Taxation - DT Ch 05: Pgbp - Test 1: answer key

Question 1 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. Vikramaditya Tech Labs LLP, a software-engineering and data-hosting concern, follows the mercantile system consistently and closes its accounts on 31 March. It is not engaged in manufacture or power generation. Its statement of profit and loss for Tax Year 2026-27 reports net profit of ₹25,00,000 after charging book depreciation of ₹6,50,000. No tax depreciation adjustment or other tax adjustment has been made. On 1 April 2026, the opening WDV of its general plant and machinery block, carrying a 15% rate, was ₹32,00,000; the opening WDV of its computer block, carrying a 40% rate, was ₹10,00,000. During the year, a new server-rack cooling machine costing ₹18,00,000 was acquired on 1 May and first used on 3 May. A second general machine costing ₹9,00,000 was acquired on 2 December and first used on 12 December. A computer system costing ₹4,00,000 was acquired on 1 January and first used on 4 January. All three additions were installed for business use and paid for through specified banking modes. One old general machine was sold on 1 February for ₹5,00,000, and one old computer was sold on the same date for ₹1,50,000; both belonged to the respective blocks. The block balances remain positive after these disposals. Separately, the LLP completed and the customer accepted data-migration services worth ₹8,00,000 on 29 March 2027. The invoice was raised on 5 April 2027 and the customer paid on 20 May 2027. This revenue was not credited in the statement of profit and loss for Tax Year 2026-27. Assume all assets were owned by the LLP, used wholly for business and eligible for the stated Rule 25 rates. Ignore GST and all other adjustments.

Which classification of the additions is correct for depreciation purposes, having regard to the block-of-assets definition and prescribed rates?

1. All three additions form one block because each is deployed in the same business.
2. The general machines form one block, while the computers form a separate block. (correct answer)
3. The cooling machine and computer system form one block because both are electronic.
4. Each addition remains a separate block until its individual cost is fully recovered.

Answer: B — The general machines form one block, while the computers form a separate block.

Explanation. A block is formed by grouping assets within the same prescribed class for which the same depreciation percentage applies. The two general machines fall in the plant-and-machinery block at 15%, whereas computers fall in a separate block at 40%. Thus, the ₹18,00,000 and ₹9,00,000 machines are grouped together, but the ₹4,00,000 computer system is not. Common business use or electronic operation does not override the rate-based classification required by Section 2(17).

Where it goes wrong. Grouping every asset used in one business together, without checking whether the prescribed depreciation rate is the same.

Authority. Section 2(17) of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 2 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Compute the normal depreciation allowable for Tax Year 2026-27 on the general plant-and-machinery block. Apply the 180-day restriction only to the qualifying addition and account for the sale proceeds from the old machine.

1. ₹8,10,000
2. ₹7,80,000
3. ₹6,75,000
4. ₹7,42,500 (correct answer)

Answer: D — ₹7,42,500

Explanation. Under Sections 33(3) and 33(4), the adjusted block before depreciation is ₹32,00,000 + ₹18,00,000 + ₹9,00,000 − ₹5,00,000 = ₹54,00,000. The ₹9,00,000 machine was used for fewer than 180 days, so it receives half the normal rate. The balance of ₹45,00,000 is depreciated at 15%: ₹6,75,000. The short-use addition receives ₹9,00,000 × 7.5% = ₹67,500. Total depreciation is ₹7,42,500. The rule restricts only that addition, not the opening WDV or M-1.

Where it goes wrong. Applying the half-rate restriction to the entire block, or forgetting to reduce the block by the amount received on sale.

Authority. Section 33(3) and Section 33(4) of the Income-tax Act, 2025; Section 41 of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 3 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Determine the depreciation allowable on the computer block for Tax Year 2026-27. The computer addition was first used for fewer than 180 days, and an existing computer in the same block was sold during the year.

1. ₹5,00,000
2. ₹4,80,000
3. ₹4,20,000 (correct answer)
4. ₹3,80,000

Answer: C — ₹4,20,000

Explanation. Under Sections 33(3) and 33(4), the computer block base is ₹10,00,000 + ₹4,00,000 − ₹1,50,000 = ₹12,50,000. The new computer was used for fewer than 180 days. The balance after excluding that addition is ₹8,50,000, on which depreciation is ₹8,50,000 × 40% = ₹3,40,000. On the new computer, depreciation is restricted to 20% of ₹4,00,000 = ₹80,000. Total allowable depreciation is ₹4,20,000. The sale proceeds reduce the block before the rates are applied under Section 41.

Where it goes wrong. Applying 40% to the full adjusted block despite the new computer being used for less than 180 days.

Authority. Section 33(3) and Section 33(4) of the Income-tax Act, 2025; Section 41 of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 4 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Assuming no other adjustments, compute the LLP's business income for Tax Year 2026-27. The reported profit includes book depreciation but omits the services completed and accepted before year-end, although the invoice and collection occurred later.

1. ₹27,87,500 (correct answer)
2. ₹25,62,500
3. ₹29,37,500
4. ₹34,37,500

Answer: A — ₹27,87,500

Explanation. Start with net profit of ₹25,00,000. Under Section 276(1), the LLP's regularly followed mercantile method applies, so add accrued service revenue of ₹8,00,000 because the services were completed and accepted before year-end. Add back book depreciation of ₹6,50,000 and deduct tax depreciation of ₹7,42,500 on plant and machinery and ₹4,20,000 on computers under Section 33. Business income is ₹25,00,000 + ₹6,50,000 + ₹8,00,000 − ₹7,42,500 − ₹4,20,000 = ₹27,87,500. Billing and collection after year-end do not defer the accrual.

Where it goes wrong. Deferring accrued revenue until the invoice date or cash collection date, and retaining book depreciation as the tax deduction.

Authority. Section 27 of the Income-tax Act, 2025; Section 33 of the Income-tax Act, 2025; Section 276(1) of the Income-tax Act, 2025

Question 5 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. Aryan Steels Ltd manufactures steel fasteners and maintains mercantile books. The opening WDV of its general plant-and-machinery block, eligible for depreciation at 15%, was ₹16,00,000 on 1 April 2026. On 15 May 2026, the company acquired and first put to use a new steel-rolling machine, M-1. The seller's base invoice price was ₹60,00,000; GST of ₹10,80,000 was separately charged and the company claimed input tax credit. Freight of ₹2,00,000 and installation charges of ₹1,00,000 were incurred. Of the installation charges, ₹15,000 was paid in cash to the installer on one day, with the balance transferred through NEFT. Interest on the acquisition loan was ₹1,20,000 up to 15 May, the date of first use, and a further ₹40,000 related to the period after first use. The State Government sanctioned and paid a capital grant of ₹10,00,000 specifically for M-1 on 10 May. On 10 January 2027, Aryan Steels acquired a new press, M-2, for ₹24,00,000 and first used it on 20 January. On 1 July 2026, it also acquired and first used a previously used imported cutting machine for ₹10,00,000; another manufacturer had used it abroad. New office appliances costing ₹3,00,000 were also acquired. M-2, the imported machine and the office appliances were paid for through banking channels. None of the assets were sold during the year. Assume that M-1 and M-2 satisfy the manufacturing-use conditions, that the imported cutting machine had been used by another person outside India, and that all plant other than the office appliances falls in the general 15% block.

Determine the actual cost of machine M-1 for depreciation. Consider the asset-specific grant, input tax credit, installation payment made in cash, and interest incurred before and after first use.

1. ₹54,20,000
2. ₹54,05,000 (correct answer)
3. ₹55,40,000
4. ₹53,90,000

Answer: B — ₹54,05,000

Explanation. Under Section 39, begin with the base price of ₹60,00,000. Add freight ₹2,00,000, installation ₹1,00,000 and pre-use interest ₹1,20,000: subtotal ₹64,20,000. GST of ₹10,80,000 is not added because input tax credit was claimed and allowed. Reduce the subtotal by the asset-linked grant of ₹10,00,000 and the ₹15,000 cash payment exceeding the daily threshold. Actual cost is ₹64,20,000 − ₹10,00,000 − ₹15,000 = ₹54,05,000. Post-use interest is not capitalised in the asset's cost.

Where it goes wrong. Including creditable GST or post-use interest in actual cost, or overlooking the cash-payment exclusion.

Authority. Section 39(1) and Section 39(2) of the Income-tax Act, 2025; Section 39(4), Table Sl. No. 10, of the Income-tax Act, 2025

Question 6 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Compute normal depreciation for Tax Year 2026-27 on Aryan Steels Ltd's 15% general plant-and-machinery block. Include opening WDV and all additions in that block, applying the restricted rate only to M-2.

1. ₹13,20,750
2. ₹12,90,750
3. ₹13,80,750 (correct answer)
4. ₹14,40,750

Answer: C — ₹13,80,750

Explanation. M-1 has actual cost of ₹54,05,000 and was used for at least 180 days. The imported cutter, although previously used abroad, was acquired and used for more than 180 days; its ₹10,00,000 cost therefore enters the full-rate base for normal depreciation. Under Section 33(3), the full-rate base is ₹16,00,000 + ₹54,05,000 + ₹10,00,000 = ₹80,05,000; at 15%, depreciation is ₹12,00,750. M-2 was used for fewer than 180 days, so ₹24,00,000 × 7.5% = ₹1,80,000. Total normal depreciation is ₹13,80,750.

Where it goes wrong. Applying half the rate to M-1 merely because it was acquired during the year, rather than checking its period of use.

Authority. Section 33(3) and Section 33(4) of the Income-tax Act, 2025; Section 41 of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 7 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

What is the aggregate additional depreciation allowable on M-1 and M-2 in Tax Year 2026-27, and what additional depreciation on M-2 remains claimable in the immediately succeeding tax year?

1. ₹10,81,000 now; nil in the succeeding year.
2. ₹13,21,000 now; nil in the succeeding year.
3. ₹12,01,000 now; ₹1,20,000 in the succeeding year.
4. ₹13,21,000 now; ₹2,40,000 in the succeeding year. (correct answer)

Answer: D — ₹13,21,000 now; ₹2,40,000 in the succeeding year.

Explanation. Under Section 33(8), M-1 qualifies for 20% additional depreciation because it is new, installed and used in manufacturing for at least 180 days: ₹54,05,000 × 20% = ₹10,81,000. M-2 was used for fewer than 180 days, so the current-year allowance is 10%: ₹24,00,000 × 10% = ₹2,40,000. Current-year total is ₹13,21,000. Section 33(9) allows the remaining 10% on M-2, another ₹2,40,000, in Tax Year 2027-28. That deferred amount is not part of the current-year total.

Where it goes wrong. Allowing the full 20% on M-2 in the acquisition year, or losing the deferred 10% available in the next year.

Authority. Section 33(8) and Section 33(9) of the Income-tax Act, 2025

Question 8 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Which statement correctly identifies the assets eligible for additional depreciation in Aryan Steels Ltd's facts?

1. Only M-1 and M-2 qualify; prior use abroad and office appliances each disqualify. (correct answer)
2. All four assets qualify because Aryan Steels carries on a manufacturing business.
3. M-1, the imported cutter and office appliances qualify; M-2 fails due to short use.
4. M-2 and the imported cutter qualify; M-1 fails because a grant reduced its cost.

Answer: A — Only M-1 and M-2 qualify; prior use abroad and office appliances each disqualify.

Explanation. Additional depreciation is available for qualifying new plant or machinery used in manufacture. M-1 and M-2 are new production machines, and use for less than 180 days changes the first-year rate rather than destroying eligibility. The imported cutter was previously used outside India, which fails the new-asset condition. Office appliances are expressly excluded. The grant affects M-1's actual cost under Section 39; it does not by itself make the machine ineligible.

Where it goes wrong. Treating the 180-day restriction as an eligibility bar, or assuming that a grant-linked reduction in cost disqualifies a new machine.

Authority. Section 33(8) of the Income-tax Act, 2025

Question 9 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. Smt. Anuradha Sen is an individual proprietor carrying on a unit that manufactures packaged spices. She follows the mercantile system regularly and has chosen the default tax regime under Section 202(1) for Tax Year 2026-27. Her opening WDV in the general plant-and-machinery block, carrying a 15% rate, was ₹20,00,000. On 1 June 2026, she acquired a new spice-mixing line for ₹12,00,000 and put it to use that day. A separate new packing machine costing ₹8,00,000 was acquired on 12 December 2026 and first used on 15 December 2026. Both are installed in the factory and used only for manufacturing. She also purchased a previously used machine from a dealer for ₹5,00,000; it had been used in a factory abroad before her acquisition and was first used by her on 11 June 2026. A new office computer system costing ₹2,00,000 was acquired on 1 November and first used on 2 November 2026. On 15 February 2027, she received a cash production-support grant of ₹4,00,000 from the State Government, not linked to any particular asset and not included in income of an earlier tax year. The grant was credited to a capital reserve in the books. A separate grant of ₹3,00,000 was specifically sanctioned and received for the spice-mixing line; the invoice and grant records identify that machine. On 28 March 2027, she completed a bulk order worth ₹6,00,000 and the buyer accepted the goods. The invoice was raised on 2 April 2027 and collection was made on 10 June 2027. The ₹6,00,000 was omitted from her statement of profit and loss for Tax Year 2026-27. Assume there are no other adjustments and all assets remain in their respective blocks.

Compute normal depreciation on Smt. Anuradha Sen's general plant-and-machinery block for Tax Year 2026-27. The asset-specific grant reduces the spice-mixing line's actual cost, and only the packing machine is subject to the short-use restriction.

1. ₹6,30,000
2. ₹5,70,000 (correct answer)
3. ₹5,40,000
4. ₹6,90,000

Answer: B — ₹5,70,000

Explanation. The spice-mixing line's actual cost is ₹12,00,000 − ₹3,00,000 grant = ₹9,00,000 under Section 39(1)(d). The full-rate base is opening WDV ₹20,00,000 + line ₹9,00,000 + used machine ₹5,00,000 = ₹34,00,000; depreciation at 15% is ₹5,10,000. The packing machine of ₹8,00,000 was used for fewer than 180 days, so depreciation is 7.5%, or ₹60,000. Total normal depreciation is ₹5,70,000. The second-hand machine still qualifies for normal depreciation because Anuradha owns and uses it in business.

Where it goes wrong. Ignoring the specific grant while computing actual cost, or applying the short-use restriction to the existing block and the full-use additions.

Authority. Section 33(3) and Section 33(4) of the Income-tax Act, 2025; Section 39(1)(d) of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 10 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Smt. Anuradha is engaged in manufacture and has acquired two new production machines. She nevertheless continues under the default tax regime in Section 202(1) for Tax Year 2026-27. What additional depreciation can she claim for the year on those machines under that regime?

1. ₹2,60,000, calculated as 20% on the qualifying reduced cost.
2. ₹1,80,000, limited to the machine used for at least 180 days.
3. Nil, since an individual under Section 202(1) cannot claim it. (correct answer)
4. ₹80,000, representing the remaining allowance on the shorter-use machine.

Answer: C — Nil, since an individual under Section 202(1) cannot claim it.

Explanation. Although the spice-mixing line and packing machine satisfy the manufacturing and new-asset tests, the assessee is an individual who has chosen the default regime under Section 202(1). The ICAI material states that additional depreciation is not available to an individual under that regime. Accordingly, the additional depreciation deduction is ₹0 for Tax Year 2026-27. Normal depreciation under Section 33(3) remains separately computable; the restriction concerns the additional allowance.

Where it goes wrong. Applying the manufacturing eligibility conditions without first checking the assessee's chosen tax regime and legal status.

Authority. Section 202(1) and Section 202(4) of the Income-tax Act, 2025; Section 33(8) of the Income-tax Act, 2025

Question 11 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Assume instead that Smt. Anuradha validly exercises the option under Section 202(4) to shift out of the default regime. What additional depreciation can she claim for Tax Year 2026-27 on the two new production machines, and what balance is carried to Tax Year 2027-28?

1. ₹1,80,000 in the current year; no balance in the next year.
2. ₹3,40,000 in the current year; no balance in the next year.
3. ₹2,80,000 in the current year; ₹80,000 in the next year.
4. ₹2,60,000 in the current year; ₹80,000 in the next year. (correct answer)

Answer: D — ₹2,60,000 in the current year; ₹80,000 in the next year.

Explanation. After shifting to the optional regime, the qualifying spice-mixing line has actual cost of ₹12,00,000 − ₹3,00,000 = ₹9,00,000. Its additional depreciation at 20% is ₹1,80,000. The packing machine was used for less than 180 days, so 10% of ₹8,00,000, or ₹80,000, is allowable now. Current-year total is ₹2,60,000. The remaining 10% on the packing machine, ₹80,000, is allowed in Tax Year 2027-28. The used machine and office computer do not qualify.

Where it goes wrong. Calculating additional depreciation on the gross cost before grant reduction, or claiming the entire 20% on the packing machine in year one.

Authority. Section 202(4) of the Income-tax Act, 2025; Section 33(8) and Section 33(9) of the Income-tax Act, 2025

Question 12 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Which treatment correctly reflects both grants and the ₹6,00,000 bulk order while computing Smt. Anuradha's business income for Tax Year 2026-27 under her regularly followed mercantile system?

1. Reduce the line's cost by ₹3 lakh; include the ₹4 lakh grant and ₹6 lakh accrued order revenue this year. (correct answer)
2. Include the ₹4 lakh and ₹3 lakh grants as taxable income on receipt, and defer the ₹6 lakh order revenue until collection.
3. Deduct both grants from machinery cost, then include the ₹6 lakh order revenue only when the buyer pays in June 2027.
4. Tax the asset grant as business income, but defer the production grant and the ₹6 lakh order revenue until they are collected.

Answer: A — Reduce the line's cost by ₹3 lakh; include the ₹4 lakh grant and ₹6 lakh accrued order revenue this year.

Explanation. The ₹3,00,000 grant is specifically related to the spice-mixing line, so it reduces that asset's actual cost under Section 39(1)(d); it is not taxed again as assistance income. The separate ₹4,00,000 production grant is not asset-linked and is taxable in the year received under Section 278(3). The ₹6,00,000 order was completed and accepted before 31 March, so it accrued under the mercantile method despite later invoicing and collection. The three adjustments are therefore cost reduction ₹3,00,000, grant income ₹4,00,000 and accrued sales ₹6,00,000.

Where it goes wrong. Treating every government grant as revenue income, or postponing mercantile sales revenue until the invoice or payment date.

Authority. Section 2(49)(w) and Section 278(3) of the Income-tax Act, 2025; Section 39(1)(d) of the Income-tax Act, 2025; Section 276(1) of the Income-tax Act, 2025

Question 13 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A professional consultancy has maintained its books under the cash system regularly for several years. For Tax Year 2026-27, it proposes to recognise selected service receipts on billing while deducting related expenses only when paid, because that produces a lower result. No special statutory timing rule applies to the items concerned. Which approach is consistent with Section 276(1) when computing income under the business or profession head? It has not notified or adopted a different method for any class of income, and the transactions are ordinary service receipts and operating expenses. The issue is the permissible basis for the head, not whether one method gives a lower amount in this particular year.

1. Use cash for receipts and mercantile for expenses whenever the result is lower.
2. Apply the regularly employed cash or mercantile system consistently to the computation. (correct answer)
3. Use mercantile for receipts and cash for expenses if the books disclose the choice.
4. Change methods for each transaction, provided the same method is used next year.

Answer: B — Apply the regularly employed cash or mercantile system consistently to the computation.

Explanation. Section 276(1) permits computation under either the cash system or the mercantile system regularly employed by the assessee. The consultancy has regularly followed cash accounting, so it cannot selectively move receipts to mercantile recognition while retaining cash recognition for expenses merely to lower taxable income. The starting point is one regularly employed permitted method, subject to specific statutory timing rules. No amount is shifted solely by choosing a favourable method for each transaction.

Where it goes wrong. Assuming that the assessee can choose cash or mercantile separately for each receipt and expense within the same computation.

Authority. Section 276(1) of the Income-tax Act, 2025

Question 14 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A State Government gives a manufacturer a ₹7,00,000 grant specifically for a production machine. The grant is received in March 2027 and is taken into account in determining that machine's actual cost under Section 39(1)(d). No part is separately credited as revenue income. How should the grant be treated when considering the assistance-income rule for Tax Year 2026-27? The machine continues to be used in manufacturing, and the assessee does not claim any separate revenue deduction for the same grant. The issue is whether the same amount must also be recognised as assistance income on receipt.

1. Include ₹7,00,000 as business income and also reduce the machine's actual cost.
2. Defer recognition until the machine is sold and include its sale proceeds then.
3. Do not include it again as income; retain the Section 39 cost reduction. (correct answer)
4. Tax half as income and add the remaining half to the machine's WDV.

Answer: C — Do not include it again as income; retain the Section 39 cost reduction.

Explanation. Section 2(49)(w) excludes subsidy or grant already taken into account in determining an asset's actual cost under Section 39(1)(d) and (3). The machine's cost is reduced by ₹7,00,000, but the same assistance is not separately brought to tax again under Section 278(3). Thus, the cost adjustment is ₹7,00,000 and the separate revenue inclusion is ₹0. This avoids double counting the same government support in the business-income computation.

Where it goes wrong. Applying the receipt-year rule to an asset-linked grant without first checking the statutory exclusion for amounts used to determine actual cost.

Authority. Section 2(49)(w) of the Income-tax Act, 2025; Section 39(1)(d) and Section 39(3) of the Income-tax Act, 2025; Section 278(3) of the Income-tax Act, 2025

Question 15 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturing company buys a new qualifying machine for ₹20,00,000 and first puts it to use for a period of 180 days during Tax Year 2026-27. It is otherwise entitled to normal depreciation at 15% and additional depreciation at 20%, and the machine is not used in office premises or for transport. Assume the company meets all conditions for the additional allowance and no grant reduces the cost. What aggregate deduction is allowable in the year of acquisition, applying the statutory 'less than 180 days' restriction?

1. ₹3,50,000
2. ₹4,00,000
3. ₹6,00,000
4. ₹7,00,000 (correct answer)

Answer: D — ₹7,00,000

Explanation. Section 33(4) restricts depreciation only where the asset is put to use for fewer than 180 days. A period of 180 days does not meet that condition. Normal depreciation is ₹20,00,000 × 15% = ₹3,00,000. Additional depreciation is ₹20,00,000 × 20% = ₹4,00,000 under Section 33(8). The aggregate deduction is ₹3,00,000 + ₹4,00,000 = ₹7,00,000. Applying half of each rate would incorrectly treat a 180-day period as fewer than 180 days.

Where it goes wrong. Reading the restriction as applying to 180 days or less rather than strictly fewer than 180 days.

Authority. Section 33(4), Section 33(8) and Section 33(9) of the Income-tax Act, 2025

Question 16 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A firm acquires a new general-rate machine for ₹8,00,000 on 28 March 2027 and completes installation on 30 March. Quality testing delays its first business use until 4 April 2027. The firm already has an operating plant-and-machinery block. What is the treatment of this new machine for depreciation in Tax Year 2026-27? The machine remained under testing and was neither operational nor kept available as standby equipment for the business before 31 March. The question concerns depreciation attributable to this new addition, not depreciation on the pre-existing block.

1. No depreciation is allowed on this addition for this year; its cost is carried into the relevant block. (correct answer)
2. Half-rate depreciation is allowed because installation was completed before year-end, even though actual business use was later.
3. Full normal depreciation is allowed because ownership and installation were both completed before the close of the tax year.
4. A proportionate depreciation deduction is allowed from installation date through 31 March, based on days remaining.

Answer: A — No depreciation is allowed on this addition for this year; its cost is carried into the relevant block.

Explanation. Depreciation requires the asset to be used for business during the tax year. Installation or readiness alone does not satisfy the actual-use condition on these facts. Since the machine is first used only on 4 April 2027, no depreciation is attributable to it for Tax Year 2026-27. Its ₹8,00,000 cost is carried into the relevant block, and depreciation on that addition can arise in the later year when the use condition is met.

Where it goes wrong. Treating installation or readiness for use as sufficient even though the stated facts establish that business use began only after year-end.

Authority. Section 33(1) and Section 33(3) of the Income-tax Act, 2025; Section 41 of the Income-tax Act, 2025

Question 17 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A company owns several depreciable assets used in its business. Some are acquired in the current tax year and others in earlier years. The assets include general plant, computers and office furniture, each attracting a different percentage under Rule 25. Which statement most accurately describes a block of assets for the depreciation system? Each group has to be identified by the rate and class in the depreciation schedule, not by the ledger caption used by the company. The year in which an item was purchased does not alter the rate-based grouping rule.

1. All assets used by one assessee constitute one block, irrespective of the rates prescribed.
2. A block groups assets of the prescribed class for which the same depreciation rate applies. (correct answer)
3. Every asset is separately depreciated on its purchase price until it is sold or discarded.
4. A block consists only of assets acquired in one tax year and put to use together.

Answer: B — A block groups assets of the prescribed class for which the same depreciation rate applies.

Explanation. Section 2(17) defines a block by reference to a class of tangible or intangible assets for which the same depreciation percentage is prescribed. Thus, general plant at 15%, computers at 40% and furniture at 10% fall in separate blocks. The year of acquisition and the identity of the owner do not create the block. Once grouped, depreciation is generally computed on the WDV of the block, subject to relevant additions, disposals and use restrictions.

Where it goes wrong. Grouping assets by common ownership or acquisition date instead of by the prescribed class and depreciation rate.

Authority. Section 2(17) and Section 33(3) of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026

Question 18 · 2 marks · Taxation - DT Ch 05: Pgbp · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A business purchases a machine for a base price of ₹25,00,000 and pays GST of ₹4,50,000. It claims and is allowed input tax credit of the full GST amount under the relevant law. Freight and erection charges are ₹1,00,000. The company records the GST separately as recoverable input tax and has received credit for the full eligible amount. No subsidy, grant or non-banking payment is involved. What amount is included in actual cost before considering any depreciation?

1. ₹30,50,000
2. ₹25,00,000
3. ₹26,00,000 (correct answer)
4. ₹29,50,000

Answer: C — ₹26,00,000

Explanation. Under Section 39(1)(b), actual cost includes the base price of ₹25,00,000 and freight and erection charges of ₹1,00,000. GST of ₹4,50,000 is excluded because input tax credit has been claimed and allowed. The calculation is ₹25,00,000 + ₹1,00,000 + ₹0 GST included = ₹26,00,000. The statutory exclusion applies to the portion of GST for which credit has been claimed and allowed. If the credit condition were not met, the cost analysis could differ.

Where it goes wrong. Adding GST to the asset cost even though input tax credit for the full amount has been claimed and allowed.

Authority. Section 39(1)(b) of the Income-tax Act, 2025

Question 19 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturer borrows funds to acquire a machine for its production line. Interest of ₹3,00,000 relates to the period from borrowing until the machine is first put to use; a further ₹1,00,000 relates to the period after first use. Both amounts are debited to the statement of profit and loss. What is the correct treatment while computing actual cost and business income? The borrowing is specifically traceable to the purchase, and there are no other charges or subsidy adjustments to consider. The question asks only how the two periods of interest are treated for actual cost and business-income purposes.

1. Both amounts are capitalised because the loan financed a fixed asset.
2. Both amounts are revenue deductions because interest is never part of actual cost.
3. Capitalise only the post-use interest and deduct the pre-use interest as revenue.
4. Capitalise ₹3,00,000 pre-use interest and consider ₹1,00,000 post-use interest as a revenue deduction. (correct answer)

Answer: D — Capitalise ₹3,00,000 pre-use interest and consider ₹1,00,000 post-use interest as a revenue deduction.

Explanation. Interest on capital borrowed to acquire an asset is not deducted for the period beginning with borrowing and ending when the asset is first put to use. That ₹3,00,000 is capitalised as part of actual cost. Interest for the later period is not included in actual cost and is deductible as business expenditure, subject to the normal conditions. The adjustment is therefore: asset cost increases by ₹3,00,000; the post-use ₹1,00,000 remains a revenue deduction rather than capital cost.

Where it goes wrong. Capitalising all interest over the full loan term, or deducting the pre-use period despite the statutory cut-off at first use.

Authority. Section 32(b)(i) of the Income-tax Act, 2025; Section 39(4), Table Sl. No. 10, of the Income-tax Act, 2025

Question 20 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A buyer acquires a machine and makes two cash payments of ₹6,000 and ₹5,000 to the same installer on the same day towards its installation. The remaining installation consideration is paid through NEFT. The two cash payments are separate vouchers, but neither is made through a specified banking or online mode. How much of the two cash payments is excluded from actual cost? Both payments are made to the same person in connection with acquiring the same asset; ignore any other additions. The remaining installation consideration is paid through NEFT and is not part of the cash-payment issue.

1. ₹11,000, because the aggregate paid to the installer in the day exceeds the threshold. (correct answer)
2. ₹6,000, because only the larger individual payment is considered for the threshold.
3. ₹5,000, because the smaller individual payment is disregarded when paid separately.
4. Nil, because each cash voucher is individually below the prescribed threshold.

Answer: A — ₹11,000, because the aggregate paid to the installer in the day exceeds the threshold.

Explanation. The provision tests the payment or aggregate of payments to a person in a day. Here, ₹6,000 + ₹5,000 = ₹11,000 was paid in cash to the same installer on one day. Since the aggregate exceeds ₹10,000 and the mode is not a specified banking or online mode, the ₹11,000 is excluded from actual cost. Splitting the consideration into two vouchers does not change the aggregate-day test.

Where it goes wrong. Testing each voucher separately instead of aggregating payments made to the same person on the same day.

Authority. Section 39(2) of the Income-tax Act, 2025; Section 66(32) of the Income-tax Act, 2025; Rule 48 of the Income-tax Rules, 2026

Question 21 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A manufacturer receives a capital assistance grant of ₹18,00,000 for a project involving several depreciable assets. The grant is not directly relatable to any single asset. The total cost of all assets covered by the project is ₹1,20,00,000, and the particular machine under review costs ₹30,00,000. What amount of grant is apportioned to reduce the actual cost of this machine? Assume the assistance is from a State authority and none of it was previously taxed as income. The grant is intended for all assets covered by the project, so the statutory apportionment method must be applied to the machine under review.

1. ₹3,00,000
2. ₹4,50,000 (correct answer)
3. ₹5,40,000
4. ₹6,00,000

Answer: B — ₹4,50,000

Explanation. For a grant not directly relatable to one asset, the reduction is A × (B/C). Here A is ₹18,00,000, B is the machine cost of ₹30,00,000 and C is the aggregate cost of ₹1,20,00,000. The proportion is 30,00,000 ÷ 1,20,00,000 = 25%. The amount allocated is ₹18,00,000 × 25% = ₹4,50,000. The machine's actual cost is reduced by this allocated share, not by the entire grant.

Where it goes wrong. Deducting the whole grant from one machine or allocating it equally across assets without applying the statutory cost proportion.

Authority. Section 39(1)(d) and Section 39(3) of the Income-tax Act, 2025

Question 22 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A company is engaged in manufacturing articles and considers additional depreciation on four acquisitions. Which acquisition meets the new-asset and use conditions, assuming all other statutory conditions are satisfied? The company has no other eligible acquisitions and all four assets are owned and used by it. It claims normal depreciation on the relevant blocks. The question concerns only the additional allowance under Section 33(8), and each item's purpose and prior use are as stated. Which one qualifies?

1. A second-hand production machine previously operated by another manufacturer abroad.
2. A new passenger vehicle acquired for transporting finished goods between depots.
3. A new production-line machine, never previously used, installed on the factory floor. (correct answer)
4. A new photocopier and air-conditioning unit installed in the company's head office.

Answer: C — A new production-line machine, never previously used, installed on the factory floor.

Explanation. Additional depreciation is intended for new plant or machinery acquired and installed by an assessee engaged in manufacture or production, subject to the statutory exclusions. The factory production-line machine is new, has not been used by another person and is installed for manufacturing. The second-hand machine fails the prior-use condition; the passenger vehicle is a road transport vehicle; and the photocopier and air-conditioning unit are office appliances or installed in office premises. Only option (c) qualifies on the stated assumptions.

Where it goes wrong. Assuming every asset purchased by a manufacturer qualifies, without applying the exclusions for prior use, office use and road transport vehicles.

Authority. Section 33(8) of the Income-tax Act, 2025

Question 23 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A qualifying manufacturing company acquires and installs new plant costing ₹16,00,000 on 1 February 2027 and first puts it to use on 5 February 2027. The asset is used for fewer than 180 days in Tax Year 2026-27. It qualifies for additional depreciation and is not subject to any other restriction. What additional depreciation is allowable in the immediately succeeding tax year? Assume the company's books and tax computation recognise the plant as a qualifying addition and there is no transfer during the following year. The issue is the unclaimed portion of the additional allowance, not normal depreciation or the computation of the block's WDV.

1. Nil, because any unclaimed balance expires at the close of the acquisition tax year.
2. ₹3,20,000, representing the whole 20% amount postponed until the immediately succeeding tax year.
3. ₹80,000, representing only one half of the remaining amount due in that next year.
4. ₹1,60,000, representing the remaining 10% of actual cost allowed in the next tax year. (correct answer)

Answer: D — ₹1,60,000, representing the remaining 10% of actual cost allowed in the next tax year.

Explanation. For use of fewer than 180 days, additional depreciation in the acquisition year is 10% of actual cost: ₹16,00,000 × 10% = ₹1,60,000. The balance 10% of actual cost is allowed in the immediately succeeding tax year. Therefore, the next-year deduction is ₹16,00,000 × 10% = ₹1,60,000. The balance is not lost and is not postponed as a full 20% allowance, because half was already claimed in the acquisition year.

Where it goes wrong. Treating the first-year 10% allowance as the entire additional depreciation entitlement instead of carrying the remaining 10% into the next year.

Authority. Section 33(8) and Section 33(9) of the Income-tax Act, 2025

Question 24 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A professional purchased a machine for personal use in an earlier year for ₹12,00,000. In Tax Year 2026-27, the machine is first brought into the professional practice when its market value is ₹5,00,000. It is a general plant-and-machinery asset, not a building, and is used wholly for the profession. Assuming the applicable depreciation rate is 15%, what depreciation is allowable for the year? Assume no depreciation was allowable during the earlier personal-use period and that no other asset is included in the block calculation. The question concerns the machine's actual cost when it first enters professional use, rather than a fresh purchase at current market value.

1. ₹1,80,000, calculated on the original acquisition cost of ₹12,00,000 paid by the professional. (correct answer)
2. ₹75,000, calculated on the ₹5,00,000 market value when business use begins.
3. Nil, because this machine cannot be included in the professional asset block.
4. ₹1,05,000, calculated on the difference between original cost and market value.

Answer: A — ₹1,80,000, calculated on the original acquisition cost of ₹12,00,000 paid by the professional.

Explanation. For a plant-and-machinery asset originally acquired for personal use and later brought into business, the actual cost remains the amount originally paid on the stated facts. The special notional-depreciation adjustment discussed for a building does not apply to this machine. Actual cost is therefore ₹12,00,000, and normal depreciation is ₹12,00,000 × 15% = ₹1,80,000. The market value of ₹5,00,000 on the date of business use is not substituted.

Where it goes wrong. Using the current market value as actual cost or extending the special building rule to other depreciable assets.

Authority. Section 39(4) of the Income-tax Act, 2025; Section 33(1) and Section 33(3) of the Income-tax Act, 2025

Question 25 · 2 marks · Taxation - DT Ch 05: Pgbp · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

The opening WDV of a general plant-and-machinery block carrying depreciation at 15% is ₹20,00,000. During Tax Year 2026-27, the assessee acquires a qualifying machine for ₹8,00,000 and uses it for 200 days. An old asset from the same block is sold for ₹6,00,000. The block continues to exist, and no other addition or disposal occurs. The machine is not an office appliance, its actual cost is ₹8,00,000, and no grant or creditable GST affects that cost. Compute normal depreciation and the closing WDV after depreciation.

1. ₹3,00,000 depreciation; closing WDV ₹19,00,000.
2. ₹3,45,000 depreciation; closing WDV ₹18,55,000.
3. ₹2,80,000 depreciation; closing WDV ₹19,20,000.
4. ₹3,30,000 depreciation; closing WDV ₹18,70,000. (correct answer)

Answer: D — ₹3,30,000 depreciation; closing WDV ₹18,70,000.

Explanation. Under Sections 33(3) and 41, the machine was used for 200 days, so the full 15% rate applies. The adjusted block before depreciation is opening WDV ₹20,00,000 + addition ₹8,00,000 − sale proceeds ₹6,00,000 = ₹22,00,000. Normal depreciation is ₹22,00,000 × 15% = ₹3,30,000. Closing WDV is ₹22,00,000 − ₹3,30,000 = ₹18,70,000. Because the block survives, the isolated sale is not separately computed here. The 200-day use test is therefore satisfied in full.

Where it goes wrong. Computing depreciation separately on each asset or omitting the sale proceeds from the block calculation.

Authority. Section 33(3) and Section 33(4) of the Income-tax Act, 2025; Section 41 of the Income-tax Act, 2025; Rule 25(1) of the Income-tax Rules, 2026