Taxation - DT Ch 06: Capital Gains - Test 3: answer key

Question 1 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. Mr. Raghav Mehta, a resident individual, owned an industrial land parcel acquired on 12 May 2014 for ₹34,00,000. The Central Government compulsorily acquired the land on 1 December 2026 for a public infrastructure project. The compensation determined in the first instance was ₹1,20,00,000. Raghav received the first instalment of ₹50,00,000 on 20 December 2026 through his bank account. The remaining ₹70,00,000 was received on 10 July 2027. He had incurred legal and other expenditure of ₹2,00,000 wholly and exclusively in connection with the compulsory acquisition. Dissatisfied with the compensation, Raghav approached the appropriate court. On 12 March 2027, pursuant to an interim order, he received ₹8,00,000 towards enhanced compensation. The court passed its final order on 20 May 2027, confirming total enhanced compensation of ₹24,00,000. The balance ₹16,00,000 was received on 31 July 2027. The interim payment was not required to be refunded under the final order. Along with the enhanced compensation, Raghav received ₹6,00,000 as interest on compensation on 31 July 2027. The interest was separately quantified and credited by the acquiring authority. No deduction under any other provision has been claimed against this interest. Raghav's tax adviser is required to distinguish the tax treatment of the original compensation, enhanced compensation and interest. In particular, the adviser must consider the year in which the compensation or part thereof was first received, the special treatment of compensation received under an interim court order, the nil cost prescribed for enhanced compensation and the separate deduction available against interest on compensation. No exemption relating to compulsory acquisition of agricultural land is available on these facts.

In which tax year will the capital gain arising from the original compensation of ₹1,20,00,000 become chargeable, considering that Raghav first received only ₹50,00,000 on 20 December 2026 and received the balance in July 2027?

1. T.Y. 2026-27, being the year in which the first part of compensation was received. (correct answer)
2. T.Y. 2027-28, being the year in which the entire compensation was received.
3. T.Y. 2026-27, but only to the extent of ₹50,00,000 actually received.
4. T.Y. 2028-29, being the year following the final compensation payment.

Answer: A — T.Y. 2026-27, being the year in which the first part of compensation was received.

Explanation. Under section 45(5)(a), capital gains on compulsory acquisition become chargeable in the previous year in which the compensation or any part thereof is first received. Raghav first received ₹50,00,000 on 20 December 2026, which falls in T.Y. 2026-27. The original compensation determined is ₹1,20,00,000. The subsequent receipt of ₹70,00,000 in July 2027 does not shift the original compensation to the following tax year.

Where it goes wrong. Treating the date of receipt of the final instalment as the year of chargeability instead of applying the first-receipt rule.

Authority. Section 45(5)(a) of the Income-tax Act, 1961; Section 67(12) of the Income-tax Act, 2025, corresponding to the compulsory-acquisition provision in the supplied ICAI material

Question 2 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Compute the capital gain arising from the original compulsory acquisition compensation of Raghav's industrial land. The original compensation was ₹1,20,00,000, acquisition cost was ₹34,00,000 and expenditure wholly and exclusively connected with the acquisition proceedings was ₹2,00,000. Ignore exemptions and assume no other adjustment is required.

1. ₹82,00,000.
2. ₹86,00,000.
3. ₹84,00,000. (correct answer)
4. ₹88,00,000.

Answer: C — ₹84,00,000.

Explanation. The original compensation is the full value of consideration: ₹1,20,00,000. Under section 48, deduct expenditure connected with transfer of ₹2,00,000 and acquisition cost of ₹34,00,000. Net computation: ₹1,20,00,000 − ₹2,00,000 = ₹1,18,00,000; ₹1,18,00,000 − ₹34,00,000 = ₹84,00,000. Accordingly, capital gain on original compensation is ₹84,00,000, chargeable in T.Y. 2026-27.

Where it goes wrong. Deducting only the amount of compensation actually received during the year instead of using the original compensation determined for the compulsory acquisition.

Authority. Section 45(5)(a) of the Income-tax Act, 1961; Section 48 of the Income-tax Act, 1961

Question 3 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

The court awarded enhanced compensation of ₹24,00,000. Of this amount, ₹8,00,000 was received under an interim order in March 2027, while the final order confirming enhancement was passed in May 2027. The balance was received in July 2027. Determine the enhanced compensation chargeable as capital gains and the relevant tax year.

1. ₹8,00,000 in T.Y. 2026-27.
2. ₹16,00,000 in T.Y. 2027-28.
3. ₹8,00,000 in T.Y. 2027-28.
4. ₹24,00,000 in T.Y. 2027-28. (correct answer)

Answer: D — ₹24,00,000 in T.Y. 2027-28.

Explanation. Enhanced compensation is chargeable in the year of receipt under section 45(5)(b). However, compensation received under an interim order is deemed chargeable in the year in which the final order is made. The ₹8,00,000 interim receipt therefore shifts to T.Y. 2027-28. The remaining ₹16,00,000 is also received in T.Y. 2027-28. Total enhanced compensation chargeable = ₹8,00,000 + ₹16,00,000 = ₹24,00,000. Its cost of acquisition and improvement are nil.

Where it goes wrong. Taxing the interim-order payment in the year of actual receipt rather than in the year in which the final court order is made.

Authority. Section 45(5)(b) and relevant proviso to section 45(5) of the Income-tax Act, 1961; Section 67(12)(c) of the Income-tax Act, 2025, corresponding to the interim-order provision in the supplied ICAI material

Question 4 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Raghav additionally received ₹6,00,000 as interest on compensation on 31 July 2027. Determine the taxable amount and head of income after applying the deduction prescribed for interest on compensation. The interest is separately identifiable and no other expenditure has been incurred in earning this interest.

1. ₹6,00,000, taxable under Capital Gains.
2. ₹3,00,000, taxable under Income from Other Sources. (correct answer)
3. ₹6,00,000, taxable under Income from Other Sources.
4. ₹3,00,000, taxable under Capital Gains.

Answer: B — ₹3,00,000, taxable under Income from Other Sources.

Explanation. Interest on compensation or enhanced compensation is taxable under Income from Other Sources in the year of receipt under section 56(2)(viii). Section 57(iv) permits a deduction of 50% of such interest. Interest received = ₹6,00,000. Deduction = ₹6,00,000 × 50% = ₹3,00,000. Taxable income = ₹6,00,000 − ₹3,00,000 = ₹3,00,000. Hence, ₹3,00,000 is taxable under Income from Other Sources in T.Y. 2027-28.

Where it goes wrong. Treating interest on enhanced compensation as capital gains merely because the underlying principal compensation is taxable under that head.

Authority. Section 56(2)(viii) of the Income-tax Act, 1961; Section 57(iv) of the Income-tax Act, 1961

Question 5 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. Aryan Steels Ltd., an Indian company, owned several assets that were damaged or destroyed during a severe cyclone followed by an accidental fire at its industrial premises during T.Y. 2026-27. The company maintained separate records for its investment properties, artistic assets, machinery and trading inventory. A vacant commercial warehouse held as an investment was completely destroyed by the cyclone on 1 August 2026. It had been acquired on 1 April 2020 for ₹36,00,000. No depreciation had been claimed on this property. The insurance company accepted the claim and paid ₹48,00,000 in cash on 15 February 2027. The company incurred no separate expenditure in obtaining the settlement. The accidental fire on 5 January 2027 also destroyed an original painting displayed in the company's corporate reception area. The painting had been acquired as a capital investment for ₹2,50,000. Instead of paying cash, the insurer transferred a replacement artwork to Aryan Steels Ltd. on 20 March 2027. The fair market value of that artwork on the date of receipt was ₹7,00,000. The fire additionally destroyed steel inventory held as stock-in-trade. Its carrying cost was ₹15,00,000. The insurer subsequently paid compensation of ₹11,00,000 on 10 April 2027 towards the inventory loss. The company had also incurred ordinary business expenses relating to the damaged inventory, but these are not relevant for determining capital gains. The finance director seeks advice on the classification and computation of the insurance receipts. The issues include the year of chargeability, the deemed full value of consideration where compensation is received in money or another asset, the deduction of the original acquisition cost and the distinction between compensation for capital assets and compensation for stock-in-trade.

When should the capital gain arising from the destruction of Aryan Steels Ltd.'s commercial warehouse be charged to tax? The warehouse was destroyed by a cyclone in August 2026, but the insurance company paid the accepted claim only on 15 February 2027.

1. T.Y. 2025-26, when the insurance policy was originally obtained.
2. T.Y. 2026-27, when the insurance compensation was received. (correct answer)
3. T.Y. 2027-28, being the year following the destruction.
4. T.Y. 2026-27, only when the company files its tax return.

Answer: B — T.Y. 2026-27, when the insurance compensation was received.

Explanation. Section 45(1A) provides that profits arising from insurance money received due to destruction or damage of a capital asset by specified events are chargeable in the previous year in which the money or other asset is received. The warehouse was destroyed in August 2026, but the ₹48,00,000 insurance settlement was received on 15 February 2027. Therefore, the relevant tax year is T.Y. 2026-27, not the year of destruction.

Where it goes wrong. Taking the date of destruction of the insured asset as the year of chargeability rather than the date of receipt of the insurance proceeds.

Authority. Section 45(1A) of the Income-tax Act, 1961; Section 67(2) of the Income-tax Act, 2025, corresponding to insurance receipts in the supplied ICAI material

Question 6 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Compute the capital gain arising from the insurance compensation received for destruction of Aryan Steels Ltd.'s warehouse. The insurance company paid ₹48,00,000 in cash. Original acquisition cost was ₹36,00,000, no depreciation was claimed and no transfer-related expenditure was incurred. Assume the warehouse qualifies as a capital asset.

1. ₹36,00,000.
2. ₹14,00,000.
3. ₹48,00,000.
4. ₹12,00,000. (correct answer)

Answer: D — ₹12,00,000.

Explanation. Under section 45(1A), insurance money received for destruction of a capital asset is deemed to be full value of consideration. Here, consideration = ₹48,00,000. Deduct original acquisition cost of ₹36,00,000 under section 48. Transfer expenses are nil. Thus, capital gain = ₹48,00,000 − ₹36,00,000 = ₹12,00,000. This gain is chargeable in the tax year in which the insurance proceeds are received, namely T.Y. 2026-27.

Where it goes wrong. Treating the insurance compensation as a tax-exempt reimbursement instead of applying the capital gains computation to the destroyed capital asset.

Authority. Section 45(1A) of the Income-tax Act, 1961; Section 48 of the Income-tax Act, 1961

Question 7 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

The insurer settled the claim for the destroyed painting by transferring another artwork having fair market value of ₹7,00,000 on 20 March 2027. The original painting had cost ₹2,50,000. Determine the capital gain and the amount treated as full value of consideration.

1. ₹4,50,000, using the replacement artwork's fair market value. (correct answer)
2. ₹2,50,000, using the original painting's acquisition cost.
3. ₹7,00,000, without deducting the original painting's cost.
4. Nil, since the insurer transferred another artistic asset.

Answer: A — ₹4,50,000, using the replacement artwork's fair market value.

Explanation. Where insurance compensation is received in the form of another asset, its fair market value on the date of receipt is deemed to be full value of consideration. Thus, FVC = ₹7,00,000. Less: original painting cost ₹2,50,000. Capital gain = ₹7,00,000 − ₹2,50,000 = ₹4,50,000. The replacement artwork was received on 20 March 2027, so the gain is chargeable in T.Y. 2026-27.

Where it goes wrong. Ignoring insurance compensation merely because it is received in the form of property instead of cash.

Authority. Section 45(1A) of the Income-tax Act, 1961; Section 48 of the Income-tax Act, 1961

Question 8 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

The insurer paid ₹11,00,000 on 10 April 2027 towards steel inventory destroyed in the fire. The inventory had been held by Aryan Steels Ltd. as stock-in-trade at a carrying cost of ₹15,00,000. Determine the appropriate tax treatment of this insurance receipt, distinguishing it from compensation received for destruction of a capital asset.

1. Capital gains of ₹11,00,000 under section 45(1A).
2. Capital loss of ₹4,00,000 under section 45(1A).
3. Business receipt under the head Profits and Gains of Business or Profession. (correct answer)
4. Exempt agricultural income because the inventory was destroyed.

Answer: C — Business receipt under the head Profits and Gains of Business or Profession.

Explanation. Section 45(1A) covers insurance proceeds relating to destruction or damage of a capital asset. Stock-in-trade is excluded from the definition of capital asset under section 2(14). Consequently, compensation for destroyed inventory is a trading receipt chargeable under section 28(i). The ₹11,00,000 receipt arose on 10 April 2027 and is considered in T.Y. 2027-28. Its treatment is distinct from insurance compensation for the warehouse and painting.

Where it goes wrong. Applying the insurance-related capital gains provision to stock-in-trade without first determining whether the destroyed asset is a capital asset.

Authority. Section 28(i) of the Income-tax Act, 1961; Section 2(14) of the Income-tax Act, 1961

Question 9 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Nandini Real Estates Pvt. Ltd. purchased a vacant commercial land parcel on 9 June 2016 for ₹60,00,000 as a long-term investment. The company did not initially intend to develop or trade in the property. However, following a change in its business strategy, the board resolved on 1 October 2026 to convert the entire land parcel into stock-in-trade of its real estate development business. The fair market value of the land on that date was ₹1,50,00,000. For development purposes, the land was divided into five equal commercial plots. The company maintained separate inventory records for each plot, with each plot representing one-fifth of the original land parcel and its corresponding fair market value and original acquisition cost. Three plots were sold on 28 February 2027 for aggregate consideration of ₹1,26,00,000. The remaining two plots were retained at the close of T.Y. 2026-27. Subsequently, these two plots were sold on 30 June 2027 for aggregate consideration of ₹92,00,000. The company did not incur any expenditure directly attributable to the conversion itself. Development expenditure was not incurred before the first three plots were sold. The commercial plots were transferred in the ordinary course of its real estate business. The finance department has requested a computation separating capital gains arising on conversion from the business income arising on the subsequent sale of converted inventory. The advisers must also determine the tax year in which the conversion gain becomes chargeable, how the gain should be apportioned when only part of the converted inventory is sold, and the treatment of the remaining plots sold in the following tax year. For this purpose, the fair market value on 1 October 2026 is the applicable valuation for the capital gains computation.

On what date did the transfer take place when Nandini Real Estates Pvt. Ltd. converted its investment land into stock-in-trade, and when does the resultant capital gain become chargeable? Consider that the company sold only three of the five converted plots during T.Y. 2026-27.

1. Transfer and chargeability both arise on the date of the first sale.
2. Transfer arises when the entire five plots are sold.
3. Transfer arises on 30 June 2027 when the remaining plots are sold.
4. Transfer arises on 1 October 2026, with proportionate chargeability when inventory is sold. (correct answer)

Answer: D — Transfer arises on 1 October 2026, with proportionate chargeability when inventory is sold.

Explanation. Conversion of a capital asset into stock-in-trade constitutes a transfer under section 2(47). The transfer date is 1 October 2026, when Nandini converted the investment land. However, section 45(2) postpones chargeability until the converted stock is sold. Since three out of five plots were sold in T.Y. 2026-27, the proportionate capital gain attributable to those plots becomes chargeable in that year. The remaining portion is deferred until its subsequent sale.

Where it goes wrong. Assuming that the conversion date and the year of chargeability are necessarily the same.

Authority. Section 45(2) of the Income-tax Act, 1961; Section 2(47) of the Income-tax Act, 1961; Section 67(6) of the Income-tax Act, 2025, corresponding to section 45(2) in the supplied ICAI material

Question 10 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Compute the capital gain chargeable in T.Y. 2026-27 on the three commercial plots sold by Nandini Real Estates Pvt. Ltd. The entire land had an acquisition cost of ₹60,00,000 and fair market value of ₹1,50,00,000 on conversion. Only three of the five equal plots were sold during the year.

1. ₹54,00,000. (correct answer)
2. ₹90,00,000.
3. ₹36,00,000.
4. ₹45,00,000.

Answer: A — ₹54,00,000.

Explanation. Total capital gain on conversion = FMV ₹1,50,00,000 − acquisition cost ₹60,00,000 = ₹90,00,000. Three of five equal plots were sold, so the proportion attributable to sales is 3/5. Capital gain chargeable = ₹90,00,000 × 3/5 = ₹54,00,000. The remaining 2/5 gain is chargeable when the other plots are subsequently sold. The sale consideration does not replace the FMV used for the capital gains component.

Where it goes wrong. Charging the entire conversion gain in the first year despite sale of only three-fifths of the converted inventory.

Authority. Section 45(2) of the Income-tax Act, 1961; Section 48 of the Income-tax Act, 1961

Question 11 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Determine the business income arising from the sale of three commercial plots on 28 February 2027. Nandini received ₹1,26,00,000 for these plots. The fair market value of the original land on conversion was ₹1,50,00,000, and each of the five plots represents an equal one-fifth share of that land.

1. ₹36,00,000, being the difference between total sale price and original acquisition cost.
2. ₹66,00,000, being sale consideration less the proportionate original cost.
3. ₹36,00,000, being ₹1,26,00,000 less the proportionate conversion-date value. (correct answer)
4. ₹54,00,000, being the capital gain attributable to three plots.

Answer: C — ₹36,00,000, being ₹1,26,00,000 less the proportionate conversion-date value.

Explanation. Three plots represent 3/5 of the original land. Their proportionate FMV on conversion = ₹1,50,00,000 × 3/5 = ₹90,00,000. Business income is sale consideration less this conversion-date value. Hence, ₹1,26,00,000 − ₹90,00,000 = ₹36,00,000. This business income is distinct from the capital gain of ₹54,00,000 computed using the proportionate original acquisition cost of ₹36,00,000.

Where it goes wrong. Deducting original acquisition cost instead of the fair market value on conversion while computing the business income component.

Authority. Section 45(2) of the Income-tax Act, 1961; Section 28(i) of the Income-tax Act, 1961

Question 12 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

The remaining two commercial plots were sold on 30 June 2027 for ₹92,00,000. Determine the capital gain attributable to these plots and the tax year in which that gain becomes chargeable under section 45(2).

1. ₹54,00,000 in T.Y. 2026-27.
2. ₹36,00,000 in T.Y. 2027-28. (correct answer)
3. ₹90,00,000 in T.Y. 2027-28.
4. ₹32,00,000 in T.Y. 2026-27.

Answer: B — ₹36,00,000 in T.Y. 2027-28.

Explanation. Total gain on conversion = ₹1,50,00,000 − ₹60,00,000 = ₹90,00,000. Two out of five plots remain, so their attributable gain is ₹90,00,000 × 2/5 = ₹36,00,000. These plots were sold on 30 June 2027, falling in T.Y. 2027-28. Under section 45(2), the proportionate conversion gain becomes chargeable when the corresponding converted inventory is sold.

Where it goes wrong. Charging the capital gain relating to the retained plots in the earlier year merely because the original land was converted during that year.

Authority. Section 45(2) of the Income-tax Act, 1961; Section 48 of the Income-tax Act, 1961

Question 13 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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 Ltd. has a block of machinery with opening written down value of ₹42,00,000 on 1 April 2026. It purchases additional machinery for ₹18,00,000 during the year. On 15 January 2027, certain machines from this block are transferred for aggregate consideration of ₹70,00,000. Transfer-related expenditure is ₹2,00,000. Other machines continue to exist in the block. Compute the capital gain arising under the special provision for depreciable assets.

1. Short-term capital gain of ₹8,00,000. (correct answer)
2. Long-term capital gain of ₹10,00,000.
3. Short-term capital gain of ₹10,00,000.
4. No capital gain because the block continues to exist.

Answer: A — Short-term capital gain of ₹8,00,000.

Explanation. Under section 50, compare consideration with opening WDV, additions and transfer expenditure. Aggregate base = ₹42,00,000 + ₹18,00,000 + ₹2,00,000 = ₹62,00,000. Consideration = ₹70,00,000. Short-term capital gain = ₹70,00,000 − ₹62,00,000 = ₹8,00,000. Since consideration exceeds the aggregate statutory base, the excess is deemed short-term capital gain even though other machinery remains in the block.

Where it goes wrong. Ignoring transfer expenses and additions during the year while calculating the statutory block-of-assets comparison.

Authority. Section 50(1) of the Income-tax Act, 1961; Section 74 of the Income-tax Act, 2025, corresponding to the depreciable-assets provision in the supplied ICAI material

Question 14 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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 has opening WDV of ₹35,00,000 in its machinery block on 1 April 2026. During T.Y. 2026-27, it purchases a new machine costing ₹10,00,000 and sells one old machine for ₹22,00,000. Other machinery continues to exist in the same block. No separate transfer expenditure is incurred. Determine the capital gains consequence and the closing block value before providing depreciation.

1. Short-term capital gain of ₹13,00,000.
2. No capital gain or loss; closing block value is ₹23,00,000. (correct answer)
3. Short-term capital loss of ₹13,00,000.
4. Long-term capital gain of ₹23,00,000.

Answer: B — No capital gain or loss; closing block value is ₹23,00,000.

Explanation. Aggregate block base = opening WDV ₹35,00,000 + addition ₹10,00,000 = ₹45,00,000. Sale consideration is ₹22,00,000, which is lower than ₹45,00,000. Since the block continues to exist, no capital gain or loss arises. Closing block value before depreciation = ₹45,00,000 − ₹22,00,000 = ₹23,00,000. Section 50 does not compute gain or loss separately for each machine while the block continues.

Where it goes wrong. Computing capital loss individually on the sold machine instead of applying the block-of-assets method.

Authority. Section 50(1) of the Income-tax Act, 1961

Question 15 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Aryan Steels Ltd. has a machinery block with opening WDV of ₹28,00,000. It purchases additional machinery for ₹12,00,000 during the tax year. Before the year closes, all machinery in that block is transferred for aggregate consideration of ₹35,00,000, and transfer-related expenditure is ₹1,00,000. No machinery remains in the block. Compute the resulting capital gain or loss under section 50.

1. Short-term capital gain of ₹6,00,000.
2. No capital gain or loss because the block ceases to exist.
3. Short-term capital loss of ₹6,00,000. (correct answer)
4. Long-term capital loss of ₹6,00,000.

Answer: C — Short-term capital loss of ₹6,00,000.

Explanation. Where the entire block ceases to exist, compare consideration with aggregate WDV and current-year additions after including transfer expenditure. Computation: ₹28,00,000 + ₹12,00,000 + ₹1,00,000 = ₹41,00,000. Sale consideration = ₹35,00,000. Since ₹35,00,000 is lower by ₹6,00,000, the result is short-term capital loss of ₹6,00,000. Section 50 applies irrespective of the individual machines' holding periods.

Where it goes wrong. Assuming that cessation of a block automatically eliminates capital loss even where consideration is below its statutory cost base.

Authority. Section 50(1) of the Income-tax Act, 1961

Question 16 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Meera Textiles Ltd. reports opening WDV of ₹50,00,000 in a depreciable machinery block. It acquires another machine for ₹20,00,000 during T.Y. 2026-27. On 31 March 2027, an existing machine is sold for ₹75,00,000. Transfer expenditure is ₹2,00,000. Other machines continue in the block. Determine the capital gain and its character under section 50.

1. Long-term capital gain of ₹3,00,000.
2. Short-term capital loss of ₹3,00,000.
3. No capital gain because the block continues.
4. Short-term capital gain of ₹3,00,000. (correct answer)

Answer: D — Short-term capital gain of ₹3,00,000.

Explanation. The amount to compare with sale consideration is opening WDV plus additions plus transfer expenditure. Calculation: ₹50,00,000 + ₹20,00,000 + ₹2,00,000 = ₹72,00,000. Transfer consideration = ₹75,00,000. Excess = ₹75,00,000 − ₹72,00,000 = ₹3,00,000. The excess is deemed short-term capital gain under section 50, even though the block continues to exist and the transferred machine may have been held for several years.

Where it goes wrong. Assuming that capital gain cannot arise unless every machine in the block is transferred.

Authority. Section 50(1) of the Income-tax Act, 1961

Question 17 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Narmada Industries Ltd. transfers three machines forming part of a single depreciable block during T.Y. 2026-27 for aggregate consideration of ₹90,00,000. The opening WDV of the block was ₹64,00,000. No additions were made during the year, and the company incurred ₹2,00,000 wholly and exclusively in connection with the transfers. Compute the taxable capital gain.

1. Short-term capital gain of ₹24,00,000. (correct answer)
2. Long-term capital gain of ₹26,00,000.
3. Short-term capital gain of ₹28,00,000.
4. No capital gain because three machines were transferred.

Answer: A — Short-term capital gain of ₹24,00,000.

Explanation. For the transferred machinery, compare aggregate consideration with opening block WDV and transfer expenditure. Statutory base = ₹64,00,000 + ₹2,00,000 = ₹66,00,000. Full value of consideration = ₹90,00,000. Capital gain = ₹90,00,000 − ₹66,00,000 = ₹24,00,000. Section 50 deems this gain short-term. The number of machines transferred does not require individual capital gain computations where they belong to the same depreciable block.

Where it goes wrong. Calculating the gain separately for each machine instead of aggregating consideration for assets belonging to the same block.

Authority. Section 50(1) of the Income-tax Act, 1961

Question 18 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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 machinery block has an opening WDV of ₹40,00,000. During T.Y. 2026-27, an additional machine costing ₹12,00,000 is purchased. A machine from the block, originally acquired eight years ago, is transferred for ₹65,00,000, with transfer expenditure of ₹1,00,000. Other assets remain in the block. Which result follows under section 50?

1. Long-term capital gain of ₹12,00,000 because the machine was held for eight years.
2. Short-term capital gain of ₹12,00,000 under the block-of-assets provision. (correct answer)
3. Short-term capital gain of ₹13,00,000 after excluding the current-year addition.
4. No capital gain because the block continues to exist.

Answer: B — Short-term capital gain of ₹12,00,000 under the block-of-assets provision.

Explanation. Aggregate comparison base = opening WDV ₹40,00,000 + addition ₹12,00,000 + transfer expenditure ₹1,00,000 = ₹53,00,000. Consideration = ₹65,00,000. Excess = ₹12,00,000. Section 50 deems this excess to be short-term capital gain. The special computation overrides the ordinary holding-period classification of the individual depreciable asset. Accordingly, the fact that the machine was acquired eight years earlier does not produce long-term capital gain.

Where it goes wrong. Applying the ordinary holding period to a depreciable asset forming part of a block governed by section 50.

Authority. Section 50(1) of the Income-tax Act, 1961

Question 19 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Mr. Devendra acquired a capital asset for ₹40,00,000. During negotiations for a proposed sale in February 2013, he received an advance of ₹5,00,000, which was subsequently forfeited when the negotiations failed. He transfers the asset in T.Y. 2026-27 for ₹65,00,000 and incurs transfer expenses of ₹1,00,000. Determine the capital gain after applying the rule for advance money forfeited before 1 April 2014.

1. ₹24,00,000.
2. ₹25,00,000.
3. ₹29,00,000. (correct answer)
4. ₹20,00,000.

Answer: C — ₹29,00,000.

Explanation. Under section 51, advance money forfeited before 1 April 2014 reduces the cost of acquisition. Adjusted cost = ₹40,00,000 − ₹5,00,000 = ₹35,00,000. Net sale consideration = ₹65,00,000 − ₹1,00,000 = ₹64,00,000. Capital gain = ₹64,00,000 − ₹35,00,000 = ₹29,00,000. Since the forfeiture preceded 1 April 2014, the reduction is reflected in the computation when the asset is subsequently transferred.

Where it goes wrong. Ignoring pre-1 April 2014 forfeiture while determining the adjusted acquisition cost.

Authority. Section 51 of the Income-tax Act, 1961

Question 20 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Ms. Ritu received an advance of ₹6,00,000 during negotiations to sell an investment property. The negotiations failed, and she forfeited the advance on 5 May 2025. She subsequently transferred the property in T.Y. 2026-27 for ₹55,00,000. Its acquisition cost was ₹32,00,000, and transfer expenditure was ₹1,00,000. Determine the capital gain and treatment of the earlier forfeiture.

1. ₹16,00,000 after reducing acquisition cost by the forfeited advance.
2. ₹22,00,000 after treating the forfeiture as capital improvement.
3. ₹28,00,000 after reducing transfer expenditure only.
4. ₹22,00,000, without reducing acquisition cost for the earlier forfeiture. (correct answer)

Answer: D — ₹22,00,000, without reducing acquisition cost for the earlier forfeiture.

Explanation. The advance was forfeited after 1 April 2014 and was taxable under section 56(2)(ix) in the year of forfeiture. Therefore, it cannot again reduce cost under section 51. Net sale consideration = ₹55,00,000 − ₹1,00,000 = ₹54,00,000. Capital gain = ₹54,00,000 − ₹32,00,000 = ₹22,00,000. The earlier ₹6,00,000 receipt is separately chargeable under Income from Other Sources in the year it was forfeited.

Where it goes wrong. Deducting an advance already taxable under Income from Other Sources from the acquisition cost, thereby granting a second tax benefit.

Authority. Section 51 of the Income-tax Act, 1961; Section 56(2)(ix) of the Income-tax Act, 1961

Question 21 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Mr. Arvind inherited a property from his father. The father had acquired it for ₹20,00,000 and had received an advance of ₹5,00,000 during negotiations for its sale in January 2013. The father forfeited that advance when the negotiations failed. Arvind later sold the inherited property for ₹48,00,000 and incurred transfer expenses of ₹1,00,000. Determine the capital gain in Arvind's hands.

1. ₹27,00,000, without reducing the father's forfeited advance from inherited cost. (correct answer)
2. ₹32,00,000, after deducting the father's forfeited advance from inherited cost.
3. ₹22,00,000, after deducting both original cost and the forfeited advance.
4. ₹47,00,000, since inheritance gives the asset a nil cost.

Answer: A — ₹27,00,000, without reducing the father's forfeited advance from inherited cost.

Explanation. Under section 49(1), inherited property generally takes the previous owner's cost as acquisition cost. Arvind's cost is therefore ₹20,00,000. Section 51 does not reduce his cost by the advance forfeited by his father, since the amount was received and retained by the previous owner rather than Arvind. Net sale consideration = ₹48,00,000 − ₹1,00,000 = ₹47,00,000. Capital gain = ₹47,00,000 − ₹20,00,000 = ₹27,00,000.

Where it goes wrong. Reducing the successor's acquisition cost by advance money received and forfeited by the previous owner.

Authority. Section 49(1) of the Income-tax Act, 1961; Section 51 of the Income-tax Act, 1961

Question 22 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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 property was acquired by Mr. Suresh in 1995. Its fair market value on 1 April 2001 was ₹30,00,000, which he validly adopts as cost of acquisition. During negotiations in 2013, he received and forfeited an advance of ₹4,00,000. He transfers the property in T.Y. 2026-27 for ₹70,00,000 and incurs expenses of ₹2,00,000 in connection with transfer. Compute his capital gain.

1. ₹40,00,000.
2. ₹42,00,000. (correct answer)
3. ₹38,00,000.
4. ₹44,00,000.

Answer: B — ₹42,00,000.

Explanation. The validly adopted FMV on 1 April 2001 is ₹30,00,000. Since the advance was forfeited before 1 April 2014, section 51 reduces this cost by ₹4,00,000. Adjusted cost = ₹26,00,000. Net consideration = ₹70,00,000 − ₹2,00,000 = ₹68,00,000. Capital gain = ₹68,00,000 − ₹26,00,000 = ₹42,00,000. The deduction is applied after determining the permitted base cost.

Where it goes wrong. Reducing the actual 1995 purchase price instead of the permitted substituted cost adopted under section 55.

Authority. Section 51 of the Income-tax Act, 1961; Section 55(2)(b) of the Income-tax Act, 1961

Question 23 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

Mr. Amit used his motor car exclusively for personal purposes before commencing a motor vehicle trading business on 1 April 2026. On that date, the car was treated as stock-in-trade, with a fair market value of ₹4,50,000. It was sold on 31 March 2027 for ₹6,00,000. Which treatment correctly applies to the conversion and the subsequent profit?

1. Capital gain of ₹1,50,000 under section 45(2).
2. Capital gain of ₹6,00,000 because conversion is deemed a sale.
3. No capital gain; the ₹1,50,000 profit is business income. (correct answer)
4. Capital loss of ₹4,50,000 under section 45(2).

Answer: C — No capital gain; the ₹1,50,000 profit is business income.

Explanation. A motor car held exclusively for personal use is an ordinary personal effect excluded from section 2(14). Since it was not a capital asset immediately before conversion, section 45(2) does not apply. The sale proceeds are considered under business income. Profit = sale price ₹6,00,000 − value taken into business stock ₹4,50,000 = ₹1,50,000. No capital gains arise on the conversion of this excluded personal effect.

Where it goes wrong. Applying section 45(2) to every asset introduced into a business without checking whether the asset was a capital asset before conversion.

Authority. Section 2(14) of the Income-tax Act, 1961; Section 45(2) of the Income-tax Act, 1961; Section 28(i) of the Income-tax Act, 1961

Question 24 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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 resident individual receives ₹8,00,000 as interest on enhanced compensation during T.Y. 2026-27. The underlying enhanced compensation has separately been taxed under the capital gains provisions. No expenditure other than the statutory deduction is claimed in respect of the interest. Determine the amount of interest taxable and the appropriate head of income.

1. ₹8,00,000 under Capital Gains.
2. ₹4,00,000 under Capital Gains.
3. ₹8,00,000 under Income from Other Sources.
4. ₹4,00,000 under Income from Other Sources. (correct answer)

Answer: D — ₹4,00,000 under Income from Other Sources.

Explanation. Interest on enhanced compensation is chargeable under Income from Other Sources in the year of receipt. Section 57(iv) permits deduction of 50% of such interest. Gross interest = ₹8,00,000. Deduction = ₹8,00,000 × 50% = ₹4,00,000. Net taxable interest = ₹8,00,000 − ₹4,00,000 = ₹4,00,000. The underlying compensation and the interest are separately classified and cannot be combined under Capital Gains.

Where it goes wrong. Combining the interest with enhanced compensation and taxing both under Capital Gains.

Authority. Section 56(2)(viii) of the Income-tax Act, 1961; Section 57(iv) of the Income-tax Act, 1961

Question 25 · 2 marks · Taxation - DT Ch 06: Capital Gains · 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.

The original compensation awarded for compulsory acquisition was ₹55,00,000, and capital gains were assessed in the year in which the compensation was first received. Subsequently, the competent court reduced the compensation to ₹47,00,000. What is the appropriate treatment of the previously assessed capital gain arising from the original compensation?

1. The difference is automatically assessed as capital loss in the year of refund.
2. The original capital gain remains unchanged because it was already assessed.
3. The difference is treated as interest under Income from Other Sources.
4. The assessed capital gain is recomputed for the original year through rectification. (correct answer)

Answer: D — The assessed capital gain is recomputed for the original year through rectification.

Explanation. Section 45(5)(c) provides for recomputation where compulsory-acquisition compensation or enhanced compensation is subsequently reduced by a court, tribunal or other authority. Original compensation = ₹55,00,000. Reduced compensation = ₹47,00,000. Reduction = ₹55,00,000 − ₹47,00,000 = ₹8,00,000. The capital gain assessed for the original year must be recomputed by taking the reduced compensation into account through rectification, rather than treating the difference as a fresh loss in the later year.

Where it goes wrong. Treating the reduction as a separate capital loss in the year of repayment instead of recomputing the capital gain of the year in which the compensation was originally charged.

Authority. Section 45(5)(c) of the Income-tax Act, 1961; Section 154 of the Income-tax Act, 1961