Taxation - DT Ch 05: Pgbp - Test 4: answer key

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

Scenario. Nandini Components Ltd., an Indian manufacturing company, follows the mercantile system of accounting. Its due date for filing the return of income for Tax Year 2026-27 is 31 October 2027. During the year, the company incurred GST liabilities of ₹7,20,000 relating to March 2027, which were discharged on 20 October 2027. Employer's contribution to the recognised provident fund amounted to ₹4,80,000 and was deposited on 28 October 2027. Employee bonus of ₹3,00,000 was paid on 31 October 2027. Leave encashment liability of ₹1,60,000 was also discharged on 29 October 2027. A gratuity contribution of ₹2,40,000 became payable during the year but was actually deposited only on 15 November 2027. The company also had outstanding interest of ₹5,00,000 on a borrowing from a scheduled bank. Of this amount, ₹2,00,000 was paid on 30 October 2027, while the balance ₹3,00,000 was converted into a funded term loan on 31 March 2027 under an arrangement with the bank. The company made no repayment against this converted loan during Tax Year 2026-27. Its accounts contain all the above expenses as charges for the year. Assume that every liability is otherwise allowable as a business deduction and that the company has complied with the applicable conditions governing the funds and borrowings. Ignore other adjustments.

Compute the aggregate deduction allowable in Tax Year 2026-27 in respect of GST, employer's provident fund contribution, employee bonus, leave encashment and the portion of scheduled-bank interest actually paid by 31 October 2027. Apply the statutory payment condition, considering that the company's return-filing due date is 31 October 2027.

1. ₹18,60,000 (correct answer)
2. ₹16,60,000
3. ₹14,00,000
4. ₹21,00,000

Answer: A — ₹18,60,000

Explanation. The specified liabilities paid on or before the return due date qualify in the original tax year. GST ₹7,20,000 + employer PF ₹4,80,000 + bonus ₹3,00,000 + leave encashment ₹1,60,000 + bank interest actually paid ₹2,00,000 = ₹18,60,000. All five payments satisfy the relevant statutory payment condition. The remaining gratuity and converted interest are excluded from this computation because they were not actually paid by the prescribed date.

Where it goes wrong. Including the entire bank interest liability merely because it was converted into a funded term loan.

Authority. Section 43B(a), 43B(b), 43B(c), 43B(d) and 43B(e) of the Income-tax Act, 1961; Section 37(2) and Section 37(3) of the Income-tax Act, 2025

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

What is the deduction available in Tax Year 2027-28 in respect of the gratuity contribution of ₹2,40,000 which was deposited on 15 November 2027? The original liability arose in Tax Year 2026-27 and the company follows the mercantile system. Assume that no deduction was allowed for this contribution in the earlier year.

1. Nil, because the contribution arose in the preceding tax year.
2. ₹2,40,000, being the amount actually deposited in the subsequent year. (correct answer)
3. ₹1,20,000, representing half of the contribution deposited late.
4. ₹72,000, representing 30% of the contribution deposited after the deadline.

Answer: B — ₹2,40,000, being the amount actually deposited in the subsequent year.

Explanation. The gratuity contribution was not paid by the return-filing due date of 31 October 2027. Consequently, it is not deductible in Tax Year 2026-27. Under Section 43B, the deduction becomes available in the tax year of actual payment. The company deposited ₹2,40,000 on 15 November 2027, falling in Tax Year 2027-28. Accordingly, deduction in that subsequent year is ₹2,40,000.

Where it goes wrong. Assuming that a delayed statutory payment is permanently disallowed rather than deductible in the year of actual payment.

Authority. Section 43B(b) of the Income-tax Act, 1961; Section 37(2)(b) and Section 37(3) of the Income-tax Act, 2025

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

Determine the treatment of the ₹3,00,000 interest outstanding to the scheduled bank that was converted into a funded term loan on 31 March 2027. The conversion deferred the liability to a future date, and no repayment was made during Tax Year 2026-27. The remaining bank interest of ₹2,00,000 was paid before the return due date. What amount relating to these interest liabilities is deductible in Tax Year 2026-27?

1. ₹5,00,000, since conversion of interest into a loan amounts to payment.
2. ₹3,00,000, because conversion discharges the original interest liability.
3. ₹2,00,000, representing the interest actually paid during the prescribed period. (correct answer)
4. Nil, because interest on scheduled-bank borrowings is never deductible.

Answer: C — ₹2,00,000, representing the interest actually paid during the prescribed period.

Explanation. Interest payable to a scheduled bank is covered by Section 43B(e). The amount actually paid within the prescribed period is ₹2,00,000 and is deductible. Conversion of the remaining ₹3,00,000 into a funded term loan does not constitute actual payment. Hence, ₹3,00,000 remains ineligible for deduction in the current year. Deduction of the converted amount arises only to the extent of subsequent repayment.

Where it goes wrong. Treating conversion of outstanding interest into another borrowing instrument as actual payment of interest.

Authority. Section 43B(e) and Explanation 3C of the Income-tax Act, 1961; Section 37(2)(e) of the Income-tax Act, 2025

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

Assume Nandini Components Ltd. pays the outstanding gratuity contribution of ₹2,40,000 and repays ₹1,20,000 towards the interest amount previously converted into a funded term loan during Tax Year 2027-28. No deduction was claimed in Tax Year 2026-27 for either amount. What aggregate deduction is available in the subsequent year?

1. ₹2,40,000, representing only the late gratuity contribution.
2. ₹6,60,000, representing all liabilities originally accrued.
3. ₹4,80,000, representing the converted interest and original contribution.
4. ₹3,60,000, representing actual payment of both outstanding amounts. (correct answer)

Answer: D — ₹3,60,000, representing actual payment of both outstanding amounts.

Explanation. The gratuity contribution of ₹2,40,000 is deductible when actually deposited in Tax Year 2027-28. Interest converted into a funded loan is allowable only to the extent of repayment. The repayment is ₹1,20,000. Total subsequent-year deduction = ₹2,40,000 + ₹1,20,000 = ₹3,60,000. The unrepaid converted balance of ₹1,80,000 remains ineligible until actually paid.

Where it goes wrong. Claiming the entire converted interest balance instead of limiting the deduction to the amount repaid.

Authority. Section 43B(b) and Section 43B(e) of the Income-tax Act, 1961; Section 37(2), Section 37(3) and Section 37(5) of the Income-tax Act, 2025

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

Scenario. Vikramaditya Packaging Ltd. manufactures industrial packaging materials and follows the mercantile system. During Tax Year 2026-27, it purchased raw materials from three suppliers registered as micro or small enterprises. It acquired goods worth ₹9,60,000 from Asha Precision, a micro enterprise, on 20 November 2026. There was no written agreement specifying the payment period. The goods were accepted without objection, but the amount remained unpaid on 31 March 2027 and was finally paid on 10 April 2027. From Bharat Small Tools, a small enterprise, the company acquired goods on 20 March 2027 for ₹7,50,000. A written agreement stipulated payment within 40 days of acceptance. The amount was paid on 25 April 2027, within the stipulated period. A separate purchase of ₹12,00,000 was made from Crest Components, also a small enterprise, on 1 February 2027. Its written agreement stipulated payment within 60 days. The company paid this amount only on 20 April 2027. In addition, it purchased packaging material worth ₹5,40,000 from Delta Industrial Supplies, which was registered as a medium enterprise. The goods were accepted on 5 January 2027, but the invoice remained unpaid until 15 May 2027. All purchases were genuine and were used in manufacturing. The company had not made any payment to these suppliers before the stated dates. Assume that all four suppliers maintained their stated enterprise classifications throughout the relevant period and that the company is otherwise entitled to claim the purchase expenditure.

Asha Precision, a micro enterprise, supplied goods worth ₹9,60,000 to Vikramaditya Packaging Ltd. on 20 November 2026. There was no written agreement specifying the payment period. The amount remained unpaid on 31 March 2027 and was paid on 10 April 2027. Though the payment was made well before the company's return-filing due date, determine the deduction allowable in Tax Year 2026-27 under the MSME payment provisions.

1. Nil, since payment was not made within the prescribed 15-day period. (correct answer)
2. ₹9,60,000, since payment was completed before the return-filing due date.
3. ₹6,72,000, representing 70% of the purchase expenditure.
4. ₹4,80,000, representing half the amount purchased from the micro enterprise.

Answer: A — Nil, since payment was not made within the prescribed 15-day period.

Explanation. Where there is no written agreement, Section 15 of the MSMED Act requires payment within 15 days from acceptance or deemed acceptance. Asha Precision is a micro enterprise, and the stipulated period was exceeded. Under Section 43B(h), the deduction is available only in the tax year of actual payment. Payment occurred on 10 April 2027, in Tax Year 2027-28. Therefore, the deduction for Tax Year 2026-27 is nil, notwithstanding payment before the return due date.

Where it goes wrong. Applying the general return-filing due-date relaxation under Section 43B to a delayed payment covered by clause (h).

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006; Section 37(2)(g) of the Income-tax Act, 2025

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

Bharat Small Tools, a small enterprise, accepted goods supplied to Vikramaditya Packaging Ltd. on 20 March 2027. The parties entered into a written agreement requiring payment within 40 days of acceptance. The buyer paid on 25 April 2027, within that agreed period. The purchase consideration was ₹7,50,000. What deduction is available for Tax Year 2026-27 under the mercantile system?

1. Nil, because payment was not completed by 31 March 2027.
2. ₹7,50,000, because payment complied with the written agreement. (correct answer)
3. ₹5,25,000, because only 70% can be deducted for small enterprises.
4. ₹3,75,000, because payment occurred in the subsequent tax year.

Answer: B — ₹7,50,000, because payment complied with the written agreement.

Explanation. The written agreement stipulates 40 days, which is within the statutory maximum of 45 days under Section 15 of the MSMED Act. Payment on 25 April 2027 is within the agreed period measured from 20 March 2027. Consequently, the supplier's payment terms have been complied with. The expenditure is therefore deductible on accrual basis in Tax Year 2026-27 under the mercantile system, even though payment occurred after year-end.

Where it goes wrong. Assuming that every payment made after 31 March to a micro or small enterprise is disallowed in the year of accrual.

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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

Crest Components, a small enterprise, entered into a written agreement allowing Vikramaditya Packaging Ltd. 60 days to pay for goods accepted on 1 February 2027. The purchase consideration was ₹12,00,000 and was paid only on 20 April 2027. Which treatment correctly applies to the payment period and deduction for Tax Year 2026-27?

1. The 60-day term is valid, and the expenditure is deductible in 2026-27.
2. The 60-day term is valid, but deduction begins in 2027-28.
3. The payment period is capped at 45 days, and deduction shifts to 2027-28. (correct answer)
4. The payment period is restricted to 15 days, and deduction is permanently denied.

Answer: C — The payment period is capped at 45 days, and deduction shifts to 2027-28.

Explanation. The written payment period cannot exceed 45 days from acceptance. Therefore, the agreement's 60-day term is restricted to the statutory maximum of 45 days. Payment on 20 April 2027 occurred beyond that period. Under Section 43B(h), the ₹12,00,000 deduction is allowed only in the tax year of actual payment. Since payment occurred in Tax Year 2027-28, the current-year deduction is nil and the subsequent-year deduction is ₹12,00,000.

Where it goes wrong. Accepting a contractual payment period exceeding 45 days or assuming that payment before the return due date restores the current-year deduction.

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006; Section 37(2)(g) of the Income-tax Act, 2025

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

Delta Industrial Supplies was registered as a medium enterprise throughout Tax Year 2026-27. It supplied packaging materials worth ₹5,40,000 to Vikramaditya Packaging Ltd. on 5 January 2027. The buyer accepted the goods, used them in manufacturing and made payment only on 15 May 2027. The buyer follows the mercantile system. Determine the treatment of the purchase expenditure under the special MSME payment restriction.

1. The entire amount is disallowed until payment because the supplier is an MSME.
2. Only 30% is allowed because payment occurred after the tax year.
3. The payment must be made within 15 days to qualify for deduction.
4. The full amount is deductible on accrual because the supplier is medium-sized. (correct answer)

Answer: D — The full amount is deductible on accrual because the supplier is medium-sized.

Explanation. Section 43B(h) applies specifically to sums payable to micro and small enterprises beyond the payment period under Section 15 of the MSMED Act. Delta Industrial Supplies is registered as a medium enterprise, so this special restriction does not apply. Under the mercantile system, the genuine purchase expenditure of ₹5,40,000 is deductible in Tax Year 2026-27 when the liability accrued, subject to the other applicable provisions.

Where it goes wrong. Treating micro, small and medium enterprises as one uniform category for purposes of Section 43B(h).

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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

Scenario. Aryan Renewable Power Ltd. operates a power-generation undertaking and has exercised the applicable option to claim depreciation on its power-generation assets on the prescribed actual-cost basis. During Tax Year 2026-27, it sold two generating machines. Machine A had an original actual cost of ₹60,00,000 and depreciation of ₹24,00,000 had been allowed up to the date of sale. It was sold on 15 February 2027 for ₹47,00,000, and scrap realised from the same machine amounted to ₹2,00,000. Machine B had an original actual cost of ₹45,00,000 and accumulated depreciation allowed of ₹15,00,000. It was sold on 3 March 2027 for ₹52,00,000, with no additional scrap proceeds. Separately, the company had claimed a deduction in an earlier year for a trading liability of ₹8,00,000 relating to raw-material purchases. During the current year, the supplier waived ₹4,50,000 of the outstanding balance. Another old liability of ₹2,00,000 relating to acquisition of a capital asset was also waived; no deduction had ever been claimed for that liability. The company further recovered ₹4,20,000 during the year from a customer against a trade debt of ₹9,00,000. In an earlier year, a deduction of ₹6,00,000 had been allowed in respect of that debt after the required write-off. All transactions were properly recorded in the books. Assume that the relevant business-income provisions apply to both machine disposals and the recoveries, and ignore capital gains and other adjustments.

Compute the amount chargeable as business income on remission of the trading liability owed to the raw-material supplier. The company had claimed a deduction of ₹8,00,000 in an earlier year and the supplier waived ₹4,50,000 during Tax Year 2026-27. A separate ₹2,00,000 liability relating to an asset acquisition was also waived, but no deduction had previously been claimed for that liability.

1. ₹4,50,000 (correct answer)
2. ₹6,50,000
3. ₹8,00,000
4. ₹2,50,000

Answer: A — ₹4,50,000

Explanation. Section 41(1) applies when a deduction has been allowed earlier for a loss, expenditure or trading liability and the assessee subsequently obtains a benefit through remission or cessation. The supplier waived ₹4,50,000 of the ₹8,00,000 previously deducted liability. This amount is taxable. The separate capital liability of ₹2,00,000 had never been allowed as a deduction, so its waiver does not satisfy the prior-deduction condition. Taxable business income is ₹4,50,000.

Where it goes wrong. Including a waived liability that never gave rise to a deduction in an earlier tax year.

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

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

Determine the balancing charge arising on the sale of Machine A by Aryan Renewable Power Ltd. The original actual cost was ₹60,00,000 and depreciation allowed before the sale was ₹24,00,000. The sale proceeds were ₹47,00,000 and scrap realised ₹2,00,000. The company is engaged in the qualifying power-generation activity and the relevant depreciation option has been exercised.

1. ₹24,00,000
2. ₹13,00,000 (correct answer)
3. ₹11,00,000
4. ₹36,00,000

Answer: B — ₹13,00,000

Explanation. First compute WDV: ₹60,00,000 − ₹24,00,000 = ₹36,00,000. Aggregate sale proceeds and scrap value = ₹47,00,000 + ₹2,00,000 = ₹49,00,000. Since this amount exceeds WDV but is below actual cost, balancing charge = ₹49,00,000 − ₹36,00,000 = ₹13,00,000. The prescribed formula therefore produces a balancing charge of ₹13,00,000, which is taxable as business income.

Where it goes wrong. Ignoring scrap value or calculating the balancing charge without comparing aggregate sale proceeds with both WDV and actual cost.

Authority. Section 41(2) of the Income-tax Act, 1961; Section 38(1)(b) and Section 38(2)(b) of the Income-tax Act, 2025

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

Compute the balancing charge on the sale of Machine B. The original actual cost was ₹45,00,000 and accumulated depreciation allowed was ₹15,00,000. The machine was sold for ₹52,00,000 without any scrap proceeds. The asset belonged to the qualifying power-generation undertaking and depreciation had been claimed on the prescribed actual-cost basis.

1. ₹22,00,000
2. ₹15,00,000 (provisional)
3. ₹15,00,000 (correct answer)
4. ₹30,00,000

Answer: C — ₹15,00,000

Explanation. WDV of Machine B = ₹45,00,000 − ₹15,00,000 = ₹30,00,000. Sale proceeds are ₹52,00,000, exceeding the actual cost of ₹45,00,000. Where sale proceeds exceed actual cost, the balancing charge is restricted to actual cost minus WDV. Calculation: ₹45,00,000 − ₹30,00,000 = ₹15,00,000. Therefore, business income chargeable as balancing charge is ₹15,00,000 rather than the entire excess sale proceeds.

Where it goes wrong. Taxing the entire amount by which sale proceeds exceed WDV without applying the actual-cost ceiling.

Authority. Section 41(2) of the Income-tax Act, 1961; Section 38(1)(b) of the Income-tax Act, 2025

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

Compute the business income arising from recovery of the customer debt during Tax Year 2026-27. The original debt was ₹9,00,000, of which ₹6,00,000 had been allowed as bad debt in an earlier year. The company subsequently recovered ₹4,20,000 from the customer. Determine the amount chargeable under the provision governing recovery of previously deducted bad debts.

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

Answer: D — ₹1,20,000

Explanation. The debt was ₹9,00,000 and the deduction allowed earlier was ₹6,00,000. The portion not previously deducted is ₹9,00,000 − ₹6,00,000 = ₹3,00,000. Recovery during the current year is ₹4,20,000. Taxable excess = ₹4,20,000 − ₹3,00,000 = ₹1,20,000. Therefore, ₹1,20,000 is deemed business income in the year of recovery.

Where it goes wrong. Taxing the entire amount recovered instead of the excess over the portion of the original debt that was not deducted.

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

Smt. Anuradha Sen follows the mercantile system and incurs GST liability of ₹8,40,000 on taxable business transactions during March 2027. The amount is payable under the applicable GST law in April 2027, after the close of Tax Year 2026-27. She pays the entire amount on 25 October 2027. Her return-filing due date is 31 October 2027. Determine the deduction allowable in Tax Year 2026-27.

1. ₹8,40,000, as payment was made before the return due date. (correct answer)
2. Nil, because GST was not payable by 31 March 2027.
3. ₹4,20,000, representing half of the GST discharged.
4. ₹2,52,000, representing 30% of the GST liability.

Answer: A — ₹8,40,000, as payment was made before the return due date.

Explanation. The GST liability arose during Tax Year 2026-27 even though the relevant GST law permitted payment in April 2027. Under Section 43B, the deduction is available in the original year when payment is made on or before the return-filing due date. Payment was made on 25 October 2027, before the assumed deadline of 31 October 2027. Accordingly, the entire ₹8,40,000 is deductible in Tax Year 2026-27.

Where it goes wrong. Assuming that a statutory liability payable after 31 March cannot qualify for deduction in the year in which it arose.

Authority. Section 43B(a) and Explanation 2 of the Income-tax Act, 1961; Section 37(2)(a) and Section 37(3) 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.

Aryan Steels Ltd. incurred a state electricity duty liability of ₹3,60,000 during Tax Year 2026-27. The company follows the mercantile system and debited the full liability to its statement of profit and loss. It paid the amount on 15 November 2027, while its return-filing due date was 31 October 2027. Determine the year in which the deduction is available under the actual-payment provisions.

1. ₹3,60,000 in Tax Year 2026-27 because the liability was accrued.
2. ₹3,60,000 in Tax Year 2027-28 when actual payment occurred. (correct answer)
3. ₹1,80,000 in each tax year in equal proportions.
4. Nil in both years because the payment was after the deadline.

Answer: B — ₹3,60,000 in Tax Year 2027-28 when actual payment occurred.

Explanation. Electricity duty is a statutory levy covered by Section 43B(a). Although the liability arose during Tax Year 2026-27, payment occurred on 15 November 2027, after the return-filing due date of 31 October 2027. Therefore, the amount is not deductible in the original year. Deduction is allowed in the tax year of actual payment, namely Tax Year 2027-28, for the full ₹3,60,000.

Where it goes wrong. Allowing the accrued statutory liability in the original year despite payment occurring after the return-filing due date.

Authority. Section 43B(a) of the Income-tax Act, 1961; Section 37(2)(a) and Section 37(3) 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 ₹5,40,000 towards employer contributions to an approved provident fund and ₹4,20,000 towards a gratuity fund during Tax Year 2026-27. The provident fund contribution is deposited on 20 October 2027, while the gratuity contribution is deposited on 10 November 2027. The return due date is 31 October 2027. Compute the amount allowable in the original tax year and the amount deferred to the subsequent tax year.

1. ₹9,60,000 allowable in Tax Year 2026-27.
2. ₹4,20,000 allowable in Tax Year 2026-27.
3. ₹5,40,000 allowable in 2026-27 and ₹4,20,000 in 2027-28. (correct answer)
4. Nil allowable in both years until all payments are completed.

Answer: C — ₹5,40,000 allowable in 2026-27 and ₹4,20,000 in 2027-28.

Explanation. Employer contributions to qualifying employee funds are covered by Section 43B(b). Provident fund contribution of ₹5,40,000 was deposited by 20 October 2027, before the 31 October return due date, and is deductible in Tax Year 2026-27. The gratuity contribution of ₹4,20,000 was paid only on 10 November 2027, after that date, and is deductible in the subsequent tax year. The aggregate original-year deduction is ₹5,40,000.

Where it goes wrong. Combining both employer contributions and allowing the entire amount merely because both liabilities were incurred during the same tax year.

Authority. Section 43B(b) of the Income-tax Act, 1961; Section 37(2)(b) and Section 37(3) 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 buyer accepts goods from a registered small enterprise on 10 September 2026. No written agreement exists between the parties regarding the payment period. The buyer settles the invoice on 28 September 2026. The supplier has no connection with the buyer and the transaction relates entirely to ordinary business purchases. Determine whether payment was made within the prescribed period under Section 15 of the MSMED Act, 2006.

1. No, because every MSME transaction requires a written agreement.
2. No, because the buyer must pay within 10 days of acceptance.
3. Yes, because payment within 30 days is always permitted.
4. Yes, because payment was within the 15-day period. (correct answer)

Answer: D — Yes, because payment was within the 15-day period.

Explanation. Where there is no written agreement, Section 15 requires payment before the appointed day, which the ICAI material explains as within 15 days from acceptance or deemed acceptance. Goods were accepted on 10 September 2026 and payment was made on 28 September 2026, within 15 days. The payment therefore meets the prescribed period and the buyer can claim deduction on accrual basis under the mercantile system.

Where it goes wrong. Applying the 45-day written-agreement period even though no written agreement was executed.

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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 manufacturer enters into a written agreement with a micro enterprise for payment within 60 days of acceptance. Goods are accepted on 3 February 2027. The agreement is otherwise genuine and the parties have followed it in the ordinary course of business. What is the maximum permissible payment period under Section 15 of the MSMED Act, 2006, and the corresponding date by which payment must be made?

1. 45 days, ending on 20 March 2027. (correct answer)
2. 60 days, ending on 4 April 2027.
3. 30 days, ending on 5 March 2027.
4. 15 days, ending on 18 February 2027.

Answer: A — 45 days, ending on 20 March 2027.

Explanation. A written agreement may provide for a payment period exceeding 15 days, but it cannot exceed 45 days from acceptance or deemed acceptance. The contractual period of 60 days is therefore restricted to 45 days. Counting 45 days from 3 February 2027 gives 20 March 2027. Thus, the maximum permissible period ends on 20 March 2027, and a payment beyond this period attracts the special deduction restriction.

Where it goes wrong. Treating the contractual 60-day period as binding even though the statutory ceiling is 45 days.

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

Question 18 · 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 small enterprise supplied machinery components worth ₹6,80,000 to a company. The goods were accepted on 1 February 2027 under a written agreement requiring payment within 35 days. The company paid on 5 March 2027. Assume that the agreement is valid and the payment is within the agreed 35-day period. The company follows the mercantile system and had not previously deducted the expenditure. Determine the deduction available for Tax Year 2026-27.

1. Nil, because payment occurred after 28 February 2027.
2. ₹6,80,000, because payment complied with the written agreement. (correct answer)
3. ₹3,40,000, because payment occurred partly in March.
4. ₹4,76,000, being 70% of the purchase amount.

Answer: B — ₹6,80,000, because payment complied with the written agreement.

Explanation. The agreed payment period is 35 days, which is within the statutory ceiling of 45 days. Payment on 5 March 2027 is within the stipulated period measured from acceptance on 1 February 2027. Therefore, there is no delay under Section 15 of the MSMED Act. The purchase expenditure of ₹6,80,000 qualifies for deduction on accrual basis in Tax Year 2026-27. No part of the amount is deferred under Section 43B(h).

Where it goes wrong. Treating the close of February as the payment deadline instead of applying the agreed 35-day period.

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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 company follows the mercantile system and owes ₹8,00,000 to a medium enterprise for goods supplied during Tax Year 2026-27. The liability is recorded in the statement of profit and loss and the company pays the amount in May 2027. The supplier was registered as a medium enterprise on the date of supply and at the time of payment. What is the consequence under the special payment restriction applicable to micro and small enterprises?

1. ₹8,00,000 is deferred until payment because all MSMEs are covered.
2. ₹4,00,000 is allowable currently and the balance is deferred.
3. ₹8,00,000 is deductible on accrual basis, since the supplier is medium-sized. (correct answer)
4. Nil is allowable because payment occurred after the tax year.

Answer: C — ₹8,00,000 is deductible on accrual basis, since the supplier is medium-sized.

Explanation. The special restriction in Section 43B(h) applies only to sums payable to micro or small enterprises beyond the payment period specified under Section 15 of the MSMED Act. A medium enterprise is outside this particular clause. Accordingly, the liability of ₹8,00,000 is deductible on accrual basis under the mercantile system, assuming the other deduction conditions are satisfied. Payment in May 2027 does not invoke Section 43B(h).

Where it goes wrong. Assuming that the entire MSME registration category, including medium enterprises, is covered by Section 43B(h).

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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 purchases goods worth ₹15,00,000 from a micro enterprise without executing a written agreement. The goods are accepted on 1 December 2026. The buyer does not pay the supplier within 15 days but settles the amount on 15 April 2027. Its return-filing due date for Tax Year 2026-27 is 31 October 2027. What deduction can be claimed for the purchase in the two tax years?

1. ₹15,00,000 in Tax Year 2026-27 because payment preceded return filing.
2. ₹7,50,000 in each tax year on an equal instalment basis.
3. ₹15,00,000 in Tax Year 2027-28, the year of actual payment. (correct answer)
4. Nil in both years because payment exceeded the prescribed period.

Answer: C — ₹15,00,000 in Tax Year 2027-28, the year of actual payment.

Explanation. No written agreement exists, so payment was required within 15 days from acceptance. The buyer failed to meet that deadline. Section 43B(h) therefore postpones the deduction to the tax year in which actual payment is made. The ₹15,00,000 was paid on 15 April 2027, which falls in Tax Year 2027-28. Payment before the return due date does not restore deduction in Tax Year 2026-27 for a delayed micro-enterprise payment.

Where it goes wrong. Applying the general Section 43B return-filing relaxation to a payment specifically covered by clause (h).

Authority. Section 43B(h) of the Income-tax Act, 1961; Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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 proprietor claimed a deduction of ₹6,50,000 for raw-material purchases in Tax Year 2024-25. During Tax Year 2026-27, the supplier agreed to waive ₹2,80,000 of the outstanding amount as part of a commercial settlement. The proprietor continued the same business during the current year. Determine the amount chargeable as business income on account of remission or cessation of the trading liability.

1. ₹2,80,000 (correct answer)
2. ₹6,50,000
3. ₹3,70,000
4. Nil, because the original purchase occurred in an earlier tax year.

Answer: A — ₹2,80,000

Explanation. The liability arose from raw-material purchases and the original expenditure of ₹6,50,000 was allowed as a deduction in Tax Year 2024-25. The supplier waived ₹2,80,000 during Tax Year 2026-27. Under Section 41(1), the benefit obtained through remission of a previously deducted trading liability is taxable in the year of remission. Therefore, business income chargeable is ₹2,80,000, not the entire original purchase liability.

Where it goes wrong. Taxing the original liability in full rather than taxing only the amount of remission actually obtained.

Authority. Section 41(1) of the Income-tax Act, 1961; Section 38(1)(a) 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 manufacturer obtained a waiver of ₹4,00,000 from a machinery supplier during Tax Year 2026-27. The outstanding amount related entirely to the original acquisition cost of a machine. The manufacturer had capitalised the liability when purchasing the machine, and the amount was never claimed as a revenue deduction or otherwise allowed in computing business income. Determine the treatment under the provisions governing remission of previously deducted liabilities.

1. ₹4,00,000 is taxable because every waiver is business income.
2. Nil is taxable, because no deduction was previously allowed for the liability. (correct answer)
3. ₹2,00,000 is taxable, representing half the amount waived.
4. ₹3,00,000 is taxable after reducing the waiver by assumed depreciation.

Answer: B — Nil is taxable, because no deduction was previously allowed for the liability.

Explanation. Section 41(1) requires a prior deduction to have been allowed in respect of the relevant loss, expenditure or trading liability. Here, the ₹4,00,000 represented capital cost of machinery and was capitalised without any deduction being allowed as revenue expenditure. Since the necessary prior-deduction condition is absent, the waiver does not become taxable under this provision. The amount chargeable under Section 41(1) is therefore nil.

Where it goes wrong. Assuming that remission of every commercial liability is automatically taxable without examining whether a deduction was previously allowed.

Authority. Section 41(1) of the Income-tax Act, 1961; Section 38(1)(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 power-generation company sells a qualifying machine for ₹38,00,000 and receives scrap proceeds of ₹2,00,000. Its original actual cost was ₹52,00,000 and depreciation allowed up to the transfer date was ₹32,00,000. The sale occurs during Tax Year 2026-27, and the undertaking has exercised the applicable depreciation option. Compute the balancing charge taxable as business income.

1. ₹20,00,000, representing actual cost less WDV.
2. ₹18,00,000, representing sale proceeds less accumulated depreciation.
3. ₹20,00,000, representing total proceeds less WDV, subject to the cost ceiling. (correct answer)
4. ₹12,00,000, representing sale proceeds less scrap proceeds and depreciation.

Answer: C — ₹20,00,000, representing total proceeds less WDV, subject to the cost ceiling.

Explanation. WDV = ₹52,00,000 − ₹32,00,000 = ₹20,00,000. Aggregate consideration including scrap = ₹38,00,000 + ₹2,00,000 = ₹40,00,000. This exceeds WDV but is below actual cost. Balancing charge = ₹40,00,000 − ₹20,00,000 = ₹20,00,000. The charge does not exceed the maximum of actual cost minus WDV, also ₹20,00,000. Hence the full ₹20,00,000 is taxable as business income.

Where it goes wrong. Ignoring scrap proceeds or treating accumulated depreciation as the balancing charge.

Authority. Section 41(2) of the Income-tax Act, 1961; Section 38(1)(b) 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 company operating a power undertaking sells its only generating machine during Tax Year 2026-27. Its original cost was ₹40,00,000, accumulated depreciation was ₹25,00,000 and sale proceeds were ₹20,00,000. The company discontinued the relevant undertaking before the end of the tax year and did not acquire any replacement machinery. Determine whether the balancing charge can still be brought to tax.

1. Nil, because cessation of the undertaking terminates the charging provision.
2. ₹5,00,000, because the sale exceeds the WDV by that amount. (correct answer)
3. ₹15,00,000, because actual cost is always taxable on disposal.
4. ₹10,00,000, because sale proceeds are reduced by the original cost.

Answer: B — ₹5,00,000, because the sale exceeds the WDV by that amount.

Explanation. WDV = ₹40,00,000 − ₹25,00,000 = ₹15,00,000. Sale proceeds exceed WDV by ₹20,00,000 − ₹15,00,000 = ₹5,00,000. This amount is below the maximum balancing charge of actual cost minus WDV, ₹25,00,000. Therefore, the balancing charge is ₹5,00,000. The provision applies even when the relevant business is no longer in existence in the year in which the sale occurs.

Where it goes wrong. Assuming that closing the undertaking before the end of the tax year automatically prevents taxation of the balancing charge.

Authority. Section 41(2) and Section 41(5) of the Income-tax Act, 1961; Section 38(1)(b) and Section 38(5) 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 trading concern had an outstanding customer debt of ₹11,00,000 which had been included in its taxable business income in an earlier year. It wrote off ₹8,00,000 as irrecoverable and claimed deduction for that amount. During Tax Year 2026-27, the business had ceased operations, but the proprietor recovered ₹5,00,000 from the same customer. Determine the business income chargeable on the subsequent recovery, considering the amount of the debt for which no deduction had previously been allowed.

1. ₹5,00,000, representing the entire collection received.
2. ₹3,00,000, representing the balance originally not written off.
3. ₹2,00,000, representing recovery less the unrecovered balance.
4. ₹2,00,000, being the excess over the portion previously not deducted. (correct answer)

Answer: D — ₹2,00,000, being the excess over the portion previously not deducted.

Explanation. The total debt was ₹11,00,000 and the deduction previously allowed was ₹8,00,000. The portion not deducted is ₹11,00,000 − ₹8,00,000 = ₹3,00,000. Current-year recovery is ₹5,00,000. Taxable excess = ₹5,00,000 − ₹3,00,000 = ₹2,00,000. Under Section 41(4), recovery of an earlier bad debt is taxable even when the original business is no longer in existence.

Where it goes wrong. Assuming that cessation of business prevents taxation of subsequent bad-debt recovery, or taxing the entire collection without reducing the portion not previously deducted.

Authority. Section 41(4) of the Income-tax Act, 1961; Section 38(1)(d) and Section 38(3) of the Income-tax Act, 2025