_p
Market standard deviation = σ_m
Coefficient of correlation = r
Portfolio beta (β_p) = \(\frac{\sigma_p r}{\sigma_m}\)
Required portfolio return (R_p) = R_f + β_p (R_m – R_f)
(a) & (b)

(c) Jensen’s Alpha

Portfolio	Beta	Return as per CAPM (Rp)	Rp – (CAPM)
A	1.75	9.0 + 1.75(14.0 – 9.0) = 17.75	1.25
B	0.90	9.0 + 0.90 (14.0 – 9.0 ) = 13.50	1.5
C	0.65	9.0 + 0.65 (14.0 – 9.0) = 12.25	2.75
D	1.25	9.0 + 1.25(14.0 – 9.0) = 15.25	2.25
E	0.90	9.0 + 0.90(14.0 – 9.0) = 13.50	3.6

Required portfolio return (R ) = R_f + P_p(R_m – R_f)

Question 38.
There are two Mutual Funds viz. D Mutual Fund Limited and K Mutual Fund Limited, each having close ended equity schemes.
NAV as on 31-12-2014 of equity schemes of D Mutual Fund Ltd. is Rs. 70.71 (consisting 99% equity and remaining cash balance) and that of K Mutual Fund Ltd. is Rs. 62.50 (consisting 96% equity and balance in cash).
Following is the other information:

	Equity schemes
	D Mutual Fund Ltd.	K Mutual Fund Ltd.
Sharpe Ratio	2	3.3
Treynor Ratio	15	15
Standard deviation	11.25	5

There is no change in portfolios during the next month and annual average cost is Rs. 3 per unit for the schemes of both the Mutual Funds.
If Share Market goes down by 5% within a month, calculate expected NAV after a month for the schemes of both the Mutual Funds.
For calculation, consider 12 months in a year and ignore number of days for particular month. [May 2015] [8 Marks]
Answer:
The two mutual funds have different proportion invested in equity and balance is held as cash. The equity proportion will fluctuate with fluctuations in share market prices, depending upon the value of Beta (β).
The following steps are to be taken for calculation of final NAV.

Step I Calculation of Beta using Sharpe and Treynor Ratios.

Let us find out the Beta on the basis of value of ER – using Treynor ratio.

Therefore, the β for the two mutual funds are 1.5 and 1.10 respectively.

Step II Determination of Equity proportion in NRV

	D Mutual Fund Ltd. (Rs.)	K Mutual Fund Ltd. (Rs.)
NAV on 31.12.14	70.71	62.50
% of Equity	99%	96%
Equity element in NAV	70	60
Cash element in NAV	0.71	2.50

Step III Calculation of fall in value of Equity
The beta (β) indicates the sensitivity of equity component of the fund with change in share market. As the market has fallen by 5%, the equity element of both the funds will also fall.
Decrease in Value = (β × % fall in Sec. Market) × NAV (Equity Element)
DMF = (1.5 × 5%) × Rs. 70 = Rs. 5.25
KMF = (1.1 × 5%) × Rs. 60 = Rs. 3.30

Step IV Calculation of balance of Cash after 1 month

	D Mutual Fund Ltd. (Rs.)	K Mutual Fund Ltd. (Rs.)
Annual Expenses	3.00	3.00
Monthly Expenses (Annual Exp./12)	0.25	0.25
Opening Cash	0.71	2.50
Less: Expenses during the month	(0.25)	(0.25)
Cash balance after 1 month	0.46	2.25

Step V Calculation of NAV after one month

Question 39.
A mutual fund Company introduces two schemes i.e. Dividend plan (Plan D) and Bonus plan (Plan B). The face value of the unit is Rs. 10. On 01-04-2005, Mr. K invested Rs. 2,00,000 each in Plan – D and Plan – B when the NAV was Rs. 38.20 and Rs. 35.60 respectively. Both the plans matured on 31-03-2010. Particulars of dividend and bonus declared over the period are as follows:

What is the effective yield per annum in respect of the above two plans? [Nov. 2010][8 Marks]
Answer:
Determination of Effective Yield under Dividend Plan (Plan – D)
Units acquired = \(\frac{2,00,000}{38.20}\) = 5235.60

Statement of Units in Hand on 31-3-2010

Therefore, Effective Yield under Plan D = \(\frac{R s .39,003.17}{R s .2,00,000} \times \frac{1}{5}\) × 100 = 3.90%

Alternatively, it can be computed by using the IRR method as Follow:
NPV at 4% = -2,00,000 + 1,96,443 = -3,557
NPV at 2% = -2,00,000 + 2,16,473 = 16,473
IRR = LR + \(\frac{N P V \text { at } L R}{N P V \text { at } L R-N P V \text { at } H R}\) (HR – LR) = 2% + \(\frac{16473}{16473-(-3557)}\)(4% – 2%) = 3.645%

Determination of Effective Yield under Bonus Plan (Plan – B)
Statement of Units in Hand on 31-3-2010

Therefore, Effective Yield under Plan B = ^ 00*066″‘ X I X = 13.12%

Alternatively, it can be computed by using the IRR method as Follow:
NPV at 13% = -2,00,000 + 1,79,765 = -20,235
NPV at 8% = -2,00,000 + 2,25,413 = 25,413
IRP = LP + \(\frac{N P V \text { at } L R}{N P V \text { at } L R-N P V \text { at } H R}\) (HR – LR)
= 8% + \(\frac{25413}{25413-(-20235)}\)(13% – 8%)
= 10.78%

Question 40.
A Mutual Fund Company introduces two schemes – Dividend Plan and Bonus Plan. The face value of the Units is Rs.10 on 1-4-2014. Mr. R invested Rs. 5 Lakh in Dividend plan and Rs.10 lakh in Bonus Plan. The NAV of Dividend Plan is Rs. 46 and NAV of Bonus Plan is Rs. 42. Both the plans matured on 31 -03-2019. The particulars of Dividend and Bonus declared over the period are as follows:

You are required to calculate the effective yield per annum in respect of the above two plans. [May 2019] [8 Marks]
Answer:
Determination of Effective Yield under Dividend Plan
Units acquired = \(\frac{5,00,000}{46}\) = 10,869.57

Statement of Units in Hand on 31-3-2010

Statement showing calculation of gain

31.03.2019	Maturity value (Rs. 49 × 11,724.15)	Rs. 5,74,483.35
	Less: Cost of Acquisition	Rs. 5,00,000.00
	Total Gain	Rs. 74,483.35

Therefore, Effective Yield under Dividend Plan = \(\frac{\text { Rs. } 74,483.35}{\text { Rs. } 5,00,000} \times \frac{1}{5}\) × 100
= 2.98%

Alternatively, it can be computed by using the IRR method as Follow:
NPV at 3% = -5,00,000 + (5,74,483.35 × 0.8626)
= -5,00,000 + 4,95,549.34 = -4,450.66
NPV at 2% = – 5,00,000 + (5,74,483.35 × 0.9057)
= – 5,00,000 + 5,20,309.57
= 20,309.57

IRP = LR + \(\frac{\text { NPV at LR }}{\text { NPV at LR – NPV at HR }}\) (HR – LR)
= 2% + \(\frac{20,309.57}{20,309.57-(-4450.66)}\)(3% – 2%)
= 2.82%

Determination of Effective Yield under Bonus plan
Units acquired = \(\frac{10,00,000}{42}\) = 23.809.52

Statement of Units in Hand on 31-3-2019

Statement showing Calculation of gain

Therefore, Effective Yield under Bonus Plan = \(\frac{5,27,777.68}{10,00,000} \times \frac{1}{5}\) × 100 = 10.556%

Alternatively, it can be computed by using the IRR method as Follow:
NPV at 11% = -10,00,000 + (15,27,777.68 × 0.59345) = -93,340.34
NPV at 8% = -10,00,000 + (15,27,777.68 × 0.68058) = 39,774.93
IRR = LR + \(\frac{N P V \text { at } L R}{N P V \text { at } L R-N P V \text { at } H R}\)(HR – LR)
= 8% + \(\frac{39,774.93}{39,774.93-(-93,340.34)}\)(11% – 8%) = 8.298% = 8.30%

Question 41.
A mutual fund has two schemes i.e. Dividend plan (Plan A) and Bonus plan (Plan B). The face value of the unit isRs. 10. On 01/04/2016 Mr. Anand invested Rs. 5,00,000 each in Plan – A and Plan – B when the NAV was Rs. 46.00 and Rs. 43.50 respectively. Both the plans matured on 31/03/2019. Particulars of dividend and bonus declared over the period are as follows:

You are required to calculate the effective yield per annum in respect of the above two plans. [May 2019 Old Syllabus] [8 Marks]
Answer:
Determination of Effective Yield under Dividend Plan (Plan A)
Units acquired = \(\frac{5,00,000}{46}\) = 10,869.57
Statement of Units in Hand on 31-3-2019

Statement showing Calculation of gain

31.03.2019	Maturity value (Rs. 52.40 × 12,409.10)	Rs. 6,50,236.84
	Less: cost of Acquisition	Rs. 5,00,000.00
	Total Gain	Rs. 1,50,236.84

Calculation of Annual Return
Therefore, Effective Yield under Dividend Plan (Plan A)
\( \frac{R s \cdot 1,50,236.84}{R s \cdot 5,00,000} \times \frac{1}{3}\) × 100 = 10.016%
Alternatively, it can be computed by using the IRR method as Follow:
NPV at 10% = – 5,00,000 + (6,50,236.84 × 0.75131) = – 11,470.56
NPV at 9% = – 5,00,000 + (6,50,236.84 × 0.77218) = 2,099.88
IRR = LR + \(\frac{N P V \text { at } L R}{N P V \text { at } L R-N P V \text { at } H R}\) (HR – LR)
= 9% + \(\frac{2099.88}{2099.88-(-11,470.56)}\)(10% – 9%)
= 9.154%

Determination of Effective Yield under Bonus Plan (Plan B)
Units acquired = \(\frac{5,00,000}{43.50}\) = 11,494.25

Statement of Units in Hand on 31 – 3 – 2019

Statement showing Calculation of gain

31.03.19	Maturity value (16,594.83 × Rs. 50)	8,29,741.50
	Less: cost of Acquisition	5,00,000.00
	Total Gain	3,29,741.50

Calculation of Annual Return
Therefore, Effective Yield under Bonus Plan (Plan B)
= \(\frac{3,29,741.50}{5,00,000} \times \frac{1}{3}\) × 100 = 21.98

Alternatively, it can be computed by using the IRR method as follows:
NPV at 20% = -5,00,000 + (8,29,741.50 × 0.57870) = -19,829
NPV at 18% = -5,00,000 + (829,741.50 × 0.60863) = +5,006
IRR = LR + \(\frac{N P V \text { at } L R}{N P V \text { at } L R-N P V \text { at } H R}\)(HR – LR) = 18% + \(\frac{5,006}{5,006+19,829}\) × 2
= 18.403%

Question 42.
T Ltd. has promoted an open-ended equity oriented scheme in 1999 with two plans – Dividend Reinvestment Plan (Plan-A) and a Bonus Plan (Plan-B); the face value of the units was Rs. 10 each. X and Y invested Rs. 5,00,000 each on 1.4.2001 respectively in Plan-A and Plan-B, when the NAV was Rs. 42.18 for Plan A and Rs. 35.02 for Plan-B, X and Y both redeemed their units on 31.3.2008. Particulars of dividend and bonus declared on the units over the period were as follows:

You are required to calculate the annual return for X and Y after taking into consideration the following information:
(i) Securities transaction tax @ 2% on redemption.
(ii) Liability of capital gains to income tax :
(a) Long-term capital gain-exempt; and
(b) Short-term capital gains at 10% plus education cess at 3%. [Nov. 2008 Modified][8 Marks]
Answer:
Determination of Effective Yield under Plan A (Mr. X)
Units acquired = \(\frac{5,00,000}{42.18}\) = 11,853.95

Therefore, Average Annual Return (%) = \(\frac{\mathrm{Rs} .1,93,569.22}{\mathrm{Rs} .5,00,000}\) × 100 = 5.53%

Determination of Return under Bonus Plan (Plan B)

Calculation of Net Gain
Redemption value (22,146.43 × 34.10) Less: Security Transaction Tax (STT) @ 0.2% of Rs. 8,61,750	7,55,193.26 1,510.39
Net Amount Received	7,53,682.87
Less: Investment	(5,00,000.00)
Net Gain	2,53,682.87

Therefore, Average Annual Return (%) = \(\frac{\text { Rs. } 2,53,682.87}{\text { Rs. } 5,00,000} \times \frac{12}{84}\) × 100 = 7.248%

Question 43.
Sun Moon Mutual Fund (Approved Mutual Fund) sponsored open-ended equity oriented scheme “Chanakya Opportunity Fund”. There were three plans viz. ‘A’ – Dividend Reinvestment Plan, ‘B’ – Bonus Plan & ‘C’ – Growth Plan.
At the time of Initial Public Offer on 1.4.1999, Mr. Anand, Mr. Bacchan & Mrs. Charu, three investors invested Rs. 1,00,000 each & chosen ‘B’, ‘C’ & ‘A’ Plan respectively.
The History of the Fund is as follows:

On 31st July, all three investors redeemed all the balance units. Calculate annual rate of return to each of the investors.
Consider:
1. Long-term Capital Gain is exempt from Income tax.
2. Short-term Capital Gain is subject to 10% Income tax.
3. Security Transaction Tax 0.2 per cent only on sale,/redemption of units.
4. Ignore Education Cess. [Nov. 2005][12 Marks]
Answer:
Determination of Effective Yield under Dividend Reinvestment Plan (Mrs. Charu)
Units acquired = \(\frac{1,00,000}{10}\) = 10,000.00

Therefore, Average Annual Return (%) = \(\frac{\text { Rs. } 6,98,969.69}{\text { Rs. } 1,00,000} \times \frac{12}{124}\) × 100 = 67.64%

Determination of Return under Bonus Plan for Mr. Anand

Therefore, Average Annual Return (%) = \(\frac{\text { Rs. } 7,57,791.50}{\text { Rs. } 1,00,000} \times \frac{12}{124}\) × 100 = 73.33%

Determination of Return under Growth Plan for Mr. Bacchan

Particulars	(Amount in Dc)
Redemption value (10,000 × 82.07) Less: Security Transaction Tax (STT) @ 0.2% of Rs. 8,20,700	8,20,700.00 1,641.40
Net Amount Received Less: Short Term Capital Gain Tax @ 10%	8,19,058.60 0.00
Net of Tax Less: Investment	8,19,058.60 (1,00,000)
Net Gain	7,19,058.60

Average Annual Return (%) = \(=\frac{\text { Rs. } 7,19,058}{\text { Rs. } 1,00,000} \times \frac{12}{124}\) × 100 = 69.59%

Question 44.
Cinderella Mutual Fund, an approved mutual fund, sponsored open- ended equity oriented scheme “Rudolf Opportunity Fund”. There are three plans under the scheme viz. ‘A’ – Dividend Re-investment plan, ‘B’ – Bonus plan and ‘C’ – Growth plan.
At the time of initial public offer on 1-4-2009, Mr. Amit, Mr. Ashish and Mr. Arun, three investors invested Rs. 2,00,000 each at face value of Rs. 10 per unit and chosen plan ‘B’, ‘C’ and ‘A’ respectively.
The particulars of the fund over the period are as follows :

On 31st July, 2019 all the three investors redeemed all the balance units. Consider the following :
(a) Long-term capital gain is exempt from Income-tax.
(b) Short-term capital gain is subject to 10% Income-tax.
(c) Security Transaction Tax is 0.2% only on sale/redemption of units,
(d) Ignore Education Cess.
You are required :
(i) To calculate the Effective Yield per annum (annual rate of return) of each of the investors.
(ii) To suggest the name of investor with the highest Effective Yield per annum with the different to his nearest investor.
(Show your calculations up to two decimal points) [Nov. 2019] [10 Marks]
Answer:
Determination of Effective Yield under Dividend Reinvestment Plan (Mr. Arun)
Units acquired = \(\frac{2,00,000}{10}\) = 20,000.00

Therefore, Average Annual Return (%) = \(\frac{\mathrm{Rs} .11,14,906.20}{\text { Rs. } 2,00,000} \times \frac{12}{124}\) × 100 = 53.95%

Determination of Return under Bonus Plan (Mr. Amit)

Calculation of Net Gain

Therefore, Average Annual Return (%) = \(\frac{\text { Rs. } 15,15,583}{\text { Rs. } 2,00,000} \times \frac{12}{124}\) × 100 = 73.33%

Determination of Return under Growth Plan (Mr. Ashish)

Particulars	(Amount in Rs.)
Redemption value (20,000 × 82.07)	16,41,400.00
Less: Security Transaction Tax (STT) @ 0.2% of Rs. 16,41,400	3282.80
Net Amount Received	16,38,117.20
Less: Short Term Capital Gain Tax @ 10%	0.00
Net of Tax	16,38,117.20
Less: Investment	(2,00,000)
Net Gain	14,38,117.20

Average Annual Return (%) = \(\frac{\text { Rs. } 14,38,117}{\text { Rs. } 2,00,000} \times \frac{12}{124}\) × 100 = 69.59%

Question 45.
[Calculation of Fee payable to Manager] ANP Plan, a hedge fund cur-rently has assets of Rs. 20 crore. Mr. X (Chartered Accountant) the manager of fund charges fee of 0.10% of portfolio asset. In addition to it he charges incentive fee of 2%. The incentive will be linked to gross return each year in excess of the portfolio maximum value since the inception of fund. The maximum value the fund achieved so far since inception of fund about one and half year ago was Rs. 21 crores.
You are required to compute the fee payable to CA. X, if return on the fund this year turns out to be
(a) 29%,
(b) 4.5%,
(c) -1.8% [Practice Question]
Answer :
(i) If return is 29%

		Amount (Rs.)
Fixed fee [0.10% of Rs. 20 crore]	(A)	2,00,000
New Fund Value [1.29 × Rs. 20 crore]		25.80 Crore
Excess Value of best achieved (25.8 crore – 21 crore)		4.8 Crore
Incentive Fee (2% of Rs. 4.80 crores)	(B)	9,60,000
Total Fee [(A)+(B)]		11,60,000

(ii) If return is 4.5%

		Amount (Rs.)
Fixed fee [0.10% of Rs. 20 crore]	(A)	2,00,000
New Fund Value [1.045 × Rs. 20 crore]		20.90 Crore
Excess Value of best achieved (20.90 crore – 21 crore)		(Rs. 0.10 crore)
Incentive Fee (as does not exceed best achieved)	(B)	Nil
Total Fee [(A) + B)]		2,00,000

(iii) If return is -1.8%
No incentive only fixed fee of Rs. 2,00,000 will be paid.

Question 46.
On 1st April, an open ended scheme of mutual fund had 300 lakhs units outstanding with Net Assets Value (NAV) of Rs. 18.75. At the end of April, it issued 6 lakh units at opening NAV plus 2% load, adjusted for dividend equa-lization. At the end of May, 3 Lakh units were repurchased at opening NAV less 2% exist load adjusted for dividend equalization. At the end of June, 70% of its available income was distributed.
In respect of April – June quarter, the following additional information are available:

	Rs. in lakh
Portfolio value appreciation	425.47
Income of April	22.950
Income of May	34.425
Income of June	45.450

You are required to calculate
(i) Income available for distribution;
(ii) Issue price at the end of April;
(iii) Repurchase price at the end of May; and
(iv) Net asset value (NAV) as on 30th June. [Nov. 2015] [8 Marks]
Answer:
(i) Calculation of Income available for Distribution

(ii) Calculation of Issue Price at the end of April

Particulars	Rs.
Opening NAV Add: Entry Load 2% of Rs. 18.750	18.750 0.375
Add: Dividend Equalization paid on Issue Price	19.125 0.0765
	19.2015

(iii) Calculation of Repurchase Price at the end of May

Particulars	Rs.
Opening NAV Less: Exit Load 2% of Rs. 18.750Add: Dividend Equalization paid on Issue Price	18.750 (0.375)
	18.375 0.1890
	18.564

(iv) Closing NAV as on 30th June

Assessment of HUF – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Assessment of HUF – CA Final DT Question Bank

Question 1.
X (HUF) was the owner of a house property which was being used for the purposes of a business carried on by a partnership firm XY and Co., in which the Karta and other members of the HUF were partners in their individual capacity. The Assessing Officer proposes to assess the annual letting value of the said property as the HUF’s income from house property. The HUF contends that the building was used for business purposes and, therefore, the annual letting value thereof was not taxable in ) its hands as income from house property under section 22. Examine the rival contentions. [CA Final May 1997] [4 Marks]
Answer:
As per section 22, the annual value of house property is not taxable if the house property is used by the assessee for the purposes of his business or profession. It has been held by Courts that if the house property of a person is used for business purposes by the partnership.firm in which such person f is a partner, then it shall be deemed that the house property is used by the partner for his business purposes. Consequently, the income from house I property shall not be assessable in the hands of partner as per section 22.

Where the Karta of a HUF is a partner in a firm in a representative capacity and the property belonging to the HUF is occupied by the firm for carrying on business, exemption under section 22 will be available to HUF [CIT v. Shri Champalal Jeevraj (1995) (Mad.)].

In the present problem, the karta and other members of X (HUF) are partners in the partnership firm XY & Co., in their individual capacity and not in their representative capacity. The business carried on by XY & Co., cannot be treated as business carried on by X (HUF) merely because the partners in XY & Co. were also the members of X (HUF). Hence, the proposal of the Assessing Officer to assess the annual letting value of the said property as the HUF’s income from house property is correct.

Question 2.
Krishna Kanhaiya HUF, running Kanha Departmental Stores consists of Karta, his wife, two sons and daughter. Both the sons who are having professional/technical qualifications as a Chartered Accountant and as an Automobile Engineer started in partnership a garage for the repairing of motor cars with a clear understanding that the technical side of the business be looked after by the Engineer while the general administration and finance part be taken care of by the Chartered Accountant. They had taken an Interest Free Loan of ₹ 5,00,000 from the HUF for starting the venture. The business of garage resulted into Net Profit of ₹ 15,00,000 for the year ended 31.03.2021. The A.O. proposes to assess the income from the business of motor garage in the hands of HUF What do you say about the validity of the proposition of the A.O.? [CA Final Nov. 2010] [4 Marks]
Answer:
The facts of the case are similar to the facts in CIT v. Charan Dass Khanna & Sons (1980) where the Delhi High Court held that where primarily I the personal efforts and skills of the individual coparceners resulted in setting up of a new business, and the investment from the HUF in the business played only a minor role, then the profits from such business shall not belong to the HUF.

In this case, two sons who are having professional and technical qualifications have started a partnership of garage for repairing of motor cars. They had taken an interest free loan of ₹ 5,00,000 from the HUF for starting the f venture. The business of garage resulted into Net Profit of ₹ 15,00,000 and the A.O. wants to treat the income from the business of motor garage in the hands of HUF.

By applying the above rationale, the action of the A.O. to assess the income from the business of motor garage in the hands of HUF is riot correct.

Question 3.
Mr. Ram (age 56) is Karta of his HUF. The HUF consists of himself, his wife and two sons viz. Mr. C (age 28) and Minor D (age 16). The HUF is assessed to income tax and has business income from the year 2003-04 onwards. The business income of HUF for the year ended 31.3.2021 is ₹ 5,00,000 (computed). Mr. Ram is employed in a private company and his salary income for the same period is ₹ 6,10,000 (computed).

You are requested to answer the following treating each of them as independent situations:
(i) Mr. C gave cash gift of ₹ 1,00,000 to the HUF of Mr. Ram. What would be the total income of HUF?
(ii) The HUF has one house property fetching rent of ₹ 10,000 per month and some movable assets. There is a proposal to make a partial partition of HUF by allotting the house property to Mr. C. Is it advisable to do a partial partition?
(iii) Minor D earned ₹ 70,000 by use of his special skill and talent. How would his income be taxed?
(iv) A Car owned personally by Mr. Ram was blended with HUF during the year. It was leased out for a monthly rent of ₹ 10,000 from 1.10.2020. How would this income be taxed? [CA Final Nov. 2015] [6 Marks]
Answer:
(i)

Total income of HUF	₹
Business Income Income from other sources [Note]	5,00,000 Nil
Total Income	5,00,000

Note:
As per sec. 56(2)(x), where an assessee receives any sum of money without consideration, the aggregate value of which exceeds ₹ 50,000 in any previous year, the whole of the aggregate value of such sum, from any person or persons, shall be taxable under the head “Income from Other Sources”. But, if such sum is received by any assessee, being an individual or HUF, from their relatives, it shall not be taxable. A relative for HUF means its members. Therefore, the cash gift received by HUF from Mr. C (being member of HUF) will not be taxable u/s 56(2)(x) in the hands of HUF.

(ii) The Income-tax Act does not recognise any partial partition of HUF vide section 171. Section 171 provides that where a partial partition has taken place among the members of a Hindu family hitherto assessed as undivided,—
(a) no claim that such partial partition has taken place shall be inquired into by the Assessing Officer and no finding shall be recorded that such partial partition had taken place;

(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;

(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition;

(d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition, and the provisions of this Act shall apply accordingly.
Therefore, partial partition is not advisable.

(iii) As per sec. 64(1 A), all income which accrues or arises to a minor shall be clubbed in the income of that of his parent whose total income (excluding the income clubbed under this sub-section) is greater. But the income earned by the minor child by way of manual work done by him or by way of activity involving application of his skill, talent or specialized knowledge and experience shall not to be clubbed. In this case, Minor child D has earned ₹ 70,000 by use of his special skill and talent and therefore, it shall not be clubbed in the hands of either of the parent and shall be taxable in his hands.

(iv) As per sec. 64(2), where an individual, who is a member of an HUF, converts his personal property as the property of the HUF, or throws his property into the common stock.of the family, without adequate consideration, then the income derived from such property by the HUF shall be included in the total income of such individual. Therefore, the monthly rent earned by leasing out of car by HUF shall be taxable in the hands of Mr. Ram.

Liability in Special Cases – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Liability in Special Cases – CA Final DT Question Bank

Question 1.
Mr. Raja, a resident individual died on 15.1.2021. Some reassessment proceedings in respect of his income chargeable to tax were pending on that date. Mr. Nitin is the legal heir of Late Raja. The A.O. continued the reassessment proceedings without bringing the legal heir Mr. Nitin on record though Mr. Nitin informed the demise of Raja and also participated in the assessment. After the completion of assessment, Mr. Nitin contends that the order of assessment is bad in law. Decide the validity of the contentions of Mr. Nitin. [CA Final May 2019 (Old Syllabus)] [4 Marks]
Answer:
As per section 159(2), for making a reassessment of the income of the deceased person, any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from that stage.

In a case where an assessee dies pending any assessment proceedings, the A.O. is required to pass appropriate orders of assessment after due notice to legal representative of deceased assessee.

However, in this case, the A.O. continued the assessment proceedings without bringing Mr. Nitin, the legal heir, on record by issuing any notice for such proceedings after the death of his father on 15.01.2021.

Therefore, the contention of the Mr. Nitin that the order of assessment is bad in law, is correct.

Question 2.
Mr. Srinivasan was a Central Government pensioner, who expired on 10.5.2021. An amount of ₹ 10 lakhs in cash was deposited into his savings bank account maintained in a nationalized bank on 28.2.2021, which was reported by the banker u/s 285BA. A notice was issued by the Assessing Officer to Mrs. Srinivasan who is his legal representative to file his Return of Income. Mrs. Srinivasan has approached you as a Tax Consultant as to the course of action to be undertaken by her, since she is unaware of her deceased husband’s financial dealings.

What will be your advice to Mrs. Srinivasan? [CA Final May 2019 {New Syllabus)] [4 Marks]
Answer:
As per Sec. 159, where a person dies, his legal representatives (LR) shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased.

For the purpose of making an assessment (including reassessment u/s 147) and for the purpose of levying any sum on the legal representatives any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representatives and shall be continued.

Further, any proceeding which could have been taken against the deceased, if he had survived, can be initiated and taken against the legal representatives. Even penalty proceedings can be initiated after the death of the deceased. However, the liability of a legal representative shall be limited to the extent to which the estate of the deceased assessee is capable of meeting the liability.

The A.O. should first issue notice u/s 142 /143 /148 to the legal representative and then proceed to assess the income of the deceased in the hands of the LR. Failure to issue such notice would make the order irregular but not void or illegal. [CITv Jai Prakash Singh (1996)(SC)]

Section 159 applies in respect of income of the deceased only upto the date of his death and not upto the end of the accounting year in which the death occurred. Therefore, in the year of death there will be 2 separate assessments:

• Upto date of death u/s 159 and
• From that date till the end of the year as personal income of the legal representatives.

In this case, Mr. Srinivasan was expired on 10.5.2021. Cash of ₹ 10 lakhs was deposited in the savings bank account of Mr. Srinivasan on 28.02.2021. A notice was issued by the A.O. to Mrs. Srinivasan who is his legal representative to file his return of income.

As per Sec. 159, the action of the A.O. to issue notice is valid and Mrs. Srinivasan has to file ROI in respect of income of Mr. Srinivasan.

Question 3.
M/s SB & Co. is a partnership firm carrying on trading activity. It has filed all its returns promptly up to the A.Y. 2020-21. The firm suffered losses year after year due to market conditions and some of its major debtors defaulted in payment of their dues. It was decided by the partners on 28.6.2020, when the scrutiny assessment for the Assessment Year 2018-19 was in progress, that the business of the firm should be discontinued and a notice of discontinuance of business was given to the A.O. on 10.7.2020. In these circumstances, you are required to advise on the tax implications for the firm. [CA Final Nov. 2019 (Old Syllabus)] [4 Marks]
Answer:
As per section 176, where any business or profession is discontinued in any assessment year, the income of that assessment year upto the date of discontinuance may, at discretion of A.O., be charged to tax in that assessment year.

The assessee discontinuing the business or profession should give notice of the discontinuance to the A.O. within 15 days thereof. Any sum received after such discontinuance shall be taxable in the hands of the recipient in the year of receipt.

Thus, M/s. SB & Co. is required to give notice u/s 176 within 15 days of discontinuance of business.

Where any discontinuation or dissolution takes place after any proceedings for such A.Y. has commenced, the proceedings may be continued against the person from the stage at which the proceedings stood at the time of such discontinuation.

Question 4.
There is a tax arrear of ₹ 52 lakhs payable by Super Six Traders (P) Ltd. relating to various assessment years. The court appointed a liquidator on 30.06.2020. The liquidator failed to notify his appointment to the A.O. and also omitted to take note of the tax arrears. He sold some of the assets of the company and settled the suppliers’ dues. What would be the legal consequence of the actions of the liquidator? [CA Final Nov. 2019 (New Syllabus)] [4 Marks]
Answer:
As per section 178, every person who is appointed as a liquidator receiver of the company which is being wound up, shall give a notice of his her appointment to the A.O. entitled to assess the income of the company within 30 days of his appointment.

The liquidator shall not, without the leave of Principal CCIT/CCIT or Principal CIT/CIT, part with any of the assets of the company until:

1. the amount of tax to be set aside has been notified by A.O. and
2. on being so notified, the amount has been set aside.

However, the liquidator may part with the assets for the purpose of tax payment, payment to secured creditors or meeting cost of winding up.

If the liquidator fails to give notice or parts with assets in contravention of above provision, he shall be personally liable for payment of tax which the company would be liable to pay and also as per section 276A, the liquidator shall be liable for imprisonment which shall not be less than 6 months but which may extend to 2 years and fine.

In this case, the liquidator of Super Six traders, (R) Ltd. has failed to notify his appointment to A.O. and also has parted with assets of the company without taking note of tax arrears and thus, liquidator shall be liable for above mentioned legal consequences.

Settlement Commission – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Settlement Commission – CA Final DT Question Bank

Question 1.
An assessee’s case is pending in appeal before the Income Tax Appellate Tribunal for assessment year 2015-16. Since the appeal is pending, the assessee wishes to file an application to the Settlement Commission for disclosing additional income, the income-tax on which is ₹ 55 lakh. Is it possible to make such application? Will your answer be different if the Tribunal sets aside the case and restores the matter to Commissioner (Appeals)? [CA Final May 2005] [3 Marks]
Answer:
For moving an application to the Settlement Commission, the case of the assessee must be pending only in assessment proceedings u/s 143(3)/144/147/ 153A before the Assessing Officer or in case of fresh assessment in pursuance of an order u/s 254/263/264, setting aside or cancelling an assessment. Settlement application is not maintainable if the case is pending before CIT(A), ITAT or a Court.

Therefore, in the given question the assessee cannot make an application to the Settlement Commission in case appeal is pending before the Income Tax Appellate Tribunal.

Even if the Tribunal sets aside the case and restores the matter to the Commissioner (Appeals), the assessee cannot make an application to the Settlement Commission.

Question 2.
Does the Settlement Commission have the power to reduce or waive interest levied u/ss 234A, 234B and 234C of the Income-tax Act? Discuss. [CA Final Nov. 2005] [6 Marks]
Answer:
The issue relating to the power of the Settlement Commission to reduce or waive interest chargeable u/ss 234A, 234B and 234C has been settled by the Supreme Court in CIT v. Anjum M.H. Ghaswala (2001).

It was held in this case that sub-section (6) of section 245D is only procedural in nature which provides for fixing the term by which the amounts settled under sub-section (4) will have to be paid. It does not empower the Commission either to reduce or waive the interest. Any settlement made by the Commission must be in accordance with the provisions of the Act.

The levy of interest u/ss 234A, 234B and 234C is mandatory in nature and therefore any settlement made must include the interest under these sections. The Settlement Commission does not have the power to reduce or waive the interest levied u/ss 234A, 234B and 234C.

However, section 245F gives the Settlement Commission all the powers which are vested in an income-tax authority. Therefore, Settlement Commission I can grant relief from the aforesaid interest to the extent of the powers given vide the circulars issued by CBDT u/s 119.

Question 3.
On an application made by Mr. Pandey, an order was passed by the Settlement Commission on 30.01.2021 u/s 245D(4). The said order had a mistake apparent on record. The Settlement Commission passed an amended order dated 30.04.2021 which resulted in modifying the liability of Mr. Pandey. Mr. Pandey is of the view that order of the Settlement Commission is final and conclusive and it has no power to rectify the said mistake.

You are required to examine the following:
(i) Correctness of claim made by Mr. Pandey
(ii) Validity of the order amended by the Settlement Commission. [CA FinatMay 2012] [5 Marks]
Answer:
(i) The Settlement Commission has been conferred all the powers vested in an income-tax authority under the Act by virtue of section 245F(1). Further, section 154, gives an income-tax authority the power to amend any order passed by it in order to rectify any mistake apparent from the record. Therefore, the Settlement Commission’s power to amend an order to rectify any mistake apparent from the record has been embedded in section 245F(1).

Also, Section 245D(6B) specifically provides that the Settlement Commission may, at any time within a period of six months from the date of the order, amend any order passed by it u/s 245D(4) to rectify any mistake apparent from the record. As in the given case, the rectification order was passed by the Settlement Commission within 6 months of passing the original order, the claim made by Mr. Pandey is not correct.

(ii) As per the proviso to section 245D(6B), the Settlement Commission, before passing the amended order which has the effect of modifying the liability of applicant should –

1. give a notice to the applicant and the Commissioner of its intention to make such an amendment; and
2. allow the applicant and the Commissioner an opportunity of being heard.

If these conditions are fulfilled, the order amended by the Settlement Commission would be a valid order, since the amended order is passed by the Settlement Commission within the permitted time limit i.e., within six months from the date of its original order.

As in the instant case, the Settlement Commission has not given a notice to the applicant Mr. Pandey, the rectification of order is not proper in law.

Question 4.
X & Co. Ltd. had made an application to the Settlement Commission. The issue in the said application related to cash credits in the books of account. The Commission passed an order making addition to the income on the basis of difference in gross profit rate adopted, which was neither an issue in the application nor in the report of the Commissioner of Income-tax. Discuss the validity of the order of the Settlement Commission. [CA Final May 2014] [4 Marks]
Answer:
Section 245D(4) provides that the Settlement Commission, after examination of records and report of the Commissioner and after examining such further evidence as may be placed before it or obtained by it, may pass such order as it thinks fit.

Further, section 245D(5) provides that the materials brought on record before the Settlement Commission shall be considered by the Members of the concerned Bench before passing any order u/s 245D(4).

In case of Supreme Agro Foods Pvt. Ltd. v. Settlement Commission (2013) (P&H), it was observed that “consideration” for the purpose of section 245D(5) means an independent examination of the evidence and material on record before the Settlement Commission by the members and application of mind thereto.

In this case, since the material was available before the Settlement Commission and such material has been taken into consideration for a finding which is relevant for determining the undisclosed income of the applicant, the addition made on the basis of difference in gross profit rate adopted is justified and the order of the Settlement Commission is proper.

Question 5.
M/s. A Ltd. has received a notice u/s 148 for the A.Y. 2017-18 on 02-02-2021. They also anticipate similar notices for the A.Ys. 2015-16 and 2016-17 for which they have already furnished return of income. On examination of the books of account produced, you noticed huge amounts of concealed income. As a consultant, what is your advice to A Ltd.? [CA Final May 2016] [4 Marks]
Answer:
An assessee may make an application to the Settlement Commission u/s 245C at any stage of a case relating to him. “Case” means any proceeding for assessment which may be pending before an Assessing Officer on the date on which such application is made. Thus, in order to make an application before the Settlement Commission, there must be a proceeding for assessment pending before an Assessing Officer on the date on which the application is made.

A proceeding for assessment or reassessment or re-computation u/s 147 shall be deemed to have commenced from the date on which a notice u/s 148 is issued. And once notice u/s 148 is issued for any assessment year, the case also becomes pending for any other assessment year(s) for which a notice u/s 148 has not been issued, but such notice could have been issued on such date, if the return of income for the other assessment year(s) has been furnished u/s 139 or in response to a notice u/s 142.

In this case, M/s. A Ltd. has received a notice u/s 148 for the A.Y. 2017-18 and also anticipates similar notices for the A.Y. 2015-16 and A.Y. 201617, for which return of income has been furnished. Thus, a proceeding for assessment is pending before an A.O. i.e., the basic condition for approaching Settlement Commission is satisfied.

Moreover, since after examination of the books of account, huge amount of concealed income is also noticed, it is presumed that the second condition that the additional amount of income-tax payable on the income disclosed in the application should exceed ₹ 10 lakhs has also been satisfied.

Based on these facts, our advice as consultant to M/s. A Ltd. would be to approach the Settlement Commission to have his case settled and apply for grant of immunity from penalty and prosecution.

Question 6.
“Orders of the Settlement Commission are binding in nature”. Explain the binding character of orders of the Settlement Commission in the context of the provisions contained in the Income-tax Act. [CA Final Nov 2016] [4 Marks]
Answer:
Order of Settlement Commission to be conclusive:
As per Sec. 245-1, the matters covered by the order of Settlement Commission cannot be reopened in any proceeding under the Act or under any other law, since the order of the Settlement Commission is final and conclusive.

Also, no appeal is possible against such order before CIT(A) or ITAT.

However, the settlement shall be void, if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts.

However, the High Court’s power of judicial review’ would remain unaffected irrespective of the scope of powers of the Settlement Commission and the provision that the decision of the Settlement Commission is final and conclusive. But inspite of such power of High Court, the decision of the Settlement Commission could be interfered with only where there are grave procedural defects or violation of rules of natural justice. The High Court cannot interfere either with an error of fact or error of law alleged to have been committed by the Settlement Commission.

Further, the order that the Settlement Commission may pass though is binding between the parties, does not lay down a ratio or a precedent.

Thus, the orders of Settlement Commission are binding in nature.

Question 7.
Seizures were made from Mr. Sunder pursuant to a search conducted in his premises. He filed an application for settlement by claiming to have received the amount by way of loans from several persons. The Settlement Commission accepted his statement and made an order. The CBI, however, conducted enquiry at the instance of the Revenue regarding the claimed amount of loans and opined that the alleged lenders had no means or financial capacity to advance such huge loans™to Mr. Sunder and were P mere name lenders only.

The Commissioner filed an application u/s 245D(6) praying for the order to be declared void and for withdrawal of benefit granted Mr. Sunder, however, contended that the order of the Settlement Commission was final and any fresh analysis would amount to sitting in judgment over an earlier decision, for which the Settlement Commission was not empowered. Discuss the correctness of Mr. Sunder’s contention. [CA Final May 2017, May 2011] [6 Marks]
Answer:
The Supreme Court in CIT v. Om Prakash Mittal (2005) observed that section 245D(6) clearly states that every order passed by the Settlement Commission under sub-section (4) has to provide for:

1. the terms of settlement; and
2. that the settlement would become void, if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts.

The decision that the order has been obtained by fraud or misrepresentation is that of the Settlement Commission. However, there is no requirement that the action be initiated by the Settlement Commission, suo motu.

The Revenue can move the Settlement Commission for decision on an issue if it has material to show that the order was obtained by fraud or misrepresentation of facts. The Supreme Court held that merely because section 245-1 provides that the order of settlement is conclusive, it does not take away the power of the Settlement Commission to decide whether the settlement order has been obtained by fraud or misrepresentation of facts. If the CIT is able to establish that the earlier decision was void because of misrepresentation of facts, then it is open for the Settlement Commission to decide the issue.

By any stretch of imagination, it cannot be said that a fresh analysis on such ground is a review of the earlier judgment by the Settlement Commission or that the subsequent Bench sitting in appeal over the earlier Bench’s decision. Hence, Mr. Sunder’s contention is not tenable in law.

Question 8.
Discuss whether the statement “The Settlement Commission may suo motu amend any order passed by it to rectify any mistake apparent from the record” is correct or not. [CA Final Nov. 2011, Nov. 2015] [2 Marks]
Answer:
The statement is correct.
As per Sec. 245D(6B), the Settlement Commission may, with a view to rectifying any mistake apparent from the record, amend any order passed by it u/s 245D(4) within 6 months from the end of the month in which the order is passed.

However, an amendment which has the effect of modifying the liability of the applicant shall not be made unless the Settlement Commission –

1. has given notice to the applicant and the Principal CIT or CIT of its intention to do so and
2. has allowed the applicant and the Principal CIT or CIT an opportunity of being heard.

Question 9.
Whether the Commissioner (Appeals) is empowered to consider an appeal filed by an assessee challenging the order of assessment in respect of which the proceedings before the settlement commissioner abates? Examine with the relevant provisions of law? [CA Final May 2018 (New Syllabus)] [3 Marks]
Answer:
As per Sec. 251, in disposing of an appeal against the assessment order in respect of which the proceedings before the Settlement Commission abates u/s 245HA, the CIT(A) has the power to confirm, reduce, enhance or annul the assessment, after taking into consideration the following:

1. All the material and other information produced by the assessee before the Settlement Commission in the course of the proceeding before it;
2. The results of the inquiry held by the Settlement Commission in the course of the proceeding before it;
3. The evidence recorded by the Settlement Commission in the course of the proceeding before it; and
4. Such other material as may be brought on his record.

As per Sec. 245HA, where a proceeding before the Settlement Commission abates, the A.O. before whom the proceeding at the time of making the application was pending shall dispose of the case in accordance with the provisions of this Act as if no application u/s 245C had been made. Therefore, after abatement, the A.O. shall dispose off the case as per the provisions of the Act and passed the order of assessment u/s 143(3) or 144 or 147 or 153A.

As per Sec. 246A, any assessee aggrieved by the order of assessment u/s 143(3), 144, 147 or 1 53A may prefer an appeal to the CIT(A).

Since, after abatement, the A.O. shall passed the order of assessment u/s 143(3) or 144 or 147 or 153A and as per sec. 246A, the assessee aggrieved by the order of assessment u/s 143(3) or 144 or 147 or 153A, may prefer an appeal to CIT(A), it is possible for the assessee to challenge the order of assessment in respect of which the proceedings before the settlement commission abates as there is no restriction u/s 246A that the assessee cannot challenge the order of assessment in respect of which the proceedings before the settlement commissioner abates.

Question 10.
The business premise of Mr. Armit was subjected to a survey u/s 133A of the Act. There were some incriminating materials found at the time of survey. The assessee apprehends reopening of assessments of the earlier years. He wants to know whether he can approach the Settlement Commission. Explain briefly the basic conditions to be satisfied and the benefits that may accrue to Mr. Amit by approaching the Settlement Commission. [CA Final Nov. 18 (New Syllabus), May 2015] [4 Marks]
Answer:
An assessee may make an application to the Settlement Commission u/s 245C at any stage of a case relating to him. “Case” means any proceeding for assessment which may be pending before an Assessing Officer on the date on which such application is made. Thus, in order to make an application before the Settlement Commission, there must be a proceeding for assessment pending before an Assessing Officer on the date on which the application is made.

A proceeding for assessment or reassessment or re-computation u/s 147 shall be deemed to have commenced from the date on which a notice u/s 148 is issued. And once notice u/s 148 is issued for any assessment year, the case also becomes pending for any other assessment year(x) for which a notice u/s 148 has not been issued, but such notice could have been issued on such date, if the return of income for the other assessment year(s) has been furnished u/s 139 or in response to a notice u/s 142.

In this case, no notice u/s 148 has been issued to Mr. Amit and thus no case is pending for assessment before the A.O. Hence, Mr. Amit cannot approach the Settlement Commission merely due to his apprehension that assessment of earlier years may be reopened. Therefore, he has to wait for the A.O. to issue notice u/s 148 and then he can make an application to the Settlement Commission u/s 245C as then it would be a “case pending” before the A.O. on that date.

Further, he can make application only if

• the additional amount of income-tax payable on the income disclosed in the application exceeds ₹ 10 lakh and
• such tax and interest thereon should be paid on or before the date of making the application and
• proof of such payment should be attached with the application.

If the Settlement Commission is satisfied that Mr. Amit has co-operated in the proceedings and made true and full disclosure of his income and the manner in which it has been derived, following benefits may accrue to Mr. Amit –

1. Immunity from prosecution for any offence under the Income-tax Act, 1961/Wealth-tax Act, 1957, where the proceedings for such prosecution have been instituted on or after the date of receipt of application u/s 245C; and
2. Immunity from imposition of penalty under the Income-tax Act, 1961, either wholly or in part, with respect to the case covered by the settlement.

Penalties and Prosecutions – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Penalties and Prosecutions – CA Final DT Question Bank

Question 1.
The A.O. completed the assessment of X Ltd. u/s 143(3) for the A.Y. 2018-19 on 30.12.2020. The A.O. has initiated the proceedings for penalty u/s 270A on 30.12.2020. What is the time limit for imposition of such penalty in the following cases?

(i) X Limited did not contest the assessment order.
(ii) X Limited contested the assessment order by filing appeal to the Commissioner (Appeals). The appeal was dismissed on 30th December, 2021, on which date the Commissioner received the appeal order.
(iii) The jurisdictional High Court stayed the penalty proceeding on 25th 4 June, 2021 and the Supreme Court vacated the stay on 25th November, 2021. [CA Final Nov. 2012] [5 Marks]
Answer:
Section 275(1) provides for the time limit for imposing penalty. According to this section, the time limit for imposition of penalty u/s 270A in the following cases would be:

(i) If X. Limited did not contest the assessment order:
Where the relevant assessment order is not the subject matter of either appeal or revision, an order imposing penalty shall not be passed

• after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, i.e. 31st March, 2021, or
• six months from the end of the month in which action for imposition of penalty is initiated, i.e. 30th June, 2021 whichever is later.

Therefore, the time limit for imposing penalty in this case would be 30th June, 2021.

(ii) If X. Limited made an appeal to the CIT(A) against the assessment order and the appeal was dismissed on 30th December, 2021 on which date the CIT received the appeal order:
Where the assessment order or other order is the subject matter of an appeal to the CIT(A) u/s 246A, and the CIT(A) passes the order disposing of such appeal, an order imposing penalty shall be passed:

• before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed i.e. 31st March, 2021 or
• within one year from the end of the financial year in which the order of the CIT(A) is received by the CCIT or CIT i.e. 31st March, 2023, whichever is later.

Therefore, the time limit for imposing penalty in this case would be 31st March, 2023.

(iii) If the penalty proceeding is stayed by the High Court on 25th June, 2021 and the stay is vacated by the Supreme Court on 25th November, 2021.
The period of stay is to be excluded from the time limit for imposition of penalty. Therefore, the time limit for imposing penalty in this case would be 30th November, 2021 (Normal Time Limit i.e. 30.06.2021 + 5 Months).

Question 2.
Examine the correctness of the following statements in the context of the provisions of the Income-tax Act, 1961.

The assessee, who is required to furnish a statement «f financial transaction or reportable account, fails to furnish the same. He is- liable for penalty u/s 271FA of the Income-tax Act, 1961. [CA Final Nov. 2014] [2 Marks]
Answer:
The statement is correct. In case of failure to furnish a.statement of financial transaction or reportable account within the time prescribed i.e., on or before 31st May immediately following the financial year in which the transaction is registered or recorded, a penalty of ₹ 500 per day is payable.

A penalty of ₹1,000 per day is payable on failure to furnish a statement of Financial transaction or reportable account in compliance of notice issued u/s 285BA(5).

Quarter 3.
(i) Explain Sec. 278C applicable in respect of offences committed by Hindu Undivided Families.
(ii) Fox limited failed to furnish information and documents sought by the Transfer Pricing Officer (TPO). Can TPO levy penalty for such failure? How much would be the quantum of penalty imposable for the said failure? [CA Final Nov. 2015] [6 Marks]
Answer:
(i) As per section 278C(1), where an offence been committed by a Hindu undivided family (HUF), the karta shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, the karta shall not be liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

As per section 278(2), where an offence has been committed by a HUF and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of any member of the HUF, such member shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

(ii) As per Sec. 271G; if any person who has entered into an international transaction or specified domestic transaction fails to furnish any such information or document as required by section 92D(3) sought for by the Transfer Pricing Officer, then, such person shall be liable to a penalty which may be levied by the A.O. or the Transfer Pricing Officer or the Commissioner (Appeals). Penalty would be a sum equal to 2% of the value of international transaction or specified domestic transaction for each such failure.

Question 4.
Mr. Madhusudan is regular in deducting tax at source and depositing the same. In respect of the quarter ended 31st December, 2020 a sum of ₹ 75,000 was deducted at source from the contractors. The statement of tax deducted at source u/s 200 was filed on 23rd March, 2021 for the quarter ended 31.12.2020.
(i) Is there any delay on the part of Mr. Madhusudan in filing the statement of TDS?
(ii) If the answer to (i) above is in the affirmative, how much amount can be levied on Mr. Madhusudan for such default u/s 234E?
(iii) Is there any remedy available to him for reduction/waiver of the levy? [CA Final Nov. 2015] [6 Marks]
Answer:
As per Sec. 200(3), every person, after paying TDS to the credit of Central Government, shall file a TDS Return quarterly. The due date of filing the return for the quarter ending on 31st December, 2020 is 31th January, 2021.

(i) Yes, there is a delay on the part of Mr. Madhusudan since he has filed return of TDS on 23rd March, 2021 instead of 31 st January, 2021. The delay is of 51 days.

(ii) As per Sec. 234E, if a person fails to deliver or cause to be delivered a TDS/TCS return within the prescribed time, he shall be liable to pay a fee of ₹ 200 for every day during which the failure continues. However, the amount of fee shall not exceed the amount of tax deductible or collectible, as the case may be. This fee has to be paid before delivering the TDS/TCS return.

Since, Mr. Madhusudan has made a delay of 51 days, a fee of ₹ 10,200 (i.e. 51 days x ? 200) shall be levied u/s 234E. The amount of TDS is ₹ 75,000 and hence the amount of fee is not exceeding the same.

(iii) The CBDT is empowered to issue general or special orders in respect of any class of incomes or class of cases, whether by way of relaxation of any of the provisions of sections 139,143, 144,147 etc. or otherwise. The CBDT may issue such order/s) from time to time, for the purpose of proper and efficient management of the work of assessment and collection of revenue. Section 234E is included in the list of sections in respect of which the CBDT is empowered to issue order for relaxation of the provisions of the Act.

Hence, the remedy available to Mr. Madhusudan is that he can file an application to the CBDT under section 119 and seek waiver/reduction of the penalty levied/leviable under section 234E.

Question 5.
An assessee deducted the tax at the time of making the payment of salaries. However, it delayed depositing the amounts of tax deducted with the revenue. The quantum of tax deducted was deposited with the revenue along with the interest by the assessee on its own before any notice determining the amount or declaring the assessee to be in default was made by the Revenue. The Assessing Officer levied penalty under section 221 of the Income-tax Act, 1961, for failure to pay tax deducted at source within the prescribed time. Is the action of Assessing Officer justified? [CA Final May 2016] [4 Marks]
Answer:
The issue under consideration in this case is whether the A.O. was justified in levying penalty u/s 221 when the assessee had voluntarily remitted the tax deducted at source, though belatedly.

In the case of Reliance Industries Ltd. v. CIT (2015), the Bombay High Court observed that as per section 201, a person is deemed to be an assessee-in- default for failure to deduct tax or after deduction, pay the tax to the credit of the Government within the prescribed time.

In this case, the assessee has deducted the tax but failed to pay the tax so deducted to the credit of the Government within the prescribed time. Hence, it would be deemed to be an assessee-in-default for failure to pay the tax after deduction. Consequently, penalty u/s 221 would be attracted.

Further, the assessee would not cease to be liable to penalty u/s 221 merely by reason of the fact that before the levy of penalty, he has paid the tax [Explanation to section 221(1)]. The action of the A.O. in this case is, therefore, justified.

Question 6.
What is the quantum of penalty that could be levied in each of the following cases:

1. Failure to get books of account audited as required under section 44AB within the time prescribed under the Act.
2.  ailure to comply with a direction issued under section 142(2A)
3. Failure to furnish report from an Accountant, as required under section 92E. [C4 Final May 2017] [3 Marks]

Answer:

1. Penalty for failure to get accounts audited as required under section 44 AB:
   Penalty leviable under section 271B is lower of 0.5% of total turnover or gross receipts OR ₹ 1,50,000.
2. Penalty for failure to comply with a direction issued under section 142(2A):
   Penalty leviable under section 272A( 1): ₹ 10,000 for each default or failure.
3. Penalty for failure to furnish report from an Accountant, as required under section 92E:
   Penalty leviable under section 271 BA: ₹ 1,00,000.

Question 7.
The A.O. lodged a complaint against M/s. KLM, a firm, under section 276CC of the Income-tax Act, 1961 for failure to furnish its return of income for the A.Y. 2021-22 within the prescribed time. The tax payable on the assessed income, as reduced by the advance tax paid and tax deducted at source, was ₹ 60,000. The appeal filed by the firm against the order of assessment was allowed by the Commissioner (Appeals). The A.O. passed an order giving effect to the order of the Commissioner (Appeals). The tax payable by the firm as per the said order of the A.O. was ₹ 5,000. The Assessing Officer has accepted the order of the Commissioner (Appeals) and has not preferred an appeal against it to the Income Tax Appellate Tribunal. The firm desires to know of the maintainability of I the prosecution proceedings in the facts and circumstances of the case. [CA Final May 2017, May 2007] [3 Marks]
Answer:
Section 276CC provides for prosecution for wilful failure to furnish a return of income within the prescribed time, in a case where tax would have been evaded had the failure not been discovered.

Since the amount of tax which would have been evaded does not exceed ₹ 25 lakh, the imprisonment would be for a term of 3 months to 2 years. In addition, fine would also be attracted.

However, in a case where the return of income is not filed within the due date, prosecution proceedings will not be attracted if the tax payable by the assessee (not being a company) on the total income determined on regular assessment, as reduced by the advance tax or self assessment tax, if any, paid and any tax deducted or collected at source, does not exceed ₹ 10,000.

In this case, even though the tax liability of the firm as per the original order of assessment exceeded ₹ 10,000, however, as a result of the order of the Commissioner (Appeals), it got reduced to ₹ 5,000, which is less than ₹ 10,000.

Therefore, since the tax liability of the firm on final assessment was determined at ₹ 5,000, the prosecution proceedings are not maintainable.

Question 8.
What would be the penalty leviable u/s 270A in case of DEF Ltd. an Indian Company, if none of the additions or disallowances made in the assessment or reassessment qualify u/s 270A(6) and the under-reported income is not on account of misreporting?

Particulars of total Income of A.Y. 2021-22		Amount in ₹
(1)	As per the return of income furnished u/s 139(1)	(6,00,000)
(2)	Determined under section 143(1)(a)	(3,00,000)
(3)	Assessed under section 143(3)	(1,00,000)
(4)	Reassessed under section 147	4,00,000

Note: The total turnover of DEF Ltd. for the P.Y. 2018-19 was ₹ 300 crores. [CA Final Nov. 2017] [4 Marks]
Answer:
PQR Ltd. is deemed to have under-reported its income since:
(i) the assessment u/s 143(3) has the effect of reducing the loss determined in a return processed u/s 143(l)(a); and .
(ii) the reassessment u/s 147 has the effect of converting the loss assessed u/s 143(3) into income.
Therefore, penalty is leviable u/s 270A for under-reporting of income.

Computation of penalty leviable under section 270A

Question 9.
BNG Ltd., a domestic company has deducted TDS of ₹ 28,451 during the Qtr. 1 of F.Y. 2020-21. They had filed the TDS return for Qtr. 1 on 15.09.2020. The IT Department had sent a notice of demand to the company, wherein a fee was levied u/s 234E of the Income Tax Act, 1961 (Act) for ₹ 8,800. The Company paid the demand raised by the Department and also claimed such payment as business expenditure during the A.Y. 2021 -22. Discuss whether the demand raised by the Department is correct, as per the provisions of the Act. Also, explain whether fee paid u/s 234E can be claimed as deduction while computing the income under the head “Profits and gains of business or profession”. [CA Final May 2018 (Old Syllabus)] [6 Marks]
Answer:
Demand raised by the Department:
As per Sec. 234E, where a person fails to deliver a statement within the time prescribed u/s 200(3), he shall be liable pay the fee of ? 200 for every day during which the failure continues. As per Sec. 200(3), the time limit for furnishing the return of TDS for Quarter 1 is 31st July but BNG Ltd. has filed it on 15.09.20 and therefore, there is a delay of 46 days (i.e. from 01.08.2020 to 15.09.2020).

Therefore, the company shall be liable for paying the fees of ₹ 9,200 200 × 46 days). However, the demand raised by the Department in respect of fees u/s 234E is only ₹ 8,800 and therefore, the Department has raised ₹ 400, less in respect of fees u/s 234E, than what is payable by the BNG Ltd.

Fee paid u/s 234E claimed as deduction:
As per Sec. 37, any expenditure incurred wholly and exclusively for the purpose of business or profession is allowed as deduction. The fee paid u/s 234E is not in the nature of penalty or interest.

The Legislature has consciously used the word ‘penalty’ and ‘interest’ at other places in contradiction to the word ‘fee’. Also, there is no express provision in the Act which disallows such fee paid and therefore, fee paid u/s 234E is allowable as deduction while computing business income.

Question 10.
MCM is a firm, liable to tax at the rate of 30% and has filed its return of income. The following information is provided to you:
(i) Returned Total income – ₹ 1,00,00,000
(ii) Total income determined u/s 143(1 )(a) – ₹ 1,20,00,000
(iii) Total income assessed u/s 143(3) – ₹ 1,60,00,000
(iv) Total income reassessed u/s 147 – ₹ 1,90,00,000
Considering that none of the additions or disallowances made in the assessment or re-assessment as above qualifies u/s 270A(6), compute the amount of penalty to be levied u/s 270A of the Income-tax Act, 1961 at the time of assessment u/s 143(3) and at the time of reassessment u/s 147. (Assume under-reporting of income is not on account of misreporting) [CA Final May 2018 (Old Syllabus)] [6 Marks]
Answer:
MCM is deemed to have under-reported its income since:

1. its income assessed u/s 143(3) exceeds its income determined in a return processed u/s 143(1)(a); and
2. the income reassessed u/s 147 exceeds the income assessed u/s 143(3).

Therefore, penalty is leviable u/s 270A for under-reporting of income.

Computation of penalty leviable under section 270A

Question 11.
Discuss the following in the context of provisions of Income Tax Act, 1961:
Penalty to be imposed on an assessee is to be based upon the law as it stood at the time that default was committed or upon the law as it stands in the financial year in which the assessment was made. Suppose, an assessee files return of income in response to a notice of reassessment, and any concealment was detected, and at that time the laws relating to imposition of penalty was different from the provisions at the time when the original return was filed. Which law should be applicable in this case? [CA Final May 2018 (Old Syllabus)] [4 Marks]
Answer:
The issue under consideration is whether the penalty for concealment of income is to be based upon the law in force at the time the original return was filed or the law in force at the time of assessment/reassessment.

The penalty imposable on account of the commission of a wrongful act is to be in accordance with the law operating on the date on which the wrongful act was committed. Since, the concealment in this case with reference to which the penalty could be imposed is the concealment of income in the return originally filed by the assessee, the law applicable on the date of such wrongful act alone could be applied.

The law applicable for imposition of penalty will be the law in force at the time of filing the original return, in which the income is not disclosed/ income is concealed, and not the law as it stands on the date on which return in response to the notice for reassessment.

Even in a case, where a return filed in response to a notice of reassessment involved an element of concealment, the law applicable would be the law as it stood at the time when the original return was filed and not the law as it stood on the date on which the return was filed in response to the notice for reassessment.

Accordingly, penalty would be imposable on the basis of the law at the time the original return was filed.

Question 12.
Pramod, a resident individual of age of 52 years, has not furnished his return of income for the A.Y. 2021-22, However, his total income for such year as assessed u/s 143(3) is ₹ 14 Lakhs.

Whether penalty u/s 270A attracted? If yes, what will be the quantum of penalty leviable? [Note: Assume that this is not a case of misreporting]. [CA Final May 2018 (New Syllabus)] [3 Marks]
Answer:
As per Sec. 270A(1), the A.O. or the CIT(A) or PCIT or CIT may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on under reported income.

As per Sec. 270A(2), the person shall be considered to have under-reported his income, if the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished.

In this case, the assessee-Pramod has not furnished his return of income for the A.Y. 2021 -22. However, his total income assessed for such year u/s c 143(3) is ₹ 14,00,000, which exceeds the maximum amount not chargeable to tax i.e. ₹ 2,50,000 and therefore, the Pramod has under reported his income. Since, the Pramod has under reported his income, he shall be liable for penalty u/s 270A @ 50% of the amount of tax payable on such under reported income.

The amount of tax payable on ₹ 14,00,000 shall be ₹ 2,41,800. Therefore, the quantum of penalty shall be 50% of ₹ 2,41,800 i.e. ₹ 1,20,900.

Question 13.
Can prosecution be launched for following defaults? Examine the relevant provisions with quantum of prescribed punishment, if any?
(i) The assessee deliberately has failed to comply with the requirement of section 142(f) and/or 142(2A).
(ii) The assessee has failed deliberately to make the payment of tax collected u/s 206C.
(iii) The assessee had restrained and not allowed the officer authorized as per section 132(1)(iib) of the Act to inspect the documents maintained in form of electronic record and the books of account. [CA Final May 2018 (New Syllabus)] [3 Marks]
Answer:
(i) As per Sec. 276D, if a person wilfully fails to produce books of account and documents as required u/s 142(1) or wilfully fails to comply with a direction to get-the accounts audited u/s 142(2A), he shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine.

(ii) As per Sec. 276BB, if a person fails to pay to the credit of the Central Government, the tax collected u/s 206C, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years with fine.

(iii) As per Sec. 275B, if a person who is required to afford the authorised officer the necessary facility to inspect the books of account or other documents, as required u/s 132(1 )(iib), fails to afford such facility to the authorised officer, he shall be punishable with rigorous imprisonment for a term which may extend to two years and shall also be liable to fine.

Question 14.
Specify the quantum of Fee/Penalty, if any, to be levied in the following cases. Your answer must specify the relevant provisions of Income-tax Act, 1961.

(i) Mr. Abhiram, an individual, whose taxable income working out to ₹ 13.25 Lakhs, filed the ROI on 12.03.2022 for the assessment year 2021-22. The due date for furnishing return of income u/s 139(1) is 31.10.2021.
(ii) Mrs. Sirisha filed the return of income on 31.01.2022 for the assessment year 2021-22. The due date for furnishing return of income is 31.07.2021 u/s 139(1) and her taxable income is ₹ 4.98 lakhs.
(iii) Mr. Robert received a sum of ₹ 2.50 lakhs from Mr. Rajiv on 31.01.2021 in cash in contravention of provisions of section 269ST. [CA Final Nov. 2018 (Old Syllabus)] [3 Marks]
Answer:
(i) As per section 234F, late fee of ₹ 5,000 is leviable, if the return of income is furnished after the due date specified u/s 139(1) but furnished on or before 31st December of the assessment year. In other cases, late fee of ₹ 10,000 is leviable.

Since, Mr. Abhiram, an individual, having total income of ₹ 13.25 lakhs, furnished his return of income for A.Y. 2021-22 on 12.3.2022 i.e., after 31st December 2021, late fee of ₹ 10,000 is leviable.

(ii) Late fee of ₹ 5,000 or ₹ 10,000, as the case may be, leviable u/s 234F cannot exceed ₹ 1,000, if the total income does not exceed ₹ 5,00,000. Accordingly, late fee not exceeding ₹ 1,000 is leviable in this case, since Mrs. Sirisha’s total income of ₹4,98,000 does not exceed ₹ 5,00,000.

(iii) As per section 271 DA, penalty equivalent to the sum received in contravention of section 269ST (i.e., receipt of a sum of ₹ 2 lakh or more in aggregate from a person in a day otherwise than by an account payee cheque/bank draft or use of ECS through a bank A/c or through such other electronic mode as may be prescribed) is leviable. Accordingly, penalty of ₹ 2.50 lakhs is leviable on Mr. Robert for receiving a sum of ₹ 2.50 lakhs (being a sum in excess of ₹ 2 lakhs) by way of cash from Mr. Rajiv on 31.1.2021.

Question 15.
In the course of search operation u/s 132rof the Income-tax Act, 1961, in the month of July, 2020, Mr. Khemka has-made a declaration u/s 132(4) to the Income Tax authorities on the earning of his income not disclosed in respect of previous year 2019-20. Can that statement save Mr. I Khemka from a levy of penalty, if he is yet to file his return of income for assessment year 2020-21? [CA Final Nov. 2018 (New Syllabus)] [3 Marks]
Answer:
As per Sec. 271AAB, where search has been initiated u/s 132, the A.O. may direct the assessee to pay in addition to tax, if any, payable by him, penalty @ 30% of the undisclosed income of the specified previous year, if such assessee;

1. in the course of the search, in a statement u/s 132(4), admits the undisclosed income; and
2. on or before the specified date:
   • pays the tax with interest in respect of undisclosed income; and
     ♦ furnish return of income for the specified previous year declaring such undisclosed income therein.

In all other cases i.e. if above conditions are not satisfied, then penalty @ 60% shall be attracted.

Therefore statement u/s 132(4) cannot save Mr. Khemka from a levy of penalty u/s 271AAB. If Mr. Khemka furnishes the ROI and pays the tax with interest on or before the specified date, then penalty will be attracted @ 30% of undisclosed income, otherwise the penalty shall be attracted @ 60%.

Question 16.
State with reasons the penalty leviable on each of the independent instances.
(1) The premises of A Ltd. were searched, and undisclosed income of ₹ 20 crores was determined. The Company did not admit the undisclosed income in a statement u/s 132(4) but declared the same in a return furnished, and paid the tax with interest thereon.

(2) M/s. ABC Trust an eligible investment fund has filed a statement of its activities for the year ended 31.3.2021 on 31.7.2021.

(3) Meena Caterers has received ₹ 1 lakh in cash and ₹ 9 lakh by account payee crossed cheque from Mr. Arvind for rendering catering services 1 on the occasion of his daughter’s wedding.

(4) Mrs. P is a trader who is subject to audit u/s 44AB. She has reported cash collections from various Sundry Debtors, but has discovered that she omitted to include 2 more debtors in the statement already filed. She has reported the omission to the authorities within 15 days. [CA Final Nov. 2019 (Old Syllabus)] [4 Marks]
Answer:
(1) As per section 271 AAB, where a search has been initiated u/s 132, the A.O. may direct the assessee to pay in addition to tax, if any, payable by him, penalty @ 60% of the undisclosed income of the specified previous year, if such assessee:

1. in the course of the search, in a statement u/s 132(4), does not admit the undisclosed income; and
2. on or before the specified date:
   • declares such income in the return of income furnished for the specified previous year; and
   • pays the tax, together with interest, if any, in respect of the undisclosed income.

Since, A Ltd. did not admit the undisclosed income in a statement u/s 132(4) but declared the same in a return furnished, and paid the tax with interest thereon, it shall be liable for a penalty (a) 60% of undisclosed income of ₹ 20 crores i.e. ₹ 12 crores.

(2) As per section 271 FAB, if any eligible investment fund which is required to furnish a statement or any information or document, as required u/s 9A(5), fails to furnish the same within the prescribed time limit i.e. within 90 days from the end of financial year, a penalty of ₹ 5,00,000 shall be levied.

In this case, M/s. ABC Trust filled statement of activities for the year ending 31.3.2021 on 31.7.2021 which is after 90 days from the end of financial year and therefore, a penalty of ₹ 5,00,000 shall be levied u/s 271 FAB.

(3) As per Sec. 269ST, no person shall receive ₹ 2,00,000 or more in respect of transaction relating to one event or occasion from a person otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system or through such other electronic mode as may be prescribed.

The contravention of such section shall attract penalty u/s 271 DA. In this case, Meena Caterers has received ₹ 1 lakh in cash and ₹ 9 lakh by account payee crossed cheque from Mr. Arvind for rendering catering services on the occasion of his daughter’s wedding. Since, the cash receipt is less than ₹ 2,00,000, there is not contravention of Sec. 269ST and therefore, no penalty shall be levied u/s 271 DA.

(4) As per Sec. 285BA(6), any inaccuracy in the statement furnished shall be reported to the prescribed authorities within 10 days. If such inaccuracy is not reported within such time limit, penalty of ₹ 50,000 shall be levied on the assessee u/s 271FAA. In this case, Mr. P has, who is liable to audit u/s 44AB, has reported the omission after 10 days, he shall be liable for a penalty of ₹ 50,000 u/s 271FAA.

Survey, Search and Seizure – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Survey, Search and Seizure – CA Final DT Question Bank

Question 1.
Premises of Ganesh were subjected to a search under Section 132 Of the Act. The search was authorized and the warrant was signed by the Joint Commissioner of Income-tax having jurisdiction over the assessee. The assessee challenged the validity of search, since Section 132(1) does not empower Joint Commissioner to authorize a search under the Act. Decide the correctness of the contention raised by the assessee. [CA Final May 2010] [4 Marks]
Answer:
Section 132 provides that Search and seizure can be authorised by Director General or Director or Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner.

However, search can be authorized by Additional Director or Additional Commissioner or Joint Director or Joint Commissioner only if he is empowered by the CBDT to do so.

In view of the above said provisions of section 132, Joint Commissioner can issue the warrant and authorize the search, if he is empowered by the CBDT to do so.

Therefore, in the given case, if the Joint Commissioner has not been specifically empowered by the CBDT to do so, the contention of the assessee would hold good.

Question 2.
The A.O. Issued notices u/s 133 to four banks requiring particulars relating to a customer in a specific format duly verified in a prescribed manner. One of the banks refused to part with the information on the ground that the letter did not specify about any proceeding pending against the said customer under the Income-tax Act, 1961. Discuss the correctness of action of the bank in refusing to furnish the particulars as required by the AO. [CA Final May 2012] [4 Marks]
Answer:
As per section 133(6), the A.O. may, for the purposes of this Act, require i any person, including banking company, to furnish information which will be useful for or relevant to, any enquiry or proceedings under the Act.

However, in case of inquiry where no proceeding is pending, this power shall not be exercised by any income tax authority below the rank of Principal Director or Director or Principal CIT or CIT, other than the Joint Director or Deputy Director or Assistant Director, without the prior approval of Principal Director or Director or Principal CIT or CIT, as the case may be.

Therefore, the A.O. can issue notice u/s 133(6) asking for particulars relating to a customer from the banking company, even if no proceeding is pending against such customer, provided he has obtained the prior approval of the Principal Director or Director or Principal CIT or CIT, as the case may be.

Hence, the action of bank in refusing to provide the particulars relating to a customer as required by the A.O. on the ground that no proceeding was pending against the customer, is not correct.

Question 3.
Mr. A’s premises were searched under section 132. During the course of search, certain records belonging to Mr. B were found, Mr. A and Mr. B wish to know from you the consequences. Advise them. [CA Final Nov. 2012] [5 Marks]
Answer:
As per section 132(4A), where any books of account or other documents, etc. are found in the possession or control of the person who is subject to search, then, it shall be presumed that such books of account or documents, etc., belong to such person. Hence, in the present case the records belonging to Mr. B found in the search of Mr. A’s premises, shall be presumed to be of Mr. A.

However, section 153C provides that where the A.O. is satisfied that any ; books of account or other documents, etc, seized belong to a person other than the person subject to search u/s 132, then the books of account or documents, etc., seized shall be handed over to the A.O. having jurisdiction over such other person and that A.O. shall proceed against such other person and issue such other person notice and assess or reassess his income as per the provisions of section 153A.

Therefore, in the present case, if the A.O. of Mr. A is satisfied that the records, belonging to Mr. B found in the course of search, have no bearing on the assessment of Mr. A, he shall hand over the same to the A.O. having jurisdiction over Mr. B. Such A.O. shall proceed with the assessment of Mr. Bu/s 153A.

Question 4.
The Director General of Income-tax after getting the information that Mr. X is in possession of unaccounted cash of ₹ 50 lakhs, issued orders by invoking powers vested in him as per section 131(1 A) for its seizure.

Is the order for seizure of cash issued by the Director General of Income-tax correct?

If not, does the Director General of Income-tax have any other power to seize such cash? [CA Final Nov 2014, Nov 2010] [3 Marks]
Answer:
As per Sec. 131 (1 A), the Director General, for the purposes of making an enquiry or investigation relating to any income concealed or likely to be concealed by any person or class of persons within his jurisdiction, shall be competent to exercise powers conferred u/s 131(1), which is confined to discovery and inspection, enforcing attendance, compelling the production of books of account and other documents and issuing commissions. This section does not, however, confer the power of seizure of cash or any asset. Thus, the order issued by the Director General of Income-tax u/s 131(1 A) 1 for seizure of cash is not correct.

However, u/s 132(1)(iii), the Director General has the power to authorize any Additional Director or Additional Commissioner or Joint Director or Joint Commissioner etc. to seize money found as a result of search, if he has reason to believe that any person is in possession of any money which represents wholly or partly income which has not been disclosed.

Therefore, the proper course open to the Director General is to exercise his power u/s 132(1) and authorize the Officers concerned to enter the premises where the cash is kept by Mr. X and seize such unaccounted cash.

Question 5.
A Co-operative society engaged in banking business received a letter from the ACIT, to furnish details of all persons who have made time deposit of ₹ 1 lakh or above during the period from 1.4.2018 to 31.3.2020.

There is no pending proceeding against the Co-operative society at the time of receipt of letter.

As a Chartered Accountant, what would be your advise to the cooperative society regarding legality of the notice? [CA Final Nov. 2015] [4 Marks]
Answer:
The issue under consideration is whether, in a case where no proceeding is pending against a person, can the A.O. call for information. It is | assumed that such details were sought for u/s 133(6).

As per Sec. 133(6), the A.O. may, for the purposes of this Act, require any person, including a banking company or any officer thereof, to furnish information which will be useful for or relevant to any enquiry or proceedings under the Act.

However, an income-tax authority below the rank of the Principal Director or Director or Principal CIT or CIT other than Joint Director or Assistant Director can exercise this power in respect of an enquiry in a case where no proceeding is pending, only with the prior approval of the Principal Director or Director or Principal CIT or CIT.

In this case, if the letter/notice been issued after obtaining approval of the competent higher authorities mentioned above, the ACIT has not erred in 1 issuing letter/notice to the co-operative society requiring them to furnish information regarding persons who have made time deposits of ₹ 1 lakh or more.

For such enquiry u/s 133(6), letter/notice could be validly issued by ACIT, after obtaining the approval of Principal Director or Director or Principal CIT or CIT. However, if prior approval of the competent higher authority is not obtained, the co-operative society can contest the validity of the notice issued.

Question 6.
Books of account and certain assets are found to be in possession of the person, whose premises are searched. What are the rebuttable presumptions regarding those items? [CA Final Nov. 2015] [3 Marks]
Answer:
As per section 132(4A), where any books of account, other documents and assets is found in the possession or control of any person in course of a search, it may be presumed:

• That such books of account, other documents arid assets belongs to such person
• That the contents of such books of account and documents are true; and
• That the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person are in that person’s hand writing, and in the case of a document stamped, executed or attested, that it was duly stamped, executed or attested by the person whom it purports to have been so executed or attested.

Question 7.
M/s. XYZ was subjected to search and seizure. During the course of search, sales, purchase ledgers and property documents pertaining to Mr. A was found in the premises of M/s. XYZ. What is the procedure to be adopted by the A.O. of M/s. XYZ who has seized the records? [CA Final May 2016] [4 Marks]
Answer:
As per section 153C(1), where the A.O. is satisfied that any books of account or documents seized or requisitioned pertains to or the information contained therein relates to any person other than the person subjected to search u/s 132 or whose books or documents were seized or requisitioned u/s 132A, then the books of account or documents seized or requisitioned shall be handed over to the A.O. having jurisdiction over such other person and that A.O. shall proceed against such other person and issue notice to him and assess or reassess income of such other person as per section 153A if, the A.O. is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for 6 A.Y. immediately preceding the A.Y. relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in section 153A(1).

In this case, if Mr. A is subject to the jurisdiction of the same A.O. as that of M/s. XYZ, the said A.O. shall proceed against Mr. A, otherwise, the A.O. of M/s. XYZ should hand over the sales, purchase ledgers and property documents pertaining.to Mr. A to the A.O. having jurisdiction over Mr. A, if he is satisfied that the same pertains to Mr. A or any information contained therein relates to Mr. A.

Thus, the same A.O. or the A.O. having jurisdiction over Mr. A, as the case may be, shall proceed against Mr. A and issue notice and assess or reassess the income of Mr. A as per section 153A, only if he is satisfied that the books of account and documents have a bearing on the determination of total income of Mr. A for 6 A.Y. immediately preceding the A.Y. relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or assessment years referred to in section 153A(1).

Question 8.
An Assessing Officer entered a hotel run by a person, in respect of whom he exercises jurisdiction, at 8:00 p.m. for the purpose of collecting information, which may be useful for the purposes of the Act. The hotel is kept open for business everyday between 9:00 a.m. to 9:00 p.m. The hotelier claims that the Assessing Officer could not enter the hotel after the sunset. The Assessing Officer wants to take away with him the books of account kept at the hotel. Examine the validity of the claim made by the hotelier and the proposed action of the Assessing Officer with reference to the provisions of the section 133B of the Income-tax Act, 1961. [CA Final May 2017, Nov. 2006] [3 Marks]
Answer:
As per section 133B, an income-tax authority may, for the purpose of collecting any information which may be useful for or relevant to the purposes of Act, enter any place of business or profession within the limit of the area assigned to such authority, or occupied by any person in respect of whom he exercises jurisdiction.

The income-tax authority may enter any such place of business or profession only during the hours at which such place is open for conduct of business or profession. As the hotel is open for business from 9:00 AM to 9:00 PM for the conduct of business, the action of A.O. of entering at 8:00 PM is valid.

Section 133B further states that the income tax authority shall on no account, remove or cause to be removed from the building or place wherein he has entered, any books of account or other documents or any cash, stock or other valuable article. Therefore, the A.O. cannot take away the books of account of the hotelier.

Question 9.
During October 2020, a search was conducted u/s 132 in the business premises of Mr. Q. At the time, the following assessments of Mr. Q were pending before the Assessing Officer:

Assessment u/s 143(3) for A.Y. 2018-19 and A.Y. 2019-20 and reassessment proceeding u/s 147 for A.Y. 2017-18.

Based on the above facts, you are required to explain the provisions applicable in case of the following:
(i) In respect of which assessment years can notice be issued for making post-search assessment?
(ii) Fate of pending assessments and reassessment.
(iii) State the consequence, if the post-search assessment orders are annulled by the Income Tax Appellate Tribunal. [CA Final Nov. 2017] [4 Marks]
Answer:
(i) The notice u/s 153A can be issued for 6 assessment years immediately , preceding the assessment year relevant to the previous year in which the search is conducted. Therefore, in the given question, for making post-search assessment notice can be issued for A.Ys. 2015-16 to 2020-21.

Further, as per the newly inserted provisions of 4,h Proviso to Sec. 153A(1), if the prescribed conditions are satisfied then notice can also be issued for relevant assessment year or years. “Relevant assessment year” means an assessment year preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond 6 assessment years but not later than 10 assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made. Therefore, on fulfilment of the specified conditions, notice can also be issued for A.Y. 2011-12 to A.Y. 2014-15.

(ii) Section 153A( 1) provides that the assessment or reassessment relating to any assessment year, falling within the above period of 6 assessment year and for the relevant assessment year or years, pending on the date of initiation of the search u/s 132, shall abate. In other words, they will cease to be applicable.

Therefore, the assessments u/s 143(3) for assessment years 2018-19 and 2019-20 and the reassessment proceeding under section 147 for assessment year 2017-18 shall abate.

(iii) As per section 153A(2), where the post-search assessment order is annulled in any appeal or any other legal proceeding, the abated assessment and reassessment proceedings shall stand revived. Therefore, the assessments u/s 143(3) relating to assessment years 2018-19 and 2019-20 and the reassessment proceeding relating to assessment years 2017-18, which abated on initiation of search, shall stand revived.

Question 10.
A search as per section 132 of the Act was conducted on 02.01.2021 and cash ₹ 40 Lakhs was seized. The assessee moved an application on 30.01.2021 to release such cash with explanation of the nature and sources thereof, which was turned down by the department. Now, the assessee seeks your advice on whether the department can withhold the explained money? If yes, then to what extent and upto what period? [CA Final, May 2018 (New Syllabus), Nov. 2009] [4 Marks]
Answer:
As per First Proviso to Sec. 132B(1)(i), if the person whose assets have been seized u/s 132 makes an application to the A.O. for release of asset within 30 days from the end of the month in which the asset was seized, and the nature and source of acquisition of any such asset is explained to the satisfaction of the A.O., then the amount of any existing liability may be recovered out of such asset and the remaining portion, if any, of the asset may be released, with the prior approval of the PCCIT or GCIT or PCIT or CIT, to the person from whose custody the assets were seized. Such asset is to be released within 120 days from the date on which the search was completed.

In this case, the application for release of asset was made within 30 days 1 from the end of the month in which the asset was seized and therefore, the amount of any existing liability may be recovered from cash of ₹ 40 seized and the balance, may be released within 120 days from the date on which the last of the authorizations for search u/s 132 was executed.

However, in this case, it has been given that the assessee’s application for release of the asset, explaining the sources thereof, was turned down by the Department. It is possible to take a view that the application was turned down due to the reason that the A.O. was not satisfied with the explanation given by the assessee as to the nature and source of acquisition of the asset. In such a case, the cash cannot be released.

Question 11.
On 08.12.2020, search operations were conducted on the business premises of Mr. Sadanandam, Stock Broker in Mumbai by IT authorised Officials. Upon conclusion of search, certain documents/assets, which were not recorded in books of account pertaining to various previous years, were found, detailed as under:

An agreement for purchase of flat indicating total con­sideration at ₹ 50 lakhs together with cash receipt for ₹ 23 lakhs and cheque receipt for ₹ 27 lakhs whereas sale deed registered for ₹ 27 lakhs.	₹ 23 lakhs	P.Y 2012-13
Jewellery based on the bill held in his desk drawer in his name.	₹ 28 lakhs	P.Y. 2011-12
Promissory note executed by his uncle in proof of loan taken from assesses.	₹ 15 lakhs	P.Y. 2013-14
Fixed deposit receipts from a bank in the name of assessee.	₹ 12 lakhs	P.Y. 2015-16
Shares and securities in name of family members.	₹ 22 lakhs	P.Y. 2016-17

Pursuant to the above documents/assets found, the Assessing Officer, under section 153A,of the Income-tax Act, 1961 has issued notice for all the previous years from 2011-12 to 2019-20.

Mr. Sadanandam contends that the Assessing Officer cannot issue notice under section 153A beyond 6 years i.e. prior to P.Y. 2014-15.

Advise suitably on the matter in the context of relevant provisions of Income-tax Act, 1961. [CA Final Nov 2018 (Old Syllabus)] [4 Marks]
Answer:
As per Fourth proviso to Sec. 153A(1), issuance of notice and assessment or reassessment thereunder can also be made for an assessment year preceding the assessment year relevant to the previous year in which search is conducted which falls beyond 6 assessment years but not beyond 10 assessment years from the end of the assessment year relevant to the previous year in which search is conducted, provided that:

(i) the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income which has escaped assessment amounts to or is likely to amount to ₹ 50 lakhs or more in one assessment year or in aggregate in the relevant assessment years;

(ii) such income escaping assessment is represented in the form of asset which shall include immovable property being land or building or both, shares and securities, deposits in bank account, loans and advances.

(iii) the income escaping assessment or part thereof relates to such year or years; and

(iv) search u/s 132 is initiated on or after 1-4-2017.
Since, jewellery is not included in the meaning of “asset”, notice cannot be issued for P.Y. 2011-12 in relation to income escaping assessment represented in the form of jewellery.

Further, since the aggregate income escaping assessment represented in the form of assets amounts to only ₹ 38 lakhs [₹ 23 lakhs, being cash payment for purchase of flat in P.Y. 2012-13 and ₹ 15 lakhs, being loan given to his uncle in the P.Y. 2013-14], the A.O. cannot issue notice u/s 153A in relation to income escaping assessment for those years.

Thus, in this case, the contention of Mr. Sadanandam that notice cannot be issued beyond the 6 year period is correct.

However, there is no restriction on A.O. to issue notice relating to income escaping assessment for the P.Y. 2015-16 [in relation to bank fixed deposit] and P.Y. 2016-17 [in relation to shares and securities in the name of family members], since the period falls within the six previous years immediately preceding the P.Y. 2020-21 in which the search was conducted.

Question 12.
The Assessing Officer surveyed a popular cinema hall by name “Thriller” which is within his jurisdiction at 12 o’clock in the midnight for collecting information which may be useful for the purpose of Income-tax Act, 1961. The concerned cinema hall is kept open for business everyday between 9 p.m. and 1 a.m. The owner of the cinema hall claims that the A.O. could not enter his business premises after sunset and at late in the midnight. The, Assessing Officer wanted to take away with him the books of account kept at the premises of the cinema hall. Examine the validity of the claim made by the owner of cinema hall and the proposed action of the Assessing Officer. [CA Final May 2019 (New Syllabus), Nov. 2011] [4 Marks]
Answer:
As per Sec. 133A, an income-tax authority (which includes A.O.) may enter:

• any place within the limits of the area assigned to him, or
• any place occupied by any person in respect of whom he exercises jurisdiction, or
• any place in respect of which he is authorised for the purposes of this section by such income-tax authority, who is assigned the area within which such place is situated or who exercises jurisdiction in respect of any person occupying such place,

at which a business or profession or an activity for charitable purpose is carried on, whether it is the principal place or not.

The income-tax authority may enter such place only during the hours at which such place is open for conduct of business or profession.

Further, the income-tax authority cannot remove any asset during survey operations. However, he is empowered to impound and retain in his custody any books of account or other documents only after recording the reasons for doing so.

In this case, the A.O. surveyed a cinema at 12 o’ clock in the midnight and the concerned cinema hall is kept open for business everyday between 9 p.m. and 1 a.m. Therefore, the A.O. has entered a cinema hall during business hours which is valid.

Further, the action of A.O. to take away the books of account kept at the premises of the cinema hall is also valid, provided that the A.O. has recorded the reasons for doing so.

Appeals and Revisions – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Appeals and Revisions – CA Final DT Question Bank

Question 1.
Does the Income-tax Appellate Tribunal have the following powers?
(i) Power to allow the assessee to urge any ground of appeal which was not raised by him before the CIT(A);
(ii) Power to review its own order. [CA Final May 2010] [4 Marks]
Answer:
Powers of ITAT in respect of the situations given are as under:
(i) Supreme Court in the case of National Thermal Power Co. Ltd. held that the tribunal is confined only to issues arising out of the appeal before CIT (A) is too narrow a view to take of the powers of the Tribunal. It has the power to allow the assessee to urge any ground not raised before the CIT(A). ITAT can entertain new questions raised before it for the first time so long as the relevant facts are on record in respect of the same.

In view of the above said judgment, ITAT can allow the assessee to urge any ground of appeal which was not raised by him before the CIT(A).

(ii) Bombay High Court in the case of Earnest Exports Ltd; held that ITAT cannot review its order passed u/s 254(1). Sec. 254(2) is not a carte blanche for the tribunal to change its own view by substituting a view which it believes should have been taken in the first instance. The High Court observed that power u/s 254(2) is limited to rectification of mistake apparent from record and thus, the tribunal must restrict itself within those parameters.

In view of the above judgment, Appellate Tribunal review its own order.

Question 2.
If an assessee fails to make a claim for any deduction m the return of income, he loses his opportunity for claiming such deduction at the assessment stage or subsequent stage. Do you agree with the proposition? [CA Final Nov. 2011] [4 Marks]
Answer:
Where the assessee fails to claim deduction in the return of income, he may claim such deduction through following ways:
(i) By filing a revised return within the time limit, the assessee can claim deduction which was not claimed at the time of filing original return of income.

(ii) In the case of Jute Corporation of India Ltd., the Supreme Court held that a claim for deduction can be admitted by the CIT(A) even if no claim for such deduction was made in the ROI or at the time of assessment proceedings, if the CIT(A) is satisfied that such a ground could not have been raised at the time of filing of return or at the time of making of the assessment order and such ground became available because of change in law or change in circumstances. So, the assessee may claim deduction before the CIT(A) by raising the additional ground.

(iii) In the case of National Thermal Power Co. Ltd., the Supreme Court held that the ITAT can entertain new questions raised before it for the first time so long as the relevant facts are on record in respect of the same. So, the claim of deduction can be allowed ITAT even if such an issue was not raised before the lower authorities.

(iv) The assessee may also claim such deduction u/s 264 before the CIT, if the same has not been allowed by the A.O.

Therefore, the proposition that any deduction not claimed in the return of income, cannot be claimed at the assessment stage or subsequent stage is not fully true.

Question 3.
“SVS Propcon” did not make a claim of 20 lakhs in the return of income filed for A.Y. 2021-22 which was disallowed in the previous assessment year under section 43B. However, the said claim was also not considered by the Assessing Officer during assessment proceedings on the ground that no revised return was filed. Can the assessee now make such claim before the appellate authority? [CA Final Nov. 2013] [4 Marks]
Answer:
Yes, the assessee is entitled to raise additional claims before the appellate authorities.

The Supreme Court in the case of National Thermal Power Co. Ltd., held that the ITAT can entertain new questions raised before it for the first time so long as the relevant facts are on record in respect of the same.

Question 4.
Examine the correctness of the following statements in the context of the provisions of the Income-tax Act, 1961. High Court has an inherent power under the Income-tax Act, 1961, to review an earlier order passed on merits.   [CA Final Nov. 2014] [2 Marks]
Answer:
Supreme Court in the case of Meghalaya Steels Ltd. observed that there is nothing in article 226 of the Constitution to preclude a High Court from exercising the power of review which is inherent in every court of plenary jurisdiction to prevent miscarriage of justice or to correct grave and palpable errors committed by it. Therefore, where the High Court commits any error in his order, which violates the law of natural justice, it can review its order.

However, as a general rule, no authority can review its order. The High Court cannot review its earlier order if there is no error in the same. The order of High Court can be reviewed by Supreme Court if an appeal is filed to Supreme Court against the order of High Court.

Question 5.
Arihant Ltd. filed an appeal to the Commissioner (Appeals) against the order of assessment made by the Assessing Officer. The appeal was allowed by the Commissioner (Appeals). The assessee later found that he was entitled to deduction of ₹ 30,000 as bad debt u/s 36(1)(vii), which the had forgotten to claim and the related amount was also not allowed by the Assessing Officer in the course of assessment. Further, the issue of deduction was not raised by the assessee in appeal before the Commissioner (Appeals) and hence it was also not considered by him in the said appeal. Subsequently, Arihant Ltd. applied to Commissioner for revision u/s 264, to allow such deduction. Examine the power of the Commissioner to grant relief to the assessee u/s 264, in such a case. [CA Final Nov. 2014] [4 Marks]
Answer:
As per Sec. 264, the Commissioner shall not revise an order which has been made the subject of an appeal to the Commissioner (Appeals). Therefore, the concept of Total Merger shall apply.

Also, the Supreme Court in the case of Hindustan Aeronautics Ltd. held that CIT has no power to revise any order u/s 264, if the order has been made subject to an appeal to the Appellate Tribunal, even if the relief claimed in the revision is different from the relief claimed in the appeal and irrespective of the fact whether the appeal is by the assessee or by the Department.

In view of this, the Commissioner cannot exercise his powers u/s 264 to revise the order of assessment and allow the deduction claimed by Arihant Ltd. in his application.

Question 6.
Can Commissioner (Appeals) refuse to admit an appeal even though such appeal is filed within time? [CA Final Nov. 2015] [3 Marks]
Answer:
As per section 249(4), the CIT(A) can refuse to admit an appeal, even though such appeal is filed within the stipulated time, where at the time of filing of the appeal:
(a) In a case where a ROI has been filed by the assessee, the assessee has not paid the tax due on the income returned by him; or
(b) In a case where no ROI has been filed by the assessee, the assessee has not paid an amount equal to the amount of advance tax which was payable by him.

However, in case (b), the assessee/appellant can apply to the CIT(A) for exemption from the requirement of prepayment of advance tax. The CIT(A) may, for any good and sufficient reason to be recorded in writing, exempt him from the said requirement.

Question 7.
Discuss the correctness or otherwise of the following statements with reference to the provisions of the income-tax Act, 1961:
(i) An appeal before Income-tax Appellate Tribunal cannot be decided in the event of difference of opinion between the Judicial Member g and the Accountant Member on a particular ground.
(ii) A High Court does not have an inherent power to review an earlier order passed by it on merits. [CA Final Nov. 2015, May 2013, Nov. 2012, Nov. 2011] [3 Marks]
Answer:
(i) The statement is incorrect. As per Sec. 255, in the event of difference in opinion between the members of the Bench of the Tribunal, the matter shall be decided on the basis of the opinion of the majority of the members. in case the members are equally divided, they shall state the point or points of difference to the President of ITAT and the case shall be referred by the President of the Tribunal for hearing on such point by one or more of the other members of the Tribunal. Such point or points shall be decided according to the opinion of majority of the members of the Tribunal who heard the case, including those who had first heard it.

(ii) Supreme Court in case of Meghalaya Steels Ltd. (SC) observed that there is nothing in article 226 of the Constitution to preclude a High Court from exercising the power of review which inheres in every court of plenary jurisdiction to prevent miscarriage of justice or to correct grave and palpable errors committed by it. Therefore, where the High Court commits any error in his order, which violates the law of natural justice, it can review its order.

However, as a general rule, no authority can review its order. The High Court cannot review its earlier order if there is no error in the same.

Question 8.
Mr. Shyam had e-filed his income-tax return for A.Y. 2021-22 within the due date declaring a total income of ₹ 9,50,000. Such total income, inter alia, includes dividend from Indian companies of ₹ 50,000 and long term capital gains on sale of shares of ₹ 2,00,000. However, Mr. Shyam correctly disclosed both such incomes in the schedule of exempt income. Consequently, the said return got processed u/s 143(1) denying both the above exemptions and intimation was served on Mr. Shyam raising a demand of tax. After receipt of said intimation, assessee filed a revised return but time limit of filing revised return u/s 139(5) had lapsed and such revised return was held invalid. Assessee filed for rectification u/s 154 which was also rejected by A.O. Decide the correctness of action of the A.O. [CA Final May 2016] [4 Marks]
Answer:
The facts of the case are similar to the facts in Sanchit Software and Solutions Pvt. Ltd. y. CIT (2012), wherein the Bombay High Court observed that the entire object of administration of tax is to secure the revenue for the development of the country and not to charge the assessee more tax than which is due and payable by the assessee.

An error was initially committed by the assessee while e-filing his return. Incomes which were exempt ought not to have been shown as part of his total income. However, the assessee had shown the impugned amounts as exempt, in the schedule of exempt income. While processing such return under section 143(1)(a), the system could not have detected This error and hence was processed, accepting the income returned by the assessee. The Assessing Officer, however, cannot take advantage of a mistake committed by the assessee.

In the case on hand, since there is an error on the face of the intimation u/s 143(1), the rectification hied u/s 154, obviously within the stipulated time limit, cannot be rejected by the A.O. Hence, the action of the A.O. is not correct.

Question 9.
D, an individual, filed his return of income for the A.Y. 2021-22 erroneously offering for taxation, interest received from notified Relief Bonds exempt u/s 10(15), in the said return. The A.O. completed the assessment u/s 143(3) on 20.12.2021 accepting the income returned by D. D had furnished complete particulars relating to the interest Income in the return of income. D approaches you for advice regarding the steps to be taken to secure exemption of the income. Advice D about the various remedies available under the Income-tax Act, 1961 for the redressal of his grievance. [CA Final May 2017] [3 Marks]
Answer:
D can file an appeal under section 246A, against the order of assessment, to the Commissioner (Appeals). The law is well settled that an appeal can be filed by an assessee even against inclusion in assessment, of such income erroneously included by him in the return of income. Reliance is 1 placed on the decision of the Delhi High Court in CIT v. Bharat General Reinsurance Co. Ltd. (1971).

If an assessee makes a mistake in submitting a return of income and submits to be assessed on a particular income before the assessing authority, he is not estopped or precluded by law from preferring an appeal and showing to the appellate authority that the income is, in fact, either wholly or partly, not exigible to tax. If such a contention is taken, it is the duty of the appellate authority to examine the matter and determine the proper tax [ leviable. There is no question of invoking the doctrine of estoppel in such a case [Narsepalli Oil Mills v. State of Mysore (1973)(Mvs.)]

In the alternative, D can file a revision petition under section 264 with the Principal Chief Commissioner or Chief Commissioner or Principal Com-missioner or Commissioner of Income-tax seeking exemption of interest from Relief Bonds, not claimed in the return of income and not allowed in the order of assessment.

The other course of action D could take is to file an application under section 154 with the Assessing Officer, seeking rectification of the order of assessment made. The consistent judicial view is that exemption not claimed by the assessee and not allowed by the Assessing Officer, though the material relating thereto was in the return of income, constitutes a mistake apparent from the record within the meaning of section 154.

Question 10.
Mrs. Santosh filed her return of income for the A. Y. 2021-22 declaring total income of ₹ 3.15 Lakhs. The return was processed u/s 143(1) and later, the case was selected for scrutiny and statutory notice u/s 143(2) was issued. The A.O, after being satisfied with the replies given for the Inquires, completed the assessment by accepting the declared income. Subsequently, the Commissioner invoked revisionary jurisdiction u/s 263, holding that the A.O. had not made enquiry properly.

Is Invoking of revisionary jurisdiction u/s 263 justified? [CA Final May 2017] [4 Marks]
Answer:
Issue involved: The issue under consideration is that whether mere non-mention or non-discussion of enquiry made by the A.O. in the assessment order justifies invoking of revisionary jurisdiction u/s 263 by the Commissioner.

Provisions Applicable: As per Explanation 2 to Sec. 263(1), where the Commissioner is of the opinion that the order passed by the A.O. is with-out making enquiries and verification which should have been made, then such order shall be deemed to be erroneous insofar as it is prejudicial to the interests of the revenue and in such a case, Commissioner can invoke revisionary jurisdiction u/s 263.

Analysis: The facts of the case are similar to the facts in CIT v. Krishna Capbox (P) Ltd. (2015), where the Allahabad High Court observed that in a case where all the necessary enquiries were made, mere non-discussion or non-mention in the assessment order cannot lead to the assumption that the A.O. did not apply his mind or that he had not made any enquiry on the subject for the Commissioner to invoke revisionary jurisdiction u/s 263. Where the assessee has satisfactorily responded to the queries raised during the assessment proceedings, the mere fact that it is not dealt with in the assessment order would not lead to a conclusion that proper enquiry was not made.

Conclusion: In this case, if it is assumed that the necessary enquiries were made by the A.O., but the CommissionerHias invoked revisionary jurisdiction u/s 263 merely due to non-discussion of non-mention of the same in the assessment order, then, as per Allahabad High Court Ruling, where necessary enquiries were made by the A.O. and satisfactorily replies were given by Mrs. Santosh, the action of the Commissioner in invoking revisionary jurisdiction u/s 263 on the ground that the A.O. had not made enquiry properly is not justified.

Question 11.
Mr. T prefers appeal with CIT(A) after receiving assessment order u/s 143(3). After filing his appeal, he realizes that certain Important issues were not raised in the statement of facts and grounds of appeal submitted. The appellant wants to produce additional evidences before the CIT(A). State the circumstances where the appellant, shall be entitled to produce additional evidence I.e. documentary, before the CIT(A) other than the evidence produced during the proceedings before the A.O. [CA Final Nov. 2017, Nov.2008] [4 Marks]
Answer:
As per Rule 46A, the assessee shall not be entitled to produce additional evidence before the CIT(A) except in the following circumstances:

(a) where the A.O. has refused to admit the evidence which ought to have been admitted; or
(b) where appellant was prevented by sufficient cause from producing the evidence which was called upon by the A.O.; or
(c) where the appellant was prevented by sufficient cause from producing before the A.O. any evidence which is relevant to any ground of appeal; or
(d) where A.O. made the impugned order without giving sufficient opportunity to the appellant.

However, the CIT(A) must record in writing the reasons for admission of additional evidence.

The CIT(A) shall not admit any additional evidence produced unless the Assessing Officer has been given a reasonable opportunity:

1. to examine the evidence or document or to cross examine the witness produced by the appellant, or
2. to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.

Question 12.
The Assessing Officer has made two additions in the assessment of Rohit & Co. (sole proprietorship firm):

1. Disallowance u/s 43B of 10 lakhs
2. Unexplained cash credits of ₹ 80 lakhs

The firm filed an appeal before CIT(A) with respect to the second addition only. The CIT(A) confirmed the addition. Further, the assessee has filed an appeal to the Appellate Tribunal w.r.t. addition of unexplained cash credit against the order of CIT(A). The Appellate Tribunal has also confirmed the addition. He then preferred the revision petition before PCIT u/s 264 for disallowance u/s 43B. The petition has been rejected on the ground that the assessment was subject matter of an Appellate Tribunal. Is the petition maintainable? [CA Final May 2018 (Old Syllabus), Nov. 2002, Nov. 2001] [4 Marks]
Answer:
As per Sec. 264, any order, other than an order to which section 263 applies passed by an authority subordinate to the PCCIT or CCIT or PCIT or CIT, can be revised by the PCCIT or CCIT or PCIT or CIT either on an application by the assessee or on his own motion.

However, the order passed by an authority subordinate to the PCCIT or CCIT or PCIT or CIT cannot be revised which is a subject matter of an appeal, or against which an appeal lies before the CIT (A) or the ITAT, but no such appeal has been actually made though the period for filing such appeal has not expired or the assessee has not waived his right of appeal. Therefore, u/s 264, the concept of total merger shall apply.

Also, the Supreme Court in the case of Hindustan Aeronautics Ltd. held that CIT has no power to revise any order u/s 264, if the order has been made subject to an appeal to the Appellate Tribunal, even if the relief claimed in the revision is different from the relief claimed in the appeal and irrespective of the fact whether the appeal is by the assessee or by the Department.

In this case, Rohit & Co. has filed an appeal before the CIT(A) with respect to addition made of unexplained cash credits of ₹ 80 lakhs by the A.O. However, CIT(A) confirmed the addition and therefore, the firm further filed an appeal to Appellate Tribunal. The Appellate Tribunal also confirmed the addition. The firm then preferred the revision petition before PCIT u/s 264 for disallowance u/s 43B but the petition has been rejected on the ground that the assessment was the subject matter of appeal to the Appellate Tribunal.

Since, the order in respect of which the petition is filed has been the subject matter of appeal before the Appellate Tribunal, it cannot be revised u/s 264. Therefore, the petition filed by the Rohit & Co. is not maintainable.

Question 13.
AUM Enterprises, a partnership firm filed its return of income for the A.Y. 2018-19 on 30-07-2020. The assessment u/s 143(3) was completed on 15th June, 2020 and the A.O. made two additions to the income of assessee namely,

1. Addition of ₹ 8 Lakhs for unexplained cash credit u/s 68 and
2. Addition of ₹ 3 Lakhs u/s 40(a)(ia) due to ‘non-furnishing of the evidence of TDS payment.

The assessee being aggrieved contested the addition of ₹ 8 Lakhs u/s 68 and appeal to the CIT(A). The appeal was decided on 5th January, 2021 against the assessee.

Now, the assessee seeks your advice as to whether it should apply for revision to CIT u/s 264 or for rectification u/s 154 to the A.O. as regards disallowance u/s 40(a)(ia). Advise? [CA Final May 2018 (New Syllabus), May 2010] [4 Marks]
Answer:
As per Sec. 264, any order, other than an order to which section 263 applies, passed by an authority subordinate to the PCCIT or CCIT or PCIT or CIT, can be revised by the PCCIT or CCIT or PCIT or CIT either on an application by the assessce or on his own motion.

However, the order passed by an authority subordinate to the PCCIT or CCIT or PCIT or CIT cannot be revised which is a subject matter of an appeal, or against which an appeal lies before the CIT(A) or the ITAT, but no such appeal has been actually made though the period for Filing such appeal has not expired or the assessee has not waived his right of appeal. Therefore, u/s 264, the concept of total merger shall apply.

In this case, AUM Enterprises has filed an appeal before the CIT(A) in respect of addition made of ₹ 8 lakhs u/s 68 by the A.O. However, the CIT(A) has passed an order against the assessee. Since, the order has been the subject matter of appeal, the assessee cannot make a revision petition u/s 264 in respect of disallowance u/s 40(a)(ia).

As per Sec. 154, with a view to rectify any mistake apparent from record, an income-tax authority may amend any order passed by it. Also, Sec. 154 provides that where any matter has been considered and decided in any proceedings by way of appeal or revision, then rectification can be made of any matter except the matters which have been considered and decided in appeal/revision. Therefore, u/s 154, Doctrine of Partial Merger will be applicable.

Therefore, it is possible for the AUM Enterprises to make an application for rectification in respect of disallowance u/s 40(a)(ia) u/s 154, since the time limit of 4 years has also not expired.

Question 14.
Assessment of Bhajan Ltd. was completed u/s 143(3) with an addition of ₹ 15 lakhs to the returned income. The assessee-company preferred appeal before the Commissioner (Appeals) which is pending now. In this backdrop, answer the following:

(i) Based on fresh information that there was escapement of income for the same assessment year, can the A.O. initiate reassessment proceedings when the appeal is pending before Commissioner (Appeals)?
(ii) Can the Assessing Officer pass an order u/s 154 for rectification of mistake in respect of issues not being subject matter of appeal?
(iii) Can the assessee-company seek revision u/s 264 in respect of matters other than those preferred in appeal?
(iv) Can the CIT make a revision u/s 263 both in respect of matters covered in appeal and other matters? [CA Final Nov. 2018 (Old Syllabus), May 2015] [5 Marks]
Answer:
(i) As per the third provison section 147, the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. The doctrine of partial merger would apply in case of Sec. 147.

Therefore, even when an appeal is pending before Commissioner (Appeals), the Assessing Officer can initiate reassessment proceedings : in respect of escaped income, provided such income is not the subject matter of the appeal before the Commissioner (Appeals) i.e., such escaped income does not form part of the additions of ₹ 15 lakhs to the returned income, which is the subject matter of appeal.

(ii) As per section 154(1 A), the Assessing Officer can pass an order under 154(1) to rectify a mistake apparent from the record, provided the rectification is in relation to a matter, other than the matter which has been considered and decided in any proceedings by way of appeal or revision. The doctrine of partial merger is applicable for section 154 also. Since in the given case the rectification of a mistake is in respect of issues not being subject matter of appeal, the A. O. can pass order u/s 154.

(iii) As per section 264(4), the Commissioner shall not revise any order under section 264, where such order has been made the subject matter of an appeal. And the concept of total merger would apply in the case of section 264. Therefore, the assessee company cannot seek revision u/s 264 even though the revision petition is in respect of matters other than those preferred in appeal.

(iv) As per section 263, the Commissioner has the power to revise an order prejudicial to revenue. But orders which are subject matter of an appeal cannot be revised. However, the matters, which have not been considered and decided in such appeal, can be revised. Thus, Doctrine of Partial Merger would apply in case of Section 263.

Thus, the Commissioner cannot make a revision u/s 263 in respect of matters covered in appeal. However, he can make revision u/s 263 in respect of other matters ie. matters which are not the subject matter of appeal.

Question 15.
Ashoke’s assessment was made u/s 143(3) for A.Y. 2018-19. Being aggrieved with certain additions, he preferred an appeal to the CIT(A), which is pending at present and not being adjudicated.

In the above situation, give your opinion on the following Issues in the context for provisions contained under the Income-tax Act, 1961:
(i) There is new information that certain Encorne for the same assessment year had escaped assessment. Is It possible for the Assessing Officer to issue notice under section 148?
(ii) Certain mistake In respect of issue which is not subject matter of appeal is noticed by the A.O. Can he pass an order u/s 154 for rectifying the mistake?
(iii) If Ashoke files petition for revision u/s 264 for a matter not being subject matter of appeal, will such petition be maintainable? [CA Final Nov. 2018 (Old Syllabus)] [5 Marks]
Answer:
(i) As per Sec. 147, the A.O. may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal or revision, which is chargeable to tax and has escaped assessment. Therefore, when an appeal is pending before the CIT(A), the A.O. can issue notice u/s 148 in respect of income chargeable to tax which has escaped assessment, if such income is not the subject matter of appeal before CIT(A).

(ii) As per Sec. 154, where any matter had been considered and decided in any proceedings by way of appeal, then rectification can be made of any matter excepts the matters which have been considered and decided in appeal i.e. Doctrine of Partial Merger will be applicable u/s 154. In this case, since the mistake is in respect of a matter which is not the subject matter of appeal, the A.O. can pass an order u/s 154 for rectifying the mistake, provided the same is a mistake apparent on the record.

(iii) As per Sec. 264, the Commissioner shall not revise any order u/s 264, where such order has been made the subject of an appeal to the CIT(A). Therefore, the Commissioner cannot revise an order u/s 264 which is pending before the CIT(A), even if the revision pertains to a matter, other than the matter covered in the appeal. Accordingly, in the present case, petition filed by Mr. Ashok for revision under section 264 is not maintainable.

Question 16.
The assessment of Foundation Bank Ltd. for A.Y. 2017-18 was made u/s 143(3) on 30th November, 2018 allowIng deduction u/s 36(1)(vii) and deduction In respect of foreign exchange rate difference as claimed In the ROI. Subsequently, two notices of reassessment were issued u/s 148 and an order of reassessment was passed u/s 147 on 31st December, 2020 which did not deal with the above deductions. Later the Principal Commissioner after examining the records of assessment, Initiated revisionary proceeding u/s 263 on 31st May 2021 for disallowing deduction u/s 36(1)(vii) and deduction In respect of foreign exchange rate difference. The bank claims that the order passed by the Principal Commissioner u/s 263 is barred by limitation. Is the claim made by Foundation Bank tenable in law? [CA Final Nov 2018 (New Syllabus), Nov. 2015] [5 Marks]
Answer:
As per Sec. 263, the CIT cannot revise the order of the A.O. u/s 263 after the expiry of 2 years from the end of the financial year in which the order sought to be revised was passed.

The issue under consideration is whether the period of limitation for an order passed u/s 263 has to be reckoned from the original order passed by the A.O. u/s 143(3) or from the order of reassessment passed u/s 147, where the subject matter of revision is different from the subject matter of reassessment u/s 147.

The facts of the case are similar to the facts in CIT v. ICICI Bank Ltd. (2012), where the Bombay High Court held that where the subject matter of revision was different from the subject matter of reassessment u/s 147, The period of limitation for an order passed u/s 263 shall be reckoned from the original order passed by the A.O. u/s 143(3) and not from the order of reassessment u/s 147.

In this case, the assessment of Foundation Bank Ltd. for A.Y. 2017-18 was made u/s 143(3) on 30.11.2018 allowing deduction u/s 36(1)(vii) and deduction of foreign exchange rate difference as claimed in the ROI. Thereafter, reassessment notice was issued to the assessee and reassessment order was 4 passed u/s 147 on 31.12.2020. Later the PCIT initiated the revisionary proceedings u/s 263 on 31.05.2021 for disallowing the deduction u/s 36(1)(vii) and deduction in respect of foreign exchange rate difference. These issues z were not the subject matter of reassessment proceedings made u/s 147.

Applying the rationale of the Bombay High Court ruling in this case, the period of limitation for passing an order u/s 263 shall be reckoned from the original order was passed by the A.O. u/s 143(3) and not from the date of reassessment order passed u/s 147. Since, the original assessment order was made on 30.11.2018, the revision order u/s 263 should have been passed by 31.03.2021. But, here, in this case, the revisionary proceedings were initiated on 31.05.2021 and hence, the same is barred by limitation.

Accordingly, the claim of the bank that the order passed by the PCIT u/s 263 is barred by limitation is correct.

Question 17.
Being aggrieved by the order of the ITAT, Delhi, an assessee filed an appeal with Honourable High Court of Delhi with a delay of 439 days in filing the appeal. While filing the appeal, the assessee made an application for condonation of delay also citing the reasons that the delay is on account of “pursuing an alternate remedy by way of filing an application before ITAT u/s 254(2) for rectification of mistake apparent from the records.” Does the contention of the assessee Is maintainable? [CA Final Nov. 2019 (Old Syllabus)1 [4 Marks]
Answer:
The issue under consideration is whether delay in filing appeal u/s 260A can be condoned where the stated reason delay is the pursuance of an alternate remedy by way of fling an application before the ITAT u/s 254(2) for rectification of mistake apparent on record.

The facts of the case are similar to the facts in Spinacom India (P.) Ltd. v. CIT (2018), where the Supreme Court rejected the condonation of delay and refused to accept the submission that the application before the ITAT u/s 254(2) was an alternate remedy to filing of the application u/s 260A. Sec. 254(2) is an application for rectifying a ‘mistake apparent from the record’ which is much narrower in scope than Sec. 260A.

The time period for filing an appeal u/s 260A does not get suspended on account of the pendency of an application before the ITAT u/s 254(2). Since, no satisfactory reason has been provided by the Appellant for the extraordinary delay of 439 days in filing the appeal, the Supreme Court dismissed the application for condonation of delay.

Accordingly, by applying the above rationale, the contention of the assessee to condone the delay of 439 days in filing the appeal on the ground of pursuing an alternate remedy of filing an appeal before ITAT u/s 254(2) for rectification of mistake apparent from records is not maintainable.

Question 18.
The assessment of Saxena Ltd. was completed u/s 143(3) with an addition of income of ₹ 23.50 lakhs to the returned income. The assessee company preferred an appeal before the Commissioner of Appeals which is pending now.

In view of the above said facts, please answer the following questions with reference to the latest provisions applicable to A.Y. 2021-22.
(1) Can the Commissioner make a revision u/s 263 both in respect of matters covered in appeal and other matters?
(2) Can the assessee company seek revision u/s 264 in respect of matters other than those preferred in appeal? [CA Final Nov. 2019 (Old Syllabus)] [4 Marks]
Answer:
(1) As per section 263, the Commissioner has the power to revise an order which is prejudicial to revenue. But orders which arc subject matter of an appeal cannot be revised. However, the matter’s, which have not been considered and decided in such appeal, can be revised. Thus, Doctrine of Partial Merger would apply in case of Section 263 and the Commissioner cannot make a revision u/s 263 in respect of matters covered in appeal. However, he can make revision u/s 263 for other matters i.e. matters which arc not the subject matter of appeal.

(2) As per section 264(4), the Commissioner shall not revise any order u/s 264, where such order has been made the subject matter of an appeal and the concept of total merger would apply in the case of section 264. Therefore, the assessee-company cannot seek revision u/s 264 even though the revision petition is in respect of matters other than those preferred in appeal.

Question 19.
An assessee, who is aggrieved by all or any of the following orders, is desirous to know the available remedial measures and the time limit against each, under the Income-tax Act, 1961: Advise him suitably.
(i) Passed under section 143(3) by Assessing Officer,
(ii) Passed under section 263 by the Commissioner of Income-tax,
(iii) Passed under section 272A by the Director General, and
(iv) Passed under section 254 by the Income Tax Appellate Tribunal. [CA Final Nov. 2019 (New Syllabus), May 2014] [8 Marks]
Answer:
(i) An assessee, aggrieved by the order passed under section 143(3), can file an appeal o the CIT(A) under section 246A(1) within 30 days of the date of service of the notice of demand.

Alternatively, the assessee can file a revision petition before Principal CCIT/CCIT or Principal CIT/CIT u/s 264 within a period of one year from the date on which the order was communicated to him or the date on which he otherwise carne to know about it, whichever is earlier.

(ii) An assessee, aggrieved by the order passed under section 263 by the CIT, can hie an appeal to ITAT u/s 253(1) within 60 days of the date on which the order sought to be appealed against is communicated to the assessee.

(iii) An assessee, aggrieved by the order passed u/s 272A by the Director General, can hie an appeal to the ITAT u/s 253(1) within 60 days of the date on which the order sought to be appealed against is communicated to the assessee.

(iv) An assessee, aggrieved by the order passed u/s 254 by the ITAT, can hie an appeal to the High Court u/s 260A within 120 days from the date of receipt of order of ITAT. However, appeal can be hied to the High Court only where the case involves a substantial question of law.

Assessment Procedures – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Assessment Procedures – CA Final DT Question Bank

Assessment Procedures

Question 1.
The A.O. has the power to make an assessment to the best of his judgment, in certain situations. What are they?[CA Final May 2010] [3 marks]
Answer:
As per Sec. 144, if any person:
(a) fails to furnish a return of income u/s 139(1) and has not furnished the return u/s 139(4), or
(b) fails to comply with all the terms of a notice issued u/s 142(1), or
(c) fails to comply with a direction issued u/s 142(2A), or
(d) fails to comply with all the terms of a notice issued u/s 143(2),

then the A.O., after taking into account all relevant material which he has gathered, shall make an assessment to the best of his judgment and determine the tax payable by the assessee.

Further, section 145(3) permits A.O. to make an assessment in the manner provided in section 144:

1. where the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee; or
2. where the method of accounting u/s 145(1) has not been regularly followed by the assessee;
3. where the ICDS notified u/s 145(2) have not been regularly followed by the assessee.

Question 2.
State whether the following assessees have to file return of income and if so, the due date for the A.Y. 2021-22:
(i) A registered trade union having income from let out property of ₹ 1,00,000.
(ii) A public trust hospital having an aggregate annual receipt of ₹ 200 lakhs and availing exemption u/s 10(23C)(via) with total income of₹ 1,10,000. [CA Final May 2011] [5 Marks]
Answer:
(i) A registered trade union is having income from property, which is exempt u/s 10(24). Sec. 139(4C) mandates filing of return only when the total income exceeds the maximum amount which is not chargeable to tax without giving effect to the provisions of sec. 10. Even without giving effect to sec. 10(24), the total income is below basic exemption limit and therefore, there is no mandatory requirement to file the
return of income.

(ii) The quantum of exemption u/s 10(23 C)(via) is not given in the question. If the total income of the public trust hospital, without giving effect to the exemption u/s 10(23C)(via), is less than the basic exemption limit of ₹ 2,50,000, the trust need not file its ROI. However, if the total in come without giving effect to the exemption u/s 10(23C)( via) exceeds ₹ 2,50,000, the trust has to file its ROI by 31st October, 2021.

Question 3.
The Assessing Officer issued a notice u/s 142( 1) on the assessee on 24th December, 2021 calling upon him to file return of income for A.Y. 202122. In response to the said notice, the assessee furnished a return of loss and claimed carry forward of business loss and unabsorbed depreciation.

State whether the assessee would be entitled to carry forward the losses as claimed in the return. [CA Final Nov. 2011] [4 Marks]
Answer:
Carry forward of business loss under sections 72(1), 73(2) (i.e. Speculation Loss) or 73A (i.e. specified business loss) cannot be made vide the return furnished in pursuance of notice u/s 142(1). Such losses can be carried forward only if the return is filed within the time limit u/s 139(1). However, the assessee can carry forward unabsorbed depreciation as it is covered u/s 32(2) through return furnished in pursuance of notice u/s 142(1).

Question 4.
State with reasons whether return of income is to be filed in the following cases for the Assessment Year 2021-22:
(i) Mr. X, an individual, aged 80 years, has a gross total income of ₹ 4,90,000 and he is eligible for deduction of ₹ 1,60,000 under Chapter VIA.
(ii) ABC, a partnership firm, has a loss of ₹ 10,000 during the previous year 2020-21.
(iii) A registered association, eligible for exemption u/s 10(23B), has income from house property of ₹ 2,80,000.
(iv) Mr. Y, an employee of ABC (P) Ltd., draws a salary of ₹ 4,90,000 and has income from fixed deposits with bank of ₹ 10,000. [CA Final May 2012] [4 Marks]
Answer:
(i) As per Sec. 139(1), every person other than a company or a firm, if his total income before claiming exemptions u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA or 54GB or deductions under Chapter-VIA, exceeds the maximum amount not chargeable to tax, is required to furnish the return of income for the relevant assessment year on or before the due date. In this case, the total income of Mr. X before claiming deduction under Chapter VI-A is ₹ 4,90,000, which does not exceeds the basic exemption limit of ₹ 5,00,000 as applicable to an individual aged 80 years or more and therefore, Mr. X is not required to furnish his return of income for the A.Y. 2021-22.

(ii) As per section 139(1), it is mandatory for a firm to furnish its return of income or loss on or before the specified due date. Therefore, M/s ABC has to furnish its return of loss for the A.Y. 2021-22 on or before the due date.

(iii) As per section 139(4C), every institution referred to, inter alia, in section 10(23B), whose total income without giving effect to the provisions of section 10 exceeds the maximum amount not chargeable to tax, is required to furnish the return of income for the relevant assessment year on or before the due date.

In this case, the registered association has income from house property of ₹ 2,80,000 before exemption u/s 10, which exceeds the basic exemption limit of ₹ 2,50,000. Therefore, it is under an obligation to furnish its return of income for the A.Y. 2021-22.

(iv) As per section 139(1), every person, whose gross total income exceeds the maximum amount not chargeable to tax, is required to furnish the return of income for the relevant assessment year on or before the due date. In this case, the gross total income of Mr. Y is ₹ 5,00,000 (₹ 4,90,000 + ₹ 10,000) which exceeds the basic exemption limit of ₹ 2,50,000 and therefore, Mr. Y has to furnish his return of income for A.Y. 2021-22.

Question 5.
Teachwell Education is a trust approved under section 10(23C)(vi) which runs various educational institutions. During the course of assessment under section 143(3), the Assessing Officer finds that the trust has carried out its activities in contravention of the section under which it was approved for exemption. Hence, the Assessing Officer wants to pass an order without giving exemption under section 10, which the assessee objects. You are required to examine the following with respect to the provisions of Income-tax Act, 1961.
(a) Whether the Assessing Officer can pass an order without giving exemption under section 10?
(b) Can the Assessing Officer get any additional time limit in completing this assessment? [CA Final May 2012] [4 Marks]
Answer:
(a) As per the first proviso to section 143(3), if the A.O. finds that the trust has carried out its activities in contravention of section 10(23C)(vi) under which it was approved for exemption, the Assessing Officer cannot himself disallow the said exemption while making an assessment u/s 143(3). He can do so only if:

1. he has intimated the Central Government or the prescribed authority, which had earlier approved the concerned institution, about the contravention of the relevant provisions by the institution; and
2. the approval granted to such institution has been withdrawn or notification in that respect has been rescinded.

Therefore, in the given case, since Teachwell Education is a trust approved under section 10(23C)(vzi), the Assessing Officer can pass an assessment order without giving exemption under section 10 only if he has intimated the contravention made by Teachwell Education to the Central Government or the prescribed authority, as the case may be, and its approval under section 10(23C)(vi) is.withdrawn.

(b) As per provisions of Explanation 1 to section 153 if the A.O. intimates the contravention of provisions of section 10(23C)(vi).to the Central Government or the prescribed authority then the period, commencing from the date of intimation of such contravention by the A.O. and ending on the date on which the copy of the order of withdrawing the approval u/s 10(23C)(vi) is received by the A.O., shall be excluded for computing the period of limitation for completing the assessment u/s 153.

Further, if in any case the time limit available to the A.O. for passing an assessment order, after such exclusion, is less than 60 days, such remaining period of assessment shall be deemed to have been extended to 60 days. Thus, the A.O. will get the above mentioned additional time for completing the assessment of Teachwell Education.

Question 6.
X and Y are partners of a partnership firm. The A.O. of X is of the opinion that the income returned by X is actually taxable in the hands of Y. The A.O., in order to safeguard the interest of the Revenue, assessed the income in the hands of both X and Y. The Assessing Officer recovered the tax due on the same from X and Y. He also imposed penalty under section 270A on Y for concealing the same. Comment on the actions of the A.O. [CA Final Nov. 2012] [5 Marks]
Answer:
When the ownership of the income is in dispute or is a matter of doubt, it is open to the A.O. to assess a particular income in the case of the person who is considered as liable to tax and include the same income in the case of another person also as a protective measure. Such an assessment is known as protective assessment.

It must, however, be noted that while protective assessment is permissible, a protective order for recovery is not permissible. In making a protective assessment, the authorities are merely making an assessment and leaving it as a paper assessment until the matter is decided one way or another, in further proceedings like appeal or revision.

Furthermore, a protective order of assessment can be passed but not a protective order of penalty.

Therefore, though the A.O.’s action in assessing the income in the hands of both X and Y is valid, the recovery of tax due on the same from X and Y and imposition of ‘penalty u/s 270A on Y for concealment of income is not valid.

Question 7.
Discuss, with reasons, whether the following statement is correct: Mahesh, a resident and ordinarily resident in India and having a house property and a bank account outside India, is not required to file ROI for A.Y. 2021-22, if his total income is below the maximum amount not liable to tax. [CA Final May 2013] [2 Marks]
Answer:
The statement is incorrect.
As per section 139(1), every resident and ordinarily resident having any asset located outside India or signing authority in any account located outside India is required to hie a return of income in the prescribed form 1 compulsorily, whether or not he has income chargeable to tax.

Therefore, Mahesh has to file a return of income in the prescribed form compulsorily for A.Y. 2021 -22, even if his total income is below the maximum amount not liable to tax, since he is a resident and ordinarily resident in India and has a house property and a bank account outside India.

Question 8.
The A.O. accepted the returned income filed by RL Ltd. for a particular A.Y. However, the A.O. initiated reassessment proceeding u/s 147 as he had reason to believe that the income had escaped assessment due to claim and allowance of club fees, gifts and presents and provision for leave encashment and accordingly, he issued notice u/s 148. However, after sufficient enquiries made by him, he came to the conclusion that no additions were required on account of these expenses.

But instead he made additions on account of disallowances u/s 14A and section 40(a)(ia) inrespect of other expenses which were not the original “reason to believe”and passed his reassessment order u/s 147. The A.O. is of the opinion thatExplanation 3 to section 147 permits him to assess the income which has escaped assessment and which comes to his notice subsequently in the course of proceeding u/s 147, even though the said issues were not part of the reasons recorded in the notice u/s 148. Is the action of the A.O. valid? [CA Final May 2013] [4 Marks]
Answer:
The issue under consideration is whether A.O. can make an assessment on the basis of an issue which came to his notice during the course of assessment, when the issues, which originally formed the basis of issue of notice u/s 148, were dropped in its entirety.

As per section 147, the A.O. may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice in the course of proceedings under that section.

The High Court, in Rg.nhaxy Laboratories Ltd. v. GIT(2011) (Delhi), observed that the words “and also” used in section 147 are of wide amplitude.
The language of the section is indicative of the position that the assessment or reassessment must be of the income, in respect of which the A.O. has formed a ‘reason to believe’ for the issue ofcnotice u/s 148 and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. The correct interpretation, therefore, would be to regard the words ‘and also’ as being “conjunctive and cumulative with” and not “in alternative to” the first part of the sentence, namely, “the Assessing Officerrtiay assess and reassess such income”.

If the income, the escapement of which was the basis of the formation of the “reason to believe”, is not assessed or reassessed, it would not be open to the A.O. to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If he intends to do so, a fresh notice u/s 148 would be necessary.

Applying the rationale of the above court ruling, the action of the A.O. in passing a reassessment order u/s 147 by making additions on account of disallowances u/s 14A and section 40(a)(ia) in respect of other expenses, when the original “reasons to believe” ceased to exist, is not valid.

However, the Courts have given a contradictory judgments in the case of CIT v. Mehak Finvest P. Ltd. (2014) (P&H) and N. Govindaraju v. ITO (2015) (Kar).

Question 9.
The regular assessment of MNO Ltd. for the A.Y. 2018-19 was completed u/s 143(3) on 13th March, 2020. There was an audit objection by the Revenue Audit team that interest on loan should be disallowed partly as there was diversion of borrowed fund to sister concern without charge of interest.

(i) State, with reasons, whether the Assessing Officer can issue notice under section 148 on the basis of audit objection of the Revenue Audit team.
(ii) If the action stated in (i) above is not permitted, what is the option open to the Revenue Department to deal with the said audit objection? [CA Final May 2014, Nov. 2011] [8 Marks]
Answer:
(i) Section 147 states that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, assess or reassess such income and also any y other income chargeable to tax which has escaped assessment and y which comes to his notice subsequently in the course of the proceedings under this section.

Thus, the A.O. should have reason to believe that’ income chargeable to tax has escaped assessment. Supreme Court in the case of Indian & I Eastern Newspaper Society v. CIT(1979) held that audit party cannot ‘ express opinion on legal issues. Such opinion cannot be the basis upon ; which the Assessing Officer can initiate reassessment proceedings. The opinion should be of the A.O. and not of the audit party.

Moreover, it is well established that the Assessing Officer cannot make reassessment u/s 147 on the basis of change of opinion. So, assuming that the A.O. had already considered this issue earlier during the course of scrutiny assessment and had come to a conclusion that no disallowance of interest paid by the assessee is required, even though loans had been given to sister concern without any interest, if the s proceedings are commenced u/s 147 then it will be a clear case of change of opinion and the same issue cannot be the basis of reassessment, merely because the Revenue Audit team takes a different view.Therefore, the Assessing Officer cannot issue notice under section 148 on the basis of audit objection of the Revenue Audit team.

(ii) The option open to the Revenue is initiation of proceedings u/s 263, by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. He has the power to call for and examine the records, if he is of the opinion that the order passed by the A.O. u/s 143(3) is erroneous in so far as it is prejudicial to the interests of the Revenue.

However, where the A.O. has considered the issue in the original assessment and come to a conclusion that no disallowance of interest is called for, the PCCIT or CCIT or PCIT or CIT cannot initiate revisionary proceedings, merely because he holds a different view. Only where the view taken by the Assessing Officer is unsustainable in law, the PCCIT or CCIT or PCIT or CIT will be justified in initiating the revisionary proceedings u/s 263.

In CIT v. Sohana Woollen Mills (2008), it has been held that mere audit objection and merely because a different view can be taken, it cannot be said that the order of the Assessing Officer is erroneous or prejudicial to the interest of revenue.

Question 10.
An assessment completed by the Assessing Officer was set aside by the ITAT on 30-01*2021 with a specific direction to re-examine certain disallowances. Before the fresh assessment is made, the Assessing Officer S discovers that some other income has escaped assessment. How should he proceed to make fresh assessment? [CA Final Nov. 2014, Nov. 2006j [4 Marks]
Answer:
If an assessment is set aside by ITAT and a direction to make a fresh assessment is given to the A.O., then, he shall make the fresh assessment under the same section in which the original assessment is made (i.e., under section 143(3)/144/147) and without any issue of fresh notice. It is not open to him to introduce new sources of income so as to enhance the assessment.

Punjab & Haryana High Court, in the case of Kartar Singh vs. CIT (1978), held that A.O.’s power to modify is confined only to the specific disallowances which were the subject matter of appeal to the ITAT.

In the given case, the assessment has been set aside with a specific direction to re-examine certain disallowances. Hence, the Assessing Officer has to proceed to make the fresh assessment on the basis of the directions given without considering any new source of income which has escaped assessment. Further, A.O. shall complete such assessment within the time limit prescribed under section 153(3).

However, after completing such assessment as per the direction of the Tribunal, the Assessing Officer can proceed under section 147 in respect of the escaped income.

Question 11.
Is it valid in law to rectify an assessment order u/s 154 due to subsequent change of law on retrospective basis? Also state, whether a Supreme Court judgment would warrant a rectification u/s 154 in respect of an order passed earlier by the A.O. [CA Final Nov. 2014, May 2013, May 2011] [4 Marks]
Answer:
In the case of CIT v. E. Sefton & Co. (R) Ltd. (1989), the Calcutta High Court held that if the assessment order is plainly and obviously inconsistent with the specific and clear provision as amended retrospectively, then it is clearly a mistake apparent from record. Therefore, the A.O. can rectify an assessment order u/s 154 due to subsequent change of law on retrospective basis.

In the case of CIT v. Subodhchandra S Patel (2004), the Gujarat High Court held that non-consideration of a judgment of the jurisdictional High Court or the Apex Court would always constitute a mistake apparent from the record, regardless of the judgment being rendered prior to or subsequent to the order proposed to be rectified.

However, the Calcutta High Court, expressed a contrary view in Geo Miller & Co. v. DCIT [2003] holding that a subsequent exposition of law by Supreme Court does not render assessment order as made on mistake.

Question 12.
Discuss the correctness of the following statements in the context of the provisions of Income-tax Act, 1961:
(i) “The Joint Commissioner of Income-tax is empowered to issue direction to the Assessing Officer as he thinks fit for the guidance of the Assessing Officer during the assessment proceedings to complete the assessment in a specific manner.” [3 Marks]
(ii) “Assessing Officer may direct for the audit of the accounts under section 142(2A) of the Act, during the assessment proceeding on the basis of certain grounds”. [3 Marks]
(iii) “If assessee does not pay the self-assessment tax before furnishing the return of income, the return furnished shall be deemed to be a defective return”. [CA Final Nov. 2014] [2 Marks]
Answer:
(i) The statement is correct.
As per section 144A, a Joint Commissioner may, on his own motion or on a reference being made to him by the A.O. or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending. Having regard to the nature of case or the amount involved or for any other reason, if he considers it necessary or expedient, he may issue such directions as he thinks fit for the guidance of the Assessing Officer during the assessment proceedings to complete the assessment in a specific manner.

Such directions shall be binding on the Assessing Officer.

However, no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. A direction as to the lines on which an investigation connected with the assessment should be made shall not be deemed to be a direction prejudicial to the assessee.

(ii) The statement Is correct. Section 142(2A) expressly includes within its scope, the following reasons, on the basis of which the A.O. may direct special audit of accounts of an assessee with the previous approval of the CIT or CCIT:

1. nature and complexity of accounts,
2. volume of the accounts,
3. doubts aboutffie correctness of the accounts,
4. multiplicity of transactions in the accounts,
5. specialized nature of business activity of the assessee; and
6. the interests of the revenue.

(iii) The statement is incorrect.
The return shall not be deemed to be defective if the assessee does not pay the self-assessment tax before furnishing the return of income.

Question 13.
RKJ Private Limited’s assessment for A.Y. 2016-17 was completed u/s 143(3) on 15^th November, 2017. The company received a notice u/s 148 dated 15^th July, 2020 requiring the company to submit a return of income for A.Y. 2016-17 on the ground of escapement of certain income from assessment.

The company has approached you for advice on the principles to be followed by it before notice u/s 143(2) for the purpose of reassessment is issued by the Assessing Officer.

State the principles to be followed by the company and the Assessing Officer. [CA Final Nov. 2015] [4 Marks]
Answer:
As per Sec. 149(1), notice u/s 148 can be issued by the A.O. at any time within 4 years from the end of the assessment year of which income chargeable to tax has escaped assessment.

In the given question, notice has been issued by the A.O. within the time limit u/s 149(1) and hence the notice is not barred by limitation.

Now, the principles laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (2003), which would serve as rules of guidance and act as a binding precedent in cases where notice of reassessment is issued, are given hereunder:

1. Where a notice u/s 148 is received, the proper course for the company is to file a return of income in response to the same.
2. Thereafter, if the company desires, it can seek reasons recorded by the A.O. for issue of notice.
3. If the reasons are asked for by the assessee, the A.O. is bound to supply such reasons, within a reasonable time.
4. On receipt of the reasons, the company can file its objections against the issuance of notice, and if so done, the A.O. is bound to dispose of the same by passing a speaking order even before proceeding with the assessment.

Only after the same, the A.O. can issue a notice u/s 143(2).

If A.O. rejects the objections of the company and the company is not satisfied with such rejection order, it may prefer a writ petition against such rejection by the A.O. If the petition is not accepted by the High Court, it may prefer a Special Leave Petition to the Supreme Court.

If the Court accepts the Company’s petition, then A.O. has to prove that he had sufficient reasons to believe for issue of notice u/s 148.

Question 14.
After completion of regular assessment on February 22, 2018, Mr. Anshul received a notice on October 12, 2019 ti/s 148 for A.Y. 2017-18 on the ground that excess depreciation was allowed on certain assets. The A.O. recorded the reason for re-opening. In the course of reassessment proceedings the A.O. also disallowed certain expenses incurred in relation to dividend and tax-free interest, without recording the reasons for applying Section 147 on disallowance of such expenses. The A.O. passed the order disallowing the excess depreciation and certain expenses u/s 14A. Mr. Anshul seeks your opinion on the correctness of action of the Assessing Officer. Advise him. [CA Final Nov 2016, Nov 2010] [3 Marks]
Answer:
As per Explanation 3 to section 147, for the purpose of assessment or re-assessment u/s 147, the A.O. may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of proceedings under this section, not-withstanding that the reasons for such issue have not been included in the reasons recorded u/s 148(2).

Therefore, though the reasons for the issue, which comes to the notice of A.O. during the reassessment proceedings, has not been recorded at the time reopening the assessment, the A.O. may deal with such issue or issues.

In this case, the A.O. has issued notice u/s 148 to Mr. Anshul for reopening the assessment on the ground that excess depreciation was allowed on certain assets to Mr. Anshul. During the course of reassessment proceedings, the A.O. also disallowed certain expenses incurred in relation to dividend and tax-free interest, for which reasons were not recorded at the time of reopening the assessment and passed the order disallowing the excess depreciation and certain expenses u/s 14A. The action taken by the A.O. is therefore, correct as per Explanation 3 to section 147.

Question 15.
ABC Ltd., a listed company filed its return of income in which a claim for deduction under Chapter VI-A was made. The case was subjected to scrutiny assessment and order under section 143(3) was passed reducing the claim for deduction under Chapter VI-A. After 4 years from the end of assessment year a notice under section 148 was issued giving reasons such as subsequent tribunal and other court decisions which show that the deduction was excessively allowed in this case.

Is the action of the Assessing Officer valid? [CA Final Nov 2017] [4 Marks]
Answer:
Issue involved: The issue under consideration is whether initiation of reassessment beyond a period of 4 years on the basis of subsequent Tribunal and High Court ruling is valid, if there is no failure on the part of the assessee to disclose fully and truly all materials facts.

Provisions applicable: As per section 147, where the A.O. has reasons to believe that any income chargeable to tax for any assessment year has escaped assessment, then he may assess or reassess such income and also any other income which has escaped assessment and which comes to his notice subsequently during the course of proceedings under this section.

Further as per 1st proviso to Sec. 147, if an assessment has been completed u/s 143(3) or u/s 147, then no notice shall be issued after the expiry of 4 years from the end of the relevant A.Y. unless income has escaped assessment for such A.Y. by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment.

Analysis: The facts of the case are similar to the facts in Allanasons Ltd v. Dy. CIT (2014) wherein the above issue came up before the Bombay High Court. The High Court observed that it is well settled in terms of the proviso to section 147, that where any assessment is sought to be opened beyond a period of four years from the end of the relevant assessment year, two conditions have to be fulfilled cumulatively.

The first condition is that there must be reason to believe that income chargeable to tax has escaped assessment. The second condition is that such escapement of in-come should have arisen due to failure on the assessee’s part to fully and truly disclose all material facts required for the assessment.

The High Court, accordingly, held that a subsequent decision of Tribunalor High Court by itself is not adequate for reopening the assessment completed earlier u/s 143(3) unless there is a failure on the part of the assessee to disclose complete facts.

Conclusion: Applying the rationale of the High Court ruling to the present case, reassessment u/s 147 is not possible beyond the period of 4 years unless it is due to the failure of ABC Ltd. to disclose fully and truly all material facts necessary for assessment. Therefore, in the given case if it is assumed that there was no failure of ABC Ltd. to disclose fully and truly all material facts necessary for assessment, the action taken by the A.O. is not valid in law.

Question 16.
Dravid (P) Ltd. is engaged in manufacture of electrical items. It received deposit from the distributors and supplied goods in the market through the distributors. It could not locate some distributors with whom there was no transaction for the past 5 years or so. The income-tax assessment was completed u/s 143(3) but the issue of unclaimed deposits of distributors was never discussed.

The A.O. issued a notice u/s 148 after 4 years from the end of the relevant assessment year but without quantifying the amount of income which had escaped assessment. The assessee challenged the matter in appeal by contending that the A.O. without being definite of the quantum of income escaping assessment could not have initiated reassessment proceedings. Decide the validity of the contention of the assessee. [CA Final May 2018 (Old Syllabus)] [4 Marks]
Answer:
Issue Involved: The issue under consideration is that whether the reassessment proceedings initiated on the basis of notice issued u/s 148 after 4 years from the end of the relevant assessment year without quantifying the amount of income which had escaped assessment can be valid or whether they can be challenged by the assessee.

Provisions applicable: As per Sec. 149(1), no notice shall be issued for the relevant assessment year, if 4 years, but not more than 6 years, have elapsed from the end of relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to ₹ 1,00,000 or more for that year.

Also, as per 1st proviso to Sec. 147, if an assessment has been completed u/s 143(3) or 147, then no notice shall be issued after the expiry of 4 years from the end of the relevant assessment year unless the income has escaped assessment for such assessment year by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment year.

Analysis: The facts of the case are similar to the facts of the case of Amarnath Agarwal v. CIT (2015), where the Allahabad High Court observed that the two distinct conditions must be satisfied for assuming jurisdiction to issue notice u/s 148 after a period of 4 years i.e. (i) escapement of income; and (ii) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment.

Further, as per sec. 149(1 )(b), it is mandatory for the A.O., in his reasons, to state that the escaped income is likely to be ₹ 1 lakh or more. This is an essential ingredient for seeking approval and the basis on which satisfaction is to be recorded by the competent authority u/s 151.

If this condition which is a precedent to substantiate the satisfaction of escapement of income is not complied with, the issuance of notice will be invalid. Accordingly, the High Court held that, in this case, the issue of notice u/s 148 after the four years time period was hot valid.

Conclusion: By applying the above rationale, the contention of the assessee to challenge the notice issued without quantifying the amount of income which had escaped assessment is valid.

Question 17.
State with brief reason, whether the following statements are true or false: (No mark will be awarded for answers without reason)
(i) Where a notice u/s 143(2) is issued to the assessee, it is not required to process u/s 143(1), the return of income filed by the assessee.
(ii) Even without rejecting the books of account, if any, maintained by the assessee, the Assessing Officer can make a reference to the Valuation Officer u/s 142A for estimating the cost of construction of an immovable property.
(iii) Expenses of special audit conducted under section 142 shall be paid by the Central Government.
(iv) Only an individual can be regarded as a Tax Return Preparer u/s 139B. [CA Final Nov. 2018 (New Syllabus)] [6 Marks]
Answer:
(i) False: As per Sec. 143(1D), notwithstanding anything contained in Sec. 143(1), the processing of return shall not be necessary, where a notice has been issued to the assessee u/s 143(2). However, sec. 143(1D) shall not apply to any return furnished on or after A.Y. 2017-18. Therefore, ROI may be processed u/s 143(1) even if a notice u/s 143(2) has been issued.

(ii) True: As per Sec. 142A, the A.O. may make a reference to Valuation Officer (V.O.) whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. Therefore to identify correct value of construction of immovable property, the A.O. can make a reference to V.O. u/s 142A for estimating the cost of construction of an immovable property, without rejecting the books of account, if any, maintained by the assessee.

(iii) True: The expenses of special audit conducted u/s 142A shall be determined by PCCIT/CCIT and shall be paid by the C.G.

(iv) True: Tax Return Preparer means any individual, who has been authorized to act as a Tax Return Preparer under aforesaid scheme but shall not include the following:

• any officer of Scheduled Bank;
• any legal practitioner;
• a Chartered Accountant;
• employee of the assessee who is getting the return furnished under this section.

Therefore, it is necessary that Tax Return Preparer is only an individual

Question 18.
For the Assessment Year 2021-22, Mr. John, was directed to carry out a special audit of his accounts u/s 142(2A) on 1.8.2021, without giving him an opportunity of being heard. ”
Answer the following questions in this regard:
(i) Can the assessee contend that since reasonable opportunity of being heard is not provided to him by the Assessing Officer, such notice requiring the special audit of accounts is not valid?

(ii) If the assessee decides to get his books of account audited u/s 142(2A), what will be the due date by which he has to submit the audit report (including the extended time, if any, allowed to him)?
(iii) If the assessee intentionally does not comply with the directions. How much penalty can be levied on him?

(iv) For failure to get the books of account audited u/s 142(2A), can prosecution proceedings be launched against the assessee? If yes, what will be the quantum of punishment for such default?

(v) Can the assessee approach the Settlement Commission to grant immunity from penalty and prosecution proceedings initiated against him? If yes, discuss the power of Settlement Commission to grant immunity in this regard. [CA Final May 2019 (Old Syllabus)] [6 Marks]
Answer:
(i) As per the proviso to section 142(2A), the Assessing Officer shall not direct the assessee to get the accounts audited unless the assessee has been given a reasonable opportunity of being heard.

Accordingly, the contention of the assessee that notice requiring special audit is not valid since reasonable opportunity of being heard has not been provided to him by the Assessing Officer is correct.

(ii) The maximum period (including extended time, if any, allowed) within which the assessee has to submit his audit report is 180 days from 1.8.2021, being the date on which direction to carry out a special audit of accounts u/s 142(2A) is received by the assessee. Accordingly, in this case, the assessee has to submit his audit report by 27.1.2022.

(iii) Penalty of ₹ 10,000 is leviable u/s 272A(1 )(d) for failure to comply with a direction issued u/s 142(2A).

(iv) If the assessee wilfully fails to comply with a direction issued to him u/s 142(2A), he shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine u/s 276D.

(v) The assessee can approach the Settlement Commission to grant immunity from penalty and prosecution, if the additional amount of income-tax payable on income disclosed in the settlement application exceeds ₹ 50 lakh, where the assessee is the subject matter of search and ₹ 10 lakh, in other cases.

If the Settlement Commission is satisfied that the assessee has co-operated with it in the conduct of proceedings before it and has made a true disclosure of income, and the manner in which such income has been derived, it may grant to such person immunity from penalty and prosecution for failure to comply with direction u/s 142(2A).

However, the Settlement Commission cannot grant immunity from prosecution where prosecution proceedings have been initiated before the date of receipt of application u/s 245C.

Question 19.
Mr. Harish, a resident of India, for the financial year ended on 31.3.2021, owned

1. a land in Canada purchased in September, 2005
2. a flat in New Jersey (USA) purchased in April 2006 and
3. a shop in a commercial complex in Finland purchased in June 2006.

He also has authority to operate a bank account (maintained with Citi- i bank, London) of a company in which his son and daughter are 100% shareholders since April 2019.

He has been served with notices u/s 148 for the Assessment Year 200607 to Assessment Year 2020-21 based on the information that he has not disclosed source of income for those asset acquisitions in his income tax returns in India.

Are the notices issued u/s 148 tenable in law? [CA Final May 2019 (New Syllabus), Nov 2013] [6 Marks]
Answer:
As per Sec. 147, where the A.O. has reasons to believe that any income chargeable to tax for any assessment year has escaped assessment, then he may subject to the provisions of sec. 148 to sec. 153, assess or reassess such income and also any other income which has escaped assessment and which comes to his notice subsequently during the course of proceedings under this section.

As per Sec. 148, before making an assessment or reassessment u/s 147, the A.O. shall serve on the assessee a notice requiring him to furnish the ROI within the time specified in the notice and the provisions of this Act shall apply as if such ROI were a ROI required to be furnished u/s 139.

As per Sec. 149(1), no notice u/s 148 shall be issued for the relevant assessment year if 4 years have elapsed from the end of relevant assessment year. However, if the escaped income is related to any asset (including financial interest in any entity) located outside India, the A.O. may issue notice upto 16 assessment years from the end of relevant assessment year.

In this case Mr. Harish, a resident of India, owned a land in Canada purchased in Sept., 2005, Flat in New Jersey purchased in April, 2006 and a shop in commercial complex Finland purchased in June, 2006. He also has ‘ authority to operate bank account in Citibank, London.

Since, the assets are located outside India, the A.O. can issue notice upto 16 assessment years from the end of relevant assessment year. Therefore, the action of A.O. to issue notice for A.Y. 2006-07 to A.Y. 2020-21 based on the information that Mr. Harish has not disclosed source of income for assets acquired outside India is valid.

Interest

Question 1.
MNO Limited paid a sum of ₹ 15 Lakhs as salary to Mr. X for which no tax was deducted at source by the company. Mr. X filed his return of income and paid the tax due by way of self assessment. The A.O. issued notice to Mr. X demanding interest u/s 234B as no advance tax was paid by him. Your opinion is sought on the following aspects,
(a) Is the action of A.O. valid?
(b) If not, is there any other means available to A.O. to recover the interest? [CA Final May 2012] [4 Marks]
Answer:
Section 209 provides that in case the payer has failed to deduct tax at source, then the amount of tax so deductible shall not be reduced from the income-tax liability of the resident payee for determining his liability to pay advance tax.

Therefore, the resident payee shall be liable to pay advance tax and in such case section 234B for default in {f&yment of advance tax would be attracted. Further, interest @1% per month or part of month would be leviable u/s 201(1A) on the payer from the month in which tax was deductible till the date of furnishing of return by the resident payee.

Question 2.
Bhola & Co., a firm, failed to pay the advance tax as required by the provisions of Income-tax Act, 1961. The assessment was done u/s 143(3) i and the assessment order issued by the A.O. stated that interest is payable i u/s 234B. The order did not contain any direction for the payment of interest, it merely stated that interest is payable. The assessee’s contention is that since the direction for payment of interest is absent in the assessment order, it could not be fastened with liability to interest u/s 234B. Examine the validity of assessee’s contention. [CA Final May 2016] [4 Marks]
Answer:
The issue under consideration is whether interest liability u/s 234B would arise in the absence of specific direction for payment of interest in the assessment order.

As per Sec. 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by the assessee isless than 90% of the assessed tax, the assessee becomes liable to pay simple interest @ 1% per month or part of the month.

Levy of interest u/s 234B is automatic w hen the conditions of section 234B are met. It was so held by the Gauhati High Court in the case of CIT v. Assam Mineral Development Corporation Ltd. (2010)

The contention of the firm, Bhola & Co., that it could not be fastened with the liability to interest under section 234B in the absence of the direction for payment of such interest in the assessment order is, therefore, not valid, assuming that interest u/s 234B has been computed for determining the tax liability as per the income-tax computation sheet annexed to the assessment order. Interest liability u/s 234B would arise, even in the absence of specific direction for payment of interest in the assessment order.

Question 3.
PA Consulting Ltd’s has total turnover of ₹ 1,55,00,000 and total income of ₹ 11,00,000 during the previous year ended 31.3.2021. Tax deducted at source by different payers amounted to ₹ 24,570 and tax paid in foreign country on a doubly taxed income amounted to ₹ 20,000 for which the company is entitled to relief u/s 90 as per the double tax avoidance agreement. During the year the company paid advance tax as under:

Date of Payment	Advance tax paid (₹)
15-06-2020	42,000
12-09-2020	69,000
15-12-2020	1,01,000
15-03-2021	62,000

The company filed its return of income for the Assessment Year 2021-22 on 15.11.2021.

Compute interest, if any payable by the company u/ss 234A, 234B and 234C. Assume that transfer pricing provision is not applicable. [CA Final Nov. 2012, May 2017] [7 Marks]
Answer:
(i) Interest for defaults in furnishing return of Income u/s 234A
Since, PA Consulting Ltd. has furnished ROI on 15-11-2021 i.e. 15 days after the due date of filling Return, interest shall be payable @ 1% for a month on the amount of tax payable on total income, as reduced by tax and prepaid taxes.

Interest Payable = ₹ 24,630 × 1% = ₹ 246.

(ii) Interest for default in paying advance tax u/s 234B
Where the advance tax paid by the assessee is less than 90% of the assessed tax, the assessee would be liable to pay interest u/s 234B.

Advance tax to be paid 90% of assessed tax = ₹ 2,98,630 × 90% = ₹ 2,68,767

Since, the advance tax paid by PA Consulting Ltd. ₹ 74,000) is more than 90% of the assessed tax (₹ 2,68,767), it is not liable to pay interest u/s 234B.

(iii) Interest u/s 234C

Calculation of interest payable under section 234C:

Question 4.
Arjun’s total Income for AY. 2021 -22 is ₹ 10 lakhs consisting of salary, capital gain and income from other sources. After considering TDS and advance tax a sum of 50,000 towards tax is still payable. Because of various reasons he could not file his return of Income within the prescribed time limit. Arjun approaches you for advice on the following Issues:

(i) Whether he can file a return of income on P December, 2021?
(ii) Whether he will be able to revise his return of income, In case he discovers any omission or mistake in his return filed on 01.12.2021?
(iii) What amount of interest and penalty, he will be subjected to for the defaults, If any, for the relevant assessment year. [CA Final Nov. 201 7] [4 Marks]
Answer:
(i) As per section 139(4), any person who has not furnished a return within the time allowed u/s 139(1) may furnish a belated return for the P.Y. at any time before the end of the relevant AX. or before the completion of assessment, whichever is earlier. Therefore, assessee can file return for A.Y. 2021-22 till 31.03.2022 assuming assessment has not been completed before 31.03.2022. Hence, Arjun can file a return of income on December, 2021

(ii) As per section 139(5), if any person, having furnished return of income u/s 139(1) or belated return u/s 139(4), discovers any omission or misstatement therein, then he may furnish a revised return at any time before the end of the relevant A.Y., or before the completion of assessment, whichever is earlier.

The return filed by Arjun on 01.12.2021 is a belated return filed u/s 139(4) and as per Sec. 139(5) belated return can be revised. Thus, Arjun will be able to revise his return of income, in case he discovers any omission or mistake in his return filed on 01.12.2021. Further, he can revise his return till 31.03.2022 assuming assessment has not completed before 31.03.2022.

(iii) Mr. Arjun will be liable to pay interest u/s 234A for default in furnishing ROI. Interest is levied on self assessment tax @ 1% p.m. or part of the month for the period of delay. In the given case the due to file ROI would be 31.07.2021 and so the interest will be levied for 5 months, Thus, the amount of interest shall be ₹ 2,500 (i.e. ₹ 50,000 × 1% × 5 months).

Further, there is no provision for levy of penalty in case of delay in 5 filing the ROI. However, Mr. Arjun would be liable to pay late fee u/s 234F. As per section 234F, fees for failure to furnish Return of income u/s 139 within the time limit prescribed u/s 139(1) shall be:

(a) ₹ 5,000, if ROI is furnished on or before 31^st day of December of the assessment year;
(b) ₹ 10,000 in any other case.

However, if the total income of the person does not exceed ₹ 5,00,000, fee payable shall not exceed ₹ 1,000.

So, Mr. Arjun would be liable to pay late fees of ₹ 5,000 as the ROI is filed before 31.12.2021 and his total income exceeds ₹ 5,00,000.

Question 5.
The assessment of Nargis Agro Ltd., for A.Y. 2021-22 was completed u/s 143(3). The order so passed does not contain any specific direction for payment of interest u/s 234B, but was being accompanied by form ITNS-150 containing and giving the calculation of interest payable u/s 234B on the Assessed Tax. The assessee being aggrieved of the levy of interest u/s 234B seeks your opinion. Kindly advice. [CA Final Nov. 2017] [4 Marks]
Answer:
The issue under consideration is whether interest liability u/s 234B would arise in the absence of specific direction for payment of interest in the assessment order.

The facts of the case are similar to the facts in CIT v. Bhagat Construction Co (P.) Ltd. (2016), where the Supreme Court observed that levy of interest u/s 234B is automatic when the conditions of section 234B are met and the income-tax computation sheet/form [Form ITNS-150] is part of the assessment order, even though the assessment order does not contain a specific direction for payment of interest.

Applying the above rationale, Nargis Agro Ltd. becomes liable to pay interest u/s 234B for A.Y. 2021-22 even if the assessment order passed under section 143(3) does not contain any specific direction for payment of such interest, since the order is accompanied by Form ITNS-150 containing and giving calculation of interest payable under section 234B.

Application Vs. Diversion of Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Application Vs. Diversion of Income – CA Final DT Question Bank

Question 1.
SR Ltd., a Company operating Chain of Hotels charges a Nominal Amount of ₹ 50 in each bill of the Resident Guests which is specifically earmarked only for the purpose of ‘Local Charities’. This amount of ₹ 50 so collected in each Bill is credited to separate account named “Charity Account”. The Assessing Officer doing the assessment has issued a Show Cause Notice to tax this amount of Charity as Income of the Company for the relevant assessment year. The Company for objecting the stand of the Assessing Officer consults you and seeks your opinion. [CA Final Nov. 2013] [5 Marks]
Answer:
The given question deals with the issue that whether the amount specifically earmarked in bills for the purpose of “local charities” can be included in the total income of the assessee.

The facts of the given case are similar to the facts in CIT v. Bijli Cotton f Mills (P) Ltd. (1979)(SC), where the Supreme Court held that since right from the inception, the amounts were impressed with an obligation to be spent for charitable purposes only, these amounts were not in the form of trading receipts.

In the given question, the guests are paying ₹ 50 in each bill to the hotel separately which is specifically earmarked only for the purpose of ‘Local Charities’. Further the amount so collected is credited to a separate “Charity Account”.

Applying the rationale of the Supreme Court’s judgment in the Bijli Cotton Mills case, the levy by the hotel was clearly a case of collecting payment for specific purpose and validly earmarked for charities.

Therefore, such amount credited to a separate “Charity” account would not form part of the price/cost of the hotel room. Accordingly, the action of the Assessing Officer in issuing show cause notice to tax the amount of charity as income of company is not correct.

Alternate view:
A Rule framed by an assessee for its internal management cannot be elevated to the level of Statutory Rule and the decision on the part of the assessee to apply a portion of what is received for benevolent purposes cannot be regarded as diversion of income by overriding title. Such amounts should be added to Income of the Assessee.
CIT v. Madras Race Club (2003) (Mad.)

Thus, where by a legal obligation, income is diverted before it reaches to the assessee, it is not taxable in the hands of the assessee, as he is not actually entitled to it. However, an essential condition for the concept of “diversion of income by overriding title” is the existence of a legal compulsion or contractual obligation to do so.

In this case, there appears to be no legal compulsion or contractual obligation, requiring the assessee to earmark the amount of ₹ 50 collected on each bill to a separate account called “Charity account”.

Therefore, in the absence of any such legal compulsion or contractual obligation, the crediting of the amount of ₹ 50 in each bill to a separate account is not diversion of income by overriding title, but application of income by SR Ltd. Consequently, the action of the Assessing Officer in bringing to tax the amount of charity as income of the company would be proper.