Taxation - DT Ch 05: Pgbp - Test 2: answer key

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

Scenario. Smt. Anuradha Sen, a sole proprietor carrying on an architectural consultancy, maintains mercantile books and computes income under the head Profits and Gains of Business or Profession. She owns a residential building in which 70% of the floor area is used exclusively for her consultancy and the remaining 30% is occupied by her family. During Tax Year 2026-27, she paid municipal taxes of ₹1,10,000 out of the total assessment of ₹1,40,000. She also paid an annual fire-insurance premium of ₹60,000 for the building. Current repairs to the building amounted to ₹90,000. Separately, she occupies a project studio under a lease agreement for which annual rent of ₹9,60,000 was paid. Under the agreement, she is responsible for repairs to the studio. During the year, she incurred ₹1,20,000 on routine repairs to that studio and ₹2,40,000 on installing permanent glass partitions that increased its usable floor area. The consultancy also owns machinery and equipment used entirely for professional work. Routine repairs and maintenance of this machinery amounted to ₹2,40,000, and a machinery-insurance premium of ₹90,000 was paid. During the same year, an obsolete printing press was replaced with a more efficient new press at a cost of ₹3,60,000. The new press increased production capacity and is expected to be used for several years. All insurance premiums and repair bills were paid during the year. There are no outstanding disputes concerning the expenditure. Assume the stated repairs are revenue in nature unless specifically identified as capital expenditure, and ignore depreciation and all other deductions.

Determine the deduction allowable for annual rent of the project studio and municipal taxes on the mixed-use residential building under the provisions governing rent, rates and taxes. Consider the amount actually paid and the proportion of the residential building used for professional purposes.

1. ₹10,58,000, including the business proportion of the full municipal assessment.
2. ₹10,37,000, comprising full studio rent and business-related taxes paid. (correct answer)
3. ₹7,49,000, after restricting both rent and municipal taxes to business use.
4. ₹10,70,000, including the full municipal taxes paid without apportionment.

Answer: B — ₹10,37,000, comprising full studio rent and business-related taxes paid.

Explanation. Rent of the project studio is fully deductible because it is occupied exclusively for business: ₹9,60,000. Municipal taxes are deductible only to the extent paid and attributable to business use. Thus, ₹1,10,000 × 70% = ₹77,000. The unpaid ₹30,000 and the remaining ₹42,000 attributable to personal occupation are excluded. Total deduction = ₹9,60,000 + ₹77,000 = ₹10,37,000 under Section 30 and its corresponding study-material provision.

Where it goes wrong. Allowing the full municipal assessment instead of the amount paid, or applying the personal-use restriction to the separate studio rent.

Authority. Section 30 of the Income-tax Act, 1961; Section 28 of the Income-tax Act, 2025

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

Compute the deduction attributable to current repairs and building insurance relating to Smt. Anuradha's mixed-use residential building. The business occupies 70% of the building, while the other 30% is used by her family. Both payments were made during the tax year, and the repair expenditure is revenue in nature.

1. ₹1,50,000, allowing the entire repair and insurance expenditure.
2. ₹1,32,000, allowing 80% of the expenditure.
3. ₹1,68,000, allowing 70% of the assessed expenditure.
4. ₹1,05,000, allowing only the business-related proportion. (correct answer)

Answer: D — ₹1,05,000, allowing only the business-related proportion.

Explanation. Only the proportion attributable to professional use is allowable. Current repairs: ₹90,000 × 70% = ₹63,000. Building insurance: ₹60,000 × 70% = ₹42,000. Aggregate deduction = ₹63,000 + ₹42,000 = ₹1,05,000. The remaining 30% relates to personal occupation and is not deductible. Section 30 permits expenditure on repairs and insurance of business premises, subject to proportionate restriction where the building is not used wholly for business.

Where it goes wrong. Claiming the entire expenditure merely because the building is partly used for professional purposes.

Authority. Section 30 of the Income-tax Act, 1961; Section 28(2) of the Income-tax Act, 2025

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

What is the deduction allowable for machinery repairs and machinery insurance during Tax Year 2026-27? The new printing press replaced an obsolete machine and increased production capacity. The existing machinery was used exclusively in the consultancy's professional activities.

1. ₹3,30,000, comprising current repairs and machinery-insurance premium. (correct answer)
2. ₹6,90,000, including the expenditure on the replacement printing press.
3. ₹2,40,000, comprising machinery repairs without insurance premium.
4. ₹90,000, comprising only the premium paid for machinery insurance.

Answer: A — ₹3,30,000, comprising current repairs and machinery-insurance premium.

Explanation. Section 31 allows current repairs and insurance against damage or destruction of machinery, plant and furniture. Routine repairs of ₹2,40,000 and the insurance premium of ₹90,000 are allowable. Their aggregate is ₹2,40,000 + ₹90,000 = ₹3,30,000. The replacement press costing ₹3,60,000 is a capital acquisition and increases productive capacity; it is not current repairs. Its tax treatment must be considered separately under the depreciation provisions.

Where it goes wrong. Treating the replacement of an obsolete machine with an improved production machine as routine repairs.

Authority. Section 31 of the Income-tax Act, 1961; Section 28 of the Income-tax Act, 2025

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

The lease agreement requires Smt. Anuradha to bear the cost of repairs to the project studio. During the year, she paid ₹1,20,000 for routine repairs and ₹2,40,000 for permanent glass partitions that increased usable floor area. What amount is deductible under the provisions relating to repairs of rented premises?

1. ₹3,60,000, as the entire expenditure is borne by the tenant.
2. ₹2,40,000, as the partitions are part of the leased premises.
3. ₹1,20,000, since only the routine repairs qualify as revenue expenditure. (correct answer)
4. Nil, because repairs to premises occupied as tenant are disallowed.

Answer: C — ₹1,20,000, since only the routine repairs qualify as revenue expenditure.

Explanation. Where premises are occupied as a tenant, repairs are deductible when the tenant has undertaken to bear their cost. Routine repairs of ₹1,20,000 satisfy this condition. The permanent glass partitions costing ₹2,40,000 increase usable floor area and constitute capital expenditure rather than current repairs. Accordingly, the allowable deduction is ₹1,20,000. The contractual obligation establishes responsibility for repairs but does not convert capital expenditure into revenue expenditure.

Where it goes wrong. Assuming that every amount spent by a tenant under a repair clause qualifies as revenue expenditure.

Authority. Section 30(a)(ii) of the Income-tax Act, 1961; Section 28 of the Income-tax Act, 2025

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

Scenario. Aryan Steels Ltd manufactures specialised steel components and maintains a research and development facility connected with its existing manufacturing operations. The company has opted for the default tax regime under Section 202(1) for Tax Year 2026-27. During the year, it incurred ₹11,50,000 on salaries of research personnel and ₹6,00,000 on research materials consumed in experiments relating directly to its manufacturing process. It also purchased laboratory equipment costing ₹9,00,000, which is used exclusively for in-house scientific research. A separate parcel of land costing ₹12,00,000 was acquired for constructing an expanded research facility. In addition to these in-house activities, the company contributed ₹5,00,000 to a notified university carrying on approved scientific research and ₹3,00,000 to an approved company engaged in scientific research. It further donated ₹2,00,000 to an engineering college that does not have the prescribed approval for scientific research. All contributions were paid during the tax year. The company maintains separate records for in-house expenditure and contributions to outside institutions. Assume all research expenditure is genuinely related to the company's manufacturing business, all stated in-house expenditure satisfies the statutory conditions, and the laboratory equipment has not been used for any other purpose. The company is considering whether shifting out of the default tax regime would change the treatment of contributions to the approved institutions. Ignore depreciation, GST and other deductions.

Compute the deduction allowable for Aryan Steels Ltd's in-house scientific research expenditure under its chosen default tax regime. Include revenue expenditure and eligible capital expenditure, but consider the separate treatment of the land acquired for the research facility.

1. ₹17,50,000, comprising only the revenue expenditure on research.
2. ₹26,50,000, comprising revenue expenditure and eligible laboratory equipment. (correct answer)
3. ₹38,50,000, including land acquired for the research facility.
4. ₹14,50,000, excluding capital equipment from scientific research expenditure.

Answer: B — ₹26,50,000, comprising revenue expenditure and eligible laboratory equipment.

Explanation. In-house scientific research related to business qualifies for deduction of revenue and eligible capital expenditure, excluding acquisition of land. Revenue expenditure = salaries ₹11,50,000 + materials ₹6,00,000 = ₹17,50,000. Eligible capital expenditure = ₹9,00,000 for laboratory equipment. Land costing ₹12,00,000 is excluded. Total deduction = ₹17,50,000 + ₹9,00,000 = ₹26,50,000. The supplied ICAI material permits this in-house deduction even under the default tax regime.

Where it goes wrong. Including land in scientific research capital expenditure or assuming that the default regime disallows every scientific research deduction.

Authority. Section 35(1)(i) and Section 35(1)(iv) of the Income-tax Act, 1961; Section 45(1) of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

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

What deduction can Aryan Steels Ltd claim under the scientific research provisions for its contributions to the notified university and approved scientific research company while continuing under the default tax regime? Both institutions satisfy the prescribed approval conditions.

1. Nil, because contributions to outside institutions are not deductible under the default regime. (correct answer)
2. ₹8,00,000, representing the contributions to both approved institutions.
3. ₹10,00,000, including the donation to the unapproved engineering college.
4. ₹5,00,000, allowing only the contribution to the notified university.

Answer: A — Nil, because contributions to outside institutions are not deductible under the default regime.

Explanation. The contributions are ₹5,00,000 to the notified university and ₹3,00,000 to the approved scientific research company. Their aggregate is ₹8,00,000. However, the supplied ICAI material specifically treats contributions to outside institutions as not allowable under the default tax regime. Accordingly, the deduction is nil. The fact that both institutions are approved does not override the restriction applicable to the selected regime.

Where it goes wrong. Confusing institutional approval with eligibility for deduction under the default tax regime.

Authority. Section 35(1)(ii), Section 35(1)(iia) and Section 35(2AA) of the Income-tax Act, 1961; Section 45(3) of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

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

Assume Aryan Steels Ltd validly exercises the option to shift out of the default tax regime. What deduction is allowable for its contributions to the approved university and approved scientific research company? The additional contribution to the engineering college without prescribed approval continues to be ₹2,00,000.

1. ₹10,00,000, including the donation to the unapproved college.
2. ₹5,00,000, being the contribution to the university only.
3. ₹3,00,000, being the contribution to the approved company only.
4. ₹8,00,000, comprising the contributions to both approved institutions. (correct answer)

Answer: D — ₹8,00,000, comprising the contributions to both approved institutions.

Explanation. Under the optional regime, eligible contributions to approved research institutions qualify for deduction. The notified university contribution is ₹5,00,000 and the approved company's contribution is ₹3,00,000. Aggregate eligible contribution = ₹5,00,000 + ₹3,00,000 = ₹8,00,000. The ₹2,00,000 paid to the college without prescribed approval is excluded. Accordingly, total allowable deduction is ₹8,00,000.

Where it goes wrong. Including a contribution to an institution without prescribed approval merely because the payment supports educational or research activity.

Authority. Section 35(1)(ii), Section 35(1)(iia) and Section 35(2AA) of the Income-tax Act, 1961; Section 45(3) of the Income-tax Act, 2025; Section 202(4) of the Income-tax Act, 2025

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

Aryan Steels Ltd claims the scientific research capital expenditure deduction for its laboratory equipment costing ₹9,00,000. After completion of the research project, the equipment continues to be used in the company's manufacturing operations. What additional depreciation or normal depreciation can be claimed on this equipment in subsequent years?

1. Normal depreciation only, because the equipment has entered commercial operations.
2. Additional depreciation only, because the equipment was used for research.
3. No depreciation, because the capital expenditure has already been allowed as a deduction. (correct answer)
4. Normal and additional depreciation, because the equipment is used in manufacturing.

Answer: C — No depreciation, because the capital expenditure has already been allowed as a deduction.

Explanation. The laboratory equipment costing ₹9,00,000 has already qualified for deduction as capital expenditure on scientific research. Section 45(6) specifically prevents depreciation on expenditure represented by an asset where the scientific research deduction has been allowed. Consequently, the depreciation base attributable to this equipment is nil in subsequent years. Its later deployment in manufacturing does not create another deduction for the same capital cost.

Where it goes wrong. Claiming depreciation again merely because the asset is subsequently deployed in the ordinary manufacturing business.

Authority. Section 35(2)(iv) of the Income-tax Act, 1961; Section 45(6) of the Income-tax Act, 2025

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

Scenario. Nandini Real Estates Pvt Ltd commenced operations of a new commercial analytics unit on 1 October 2026. The company incurred various preliminary expenses between February 2026 and September 2026 exclusively for establishing the new unit. These included ₹4,00,000 for a feasibility report, ₹3,00,000 for a project report, ₹2,00,000 for a market survey, ₹3,50,000 for engineering services, ₹1,50,000 in legal charges for drafting agreements relating to the establishment of the unit, ₹2,50,000 for drafting and printing its memorandum and articles of association and company registration, and ₹1,50,000 in underwriting commission and prospectus expenses. The cost of the project is ₹2.40 crore, while capital employed in the business at the relevant date is ₹3.20 crore. The company also incurred ₹5,00,000 on machinery installation and ₹2,00,000 on employee induction training. During the same tax year, a customer owing ₹12,00,000, which had been recognised as sales revenue in an earlier year, became insolvent. The company actually wrote off ₹7,00,000 in its books as irrecoverable. It also created a general provision of ₹2,00,000 against other doubtful customer balances without writing off any individual debt. Separately, the company spent ₹4,00,000 on a school-building project under its corporate social responsibility programme, paid an environmental-law penalty of ₹2,00,000, and paid ₹50,000 to an inspector to secure a permit through an unlawful arrangement. It also paid ₹1,20,000 as liquidated damages to a customer for delayed delivery under a lawful commercial contract. Assume all payments and write-offs occurred during Tax Year 2026-27.

Compute the annual amortisation deduction allowable to Nandini Real Estates Pvt Ltd for preliminary expenses in Tax Year 2026-27. The company may choose between 5% of project cost and 5% of capital employed, subject to the aggregate qualifying expenditure incurred.

1. ₹3,20,000, based on the higher capital-employed ceiling and five-year amortisation. (correct answer)
2. ₹2,40,000, based on 5% of project cost divided over five years.
3. ₹3,60,000, based on the entire qualifying expenditure divided over five years.
4. ₹4,00,000, based on 5% of capital employed without applying the expenditure limit.

Answer: A — ₹3,20,000, based on the higher capital-employed ceiling and five-year amortisation.

Explanation. Qualifying expenditure totals ₹18,00,000. The project-cost ceiling is ₹2.40 crore × 5% = ₹12,00,000. The capital-employed ceiling is ₹3.20 crore × 5% = ₹16,00,000. The company can select the higher capital-employed basis. Deductible aggregate expenditure is therefore ₹16,00,000, limited by the qualifying expenditure. Annual amortisation = ₹16,00,000 ÷ 5 = ₹3,20,000. Machinery installation and employee induction training are not included in the eligible preliminary expenditure list.

Where it goes wrong. Dividing all preliminary expenses by five without first applying the statutory aggregate ceiling.

Authority. Section 35D(2) and Section 35D(3) of the Income-tax Act, 1961; Section 44 of the Income-tax Act, 2025

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

Nandini Real Estates Pvt Ltd commenced operations of its new unit on 1 October 2026. Assuming it satisfies all conditions for preliminary-expense amortisation, identify the five successive tax years in which the deduction is available. The preliminary expenditure was incurred before the unit commenced production or operation.

1. Tax Years 2025-26 to 2029-30, beginning with the year of initial expenditure.
2. Tax Years 2027-28 to 2031-32, beginning after commencement of production.
3. Tax Years 2026-27 to 2029-30, spread over four succeeding years only.
4. Tax Years 2026-27 to 2030-31, beginning with the year of commencement. (correct answer)

Answer: D — Tax Years 2026-27 to 2030-31, beginning with the year of commencement.

Explanation. For a new unit, amortisation begins in the tax year in which that unit commences production or operation. Here, commencement occurred on 1 October 2026, falling in Tax Year 2026-27. The five successive years are therefore 2026-27, 2027-28, 2028-29, 2029-30 and 2030-31. Each year permits one-fifth of the allowable aggregate preliminary expenditure. The date on which preliminary expenses were originally incurred does not determine the first amortisation year.

Where it goes wrong. Starting the five-year period when preliminary expenditure is incurred instead of when the new unit commences operations.

Authority. Section 35D(1) and Section 35D(3) of the Income-tax Act, 1961; Section 44 of the Income-tax Act, 2025

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

Determine the amount allowable as bad debt deduction for Nandini Real Estates Pvt Ltd for Tax Year 2026-27. The company wrote off ₹7,00,000 from the customer balance in its books. A separate general provision of ₹2,00,000 was created against other doubtful customer balances without writing off any particular debt.

1. ₹9,00,000, comprising the actual write-off and the general provision.
2. ₹12,00,000, representing the entire customer balance originally recognised.
3. ₹7,00,000, being the amount actually written off as irrecoverable. (correct answer)
4. Nil, because the company has not demonstrated actual insolvency recovery proceedings.

Answer: C — ₹7,00,000, being the amount actually written off as irrecoverable.

Explanation. The original customer debt of ₹12,00,000 was included in sales revenue in an earlier year. The amount actually written off is ₹7,00,000, which satisfies the write-off condition. The additional ₹2,00,000 is only a general provision and does not represent an actual write-off. Therefore, allowable bad debt deduction = ₹7,00,000. The law does not require the assessee to establish through separate recovery proceedings that the written-off debt has become irrecoverable.

Where it goes wrong. Adding the general provision to the actual write-off or insisting on separate proof of irrecoverability after an actual write-off.

Authority. Section 36(1)(vii) and Section 36(2) of the Income-tax Act, 1961; Section 31(2) and Section 31(3)(a) of the Income-tax Act, 2025

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

Which amount is allowable as a general business deduction under the facts relating to Nandini Real Estates Pvt Ltd? Consider the school-building CSR expenditure, environmental-law penalty, unlawful payment to an inspector and liquidated damages payable under the commercial contract.

1. ₹7,70,000, including all expenditure incurred for business-related purposes.
2. ₹1,20,000, being the compensatory contractual damages only. (correct answer)
3. ₹5,20,000, including CSR expenditure and contractual damages.
4. ₹3,20,000, including the environmental penalty and contractual damages.

Answer: B — ₹1,20,000, being the compensatory contractual damages only.

Explanation. The CSR school expenditure of ₹4,00,000 is specifically disallowed. The environmental-law penalty of ₹2,00,000 and unlawful payment of ₹50,000 are also disallowed because they relate to prohibited conduct. Liquidated damages of ₹1,20,000 under a lawful commercial contract are compensatory, not penal. Thus, allowable expenditure is ₹1,20,000. The character and purpose of a payment, rather than its accounting description, determine its deductibility.

Where it goes wrong. Treating all payments arising from business transactions as deductible even when they relate to CSR obligations or unlawful conduct.

Authority. Section 37(1), Explanation 1 and Explanation 2 of the Income-tax Act, 1961; Section 34(1) and Section 34(3) 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.

Mr. Dev operates a management consultancy from a building owned by him. The building is used 60% for professional work and 40% as his personal residence. During Tax Year 2026-27, he pays municipal taxes of ₹2,00,000 and building insurance premium of ₹50,000. Both expenses relate to the entire building and are paid during the tax year. No part of the building is let out, and the expenditure is not capital in nature. Calculate the deduction allowable under the provisions relating to premises used partly for business.

1. ₹2,50,000, representing the entire taxes and insurance premium.
2. ₹1,00,000, representing the personal-use proportion.
3. ₹1,75,000, representing 70% of the aggregate expenditure.
4. ₹1,50,000, representing the professional-use proportion. (correct answer)

Answer: D — ₹1,50,000, representing the professional-use proportion.

Explanation. Aggregate expenditure is municipal taxes ₹2,00,000 plus insurance ₹50,000 = ₹2,50,000. Since the building is used 60% for business, only that proportion qualifies. Deduction = ₹2,50,000 × 60% = ₹1,50,000. The remaining ₹1,00,000 relates to personal occupation and is not deductible. The proportionate restriction applies even though the expenses themselves are otherwise allowable under Section 30.

Where it goes wrong. Assuming that ownership of the building permits deduction of expenditure attributable to personal occupation.

Authority. Section 30 of the Income-tax Act, 1961; Section 28(2) of the Income-tax Act, 2025

Question 14 · 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 manufacturing concern spends ₹1,80,000 on repairing damaged roof sheets and replacing defective electrical wiring in its factory building. It separately spends ₹6,50,000 on constructing a new mezzanine floor that increases the building's storage capacity. Both payments are made during the year, and the entire factory is used for business. Determine the amount deductible as repairs under Section 30. The expenditure is separately identified in the contractor's bills, and no part relates to personal use.

1. ₹8,30,000, since all work relates to the same factory building.
2. ₹6,50,000, as the mezzanine floor is part of the existing premises.
3. ₹1,80,000, representing current repairs to the existing building. (correct answer)
4. Nil, because both categories of expenditure improve the building.

Answer: C — ₹1,80,000, representing current repairs to the existing building.

Explanation. The expenditure of ₹1,80,000 on roof repairs and defective wiring restores the existing factory building and is revenue expenditure. Construction of the mezzanine floor costs ₹6,50,000 and creates additional storage capacity, giving the building an enduring improvement. It is capital expenditure. Thus, deduction under the repairs provision is restricted to ₹1,80,000. The capital expenditure must be considered separately for any applicable capital allowance.

Where it goes wrong. Treating every improvement carried out on an existing business building as current repairs.

Authority. Section 30(a)(ii) of the Income-tax Act, 1961; Section 28 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 food-processing business contributes ₹1,20,000 to a trade association fund that provides insurance against fire damage to its members' stock. Under the association's rules, 10% of the premium may be returned to members at the end of the year if no insurance claim arises. The contribution is paid during Tax Year 2026-27 and the entire stock is held for business purposes. What amount is deductible as insurance expenditure?

1. ₹1,20,000, since the association contribution provides stock-loss insurance. (correct answer)
2. ₹1,08,000, after excluding the potentially returnable premium portion.
3. ₹12,000, representing only the non-refundable part of the contribution.
4. Nil, because insurance contributions to trade associations are not permitted.

Answer: A — ₹1,20,000, since the association contribution provides stock-loss insurance.

Explanation. Insurance expenditure against risk of damage or destruction of stock or stores is deductible. The supplied ICAI material also recognises premiums paid through trade associations that indemnify and insure members against losses, even where a portion may be returnable in specified circumstances. Therefore, the deductible contribution is the full ₹1,20,000. The possibility of receiving a conditional return does not itself invalidate the expenditure incurred for insurance protection.

Where it goes wrong. Reducing the insurance deduction merely because part of an association premium may be returned under specified conditions.

Authority. Section 36(1)(i) of the Income-tax Act, 1961; Section 30(a) of the Income-tax Act, 2025

Question 16 · 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 manufacturing company follows the default tax regime and incurs ₹6,00,000 on salaries of in-house research personnel, ₹2,00,000 on research materials and ₹4,00,000 on laboratory equipment. It also acquires land for ₹7,00,000 for the same research facility and contributes ₹3,00,000 to an approved National Laboratory and ₹2,00,000 to a notified research association. Assume the in-house research relates to its business and all contributions satisfy institutional approval requirements. Compute the scientific research deduction allowable under the default regime.

1. ₹10,00,000, comprising revenue expenditure and external contributions.
2. ₹12,00,000, comprising eligible in-house revenue and capital expenditure. (correct answer)
3. ₹17,00,000, including research contributions but excluding land.
4. ₹19,00,000, including all expenditure except the acquisition of land.

Answer: B — ₹12,00,000, comprising eligible in-house revenue and capital expenditure.

Explanation. In-house revenue deduction = ₹6,00,000 + ₹2,00,000 = ₹8,00,000. Eligible laboratory equipment adds ₹4,00,000, taking the in-house deduction to ₹12,00,000. Land costing ₹7,00,000 is excluded from capital research expenditure. Contributions to the National Laboratory and notified association are not allowable under the default tax regime. Consequently, the total deduction is ₹12,00,000.

Where it goes wrong. Allowing approved institutional contributions under the default regime or including land in eligible research capital expenditure.

Authority. Section 35(1)(i), Section 35(1)(iv) and Section 35(2AA) of the Income-tax Act, 1961; Section 45(1) and Section 45(3) of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

Question 17 · 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 new manufacturing business commenced operations on 1 October 2026. During the three years immediately preceding commencement, it incurred ₹3,00,000 on research salaries, ₹1,50,000 on research materials and ₹4,00,000 on laboratory equipment. An additional ₹80,000 was spent on research materials in September 2023, outside the three-year window. Land for the laboratory costing ₹5,00,000 was also purchased in 2024. Assume the salary and material expenditure within the prescribed period is certified by the prescribed authority. Compute the deduction under the scientific research provisions.

1. ₹5,30,000, excluding all capital expenditure incurred before commencement.
2. ₹13,50,000, including land and all pre-commencement research expenditure.
3. ₹8,50,000, comprising eligible revenue and laboratory capital expenditure. (correct answer)
4. ₹9,30,000, including the research materials incurred outside the period.

Answer: C — ₹8,50,000, comprising eligible revenue and laboratory capital expenditure.

Explanation. Eligible pre-commencement revenue expenditure is salaries ₹3,00,000 plus materials ₹1,50,000 = ₹4,50,000. Laboratory equipment adds eligible capital expenditure of ₹4,00,000, since it was acquired within the three-year period. Land is excluded. The additional ₹80,000 materials were incurred outside the stipulated window. Total deduction = ₹4,50,000 + ₹4,00,000 = ₹8,50,000 in the tax year of commencement, subject to the stated certification condition.

Where it goes wrong. Including expenditure incurred outside the three-year period or treating land as eligible capital scientific research expenditure.

Authority. Section 35(1)(i), Section 35(1)(iv) and Section 35(2) of the Income-tax Act, 1961; Section 45(1)(b) and Section 45(1)(c) of the Income-tax Act, 2025

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.

An assessee claims a deduction of ₹9,00,000 for laboratory machinery acquired exclusively for scientific research related to its existing business. The entire capital cost is allowed as a deduction under the scientific research provisions during Tax Year 2026-27. In the following year, the machinery is transferred to the production department and used for manufacturing goods. What depreciation deduction can the assessee claim on this machinery?

1. Nil, because its capital cost has already been allowed as research expenditure. (correct answer)
2. ₹1,35,000, being normal depreciation at 15% on its original cost.
3. ₹2,70,000, being normal and additional depreciation on original cost.
4. ₹9,00,000, being the unabsorbed scientific research deduction again.

Answer: A — Nil, because its capital cost has already been allowed as research expenditure.

Explanation. The full capital cost of ₹9,00,000 has already been deducted as scientific research expenditure. The Act prevents depreciation in respect of expenditure represented by an asset where the research deduction has been allowed. Therefore, depreciation on the machinery in the subsequent year is nil. Changing the department in which the machinery is used does not permit a second deduction of the same capital cost.

Where it goes wrong. Claiming normal depreciation again after obtaining a scientific research deduction on the same capital expenditure.

Authority. Section 35(2)(iv) of the Income-tax Act, 1961; Section 45(6) 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.

An Indian company incurs qualifying preliminary expenses of ₹24,00,000 before commencing a new undertaking. The cost of the project is ₹2.80 crore and the capital employed in the business is ₹4 crore. The company opts for the basis yielding the higher statutory ceiling. Determine its annual deduction under Section 35D, assuming the eligible expenditure is amortised equally over five successive tax years.

1. ₹2,80,000, based on the project-cost ceiling divided over five years.
2. ₹4,80,000, based on the entire qualifying expenditure divided over five years.
3. ₹2,40,000, based on a deduction spread over ten years.
4. ₹4,00,000, based on the capital-employed ceiling over five years. (correct answer)

Answer: D — ₹4,00,000, based on the capital-employed ceiling over five years.

Explanation. The project-cost ceiling is ₹2,80,00,000 × 5% = ₹14,00,000. The capital-employed ceiling is ₹4,00,00,000 × 5% = ₹20,00,000. The company chooses the higher capital-employed basis. Although qualifying expenditure is ₹24,00,000, only ₹20,00,000 can be amortised. Annual deduction = ₹20,00,000 ÷ 5 = ₹4,00,000 for each of five successive tax years.

Where it goes wrong. Applying the five-year division to the whole qualifying expenditure without first determining the maximum permissible aggregate amount.

Authority. Section 35D(2) and Section 35D(3) of the Income-tax Act, 1961; Section 44(3) and Section 44(5) of the Income-tax Act, 2025

Question 20 · 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 claiming amortisation of preliminary expenses is required to furnish a statement containing prescribed particulars under Rule 27 of the Income-tax Rules, 2026. Assume the due date for furnishing the company's return for Tax Year 2026-27 is 31 October 2027. By which date must the statement be furnished under the rule? The question relates to the time limit for filing the prescribed particulars and not the date on which the annual amortisation deduction is claimed.

1. 31 October 2027, being the due date for the return itself.
2. 30 September 2027, being one month before the return due date. (correct answer)
3. 31 March 2027, being the close of the tax year concerned.
4. 30 November 2027, being one month after the return due date.

Answer: B — 30 September 2027, being one month before the return due date.

Explanation. Rule 27 requires the statement containing prescribed particulars of preliminary expenditure to be furnished within one month before the return due date. The assumed return due date is 31 October 2027. One month before that date is 30 September 2027. The statement must therefore be furnished by 30 September 2027. The rule's time limit is distinct from the five-year period over which the eligible preliminary expenditure is amortised.

Where it goes wrong. Confusing the statement-filing deadline with the return-filing deadline or the end of the tax year.

Authority. Section 35D of the Income-tax Act, 1961; Section 44 of the Income-tax Act, 2025; Rule 27 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 trader's customer owes ₹9,00,000, which was recognised as sales revenue in an earlier tax year. During Tax Year 2026-27, the customer enters insolvency proceedings and the trader writes off ₹6,50,000 of the outstanding amount as irrecoverable in its books. The trader retains the remaining balance as recoverable. No separate recovery proceedings have established the ultimate irrecoverability of the written-off portion. Determine the deduction allowable for bad debts.

1. ₹9,00,000, representing the entire amount originally recognised as sales.
2. Nil, until the insolvency proceedings conclude and recovery becomes impossible.
3. ₹6,50,000, representing the amount actually written off. (correct answer)
4. ₹2,50,000, representing only the remaining unpaid balance.

Answer: C — ₹6,50,000, representing the amount actually written off.

Explanation. A trade debt qualifies for bad debt deduction if it has been included in computing income in the same or an earlier year and is written off as irrecoverable in the relevant accounts. The earlier sales recognition satisfies the first condition. The actual write-off is ₹6,50,000, while ₹2,50,000 remains outstanding and is not written off. Accordingly, deduction is ₹6,50,000. Separate proof of ultimate irrecoverability is not required once the statutory conditions are satisfied.

Where it goes wrong. Demanding proof of completed recovery proceedings instead of checking the prior income recognition and actual write-off conditions.

Authority. Section 36(1)(vii) and Section 36(2) of the Income-tax Act, 1961; Section 31(2) of the Income-tax Act, 2025

Question 22 · 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 estimates that ₹3,20,000 of its trade receivables may become irrecoverable because several customers are facing financial difficulties. It debits this estimate to its statement of profit and loss and credits a general provision for doubtful debts. No individual customer balance is actually written off from the books during Tax Year 2026-27. What deduction can the company claim under Section 36(1)(vii)?

1. ₹1,60,000, being one-half of the estimated doubtful receivables.
2. ₹3,20,000, representing the provision created during the year.
3. ₹2,40,000, after applying a general recovery-risk adjustment.
4. Nil, because no debt has actually been written off. (correct answer)

Answer: D — Nil, because no debt has actually been written off.

Explanation. A deduction under Section 36(1)(vii) requires an actual write-off of a bad debt in the accounts, subject to the prior-income-recognition or money-lending condition. Here, the company has only created a general provision of ₹3,20,000. No individual receivable has been written off. Therefore, the deductible amount is nil. A prudent accounting estimate of possible loss does not satisfy the statutory requirement for an actual write-off.

Where it goes wrong. Equating a provision made on the basis of expected credit losses with an actual write-off of an identified bad debt.

Authority. Section 36(1)(vii) and Section 36(2) of the Income-tax Act, 1961; Section 31(2) and Section 31(3)(a) 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 company had a trade debt of ₹9,00,000 in respect of which a deduction of ₹6,00,000 was allowed as bad debt in an earlier year. During Tax Year 2026-27, the company recovers ₹4,20,000 from the same debtor. The business is still operating. Compute the amount chargeable as business income in the current tax year under the provisions governing subsequent recovery of bad debts.

1. ₹4,20,000, representing the entire amount recovered from the debtor.
2. ₹1,20,000, representing the excess recovery over the previously undeducted balance. (correct answer)
3. ₹3,00,000, representing the difference between the debt and deduction previously allowed.
4. Nil, because a subsequent recovery is not taxable when the business continues.

Answer: B — ₹1,20,000, representing the excess recovery over the previously undeducted balance.

Explanation. The total debt was ₹9,00,000 and the deduction previously allowed was ₹6,00,000. The amount not allowed as deduction is ₹9,00,000 − ₹6,00,000 = ₹3,00,000. Recovery during the current year is ₹4,20,000. The taxable excess is ₹4,20,000 − ₹3,00,000 = ₹1,20,000. Accordingly, ₹1,20,000 is deemed business income in the year of recovery, irrespective of whether the original business continues.

Where it goes wrong. Taxing the entire recovery instead of restricting deemed business income to the amount exceeding the earlier non-deducted portion.

Authority. Section 41(4) of the Income-tax Act, 1961; Section 38(1)(d) of the Income-tax Act, 2025

Question 24 · 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 manufacturing consumer goods spends ₹4,50,000 on constructing a school building in the neighbouring locality as part of its corporate social responsibility obligations under Section 135 of the Companies Act, 2013. The management argues that the school project improves the company's reputation, strengthens local relations and indirectly benefits its business. The expenditure is revenue in nature, is supported by payment records and is charged to the statement of profit and loss. What amount is deductible under Section 37(1)?

1. Nil, because expenditure on prescribed CSR activities is specifically excluded. (correct answer)
2. ₹2,25,000, representing one-half of the CSR amount incurred.
3. ₹4,50,000, because the project improves the company's business reputation.
4. ₹3,60,000, representing CSR expenditure after a notional personal-use adjustment.

Answer: A — Nil, because expenditure on prescribed CSR activities is specifically excluded.

Explanation. Section 37(1), Explanation 2 specifically excludes expenditure incurred on activities relating to corporate social responsibility under Section 135 of the Companies Act, 2013. The company's CSR expenditure is ₹4,50,000, but the allowable deduction under the general business deduction provision is nil. An indirect benefit to reputation or societal welfare relations does not override this express statutory restriction.

Where it goes wrong. Relying on indirect commercial benefits to claim CSR expenditure despite its specific statutory exclusion.

Authority. Section 37(1), Explanation 2 of the Income-tax Act, 1961; Section 34(3)(b) 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.

A company pays ₹2,40,000 as a statutory environmental penalty for violating pollution-control requirements and ₹1,10,000 to compound a related offence. It also pays ₹1,60,000 to a customer as liquidated damages for delay in completing a supply contract. The contractual payment is compensatory and does not arise from any breach of statutory law. All three amounts are debited to the statement of profit and loss. Determine the deduction allowable under the general business deduction provision.

1. ₹5,10,000, because all payments arose from the company's business operations.
2. ₹2,70,000, including the compounding payment and contractual damages.
3. ₹1,60,000, comprising only the compensatory contractual damages. (correct answer)
4. ₹3,50,000, comprising the environmental penalty and contractual damages.

Answer: C — ₹1,60,000, comprising only the compensatory contractual damages.

Explanation. The statutory environmental penalty of ₹2,40,000 arises from violation of law and is disallowed. The ₹1,10,000 payment to compound the offence is also disallowed. The liquidated damages of ₹1,60,000 arise from a lawful commercial contract and are compensatory rather than penal. Such contractual damages are allowable as business expenditure when incurred wholly and exclusively for business. Consequently, the deduction is ₹1,60,000.

Where it goes wrong. Treating compensatory contractual damages and penalties for statutory offences as having the same tax treatment.

Authority. Section 37(1), Explanation 1 of the Income-tax Act, 1961; Section 34(3)(a) of the Income-tax Act, 2025