CA Final Direct Tax and International Taxation MCQs

Direct tax MCQs for Paper 4, each test marked with the assessment year it is set on.

5 full-length tests. Each has 23 questions for 30 marks in 30 minutes. MCQ 1 is free.

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Try 3 questions from MCQ 1

They are set on assessment year AY 2026-27. Work each one out, then open the answer to see why every option is right or wrong.

Kalinga Engineering Works

Kalinga Engineering Works follows the mercantile system of accounting and is finalising its accounts for the previous year 2025-26. Four payments are in question.

Bhadra Castings is a micro enterprise. Kalinga accepted goods worth Rs. 18 lakhs from it on 10 February 2026. A written agreement between them requires payment within 40 days of acceptance. Kalinga paid on 5 April 2026.

Sagar Alloys is a small enterprise. Kalinga accepted goods worth Rs. 9 lakhs from it on 20 March 2026. There is no written agreement between them. Kalinga paid on 2 April 2026.

Neelachal Forgings is a medium enterprise. Kalinga accepted goods worth Rs. 12 lakhs from it on 1 March 2026 under a written agreement requiring payment within 30 days. Kalinga paid on 20 May 2026.

Kalinga also owed Rs. 4 lakhs of goods and services tax for March 2026, which it paid on 20 September 2026, before the due date for furnishing its return of income for the assessment year 2026-27.

Question 1, 2 marks

What amount is disallowed in computing Kalinga's business income for the previous year 2025-26 by reason of clause (h) of section 43B?

  1. Rs. 27 lakhs, being the amounts payable to Bhadra Castings and Sagar Alloys, both of which were paid only after the close of the previous year.

    Wrong on Sagar Alloys. Payment on 2 April was within the fifteen days that apply where there is no agreement.

  2. Rs. 18 lakhs, being the amount payable to Bhadra Castings, which was paid beyond the period the written agreement between the parties allowed.

    Correct answer

    Correct - Rs. 18 lakhs only.

  3. Nothing, every one of the three suppliers having been paid within a period that the Micro, Small and Medium Enterprises Development Act, 2006 permits.

    Wrong. Bhadra Castings was paid two weeks after the agreed period had expired.

  4. Rs. 30 lakhs, being the amounts payable to Bhadra Castings and Neelachal Forgings, each of which was paid after the time its written agreement allowed.

    Wrong on Neelachal Forgings, which is a medium enterprise and outside clause (h).

Show answer
Why

Clause (h) reaches a sum payable to a micro or small enterprise beyond the time limit in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. Bhadra Castings is a micro enterprise and the written agreement allowed 40 days from acceptance on 10 February 2026, so payment was due by 22 March 2026; payment on 5 April 2026 is late and Rs. 18 lakhs is disallowed. Sagar Alloys is a small enterprise with no written agreement, so the period is 15 days from acceptance on 20 March 2026, and payment on 2 April 2026 is within it. Neelachal Forgings is a medium enterprise, which clause (h) does not reach at all, so the delay there is irrelevant to this clause.

Reference: Section 43B(h) read with section 15 of the MSMED Act, 2006; Study Material Module 1, Chapter 3.

Question 2, 1 mark

A single transaction falls within both section 194-O and section 194S. Under which provision is tax to be deducted?

  1. Under section 194-O, the e-commerce operator being the person in the better position to identify the participant and to deduct the tax from the sum it pays over.

    Wrong. The Act gives precedence the other way.

  2. Under both, each deductor accounting separately for the tax attributable to the aspect of the transaction that its own provision is directed at.

    Wrong. The same transaction does not bear deduction twice at source.

  3. Under section 194S, the specific provision for the transfer of a virtual digital asset prevailing over the general provision for an e-commerce transaction.

    Correct answer

    Correct - section 194S prevails.

  4. Under neither, a transaction attracting two deduction provisions at once being left to be dealt with in the payee's own assessment instead.

    Wrong. The overlap is resolved by the statute itself.

Show answer
Why

Where tax is deductible under section 194-O and also under section 194S in respect of the same transaction, the Act resolves the overlap expressly: tax is to be deducted under section 194S and not under section 194-O. The provision dealing specifically with payment on the transfer of a virtual digital asset takes precedence over the general provision for the sale of goods or provision of services through an e-commerce operator. Double deduction is not the answer, and the overlap is not left for the payee's assessment to sort out.

Reference: Sections 194-O and 194S; Study Material Module 2, Chapter 12.

Question 3, 1 mark

At what rate is tax to be collected where the collectee does not furnish a permanent account number?

  1. At twice the rate specified in the relevant provision or at 5%, whichever is the higher, subject to a ceiling of 20% on the rate so arrived at.

    Correct answer

    Correct - the higher of twice the rate and 5%, capped at 20%.

  2. At twice the rate specified in the relevant provision, without any ceiling, the collectee being free to claim the excess back on filing a return of income.

    Wrong. There is a ceiling of 20%.

  3. At a flat 20% in every case, the rate specified in the relevant provision being displaced entirely once a permanent account number is not furnished.

    Wrong. Twenty per cent is a ceiling, not a flat rate.

  4. At the rate specified in the relevant provision, the failure to furnish a permanent account number attracting a separate penalty rather than a higher rate.

    Wrong. The consequence is a higher rate of collection, not merely a penalty.

Show answer
Why

Where a collectee does not furnish a permanent account number to the collector, tax is collected at the higher of twice the rate specified in the relevant provision and 5%, and the higher rate so arrived at must not exceed 20%. The same treatment applies where the collectee furnishes a declaration under section 206C(1A) but no permanent account number, and where the number given is invalid or does not belong to the collectee. The provision does not apply to a non-resident who does not have a permanent establishment in India.

Reference: Section 206CC; Study Material Module 3, Chapter 13.

That is the review you get on every question after a full test, with your marks broken down by topic, weakest first, so you know what to revise next.

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What the DT tests cover

A tax MCQ can be wrong in a way no arithmetic check will catch: a rate that has moved, a threshold that has changed, a provision that has been withdrawn. Every test here is marked with the assessment year and Finance Act it is set on, and every rate and threshold was checked against the study material before the question was written.

The questions follow the paper's case-study pattern: a set of facts about a business or a non-resident, and several questions on the provisions it raises. They cover TDS and TCS including the Liberalised Remittance Scheme, section 43B(h) payments to micro and small enterprises, business connection and permanent establishment, shipping income of non-residents, transfer pricing and secondary adjustments, and the limitation of interest deduction under section 94B.

When the live assessment year moves on, the tests are re-verified against the new law rather than left as they were.

The questions are new, written from the Acts, the Standards and the study material, and are not reprints of ICAI papers.

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