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CA Final · Direct Tax Laws & International Taxation · Deductions from Gross Total Income

Meghna Enterprises has an eligible undertaking whose profits are claimed as a Part C deduction. In the tax year, the unit transferred goods to another business of the same assessee at Rs. 9,00,000 as recorded in its accounts, while the market value on the transfer date was Rs. 12,00,000. The unit's profit as per its books was Rs. 20,00,000. How will the profit of the eligible unit be computed for the deduction under section 122(6)?

The unit's profit is Rs. 23,00,000. Under section 122(6) the transfer is treated as made at market value of Rs. 12,00,000, not the recorded Rs. 9,00,000, so the Rs. 3,00,000 shortfall is added back to the book profit of Rs. 20,00,000.

  1. ARs. 20,00,000, as the recorded consideration is binding
  2. BRs. 23,00,000, by adding Rs. 3,00,000 to book profitCorrect
  3. CRs. 17,00,000, by reducing Rs. 3,00,000 from book profit
  4. DRs. 11,00,000, by reducing Rs. 9,00,000 from book profit

Explanation

Where goods held by the eligible unit are transferred to another business at a price differing from market value, profits are computed as if the transfer was at market value. Transfer out of the unit at Rs. 9,00,000 instead of Rs. 12,00,000 understated unit profit by Rs. 3,00,000, so profit is Rs. 20,00,000 + Rs. 3,00,000 = Rs. 23,00,000. Option C reverses the direction of adjustment.

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