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A test of conceptual skills
May, 31st 2010

The May 2010 CA (Final) paper on Direct Tax Laws (New) assesses the candidates' knowledge of case laws and recent amendments as well.

In the CA curriculum, the subject Direct Tax Laws' has huge significance and chartered accountants have made big strides in the profession through the application of expert knowledge gained in the subject both during training and post-qualification. The Direct Tax Laws (New) of the May 2010 examination is a continuation of the trend of rigorous testing of candidates at the CA (Final) level, assessing their knowledge of concepts, case laws and recent amendments.

Application of provisions

The first question, a lengthy one carrying 20 marks, is on limited company which came into existence upon conversion of a partnership firm. It requires (i) application of Section 41 for taxing the amount waived by a supplier of materials; (ii) relationship between Section 40A(3) and Section 194C; (iii) deduction in respect of VRS compensation under Section 35DDA; and (iv) eligibility for deduction in respect of exchange fluctuation loss due to restatement of suppliers' liability.

One of the crucial aspects in this question relates to claim of bad debt routed through provision for bad and doubtful debts account. A recent Supreme Court decision in the Vijaya Bank (323 ITR 166 SC) case is applicable (though it was rendered within six months before the examination date).

Issues such as withdrawal of capital gain exemption given earlier to the firm under Section 47(xiii) and change in shareholding pattern to test the application of Section 79, and issues relating to deemed dividend taxation are also included in this question. It is a treat to see how well the question was coined with original thinking aided by expertise in the subject.

Recent amendments

The second question seeks to test the students' updated knowledge on the recent changes in provisions of law. It contains (i) expenditure relating to exempt income not eligible for deduction in view of Section 14A; (ii) speculation income under Section 43(5) which does not include transactions in derivatives carried out by a company engaged in the business of financing and investments; and (iii) capital expenditure on scientific research not eligible for deduction as per Section 35(1)(iv) where the research is not related to its business. Similarly, in the third question, the candidates' knowledge on recent changes to Sections 35AD and 73A inserted by the Finance (No.2) Act, 2009 are tested by way of a computation problem.

However, in a sub-part to the third question relating to capital gains computation, the amendment brought in by the Finance Act, 2010 could also be stated as the answer by the candidates though it is not applicable for this examination. As the law has got changed retrospectively, the answer intended, being as per the law prior to amendment, would not be logical or practical .

TDS provisions

The fourth question seeks application of Section 194C recently amended, Section 194J read with Circular No. 88/2008 and Section 192 supported by Supreme Court decision in the Eli Lilly & Co (India) P Ltd (312 ITR 225) case. The fourth question also tests the theoretical knowledge by seeking rule 8 of Part A of the Fourth Schedule and Section 144 of the Act.

Case-law-based awareness was tested in the fifth question by grouping some issues to know the powers of the Income-Tax Appellate Tribunal.

The other sub-parts of the question deal with some fundamentals like deduction of stamp duty and registration charges against Income from house property' and reasoning for deduction under Section 80-IB by taking into account some court decisions.

The question relating to charitable trust is original and is intended to test the candidates to narrate the application of various provisions such as Sections 11 and Section 10(23C)(iiiae) and also the finer skills of computation of taxable income.

Yet another interesting issue in the question paper relates to the DTAA between India and Mauritius by giving para 2 of Article 24 to be interpreted in the light of Explanation 1 to Section 90. This question however could not be given a definite answer in the absence of court decision.

Cumbersome wealth tax

This question is difficult because three types of assets were given for wealth tax valuation. A vacant land with unearned increase in value and written-down value of let-out building are difficult when compared to questions asked in earlier examinations.

As a relief, the other sub-part is a repeat of the question posed earlier, which could be answered by citing case laws such as CWT vs H. S. Chauhan (245 ITR 704 Delhi).

The question paper is a real test in assessing candidates' skill in direct tax laws.

Even practising chartered accountants would gain immensely by trying to tackle the various issues raised in the paper as it would help update their knowledge.

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