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Chapter 13 – Income Tax Liability –

Computation and Optimization – Past Year
Questions

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S.
No.
1
Transaction
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Adjustments While Computing PGBP Income
PGBP Adjustments - Expenditures

Rent Paid for Residential House

If Debited to P&L
Add Back to Net Profit
Treatment
Otherwise
No Action Required
2 Depreciation Always Add Back; Compute Compute and Deduct in
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fresh and deduct in the end the end
3 Municipal Taxes Paid for House Add Back to Net Profit; Subtract while
Property Subtract while computing computing IFHP
IFHP
4 Contribution to Outsiders for No Action Required Subtract from Net Profit
Scientific Research (Old Scheme)
5 Contribution to Outsiders for Add Back to Net Profit No Action Required
Scientific Research (New Scheme)
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6 Payment exceeding ₹10,000 in Add Back to Net Profit (Full No Action Required
cash to Non-Transporters Amount)
7 Payment exceeding ₹35,000 in Add Back to Net Profit (Full No Action Required
cash to Transporters Amount)
8 Undervaluation of Opening Stock Subtract from Profit
9 Unreasonable Payment to Add Back No Action Required
Relatives
10 Car used for Personal as well as Add back personal portion of No Action Required
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for Business Use car expenditure

11 Drawings Add Back to Net Profit No Action Required
12 Investment in NSC Add Back to Net Profit; Subtract from GTI
Subtract from GTI
13 Bonus to Staff not paid till Due Add Back to Net Profit No Action Required
Date of Return Filing
14 Advertisement in the souvenir of Add Back to Net Profit No Action Required
political party
CA

15 Payment/Donation to a Political Add Back to Net Profit; Subtract from GTI

Party Subtract from GTI

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PGBP Adjustments - Expenditures
S. Transaction Treatment
No. If Debited to P&L Otherwise
16 Penalty/Fee for Delayed Filing of Add Back to Net Profit No Action Required
Returns
17 Penalty for non-fulfilment of No Action Required No Action Required

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delivery conditions
18 Interest/Commission Paid Add Back 30% of Interest to No Action Required
without TDS Profit
19 Interest paid on late payment of No Action Required No Action Required
GST
20 Income Tax Paid Add Back to Net Profit No Action Required
21 Interest on Loan for Personal Add Back to Net Profit No Action Required
Purpose
22 Advertisement in a souvenir Add Back to Net Profit No Action Required

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published by local political party
23 Purchase of Furniture or Any Add Back to Net Profit; Consider in Block and
Other Capital Asset Consider in Block and Provide Provide Depreciation
Depreciation
24 Family Planning Expenditure (for Add Back to Net Profit No Action Required
Non-Corporate Assessees)

PGBP Adjustments - Incomes

S. Transaction Treatment
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No. If Credited to P&L Otherwise
1 Income Tax Refund Subtract from Profit No Action Required
(Principal)
2 Income Tax Refund Subtract from Profit; Include in Include in IFOS
(Interest) IFOS
4 Dividend Subtract from Profit; Include Include Gross Value in IFOS
Gross Value in IFOS
5 Winnings from Game Subtract from Profit; Include Include Gross Value in IFOS
SH

Show Gross Value in IFOS

6 Rent Received from House Subtract from Profit; Consider in Consider in IFHP
Property IFHP
7 Income from UTI Subtract from Profit; Include Include Gross Value in IFOS
Gross Value in IFOS
8 Honorarium Subtract from Profit; Include in Include in IFOS
IFOS
9 Benefits Received from No Action Required Add to Profit
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Clients (for Profession)

10 Undervaluation of Closing Add to Profit
Stock
11 Interest on Debentures Subtract from Profit; Include Include Gross Value in IFOS
Gross Value in IFOS
12 Profit from Sale of Subtract from Profit; Treated as Treated as Capital Gains
Scientific Research Asset Capital Gains
CA

13 Sale of Goods to Relative No Action Required No Action Required

at less than MRP

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PGBP Adjustments - Incomes
S. Transaction Treatment
No. If Credited to P&L Otherwise
14 Royalty on Patents Subtract from Profit; Include in Include in IFOS
IFOS
15 Bad Debts Recovered Subtract the unreasonable Add to Profit only the

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(Credited Unreasonably) portion reasonable portion
16 Warehousing Charges Subtract from Profit; Taxed as Taxed as Specified Business
Specified Business Income Income
17 Interest on FDs Subtract from Profit; Include Include Value in IFOS
Value in IFOS
18 Interest on PPF Subtract from Profit; Include Include Value in IFOS
Value in IFOS
19 Interest on Savings Bank Subtract from Profit; Include Include Value in IFOS
Value in IFOS

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20 Interest on National Subtract from Profit; Include Include Value in IFOS
Savings Certificates VIII Value in IFOS
Issue

Question 1 – May 2025 – 15 Marks

Mrs. S.C. Bose (aged 62 years) is a widow of a public sector employee who died during his service in
2011. She earns income from business of running a flower bouquet shop at Kolkata and income from
royalty from writing books of science and sells in India and abroad. Profit & Loss account for the year
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ended 31st March, 2025 furnished by her is given below:

Particulars ₹ Particulars ₹
To Opening stock 1,00,000 By Sales of flower bouquet 36,75,000
To Purchases 15,66,000 By Family pension from PSU through 3,60,000
bank
To Salaries and wages 4,90,000 By Royalty form California University 4,25,000
for books sold (Foreign exchange
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brought into India)

To Expenses relating to books 75,000 By Dividend (Net of TDS) 4,50,000
authored by her
To Expenses in connection with 12,000 By Interest on FDR (No TDS 76,000
dividends deducted)
To Repairs & Maintenance 3,25,000 By Closing stock 1,36,000
To Amount paid to IIT Chennai for 35,000
scientific research projects
To Computers and other electronic 4,50,000
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items (purchased on 01-12-2024)

To Net Profit 20,69,000
51,22,000 51,22,000
Additional Information:

1. Purchases include ₹2 lakhs relate to flowers and creepers directly purchased from a farmer in
cash on 26.09.2024.
CA

2. Repairs & Maintenance includes one-time deposit of ₹2,00,000 paid to electricity and water
department.

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3. Computers and other electronic items includes ₹1,00,000 paid for television and washing
machine for her household use.
4. Salary & wages includes salary paid ₹2,40,000 to her illiterate brother (reasonable salary as
per market rate is ₹1,80,000).
5. She purchased a residential house for ₹110 lakhs for which loan of ₹75 lakhs was taken from
State Bank of India. Accrued interest was ₹3,37,500 till 31-03-2025 which was paid on 10-04-

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2025. No principal amount and interest was paid by Mrs. S.C. Bose till 31-03-2025. Ground
floor of the house was used for shop and first floor was occupied for her residence.
6. She purchased an electric vehicle on 30-09-2024 for ₹25 lakhs for business purposes.
7. She sold 10,000 listed shares of SBCL Ltd. for ₹11,66,000 on 11-12-2024 which were purchased
for ₹2,65,000 on 16.08.2024. STT was paid on purchase and sale both.

Compute total income of Mrs. S.C. Bose under default tax regime u/s 115BAC and optional tax regime
of the Income-tax Act, 1961.

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Solution

Computation of Total Income of Mrs. S.C. Bose for A.Y. 2025-26 Under Default Tax Regime Under
Section 115BAC(1A)
Particulars ₹
Income from House Property
Self Occupied Portion (First Floor)
Annual Value -
Less: Deduction u/s 24
Less: Interest on Housing Loan (Not Allowed under Default Tax Regime) -
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Income from House Property (A) -
Profits and Gains from Business or Profession
Net Profit as per Profit & Loss A/c 20,69,000
Add: Expenses relating to books authored by her (Note 1) -
Add: Expenses in connection with Dividends (Note 2) 12,000
Add: Amount paid to IIT Chennai from scientific research projects, not 35,000
allowable under default tax regime
Add: Computers and other electronic items [Capital expenditure not 4,50,000
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allowed as deduction]
Add: Payment to a farmer exceeding ₹10,000 in cash (Note 3) -
Add: One-time deposit to electricity and water department (Note 4) 2,00,000
Add: Excessive salary paid to brother (Note 5) 60,000
28,26,000
Less: Family pension from PSU (Taxable under the head "Income from 3,60,000
Other Sources")
Less: Royalty from California University for Books Sold (Note 6) -
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Less: Dividend (Taxable under the head "Income from Other Sources") 4,50,000
Less: Interest on FDRs (Taxable under the head "Income from Other 76,000
Sources")
Less: Interest on residential house used for shop (₹3,37,500/2) (Note 7) 1,68,750
Less: Depreciation (Note 8) 16,20,000 26,74,750
Profits and Gains from Business or Profession (B) 1,51,250
Capital Gains
CA

Sale consideration on sale of listed shares of SBCL Ltd. 11,66,000

Less: Cost of Acquisition 2,65,000

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Short term capital gains taxable under section 111A [Since shares are held 9,01,000
for less than 12 months and STT has been paid] (C)
Income from Other Sources
Family pension from PSU 3,60,000
Less: Lower of:
Less: 33.33% of ₹3,60,000 (1/3 × ₹3,60,000) 1,20,000

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Less: ₹25,000 25,000 25,000
3,35,000
Dividend (Gross Value) (₹4,50,000 ÷ 90%) 5,00,000
Less: Expenses in Connection with Dividend to the extent of 20% of Gross 12,000 4,88,000
Dividend (Note 9)
Interest on FDRs 76,000
Income from Other Sources (D) 8,99,000
Gross Total Income (A) + (B) + (C) + (D) 19,51,250
Less: Deduction under section 80QQB and 80TTB [Not allowable under -

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default tax regime]
Total Income 19,51,250

Computation of Total Income of Mrs. S.C. Bose for A.Y. 2025-26 Under the Optional Tax Regime
Under Section 115BAC(1A)
Particulars ₹
Income from House Property
Annual Value -
Less: Deduction u/s 24
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Less: Interest on Housing Loan (50% × ₹3,37,500) 1,68,750
Income from House Property (A) (1,68,750)
Profits and Gains from Business or Profession
As per Default Tax Regime 1,51,250
Less: Amount paid to IIT Chennai for scientific research projects (100% 35,000
deduction allowed u/s 35(2AA))
Profits and Gains from Business or Profession (B) 1,16,250
Capital Gains (Same as Default Scheme) (C) 9,01,000
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Income from Other Sources

Family pension from PSU 3,60,000
Less: Lower of:
Less: 33.33% of ₹3,60,000 (1/3 × ₹3,60,000) 1,20,000
Less: ₹15,000 15,000 15,000
3,45,000
Dividend (Same as Default Scheme) 4,88,000
Interest on FDRs (Same as Default Scheme) 76,000
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Income from Other Sources (D) 9,09,000

Gross Total Income (A) + (B) + (C) + (D) 17,57,500
Less: Deductions u/C VI-A
Less: u/s 80QQB: Deduction for Royalty Income (₹4,25,000 – ₹75,000 = 3,00,000
₹3,50,000), restricted to
Less: u/s 80TTB: Interest on FDRs assuming FDRs are with banks, restricted 50,000 3,50,000
to (Note 10)
CA

Total Income 14,07,500

Notes:

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1. Expenses relating to books authored by her are allowed as deduction considering royalty
income is taxable under the head “Profits and gains from business or profession”. Royalty
income may also be taxed under the head “Income from other Sources”. In such case, expenses
relating to books would not be allowed as deduction while computing business income and
allowed from royalty income while computing “Income from Other Sources”.
2. Expenses in connection with dividends are not allowed since expense is in respect of dividend

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taxable under the head “Income from Other Sources”.
3. Payment to a farmer exceeding ₹10,000 in cash for purchase of flower and creepers is not
disallowed under section 40A(3), since payment to farmer comes under exclusion.
4. The one-time deposit of ₹2,00,000 paid to the electricity and water department is not
allowable as a deduction because it is in the nature of a security deposit or capital advance,
not an actual business expense. Such deposits are usually refundable or provide an enduring
benefit, and they do not relate to the current year’s operations or to repairs and maintenance
of the business. As per the principle under Section 37(1) of the Income-tax Act, 1961, only
expenses that are actually incurred and wholly for business purposes can be deducted. Since

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this deposit is capital in nature, it must be added back to net profit while computing business
income.
5. Excessive salary paid to brother is disallowed under section 40A(2), since brother falls under
the definition of relative and salary paid is in excess of market rate. Therefore, ₹60,000
(₹2,40,000 – ₹1,80,000) is disallowed.
6. No adjustment is required for Royalty form California University for books sold since royalty is
taxable under the head “Profits and gains from business or profession”. Royalty income may
also be taxed under the head “Income from Other Sources”. In such case, the income has to
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be reduced while computing business income.
7. Since ground floor is used for business purposes, the interest amount attributable to that is
allowed under the head "Profits and Gains from Business or Profession". It is assumed that the
areas of the ground floor and first floor are equal. Also, since the interest is paid on or before
due date of filing return of income, disallowance under section 43B would not be attracted.
8. Calculation of Depreciation

Particulars ₹
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Computers and Electronic Items Purchased During the Year 4,50,000

Less: Attributable to Household Use 1,00,000
Computers and Electronic Items Purchased for Business 3,50,000

Depreciation (50% × 40% × ₹3,50,000) (Since they were put to use for less 70,000
than 180 days during the year)
Depreciation on Residential House Used for Shop (50% × 10% × ₹1,10,00,000) 5,50,000
Depreciation on Electric Vehicle (40% × ₹25,00,000) 10,00,000
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Total Depreciation 16,20,000

9. It is assumed that the expenses in connection with dividend are in the nature of interest
expenses. If it is assumed that expenditure are in the nature of expenses other than interest
expenses, no deduction would be allowed from dividend income.
10. If it is assumed that FDRs are not with banks, co-operative society engaged in banking business
or post office, deduction under section 80TTB would not be available.
CA

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Question 2 – January 2025 – 15 Marks

Mr. Rohit, a resident individual, aged 65 years, is a qualified medical practitioner. He runs his own
clinic. Income & Expenditure A/c of Mr. Rohit for the year ending March 31st 2025 is as under:

Amount Amount
Expenditure Income
(₹) (₹)

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To Salary to Staff 8,20,000 By Consultation Fees 22,00,000
To Administrative Expenses 5,90,000 By Salary received from 1,80,000
Care Hospital Pvt. Ltd.
To Conveyance Expenses 24,000 By Rental Income from 78,000
House Property
To Power & Fuel 24,000 By Dividend from Foreign 10,000
Companies
To Interest on Housing Loan 1,00,000
To Interest on Education Loan for son 26,000

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To Amount paid to scientific research 25,000
association approved & notified u/s 35
To Net Profit 8,59,000
Total 24,68,000 Total 24,68,000
Following is the further information relating to Financial Year 2024-2025:

1. He is working part-time with Care Hospital Pvt. Ltd. His Salary details are as under:
Basic Pay ₹ 13,000 p.m.
Transport Allowance ₹ 2,000 p.m.
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Total ₹ 15,000 p.m.
Further, during P.Y. 2024-25 his son had undergone a medical treatment in Care Hospital Pvt.
Ltd. free of cost. The hospital would have charged a sum of ₹ 1,00,000 for a similar treatment
to unrelated patients.
2. He owns a residential house. The ground floor of the house (50% portion) is self-occupied by
him while first floor of the house (50% portion) has been rented out since 01/10/2024. The
reconstruction of the entire house was started on 01.04.2024 and was completed on
30.09.2024. The monthly rent is ₹ 10,000. The tenant also pays ₹ 3,000 p.m. as power back-up
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charges. He took a housing loan of ₹ 12 lakhs on 01.04.2024. Interest on housing loan for the
period 01.04.2024 to 30.09.2024 was ₹ 60,000 and for the period 01.10.2024 to 31.03.2025
was ₹ 40,000.
During the year, he also paid municipal taxes for the F.Y. 2023-24 ₹ 4,000 and F.Y. 2024-25
₹ 6,000.
3. Other Information:
a. Payment of salary of ₹ 25,000 per month to sister-in-law of Mr. Rohit, who was in-
charge of the Accounts & Receivables department. However, in comparison to similar
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work profile, the reasonable salary at market rate is ₹ 20,000 per month.
b. Conveyance expenses include a sum of ₹ 12,000 incurred for conveyance from house
to Care Hospital Pvt. Ltd. and vice-versa in relation to his employment.
c. Power and fuel expenses include a sum of ₹ 6,000 incurred for generator fuel for
providing power back up to the tenant.
d. Administrative expenses include a sum of ₹ 10,000 paid as Municipal Taxes for his
house.
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e. Clinic Equipment details are:

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Opening W.D.V. of Clinic Equipment as on 01.04.2024 was ₹ 1,00,000 and fresh
purchase made on 28.08.2025 for ₹ 25,000 which was paid in cash.
f. He also paid tuition fees of ₹ 40,000 for his Grand Daughter, which is debited to his
capital a/c.
g. He availed a loan of ₹ 8,00,000 from bank for higher education of his son. He repaid
principal of ₹ 50,000 and interest of ₹ 26,000 during P.Y. 2024-2025.

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You are required to compute his net taxable income and net tax liability for the A.Y. 2025-26 if he has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).

Solution

Computation of Net Taxable Income of Mr. Rohit for A.Y. 2025-26 Under the Normal Provisions
of the Act
Particulars ₹
Income from Salaries

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Basic Pay (₹ 13,000 × 12) 1,56,000
Transport Allowance (₹ 2,000 × 12) (Note 1) 24,000
Cost of treatment for son in Care Hospitals Pvt. Ltd. (Note 2) -
Gross Salary 1,80,000
Less: Standard deduction u/s 16 [Actual salary or ₹ 50,000, whichever is less] 50,000
Net Salary 1,30,000
Less: Set off of loss from house property 41,500
Income from Salaries (A) 88,500
.
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Income from House Property
Self Occupied Portion (Ground Floor)
Annual Value -
Less: Deduction u/s 24
Less: Interest on housing loan for reconstruction [(₹ 60,000 + ₹ 40,000) ÷ 2] 50,000
Restricted to (Note 3) 30,000
Income from Self Occupied Property (B) (30,000)
.
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Let Out Portion (First Floor)

Gross Annual Value (Rent received is taken as GAV = ₹ 10,000 p.m. × 6 60,000
months)
Less: Municipal taxes paid in the P.Y. 2024-25 pertaining to let out portion 5,000
[(₹ 4,000 + ₹ 6,000)/2], allowable since it is paid during the year, even if it
relates to earlier years
Net Annual Value (NAV) 55,000
Less: Deduction u/s 24
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Less: u/s 24(a): 30% of NAV (30% × ₹ 55,000) 16,500

Less: u/s 24(b): Interest on Housing Loan [(₹ 60,000 + ₹ 40,000) ÷ 2] 50,000 66,500
Income from Self Occupied Property (C) (11,500)
.
Net Income from House Property (B) + (C) (41,500)
Less: Set Off Against Income from Salaries 41,500
Taxable Income from House Property (D) -
.
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Profits and Gains from Business or Profession

Net profit as per Income and Expenditure account 8,59,000

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Add: Items of expenditure not allowable while computing business income
Add: Interest on Housing Loan (Considered under Income from House 1,00,000
Property)
Add: Interest on Education Loan for son (Allowed as Deduction from Gross 26,000
Total Income)
Add: Excessive salary paid to sister-in law [Allowed, since sister-in law does -
not fall within the definition of relative]

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Add: Conveyance expenses in relation to her employment with Care Hospital 12,000
Pvt. Ltd. debited to Income and Expenditure A/c, not allowed
Add: Power and fuel expenses incurred for providing power back up to 6,000
tenant not deductible
Add: Municipal tax paid relating to residential house included in 10,000
administrative expenses, not deductible
10,13,000
Less: Items of income to be treated separately under the respective head of
income and Allowable Expenditure

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Less: Salary received from Care Hospital Pvt. Ltd. (Taxable under the head 1,80,000
"Income from Salaries")
Less: Rental Income from House Property (Taxable under the head "Income 78,000
from House Property")
Less: Dividend from Foreign Companies (Taxable under the head "Income 10,000
from Other Sources")
Less: Depreciation on Clinical Equipment (Note 4) 15,000 2,83,000
Profits and Gains from Business or Profession (E) 7,30,000
Note – Mr. Rohit is a medical professional and if he claims that his profits and gains from
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profession are lower than ₹ 11,00,000 (50% of gross receipts i.e., ₹ 22,00,000) and his
total income exceeds the maximum amount not chargeable to tax, he would be required
to maintain books of accounts and get them audited from an accountant by virtue of
section 44ADA(4).
.
Income from Other Sources
Dividend from Foreign Companies 10,000
Power back up charges from tenant (₹ 3,000 p.m. × 6 months) 18,000
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Less: Actual expenditure incurred for providing power back up 6,000 12,000
Income from Other Sources (F) 22,000
.
Gross Total Income (A) + (D) + (E) + (F) 8,40,500
Less: Deductions under Chapter VI-A
Less: Deduction under section 80C – Tuition fee paid for grand child is not -
allowable
Less: Deduction under section 80E - Interest on loan taken for higher 26,000
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education of her son is deductible

Less: Principal repayment of loan taken for education is not deductible - 26,000
Total Income 8,14,500

Computation of Net Tax Liability of Mr. Rohit for A.Y. 2025-26 Under the Normal Provisions of
the Act
Particulars ₹
CA

On First ₹ 3,00,000 -
From ₹ 3,00,001 to ₹ 5,00,000 (5% × ₹ 2,00,000) 10,000
From ₹ 5,00,001 to ₹ 8,14,500 (20% × ₹ 3,14,500) 62,900
CA NISHANT KUMAR 9
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72,900
Add: Health and Education Cess @ 4% (4% × ₹ 72,900) 2,916
Net Tax Liability 75,816
Net Tax Liability (Rounded Off) 75,820
Notes:

1. Transport Allowance is fully taxable.

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2. The value of medical treatment provided to an employee’s family member in any hospital
maintained by the employer is excluded from the definition of perquisite, hence this amount
is not taxable.
3. Interest on loan is allowed as deduction from Self Occupied House Property upto ₹ 2,00,000
only if all the three conditions are satisfied: 1) Loan is taken for purchase or construction of
the house property; 2) Loan is taken on or after 01-04-1999; 3) If the loan is taken for
construction, the construction is completed within 5 years from the year in which the loan is
taken. In any other case, the deduction is restricted to ₹ 30,000. In this case, since the loan

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was taken for re-construction, and not construction, the deduction is restricted to ₹ 30,000.
4. Depreciation on Clinical Equipment

Particulars ₹
Opening WDV as on 01-04-2024 1,00,000
Add: Additions During the Year (See Note Below) -
WDV for Depreciation 1,00,000

Depreciation @ 15% (15% × ₹ 1,00,000) 15,000

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Note: No depreciation is allowable on additions of ₹ 25,000 during the year, since payment
was made in cash and hence, it will not form part of actual cost.

Question 3 – September 2024 – 15 Marks

Mr. Raman, a resident individual aged 62 years, is engaged in the business of manufacturing and sales
of spare parts for motor bikes, as a proprietor. He prepares his accounts on mercantile basis. This
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business is carried out on the ground floor of a two storied commercial building owned by him, the
written down value of which is ₹8 lakhs as on April 1, 2024. He prepares his accounts on accrual basis.
The Statement of Profit and Loss for the previous year ended on March 31, 2025 shows a net profit of
₹9.25 lakhs (before taxation and depreciation) after debiting/crediting the following items:

1. Travelling expenses includes ₹2,40,000 being expenditure incurred on a foreign tour to Taiwan
for attending a business exhibition and meeting with vendors, out of which ₹40,000 is incurred
in Indian currency and ₹2,00,000 in foreign currency. Mr. Raman has spent 10 days in Taiwan,
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out of which 4 days were utilized by him for attending marriage ceremony of a vendor's son.
2. Administrative expenses include ₹9,525 paid towards interest on delay in deposit of GST.
3. General expenses include a sum of ₹3,88,000 paid to a non-resident as fee for technical
services without deduction of tax at source.
4. Fire insurance premium of ₹66,000 for the entire building remained unpaid till 31st March,
2025.
5. Expenditure of ₹75,000, was paid to a scientific research association approved under section
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35. Out of ₹75,000, ₹50,000 was utilised towards the purchase of land by the research
association.

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6. He let out first floor of his commercial building to Mr. Aman on April 1, 2024 and received rent
of ₹35,000 per month. Municipal taxes ₹20,000 relating to the building were paid equally by
both Mr. Raman and Mr. Aman. Rent received was credited and municipal taxes of ₹10,000
(relating to ground floor) was debited to the statement of profit and loss.
7. He sold a piece of land for ₹44 lakhs on 12th April, 2024. He had acquired the land for 40 lakhs
on 1st January, 2023. The gain of 4,00,000 is credited to the statement of profit and loss.

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(CII for F.Y. 2022-23: 331; F.Y. 2024-25: 363)

Additional Information:

1. Mr. Raman purchased raw material from M/s. Paul Industries, a micro enterprise, for ₹49,000
on March 10, 2025. However, the payment to M/s. Paul Industries was made on April 5, 2025
by cheque. No written agreement for payment existed between M/s. Paul Industries and Mr.
Raman. Another supplier M/s. Kal Industries, a small enterprise, with whom also no written
agreement existed for payment, was paid ₹1,34,000 in cash on April 5, 2025 for purchase of

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raw material on March 31, 2025. Both M/s. Paul Industries and M/s. Kal Industries follow
mercantile system of accounting.
2. Mr. Raman acquired a registered trademark on July 15, 2024 for ₹2,00,000. Mr. Raman started
using this trademark for his business from January 15, 2025. Mr. Raman omitted to enter any
transaction relating to this trademark in his books of accounts.
3. Mr. Raman bought a car for personal use on 12th April, 2021 for ₹5,40,000. He started using
this car for business purposes from 01.04.2024. As on that day, the market value of the car
was ₹2,10,000. Assume the rate of depreciation to be 15%.
AN
4. He incurred ₹2,50,000 on the purchase of a new machinery to be used in the production of
spare parts for motor bikes on May 15, 2024.
5. He has paid tuition fees of ₹25,000 for the education of his daughter to a college.
6. During the year, Mr. Raman has incurred ₹9,500 in cash for preventive health check-up where
₹5,000 was for himself and ₹4,500 was for his parents who are super senior citizens.
7. Donation paid to a registered political party by way of cheque ₹20,000.

Compute the total income and tax payable for assessment year 2025-26 by Mr. Raman under default
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tax regime and optional tax regime as per normal provisions of the Act. Which option is advantageous
to Mr. Raman?

Solution

Computation of Total Income of Mr. Raman for A.Y. 2025-26 Under Default Scheme
Particulars ₹
Income from House Property
Gross Annual Value of first floor (Rent received has been taken as gross 4,20,000
NI

annual value in the absence of other information) [₹35,000 × 12]

Less: Municipal Taxes Paid (Note 1) -
Net Annual Value 4,20,000
Less: Deductions u/s 24:
Less: u/s 24(a): Standard Deduction @ 30% (30% × ₹4,20,000) 1,26,000
Income from House Property (A) 2,94,000
Profits and Gains from Business or Profession
CA

Net Profit as per Profit & Loss A/c 9,25,000

Add: Travelling Expenses (Note 2) -
Add: Interest on delay in deposit of GST (Note 3) -

CA NISHANT KUMAR 11
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Add: Fee for technical services to non-resident (Note 4) 3,88,000
Add: Fire Insurance Premium (₹66,000 × 1/2) (Note 5) 33,000
Add: Contribution to scientific research association approved u/s 35 (Note 75,000
6)
Add: Municipal taxes for ground floor (Note 1) -
Add: Sum payable for purchase of raw material from M/s Paul Industries, a 49,000
micro enterprise (Note 7)

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Add: Sum payable for purchase of raw material from M/s Kal Industries, a -
small enterprise (Note 8)
14,70,000
Less: Rent received for let out portion 4,20,000
Less: Gain on sale of land 4,00,000
Less: Depreciation (Note 9) 2,23,500 10,43,500
Profits and Gains from Business or Profession (B) 4,26,500
Capital Gains
Full Value of Consideration 44,00,000

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Less: Cost of Acquisition 40,00,000
Short term capital gains on land [Since land is held for less than 24 months] 4,00,000
(C)
Gross Total Income (A) + (B) + (C) 11,20,500
Less: Deduction under Chapter VI-A [Not allowable under default tax -
regime]
Total Income 11,20,500
AN
Computation of Tax Payable
Particulars ₹
On First ₹3,00,000 -
From ₹3,00,001 to ₹7,00,000 (5% × ₹4,00,000) 20,000
From ₹7,00,001 to ₹10,00,000 (10% × ₹3,00,000) 30,000
From ₹10,00,001 to ₹11,20,500 (15% × ₹1,20,500) 18,075
68,075
Add: Health and Education Cess @ 4% (4% × ₹68,075) 2,723
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Tax Payable 70,798

Tax Payable (Rounded Off) 70,800

Computation of Total Income of Mr. Raman for A.Y. 2025-26 Under Regular Provisions of the Act
Particulars ₹
Income from House Property (Same as Default Scheme) (A) 2,94,000
Profits and Gains from Business or Profession
NI

As per Default Scheme 4,26,500

Less: Contribution to scientific research association approved u/s 35 75,000
Less: Additional Depreciation on Machinery (20% × ₹2,50,000) 50,000 1,25,000
Profits and Gains from Business or Profession (B) 3,01,500
Capital Gains (Same as Default Scheme) (C) 4,00,000
Gross Total Income (A) + (B) + (C) 9,95,500
Less: Deductions under Chapter VI-A
CA

Less: u/s 80C: Tuition fees to a college for daughter’s education 25,000
Less: u/s 80D: Preventive health check-up for self and parents restricted to 5,000

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Less: u/s 80GGC: Donation to a registered political party since the payment is 20,000 50,000
made otherwise than by cash
Total Income 9,45,500

Computation of Tax Payable

Particulars ₹

UM
On First ₹3,00,000 -
From ₹3,00,001 to ₹5,00,000 (5% × ₹2,00,000) 10,000
From ₹5,00,001 to ₹9,45,500 (20% × ₹4,45,500) 89,100
99,100
Add: Health and Education Cess @ 4% (4% × ₹78,075) 3,964
Tax Payable 1,03,064
Tax Payable (Rounded Off) 1,03,060
Since tax payable under default tax regime is lower than the tax payable under normal provisions of
the Act, it would be beneficial for Mr. Raman to pay tax under default tax regime u/s 115BAC.

Notes:

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1. From the Gross Annual Value, the Municipal Taxes are allowed as deduction only when they
are paid by the owner. When the municipal taxes are paid by the tenant, the deduction is not
allowed. In the question, it is written that the Municipal Taxes for the entire building were
₹20,000, which were paid equally by the owner (Mr. Raman) and the tenant (Mr. Aman). Then
it says that the Municipal Taxes relating to the ground floor (where the business was carried
on by Mr. Raman) were ₹10,000, and they were debited to the Profit & Loss Account. This shall
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be allowed as deduction while computing income under the head Profits and Gains from
Business or Profession. Since these have already been debited to Profit & Loss A/c, no
adjustment is required for the same. It is only logical that out of the total Municipal Taxes of
₹20,000, ₹10,000 relating to Ground Floor (where the business was carried on by Mr. Raman)
were paid by Mr. Raman, and ₹10,000 relating to First Floor (which was let out to Mr. Aman)
were paid by Mr. Aman. Therefore, Municipal Taxes for the let out portion of the property
were paid by the tenant (Mr. Aman), and hence, no deduction for the same is allowed.
2. Since the travelling expenses are incurred wholly and exclusively for business purposes, they
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are fully allowed. Alternatively, it is possible to assume that the proportionate foreign tour
expenditure attributable to attending the marriage ceremony of a vendor’s son is a personal
expenditure. In such case, ₹2,40,000 × 4 /10 = ₹96,000 would be disallowed.
3. Interest on delay in deposit in GST is compensatory in nature and hence, allowable as
expenditure.
4. Fee for technical services to non-resident is fully disallowed under section 40(a)(i) since the
TDS was not deducted.
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5. Fire insurance premium for ground floor which is occupied for business purpose is allowed
since Mr. Raman is following mercantile system of accounting. Remaining half for let out
portion is disallowed.
6. Contribution to scientific research association approved u/s 35 is not allowable under section
35(1)(ii) as per default tax regime.
7. Sum payable for purchase of raw material from M/s Paul Industries, a micro enterprise is not
allowable as per section 43B(h) since payment was made to a micro enterprise on 5.4.2025
CA

which is beyond the time limit specified u/s 15 of the MSMED Act, 2006 i.e., within 15 days
from 10.3.2025.

CA NISHANT KUMAR 13
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8. Sum payable for purchase of raw material from M/s Kal Industries, a small enterprise is
allowable as per section 43B(h) since payment was made to a small enterprise on 5.4.2025 i.e.,
within 15 days from 31.3.2025. However, since the payment is made in cash on 5.4.2025,
₹1,34,000 for purchase of raw material would be the deemed income of P.Y. 2025-26 as per
section 40A(3A)].
9. Calculation of Depreciation

UM
Particulars ₹
Normal Depreciation
On Building (10% × ₹8,00,000) 80,000
On Trademark (50% × 25% × ₹2,00,000) (Since trademark is put to use for less 25,000
than 180 days)
On Car (15% × ₹5,40,000) (Note 10) 81,000
On New Machinery (15% × ₹2,50,000) 37,500
Additional Depreciation
On New Machinery (Not allowable under Default Tax Regime) -

TK
Total Depreciation 2,23,500
10. Market Value of the Car on the date of bringing it into business is of no relevance. Also, the
concept of Notional Depreciation, where written down value of the asset is calculated on the
date of bringing it into the business on the basis of prevalent depreciation rate by applying the
depreciation from the date of purchase till the date of bringing it into the business applies only
on buildings, and not on any other asset.
AN
Question 4 – May 2024 – 15 Marks

Mr. Sahil, resident Indian aged 40 years, a Manufacturer at Chennai, gives the following
Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2025.

Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2025
Particulars ₹ Particulars ₹
To Opening Stock 71,000 By Sales 43,50,000
To Purchase of Raw Materials 17,20,500 By Closing Stock 2,00,000
SH

To Manufacturing Wages & 5,80,500

Expenses
To Gross Profit 21,78,000
45,50,000 45,50,000
To Administrative Charges 2,90,000 By Gross Profit 21,78,000
To SGST Penalty Paid (It is not 7,000 By Dividend From Domestic 15,000
compensatory nature) Companies
To GST Paid 1,10,000 By Winning from Lotteries (Net of 10,500
NI

TDS) (TDS 4,500)

To General Expenses 55,000 By Profit on Sale of Shares 45,000
To Miscellaneous Expenses 1,50,500
To Loss on Sale of Shares 20,000
To Interest to Bank (on Machinery 60,000
term loan)
To Depreciation 2,00,000
CA

To Net Profit 13,56,000

22,48,500 22,48,500
Following are the further information relating to Financial Year 2024-2025:

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1. Administrative Charges include ₹46,000 paid as commission to brother of Assessee. The
Commission amount at the market rate in ₹36,000.
2. The assessee paid ₹33,000 in cash to a Transport Carrier on 26.12.2024. This amount is
included in Manufacturing Expenses. (Assume that the provisions relating to TDS are not
applicable on this payment.)
3. A Sum of ₹4,000 per month was paid as salary to a staff throughout the year and this has not

UM
been recorded in books of account.
4. Bank Term Loan Interest actually paid upto 31.03.2025 was ₹20,000 and the balance was paid
in October 2025.
5. Miscellaneous Expenses include ₹10,000 contributed to Prime Minister's Relief Fund.
6. Loss on Sale of Shares represents shares sold within a period of 6 months from the date of
purchase.
7. Profit on Sale of Shares represents shares held for 2 years & Securities Transaction Tax was
paid on it.
8. Housing Loan Principal repaid during the year was ₹50,000 and it relates to residential property

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occupied by him. Interest on Housing Loan was ₹2,60,000. Housing Loan was taken from
Canara Bank. (Value of house property is ₹45 Lakhs, loan value ₹25 Lakhs and sanction date
31.03.2018). These amounts were not dealt with in the Profit and Loss Account given above.
(Assume this housing loan is eligible for 80EE deduction).
9. Deprecation allowable under the Act to be computed on the basis of following information:
Plant & Machinery (Depreciation Rate @15%) ₹
Opening WDV (as on 01.04.2024) 12,00,000
Additions During the year (Used for more than 180 Days) 2,00,000
AN
Total Additions during the year 4,00,000
Note: Ignore Additional Depreciation u/s 32(1)(iia)
Compute the total income and tax liability of Mr. Sahil for the A.Y. 2025-26 if he has exercised the
option of shifting out of the default tax regime provided under Section 115BAC(1A).

Solution

Computation of Total Income of Mr. Sahil for A.Y. 2025-26

Particulars ₹
SH

Income from House Property

Net Annual Value of self-occupied property -
Less: Deduction u/s 24(b): Interest on housing loan of ₹2,60,000 restricted 2,00,000
to ₹2,00,000
Income from House Property (2,00,000)
Less: Set off from Profits and Gains from Business or Profession 2,00,000
Net Income from House Property (A) -
.
NI

Profits and Gains from Business or Profession

Net Profit as per Profit & Loss A/c 13,56,000
Add: SGST Penalty (Note 1) 7,000
Add: Loss on Sale of Shares (Considered under the head Capital Gains) 20,000
Add: Depreciation (Considered Separately) 2,00,000
Add: Commission paid to brother (Note 2) 10,000
Add: Cash payment to a Transport Carrier (Note 3) -
CA

Add: Interest to bank on term loan (Note 4) 40,000

Add: Contribution to Prime Minister’s Relief Fund (Note 5) 10,000
16,43,000

CA NISHANT KUMAR 15
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Less: Dividend from Domestic Companies (Considered under Income from 15,000
Other Sources)
Less: Winnings from Lotteries (Considered under Income from Other 10,500
Sources)
Less: Profit on Sale of Shares (Considered under Capital Gains) 45,000
Less: Depreciation (Note 6) 2,25,000 2,95,500

UM
Business Income (See Note 7 for Alternate Answer) 13,47,500
Less: Set off of Loss from House Property as per Section 71(3A) 2,00,000
Profits and Gains from Business or Profession (B) 11,47,500
.
Capital Gains
Long term capital gains taxable u/s 112A [Since shares are held for 2 years 45,000
and STT has been paid]
Less: Set off of short term capital loss as per section 70(2) 20,000
Capital Gains (C) 25,000
.

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Income from Other Sources
Dividend from Domestic Companies 15,000
Winning from lotteries (Gross) (₹10,500 + ₹4,500) 15,000
Income from Other Sources (D) 30,000
.
Other Income
Salary paid to staff not recorded in the books (Note 8) 48,000
Other Income (E) 48,000
.
AN
Gross Total Income (A) + (B) + (C) + (D) + (E) 12,50,500
Less: Deductions under Chapter VI-A
Less: u/s 80C: Principal repayment of housing loan 50,000
Less: u/s 80EE: Interest on housing loan of ₹60,000 [₹2,60,000 – ₹2,00,000, 50,000
allowed u/s 24(b)] allowable under section 80EE upto ₹50,000
Less: u/s 80G: Contribution to Prime Minister’s Relief Fund (assuming 10,000 1,10,000
contribution is made otherwise than by way of cash)
Total Income 11,40,500
SH

Computation of Tax Liability

Particulars ₹
Tax on LTCG of ₹25,000 u/s 112A [Exempt upto ₹1.25 lakh] -
Tax on winning from lotteries of ₹15,000 @ 30% 4,500
Tax on unexplained expenditure of ₹48,000 @ 60% 28,800
Tax on balance income of ₹10,52,500 (₹11,40,500 – ₹25,000 – ₹15,000 –
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₹48,000) at slab rates:

On first ₹2,50,000 -
From ₹2,50,001 to ₹5,00,000 (5% × ₹2,50,000) 12,500
From ₹5,00,001 to ₹10,00,000 (20% × ₹5,00,000) 1,00,000
From ₹10,00,001 to ₹10,52,500 (30% × ₹52,500) 15,750 1,28,250
1,61,550
Add: Surcharge @ 25% on Tax on Unexplained Expenditure of ₹28,800 (25% 7,200
× ₹28,800)
CA

1,68,750
Add: Health and Education Cess @ 4% (4% × ₹1,68,750) 6,750
Tax Liability 1,75,500
CA NISHANT KUMAR 16
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Notes:

1. SGST penalty paid is not compensatory in nature and therefore, not allowable.
2. Commission paid to a related person/relative to the extent it is excessive to market rate is
disallowed under section 40A(2).
3. Cash payment to a Transport Carrier is not disallowed under section 40A(3) since the limit for
one time cash payment is ₹35,000 in respect of payment to transport operators.

UM
4. Interest paid to bank after the due date of filing of return under section 139(1) is disallowed
as per section 43B.
5. Contribution to Prime Minister’s Relief Fund is not allowable since the same is not incurred
wholly and exclusively for business purpose.
6. Calculation of Depreciation

Particulars ₹
Opening WDV (as on 01.04.2024) 12,00,000
Add: Additions during the year (used for more than 180 days) 2,00,000

TK
Add: Additions during the year (used for less than 180 days) 2,00,000
WDV for Depreciation 16,00,000

Depreciation @ 7.5% × ₹2,00,000 15,000

Depreciation @ 15% × (₹16,00,000 – ₹2,00,000) 2,10,000
Total Depreciation 2,25,000
7. As per section 44AD, in case of Mr. Sahil, being an eligible assessee, a sum equal to ₹3,48,000
(8% of total turnover i.e., ₹43,50,000) or as the case may be, a sum higher than the aforesaid
AN
sum claimed to have been earned by him would be deemed to be the business income. In this
case, since Mr. Sahil has maintained books of account, he can claim the higher sum actually
earned ₹13,47,500 as his income from business. Please note that if it is assumed that the entire
sales are received by A/c payee cheque or A/c payee draft or ECS or other electronic prescribed
modes on or before due date of filing return of income, the presumptive rate would be 6%.
Therefore, if Mr. Sahil claims his business income as ₹3,48,000 i.e., 8% of total turnover under
section 44AD, his total income and tax liability would undergo a change.
8. Assuming the expenditure is in the nature of unexplained expenditure, the same is deemed to
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be income as per section 69C of Mr. Sahil. No deduction would be allowed in respect of such
expenditure. Alternatively, it is possible to assume that the salary not recorded in the books
of account was an erroneous omission and the assessee has offered satisfactory explanation
about the source of such expenditure. In such a case, it would not be considered as deemed
income and the same would be allowed as deduction while computing business income on the
basis of books of accounts. In such a case, business income, total income and tax liability
(rounded off) would be ₹10,99,500, ₹10,44,500 and ₹1,23,080. (Note 9)
9.
NI

a. Business Income = ₹11,47,500 – ₹48,000 = 10,99,500

b. Total Income:

Particulars ₹
Income from House Property -
Profits and Gains from Business or Profession 10,99,500
Capital Gains 25,000
CA

Income from Other Sources 30,000

Gross Total Income 11,54,500
Less: Deductions under Chapter VI-A 1,10,000

CA NISHANT KUMAR 17
 AR
Total Income 10,44,500
c. Tax Liability:

Computation of Tax Liability

Particulars ₹
Tax on LTCG of ₹25,000 u/s 112A [Exempt upto ₹1.25 lakh] -
Tax on winning from lotteries of ₹15,000 @ 30% 4,500

UM
Tax on balance income of ₹10,04,500 (₹10,44,500 – ₹25,000
– ₹15,000) at slab rates:
On first ₹2,50,000 -
From ₹2,50,001 to ₹5,00,000 (5% × ₹2,50,000) 12,500
From ₹5,00,001 to ₹10,00,000 (20% × ₹5,00,000) 1,00,000
From ₹10,00,001 to ₹10,04,500 (30% × ₹4,500) 1,350 1,13,850
1,18,350
Add: Health and Education Cess @ 4% (4% × ₹1,25,850) 4,734
Tax Liability 1,23,084

TK
Tax Liability (Rounded Off) 1,23,080

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