Taxation - DT Ch 05: Pgbp - Test 3: answer key

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

Scenario. Vikramaditya Tech Labs Ltd., an Indian software-development company, follows the mercantile system of accounting and has opted for the default tax regime for Tax Year 2026-27. During the year, it incurred consultancy expenditure of ₹18,00,000 payable to a resident individual consultant. Tax was deductible from this payment under the applicable TDS provisions, but the company failed to deduct it. It also incurred ₹12,00,000 towards technical maintenance services provided by a resident contractor. TDS of ₹1,20,000 was deducted on 31 March 2027 but deposited with the Government only on 20 November 2027. The company's return-filing due date is 31 October 2027. In February 2027, the company paid ₹16,00,000 as royalty to a foreign software company. The payment was chargeable to tax in India, but the company neither deducted nor deposited the applicable tax. Another payment of ₹6,00,000 was made to a foreign technical specialist, from which applicable tax was deducted on 20 March 2027 and deposited on 15 September 2027. Separately, the company paid ₹8,00,000 to R.S. Marketing Associates, a resident firm, without deducting tax. The firm subsequently furnished its return on 30 July 2027, included the entire receipt in its taxable income and paid the resulting tax. Vikramaditya Tech Labs Ltd. obtained the prescribed accountant's certificate confirming these facts on 15 September 2027. Assume every payment is otherwise deductible, all stated TDS provisions apply, and there are no other disallowances.

Determine the aggregate amount disallowable for Tax Year 2026-27 in respect of the two payments to resident recipients, namely consultancy charges of ₹18,00,000 and maintenance charges of ₹12,00,000. Consider both the failure to deduct tax and the failure to deposit deducted tax by the return-filing due date. The company has not satisfied the applicable TDS conditions by 31 October 2027.

1. ₹6,00,000
2. ₹9,00,000 (correct answer)
3. ₹12,00,000
4. ₹7,20,000

Answer: B — ₹9,00,000

Explanation. Section 40(a)(ia) provides for disallowance of 30% of qualifying payments to residents where tax has not been deducted or has not been deposited by the return-filing due date. Consultancy charges: ₹18,00,000 × 30% = ₹5,40,000. Maintenance charges: ₹12,00,000 × 30% = ₹3,60,000, since tax was deposited after 31 October 2027. Total disallowance = ₹5,40,000 + ₹3,60,000 = ₹9,00,000.

Where it goes wrong. Disallowing the full resident payments instead of applying the 30% restriction, or overlooking that delayed deposit after the return due date also attracts disallowance.

Authority. Section 40(a)(ia) of the Income-tax Act, 1961; Section 35(b)(i) of the Income-tax Act, 2025

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

What is the amount disallowed in Tax Year 2026-27 in respect of royalty paid to the foreign software company? The royalty of ₹16,00,000 is chargeable to tax in India, TDS was applicable, and the company failed to deduct the tax. A separate foreign technical payment of ₹6,00,000 was subject to TDS deposited before the return-filing due date. Consider the distinct treatment applicable to payments covered by Section 40(a)(i).

1. ₹4,80,000
2. ₹8,00,000
3. ₹16,00,000 (correct answer)
4. ₹12,00,000

Answer: C — ₹16,00,000

Explanation. Section 40(a)(i) provides for disallowance of the entire qualifying sum payable to a non-resident or foreign company where applicable TDS has not been deducted or deposited by the return-filing due date. Royalty disallowance = ₹16,00,000. The separate ₹6,00,000 payment is not disallowed because its TDS was deposited before 31 October 2027. Therefore, the total disallowance relating to the royalty is ₹16,00,000.

Where it goes wrong. Applying the resident-payment restriction of 30% to a payment chargeable to tax and payable to a foreign company.

Authority. Section 40(a)(i) of the Income-tax Act, 1961; Section 35(b)(ii) of the Income-tax Act, 2025

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

Assume Vikramaditya Tech Labs Ltd. deducts and deposits the outstanding TDS relating to the two resident payments and the foreign royalty payment during Tax Year 2027-28. What amount of deduction becomes allowable in that subsequent tax year in respect of expenditure previously disallowed under the TDS provisions? Assume all TDS deficiencies are fully remedied during that subsequent year.

1. ₹25,00,000 (correct answer)
2. ₹9,00,000
3. ₹16,00,000
4. ₹18,00,000

Answer: A — ₹25,00,000

Explanation. For resident payments, the amount previously disallowed is only 30%: ₹30,00,000 × 30% = ₹9,00,000. This portion becomes deductible when the applicable tax is deducted and deposited. For the foreign royalty, the entire ₹16,00,000 previously disallowed becomes deductible when the TDS deficiency is remedied. Total subsequent-year deduction = ₹9,00,000 + ₹16,00,000 = ₹25,00,000.

Where it goes wrong. Allowing only 30% of the foreign payment in the subsequent year, or allowing the entire resident payment again instead of only its previously disallowed portion.

Authority. Section 40(a)(i) and Section 40(a)(ia) of the Income-tax Act, 1961; Section 35(b)(i) and Section 35(b)(ii) of the Income-tax Act, 2025

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

The company has not deducted tax from the ₹8,00,000 payment to R.S. Marketing Associates. However, the recipient has furnished its return, included the receipt in its income and paid the resulting tax. The payer has also obtained the prescribed accountant's certificate. What is the consequence under the resident-payment TDS disallowance provisions?

1. ₹2,40,000 is disallowed until TDS is deposited by the payer.
2. ₹8,00,000 is disallowed because no tax was deducted.
3. ₹1,20,000 is disallowed because the recipient is a firm.
4. Nil is disallowed because the prescribed payee conditions are satisfied. (correct answer)

Answer: D — Nil is disallowed because the prescribed payee conditions are satisfied.

Explanation. The recipient has furnished its return, included the payment of ₹8,00,000 in its taxable income and paid the resulting tax. The payer has also obtained the prescribed accountant's certificate. Consequently, the payer is deemed to have deducted and paid the applicable tax on the date the recipient furnished its return, namely 30 July 2027. The conditions for relief are fulfilled, so no 30% disallowance arises on this payment.

Where it goes wrong. Assuming that failure to deduct tax invariably attracts disallowance, without considering the statutory relief available when the recipient satisfies all prescribed conditions.

Authority. Section 40(a)(ia) of the Income-tax Act, 1961; Section 35(b)(i) and Section 398(2) of the Income-tax Act, 2025

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

Scenario. Nandini Real Estates Pvt Ltd undertakes commercial construction and property-management activities. During Tax Year 2026-27, its director, Mr. Karan Mehta, arranged consultancy services through his spouse, Mrs. Riya Mehta. The company paid her ₹18,00,000 for business-development and project-monitoring services. The Assessing Officer determined, after considering the services rendered, prevailing market remuneration and the company's business requirements, that ₹12,50,000 represented reasonable expenditure. The balance was considered excessive. The company also purchased office stationery from Bright Supplies, an unrelated vendor. It made three cash payments of ₹7,000, ₹4,000 and ₹2,500 to this vendor on 18 December 2026 against separate invoices. On the same date, it paid ₹34,900 in cash to a goods transport operator for hiring a goods carriage to transport construction materials. The transport arrangement was genuine and the payment related entirely to carriage of goods. Separately, the company acquired office equipment costing ₹12,000 from another vendor and paid through a non-account-payee crossed cheque. No Rule 6DD exception applies to the stationery or equipment purchases, and none of the payments was made through NEFT, RTGS, UPI or another specified banking or online mode. Assume all expenses were otherwise incurred wholly for business, and the related-party disallowance and cash-payment provisions apply independently.

Compute the amount disallowable under the provisions relating to excessive payments to specified persons in respect of consultancy services received from the director's spouse. The actual payment was ₹18,00,000, while the Assessing Officer determined that ₹12,50,000 was reasonable after considering the services, market remuneration and business requirements. Assume the finding regarding excessive expenditure is supported by the stated facts.

1. ₹18,00,000
2. ₹12,50,000
3. ₹5,50,000 (correct answer)
4. ₹4,50,000

Answer: C — ₹5,50,000

Explanation. The director's spouse is a specified person for this purpose. The reasonable expenditure determined by the Assessing Officer is ₹12,50,000 against the actual payment of ₹18,00,000. Excessive component = ₹18,00,000 − ₹12,50,000 = ₹5,50,000. Only the excessive portion is disallowed under Section 40A(2)(a); the balance remains allowable, assuming the other conditions for business deduction are satisfied.

Where it goes wrong. Disallowing the entire payment to a related person rather than restricting the disallowance to the portion found excessive or unreasonable.

Authority. Section 40A(2)(a) and Section 40A(2)(b) of the Income-tax Act, 1961; Section 36(2) and Section 36(3) of the Income-tax Act, 2025

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

Determine the disallowance for stationery purchases made from Bright Supplies on 18 December 2026. The company made three cash payments of ₹7,000, ₹4,000 and ₹2,500 against separate invoices to the same supplier on the same day. None was made through a specified banking or online mode, and no Rule 6DD exception applies. What amount is disallowed?

1. ₹2,500
2. ₹3,500
3. ₹7,000
4. ₹13,500 (correct answer)

Answer: D — ₹13,500

Explanation. Section 40A(3) considers the aggregate cash payments made to the same person on a single day. Aggregate payment = ₹7,000 + ₹4,000 + ₹2,500 = ₹13,500. Since this exceeds ₹10,000 and no exception applies, the entire expenditure represented by these payments is disallowed. Thus, the disallowance is ₹13,500, not merely the amount exceeding ₹10,000.

Where it goes wrong. Testing each invoice independently instead of aggregating payments made to the same supplier on the same day.

Authority. Section 40A(3) of the Income-tax Act, 1961; Section 36(4) of the Income-tax Act, 2025

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

Nandini Real Estates Pvt Ltd paid ₹34,900 in cash to a goods transport operator for hiring a goods carriage. The payment relates exclusively to transportation of construction material and was made in one day. No other amount was paid to that transport operator during the day. Determine the disallowance under the cash-payment provisions.

1. Nil, because the amount does not exceed ₹35,000. (correct answer)
2. ₹24,900, representing the excess over ₹10,000.
3. ₹34,900, because every transporter payment must be digital.
4. ₹10,000, representing the normal cash-payment threshold.

Answer: A — Nil, because the amount does not exceed ₹35,000.

Explanation. The special cash-payment limit for a transport operator receiving payment for plying, hiring or leasing goods carriages is ₹35,000 in a day. The company's cash payment is ₹34,900, which is within that limit. Therefore, there is no disallowance. The general threshold of ₹10,000 does not apply to this qualifying transport payment.

Where it goes wrong. Applying the ordinary ₹10,000 threshold to a qualifying payment for hiring or plying goods carriages.

Authority. Section 40A(3) and Section 40A(3A) of the Income-tax Act, 1961; Section 36(4) and Section 36(6) of the Income-tax Act, 2025

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

The company purchased office equipment for ₹12,000 and paid through a crossed cheque that was not marked account-payee. The payment was not made by bank draft, electronic clearing, NEFT, RTGS, UPI or any other prescribed electronic mode. No Rule 6DD exception applies. Determine the amount disallowed under Section 40A(3).

1. ₹2,000, representing only the amount above the threshold.
2. ₹12,000, representing the entire expenditure paid through the non-prescribed mode. (correct answer)
3. Nil, because a crossed cheque is always a specified banking mode.
4. ₹3,600, representing a 30% restriction on the equipment cost.

Answer: B — ₹12,000, representing the entire expenditure paid through the non-prescribed mode.

Explanation. The prescribed banking modes include an account-payee cheque or bank draft, electronic clearing and notified electronic modes. A non-account-payee crossed cheque does not satisfy this requirement. The payment of ₹12,000 exceeds the ₹10,000 threshold. Consequently, the entire expenditure paid through that mode is disallowed, giving a disallowance of ₹12,000.

Where it goes wrong. Treating every crossed cheque as an account-payee cheque for purposes of the specified banking mode requirement.

Authority. Section 40A(3) of the Income-tax Act, 1961; Section 36(4) and Section 66(32) of the Income-tax Act, 2025; Rule 48 of the Income-tax Rules, 2026

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

Scenario. Aryan Agro Foods Ltd. manufactures packaged agricultural products and follows the mercantile system of accounting. During Tax Year 2026-27, the company purchased mustard seeds worth ₹1,25,000 directly from a cultivator. As the cultivator operated in a remote agricultural area, the company paid the consideration in cash. It also paid ₹44,000 in cash to a Government licensing authority for a statutory fee where the authority's governing rules specifically required payment in legal tender. The company purchased packaging materials from CityPack Traders, an ordinary commercial supplier having a bank account and operating from an established commercial centre. The company made three cash payments of ₹5,500, ₹6,000 and ₹4,000 to CityPack Traders on 15 January 2027 against different invoices. In the preceding tax year, the company had claimed a deduction of ₹52,000 for freight services on mercantile basis. The corresponding liability was paid in cash on 20 February 2027 through two instalments of ₹28,000 and ₹24,000 to the same transport supplier on the same day. The company had already obtained the deduction for the freight expenditure in the preceding year. The payment was not covered by any exception under Rule 6DD. Assume all purchases and services were genuine, the relevant expenditure was otherwise deductible, and the company has maintained evidence of the transactions and payment dates.

Aryan Agro Foods Ltd purchased mustard seeds worth ₹1,25,000 directly from a cultivator and paid the entire consideration in cash. The cultivator personally grew the agricultural produce and the company purchased it for its manufacturing business. Although the payment exceeds ₹10,000, determine the treatment under the cash-payment disallowance provisions.

1. ₹1,15,000, being the amount above the ordinary threshold.
2. ₹37,500, being 30% of the cash purchase expenditure.
3. ₹1,25,000, being the entire cash purchase amount.
4. Nil, because the purchase is directly from the cultivator. (correct answer)

Answer: D — Nil, because the purchase is directly from the cultivator.

Explanation. Rule 6DD provides an exception for cash payments for purchase of agricultural produce directly from the cultivator, grower or producer. Aryan Agro Foods Ltd purchased the mustard seeds directly from the person who cultivated them. Consequently, the payment of ₹1,25,000 falls within the prescribed exception. The deduction remains allowable despite exceeding the ordinary ₹10,000 threshold.

Where it goes wrong. Applying the cash threshold without checking the specific exception for purchases directly from the cultivator or producer.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD(e) of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025; Rule 26 of the Income-tax Rules, 2026

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

A company pays ₹44,000 in cash to a Government licensing authority towards a statutory fee. The authority's governing payment rules specifically require the fee to be paid in legal tender, and no electronic payment facility is permitted for this particular collection. The company retains the payment receipt. Determine the treatment under the cash-payment provisions.

1. ₹34,000 is disallowed under the ordinary cash threshold.
2. Nil is disallowed because payment in legal tender is required by Government rules. (correct answer)
3. ₹44,000 is disallowed because the expenditure exceeds ₹10,000.
4. ₹13,200 is disallowed under the 30% resident-payment rule.

Answer: B — Nil is disallowed because payment in legal tender is required by Government rules.

Explanation. Rule 6DD(b) exempts a payment made to the Government where its rules require that payment to be made in legal tender. The statutory fee of ₹44,000 satisfies this condition because the governing rules require legal tender. Hence, the cash-payment disallowance is nil. The payment amount exceeding ₹10,000 does not override the specific statutory exception.

Where it goes wrong. Assuming that every Government payment exceeding ₹10,000 must be made through a specified banking or online mode, without examining the legal-tender exception.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD(b) of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025; Rule 26(b) of the Income-tax Rules, 2026

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

Aryan Agro Foods Ltd made three cash payments of ₹5,500, ₹6,000 and ₹4,000 to CityPack Traders on 15 January 2027. CityPack Traders is an ordinary commercial packaging supplier with an established banking facility. The payments relate to separate invoices, and no Rule 6DD exception applies. Determine the allowable deduction and the disallowance for that day.

1. ₹5,500 is disallowed, being the largest individual payment.
2. ₹6,000 is disallowed, being the last payment made during the day.
3. ₹15,500 is disallowed, representing the aggregate cash expenditure. (correct answer)
4. ₹5,500 is allowable, being the first payment made during the day.

Answer: C — ₹15,500 is disallowed, representing the aggregate cash expenditure.

Explanation. Aggregate cash payment to CityPack Traders = ₹5,500 + ₹6,000 + ₹4,000 = ₹15,500. The aggregate exceeds ₹10,000 in a single day. Since CityPack Traders is an ordinary supplier and no prescribed exception applies, the entire ₹15,500 is disallowed. Separate invoices and different payment times do not change the aggregation requirement. No part of this expenditure is allowable under Section 40A(3) for the stated payments.

Where it goes wrong. Applying the threshold separately to three invoices even though all payments were made to the same person on one day.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025

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

The company had claimed a deduction of ₹52,000 for freight expenditure in the preceding tax year under the mercantile system. During Tax Year 2026-27, the amount was discharged in two cash instalments of ₹28,000 and ₹24,000 to the same transporter on the same day. No exception under Rule 6DD applies. Determine the amount chargeable as business income in Tax Year 2026-27 under the provision dealing with subsequent cash payment of previously allowed expenditure.

1. ₹52,000 (correct answer)
2. ₹42,000
3. ₹15,600
4. Nil

Answer: A — ₹52,000

Explanation. The expenditure of ₹52,000 was already allowed on accrual basis in the preceding tax year. Subsequent-year cash payment is covered by Section 40A(3A) when it exceeds the prescribed threshold and no exception applies. Aggregate payment = ₹28,000 + ₹24,000 = ₹52,000. As the amount is treated as business income in the year of payment, ₹52,000 is chargeable in Tax Year 2026-27.

Where it goes wrong. Applying Section 40A(3) as a fresh deduction disallowance instead of applying Section 40A(3A) to expenditure already allowed in an earlier year.

Authority. Section 40A(3A) of the Income-tax Act, 1961; Section 36(5) and Section 36(6) of the Income-tax Act, 2025

Question 13 · 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.

Vikramaditya Manufacturing LLP pays ₹14,40,000 as consultancy fees to the brother of one of its partners. The services were actually rendered and were wholly connected with the business. The Assessing Officer determines that ₹10,80,000 represents reasonable remuneration after considering fair market value and the firm's business requirements. The balance is regarded as excessive. What amount is liable for disallowance under the provisions relating to payments to specified persons?

1. ₹3,60,000 (correct answer)
2. ₹10,80,000
3. ₹14,40,000
4. ₹7,20,000

Answer: A — ₹3,60,000

Explanation. The brother of a partner is a specified person in relation to a firm. Actual payment is ₹14,40,000 and the reasonable amount determined by the Assessing Officer is ₹10,80,000. Disallowance = ₹14,40,000 − ₹10,80,000 = ₹3,60,000. The expenditure representing genuine services and not found excessive remains deductible, subject to the other statutory conditions.

Where it goes wrong. Assuming that a payment to a partner's relative is automatically disallowed in full rather than disallowing only the excessive component.

Authority. Section 40A(2)(a) and Section 40A(2)(b) of the Income-tax Act, 1961; Section 36(2) and Section 36(3) 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.

An Indian company incurs ₹8,40,000 towards royalty payable to a foreign company. The amount is chargeable to tax in India and TDS is required under the relevant withholding provisions. The company deducts tax on 25 March 2027 but deposits the amount with the Government on 15 November 2027, after the return-filing due date of 31 October 2027. Determine the disallowance for Tax Year 2026-27.

1. ₹2,52,000, being 30% of the royalty payment.
2. ₹4,20,000, representing half the royalty payment.
3. ₹8,40,000, representing the entire royalty expenditure. (correct answer)
4. Nil, because tax was deducted before 31 March 2027.

Answer: C — ₹8,40,000, representing the entire royalty expenditure.

Explanation. For a qualifying payment to a foreign company, the entire expenditure is disallowed where deducted tax is not deposited by the return-filing due date. Although TDS was deducted on 25 March 2027, it was deposited only on 15 November 2027, after 31 October 2027. Consequently, the entire royalty expenditure of ₹8,40,000 is disallowed for Tax Year 2026-27. The timing of actual deduction alone is insufficient.

Where it goes wrong. Assuming that deduction of TDS before 31 March is sufficient even when the corresponding tax is deposited after the applicable return due date.

Authority. Section 40(a)(i) of the Income-tax Act, 1961; Section 35(b)(ii) of the Income-tax Act, 2025

Question 15 · 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 incurs ₹15,50,000 as professional fees payable to a resident consultant. TDS is applicable but is deducted only in Tax Year 2027-28 and deposited during that year. The company follows the mercantile system, and the full expenditure was otherwise allowable in Tax Year 2026-27. Compute the amount disallowed in Tax Year 2026-27 and subsequently allowed when tax is deducted and deposited.

1. ₹15,50,000 disallowed and ₹15,50,000 allowed subsequently.
2. ₹1,55,000 disallowed and ₹1,55,000 allowed subsequently.
3. ₹4,65,000 disallowed and ₹4,65,000 allowed subsequently. (correct answer)
4. ₹7,75,000 disallowed and ₹7,75,000 allowed subsequently.

Answer: C — ₹4,65,000 disallowed and ₹4,65,000 allowed subsequently.

Explanation. The resident-payment provision restricts the deduction by 30%. Calculation: ₹15,50,000 × 30% = ₹4,65,000. Hence, ₹4,65,000 is disallowed in Tax Year 2026-27. Since tax is deducted and deposited in Tax Year 2027-28, the previously disallowed ₹4,65,000 becomes deductible in that year. The remaining 70% was not disallowed in the original year.

Where it goes wrong. Treating the subsequent-year allowance as the full consultancy fee rather than the 30% portion previously disallowed.

Authority. Section 40(a)(ia) of the Income-tax Act, 1961; Section 35(b)(i) 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 business fails to deduct TDS from ₹6,00,000 paid to a resident professional. The professional subsequently furnishes the prescribed return, includes the entire receipt in taxable income and pays the resulting tax. The payer obtains the prescribed accountant's certificate confirming these facts. On what date is the payer deemed to have deducted and paid the tax for purposes of the resident-payment disallowance provisions?

1. The date on which the professional receives the payment.
2. The last day of the tax year in which payment was made.
3. The date on which the payer obtains the accountant's certificate.
4. The date on which the professional furnishes the income-tax return. (correct answer)

Answer: D — The date on which the professional furnishes the income-tax return.

Explanation. Where the recipient has furnished the prescribed return, included the payment of ₹6,00,000 in taxable income, paid the resulting tax and the payer furnishes the prescribed accountant's certificate, the payer is deemed to have deducted and paid tax on the date of furnishing the recipient's return. The date of payment or the later date of obtaining the certificate does not replace this statutory date.

Where it goes wrong. Using the date of payment or the date of obtaining the certificate rather than the date on which the recipient furnishes the return.

Authority. Section 40(a)(ia) of the Income-tax Act, 1961; Section 35(b)(i) and Section 398(2) 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 makes four payments exceeding ₹10,000 each during Tax Year 2026-27. The payments are made respectively through an account-payee cheque, a non-account-payee crossed cheque, NEFT and UPI. All four expenses are otherwise deductible and no Rule 6DD exception applies. Which payment method among these transactions independently satisfies the prescribed specified banking or online mode requirement?

1. An account-payee cheque, NEFT and UPI. (correct answer)
2. Every crossed cheque, including a non-account-payee cheque.
3. Only an account-payee cheque, excluding electronic transfers.
4. Only NEFT and UPI, excluding all cheque payments.

Answer: A — An account-payee cheque, NEFT and UPI.

Explanation. Specified banking or online modes include account-payee cheques, account-payee bank drafts, electronic clearing and prescribed electronic transactions. NEFT and UPI qualify under Rule 48. A non-account-payee crossed cheque does not satisfy the account-payee cheque requirement. Accordingly, the qualifying modes among those listed are the account-payee cheque, NEFT and UPI. Payments through these modes do not attract cash disallowance under Section 40A(3).

Where it goes wrong. Treating a non-account-payee crossed cheque as equivalent to an account-payee cheque.

Authority. Section 40A(3) of the Income-tax Act, 1961; Section 66(32) of the Income-tax Act, 2025; Rule 48 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 logistics company pays ₹35,001 in cash to a transport operator for hiring a goods carriage. The entire amount relates to a single day's transportation service. No part is paid by a specified banking or online mode, and no exception under Rule 6DD applies. What is the disallowance under Section 40A(3)?

1. ₹1,000, representing the amount over ₹34,001.
2. ₹35,001, representing the entire cash expenditure. (correct answer)
3. ₹25,001, representing the amount above ₹10,000.
4. Nil, because the transporter-specific threshold applies.

Answer: B — ₹35,001, representing the entire cash expenditure.

Explanation. The enhanced threshold for qualifying transport-operator payments is ₹35,000 per day. The cash payment of ₹35,001 exceeds that threshold by ₹1. Once the statutory threshold is exceeded, the entire payment is disallowed. Thus, the disallowance is ₹35,001, not merely ₹1 or the excess over the ordinary ₹10,000 threshold.

Where it goes wrong. Disallowing only the rupee exceeding ₹35,000 instead of the entire payment, or applying the ordinary ₹10,000 limit.

Authority. Section 40A(3) of the Income-tax Act, 1961; Section 36(4) and Section 36(6) of the Income-tax Act, 2025

Question 19 · 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 company purchases agricultural produce costing ₹75,000 in cash from a commission agent operating at a wholesale market. The agent purchased the goods from several cultivators and subsequently resold them to the company in its own name. The agent is not the cultivator, grower or producer of the goods. No other exception applies. Can the company claim the expenditure without attracting cash-payment disallowance?

1. Yes, because agricultural produce is always covered by Rule 6DD.
2. Yes, because the commission agent represents the cultivators.
3. No, because the seller is not the cultivator, grower or producer. (correct answer)
4. No, because the entire purchase value exceeds the ordinary threshold.

Answer: C — No, because the seller is not the cultivator, grower or producer.

Explanation. Rule 6DD(e) covers purchases of specified agricultural produce where payment is made to the cultivator, grower or producer. Here, the company purchases from a commission agent who acquired and resold the goods in its own name. The seller is not the cultivator, grower or producer on the stated facts. Consequently, the ₹75,000 cash payment exceeds ₹10,000 and the entire expenditure is disallowed.

Where it goes wrong. Assuming that purchasing agricultural produce from any intermediary automatically qualifies for the producer-specific exception.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD(e) of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025; Rule 26(e) of the Income-tax Rules, 2026

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 manufacturer pays ₹48,000 in cash to a supplier situated in a remote village. On the payment date, the village has no bank branch. The supplier ordinarily resides in that village and carries on his trading business there. The payment relates to genuine raw-material purchases and is not made through any prescribed banking mode. Determine whether the payment qualifies for an exception under Rule 6DD.

1. No, because the supplier must be a cultivator or agricultural producer.
2. No, because the payment exceeds the enhanced transport threshold.
3. Yes, but only ₹10,000 is allowable as a deduction.
4. Yes, because the supplier ordinarily resides in a village not served by a bank. (correct answer)

Answer: D — Yes, because the supplier ordinarily resides in a village not served by a bank.

Explanation. Rule 6DD(g) provides an exception where payment is made in a village or town not served by any bank on the payment date, to a person ordinarily residing or carrying on business there. Both conditions are satisfied: the village has no bank and the supplier ordinarily resides and carries on business there. Therefore, the ₹48,000 cash payment does not attract disallowance.

Where it goes wrong. Considering only the absence of a bank while ignoring the additional requirement that the recipient ordinarily resides or carries on business in that locality.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD(g) of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025; Rule 26(g) 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 company makes a payment of ₹11,50,000 to an independent service provider. A shareholder of the company beneficially owns 19% of its voting power throughout Tax Year 2026-27. The shareholder is neither a director nor a relative of a director, and no other relationship covered by the specified-person provisions exists. The Assessing Officer does not identify any other ground for treating the service provider as a related person. Does the shareholder satisfy the substantial-interest test for the purposes of Section 40A(2)?

1. No, because the holding is below the 20% voting-power threshold. (correct answer)
2. Yes, because every shareholder has substantial interest in the company.
3. Yes, because the shareholder holds more than 10% voting power.
4. No, because only directors can ever have substantial interest.

Answer: A — No, because the holding is below the 20% voting-power threshold.

Explanation. For a company, substantial interest requires beneficial ownership of equity shares carrying not less than 20% of voting power during the tax year. The shareholder's holding is 19%, which is below the prescribed threshold. No separate relationship through directorship or relatives is present. Therefore, this individual does not qualify through the substantial-interest test on the given facts.

Where it goes wrong. Confusing the substantial-interest threshold with a lower shareholding threshold or assuming that every shareholder is automatically a specified person.

Authority. Section 40A(2)(b) of the Income-tax Act, 1961; Section 36(3) and Section 66 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 business makes cash payments on one day to two unrelated suppliers. Supplier A receives ₹8,000 in the morning and ₹4,000 in the evening. Supplier B receives ₹10,000 in a single payment. No specified banking mode or Rule 6DD exception applies. Both expenditures are otherwise deductible. Compute the aggregate disallowance under Section 40A(3), keeping in mind that the daily threshold is tested separately for each person.

1. ₹22,000, representing all cash payments made during the day.
2. ₹12,000, representing the payments to Supplier A only. (correct answer)
3. ₹10,000, representing the payment made to Supplier B only.
4. ₹2,000, representing the amount exceeding the combined threshold.

Answer: B — ₹12,000, representing the payments to Supplier A only.

Explanation. Supplier A's aggregate cash payment is ₹8,000 + ₹4,000 = ₹12,000. Since it exceeds ₹10,000, the entire ₹12,000 is disallowed. Supplier B receives exactly ₹10,000, which does not exceed the threshold. Consequently, Supplier B's expenditure is not disallowed. Aggregate disallowance = ₹12,000 + Nil = ₹12,000.

Where it goes wrong. Aggregating payments to different suppliers or treating an amount equal to ₹10,000 as exceeding the statutory threshold.

Authority. Section 40A(3) of the Income-tax Act, 1961; Section 36(4) of the Income-tax Act, 2025

Question 23 · 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 pays ₹50,000 in cash to an employee on retirement towards a gratuity or similar terminal benefit. The aggregate terminal benefit payable to the employee or the employee's heir does not exceed ₹50,000. The payment is genuine and supported by the retirement records. No banking mode is used. Determine whether the company can claim the expenditure without attracting disallowance under Section 40A(3).

1. No, because all retirement payments above ₹10,000 are disallowed.
2. No, because the employee must receive the payment through UPI.
3. Yes, because the prescribed terminal-benefit exception covers amounts up to ₹50,000. (correct answer)
4. Yes, but only ₹10,000 is deductible under the ordinary cash limit.

Answer: C — Yes, because the prescribed terminal-benefit exception covers amounts up to ₹50,000.

Explanation. Rule 6DD(h) provides an exception for specified terminal benefits paid to an employee or the employee's heir in connection with retirement, retrenchment, resignation, discharge or death, where the aggregate amount does not exceed ₹50,000. Here, gratuity of ₹50,000 satisfies the ceiling. Therefore, the cash-payment disallowance is nil and the payment remains deductible subject to the other applicable conditions.

Where it goes wrong. Ignoring the separate ₹50,000 terminal-benefit exception and applying the ordinary cash threshold.

Authority. Section 40A(3) of the Income-tax Act, 1961; Rule 6DD(h) of the Income-tax Rules, 1962; Section 36(4) of the Income-tax Act, 2025; Rule 26(h) of the Income-tax Rules, 2026

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 company following the mercantile system claimed a deduction of ₹90,000 for legal expenditure in Tax Year 2025-26 when the liability accrued. It discharged the liability on 15 December 2026 by paying ₹90,000 in cash to the same legal service provider in one payment. The payment was not covered by any Rule 6DD exception. What is the tax consequence in Tax Year 2026-27?

1. ₹27,000 is disallowed as a fresh expenditure deduction.
2. ₹60,000 is treated as business income in the subsequent year.
3. Nil is taxable because the expenditure was allowed on accrual.
4. ₹90,000 is deemed business income in the year of cash payment. (correct answer)

Answer: D — ₹90,000 is deemed business income in the year of cash payment.

Explanation. The ₹90,000 expenditure was allowed in Tax Year 2025-26 on accrual basis. Its subsequent cash payment of ₹90,000 in Tax Year 2026-27 exceeds the ₹10,000 threshold and is not covered by an exception. Under Section 40A(3A), the entire cash payment is deemed to be business income in the subsequent year. Therefore, ₹90,000 is chargeable in Tax Year 2026-27.

Where it goes wrong. Assuming that the cash-payment provision cannot apply because the expenditure was already allowed in an earlier year.

Authority. Section 40A(3A) of the Income-tax Act, 1961; Section 36(5) of the Income-tax Act, 2025; Rule 6DD of the Income-tax Rules, 1962

Question 25 · 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 manufacturer appoints a purchasing agent under a written agreement requiring the agent to make cash payments to certain small producers for specified raw materials. During Tax Year 2026-27, the manufacturer pays ₹75,000 in cash to that agent for the stated purchases. The agent is contractually required to settle the underlying goods purchases in cash on behalf of the manufacturer. The arrangement is genuine, and the payment is not made through a specified banking or online mode. Determine the treatment under Rule 6DD.

1. Nil disallowance, because the payment is made to an agent required to pay in cash. (correct answer)
2. ₹65,000 disallowance, because the ordinary threshold is ₹10,000.
3. ₹75,000 disallowance, because all payments to agents are excluded.
4. ₹22,500 disallowance, representing 30% of the expenditure.

Answer: A — Nil disallowance, because the payment is made to an agent required to pay in cash.

Explanation. Rule 6DD(j) covers payments made to an agent who is required to make cash payments for goods or services on behalf of the assessee. The written agreement specifically requires the purchasing agent to settle the underlying purchases in cash. Accordingly, the ₹75,000 payment satisfies the stated exception and no disallowance arises, notwithstanding that the ordinary ₹10,000 threshold is exceeded.

Where it goes wrong. Assuming that all payments to agents qualify for the exception, without checking whether the agent is actually required to make cash payments on behalf of the assessee.

Authority. Section 40A(3) and Section 40A(3A) of the Income-tax Act, 1961; Rule 6DD(j) of the Income-tax Rules, 1962; Section 36(4) and Section 36(5) of the Income-tax Act, 2025; Rule 26(j) of the Income-tax Rules, 2026