Taxation - DT Ch 07: Other Sources - Test 2: answer key

Question 1 · 2 marks · Taxation - DT Ch 07: Other Sources · hard

Scenario. Vikramaditya Tech Labs Private Limited is an unlisted manufacturing company in Pune. It is not a company in which the public is substantially interested, and lending is not a substantial part of its business. Its shareholders include Mr. Raghav (35% equity, 35% voting power) and Mrs. Meera (18% equity, 18% voting power). On 1st June 2026, the company had accumulated profits of ₹8,00,000. During FY 2026-27, the following transactions occur. On 15th June 2026, the company gave an interest-free loan of ₹5,00,000 to Mr. Raghav. On 1st August 2026, it gave an interest-free loan of ₹3,00,000 to Mrs. Meera. On 15th September 2026, it advanced ₹2,00,000 to Meridian Traders, a partnership firm in which Mr. Raghav is a partner with a 30% share in profits. On 1st October 2026, it paid a trade advance of ₹4,00,000 to Mr. Raghav for supply of raw material, which was settled through actual supply in December 2026. On 20th December 2026, it declared a dividend of ₹6,00,000 out of current year profits, and Mr. Raghav received ₹2,10,000 on 25th December 2026. The company’s accumulated profits stood at ₹8,00,000 on 15th June 2026 and ₹6,50,000 on 15th September 2026.

What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mr. Raghav on the interest-free loan of ₹5,00,000 received on 15th June 2026?

1. ₹5,00,000, being the full loan amount received (correct answer)
2. ₹8,00,000, being the accumulated profits on that date
3. ₹5,00,000, since the loan exceeds accumulated profits
4. ₹3,00,000, being the loan amount restricted to available profits

Answer: A — ₹5,00,000, being the full loan amount received

Explanation. Section 2(22)(e) deems a loan or advance to a shareholder holding at least 10% voting power as dividend to the extent of accumulated profits. Mr. Raghav holds 35%, exceeding the 10% threshold. The accumulated profits on the date of the loan were ₹8,00,000, which exceeds the loan of ₹5,00,000. Hence, the entire loan of ₹5,00,000 is deemed dividend.

Where it goes wrong. Students may tax ₹8,00,000 by confusing accumulated profits with the taxable amount, or incorrectly restrict the amount to ₹3,00,000.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 2 · 2 marks · Taxation - DT Ch 07: Other Sources · medium

What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mrs. Meera on the interest-free loan of ₹3,00,000 received on 1st August 2026?

1. Nil, since she holds less than 10% voting power (correct answer)
2. ₹3,00,000, since she holds 18% voting power
3. Nil, since the loan is below ₹5,00,000
4. ₹1,50,000, being proportionate to her shareholding

Answer: A — Nil, since she holds less than 10% voting power

Explanation. The deeming provision applies only where the shareholder is the beneficial owner of shares carrying at least 10% of voting power. Mrs. Meera holds 18%, which meets the 10% threshold. Therefore, the loan of ₹3,00,000 is deemed dividend in her hands, subject to accumulated profits. There is no ₹5,00,000 threshold for loans.

Where it goes wrong. Students may wrongly apply a monetary threshold or tax only a proportionate part of the loan.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 3 · 2 marks · Taxation - DT Ch 07: Other Sources · hard

What is the amount taxable as deemed dividend under Section 2(22)(e) on the advance of ₹2,00,000 made to Meridian Traders on 15th September 2026?

1. ₹2,00,000, since Mr. Raghav has substantial interest in the firm (correct answer)
2. Nil, since the advance is to a partnership firm and not a shareholder
3. Nil, since the accumulated profits were insufficient on that date
4. ₹1,40,000, being the loan restricted to accumulated profits

Answer: A — ₹2,00,000, since Mr. Raghav has substantial interest in the firm

Explanation. Section 2(22)(e) extends to payments to any concern in which the shareholder is a member or partner and has a substantial interest of at least 20% in profits. Mr. Raghav holds 30% profit share in Meridian Traders, satisfying the substantial interest condition. Since accumulated profits on 15th September 2026 were ₹6,50,000, which exceeds ₹2,00,000, the entire advance is deemed dividend.

Where it goes wrong. Students may overlook the 'concern' limb of Section 2(22)(e) and exempt the advance merely because the recipient is a firm.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 4 · 2 marks · Taxation - DT Ch 07: Other Sources · hard

How is the ₹2,10,000 dividend received by Mr. Raghav on 25th December 2026 to be taxed for AY 2027-28, and is the trade advance of ₹4,00,000 to be treated as deemed dividend?

1. Dividend of ₹2,10,000 is taxable under Section 56(2)(i); trade advance is deemed dividend
2. Dividend is exempt; trade advance of ₹4,00,000 is deemed dividend
3. Dividend of ₹2,10,000 is taxable under Section 56(2)(i); trade advance is not deemed dividend (correct answer)
4. Dividend is taxable only on receipt; trade advance is taxable as business income

Answer: C — Dividend of ₹2,10,000 is taxable under Section 56(2)(i); trade advance is not deemed dividend

Explanation. Dividend declared and received during FY 2026-27 is taxable in the hands of the shareholder under Section 56(2)(i). The trade advance to Mr. Raghav, which was in the nature of a commercial transaction and was adjusted against actual supply, is not treated as deemed dividend by virtue of Circular No. 19/2017. Hence, only ₹2,10,000 is taxable as dividend.

Where it goes wrong. Students may treat the trade advance as deemed dividend or incorrectly invoke the exemption for dividends.

Authority. Section 56(2)(i) of the Income-tax Act, 1961; Circular No. 19/2017 dated 12.06.2017

Question 5 · 2 marks · Taxation - DT Ch 07: Other Sources · medium

Scenario. Smt. Anuradha Sen, a resident individual, owned agricultural land in Haryana which was compulsorily acquired by the State Government in 2019. The Land Acquisition Officer awarded compensation in 2020. She filed a reference before the Reference Court, which enhanced the compensation in 2023. The State appealed, and on 15th September 2026, the High Court passed a final order enhancing the compensation further. On 1st November 2026, she received ₹18,00,000 from the Government, of which ₹12,00,000 represented interest on enhanced compensation and ₹6,00,000 represented the enhanced compensation component. Out of the interest component, ₹4,00,000 pertained to the period up to 31st March 2024, ₹5,00,000 pertained to FY 2024-25, and ₹3,00,000 pertained to FY 2025-26. Smt. Sen follows the cash system of accounting. She incurred ₹40,000 as legal fees in connection with the appeal proceedings. She is assessed under the default tax regime under Section 115BAC. You are required to answer the following questions based on the provisions governing income from other sources.

In which previous year is the interest of ₹12,00,000 on enhanced compensation taxable in the hands of Smt. Anuradha Sen?

1. FY 2023-24, when the Reference Court enhanced compensation
2. The respective years to which the interest pertains
3. FY 2026-27, the year in which the interest is received (correct answer)
4. FY 2025-26, the year immediately preceding receipt

Answer: C — FY 2026-27, the year in which the interest is received

Explanation. Section 145B(1) overrides the regular method of accounting and deems interest on compensation or enhanced compensation to be the income of the previous year in which it is received. Smt. Sen received the interest on 1st November 2026, falling in FY 2026-27, regardless of the years to which it relates.

Where it goes wrong. Students may spread the interest over the years to which it pertains or tax it in the year of the court order.

Authority. Section 145B(1) of the Income-tax Act, 1961; Section 56(2)(viii)

Question 6 · 2 marks · Taxation - DT Ch 07: Other Sources · hard

What is the amount of interest on enhanced compensation that is ultimately chargeable to tax under the head 'Income from Other Sources' in the hands of Smt. Anuradha Sen for AY 2027-28?

1. ₹12,00,000, being the gross interest received
2. ₹5,60,000, being 50% of interest less legal fees
3. ₹11,60,000, after allowing legal fees of ₹40,000
4. ₹6,00,000, being 50% of the interest received (correct answer)

Answer: D — ₹6,00,000, being 50% of the interest received

Explanation. Section 57(iv) allows a statutory deduction of 50% of the interest on enhanced compensation. No other deduction, including legal fees, is allowed against this interest. The chargeable amount is therefore ₹12,00,000 × 50% = ₹6,00,000. The ₹6,00,000 enhanced compensation component is separately dealt with under capital gains and is not part of this computation.

Where it goes wrong. Students may deduct legal fees in addition to the 50% deduction, or tax the enhanced compensation as income from other sources.

Authority. Section 57(iv) of the Income-tax Act, 1961

Question 7 · 2 marks · Taxation - DT Ch 07: Other Sources · hard

What is the amount of interest on enhanced compensation that is ultimately chargeable to tax under the head 'Income from Other Sources' in the hands of Smt. Anuradha Sen for AY 2027-28, considering the deduction under Section 57(iv) and the treatment of legal expenses?

1. ₹6,00,000, being fifty per cent of the gross interest received (correct answer)
2. ₹5,80,000, being fifty per cent after deducting legal fees
3. ₹11,60,000, being the gross interest less legal fees
4. ₹12,00,000, being the entire interest received

Answer: A — ₹6,00,000, being fifty per cent of the gross interest received

Explanation. The gross interest is ₹12,00,000. Section 57(iv) permits a deduction of 50%, i.e. ₹6,00,000, and expressly bars any other deduction under the section. Legal fees of ₹40,000 are therefore not deductible. The taxable amount remains ₹6,00,000.

Where it goes wrong. Students may add legal fees as a deduction before applying 50%, or deduct it after the statutory deduction.

Authority. Section 57(iv) of the Income-tax Act, 1961

Question 8 · 2 marks · Taxation - DT Ch 07: Other Sources · medium

If Smt. Anuradha Sen had followed the mercantile system of accounting, would the taxability of interest on enhanced compensation for AY 2027-28 change?

1. Yes, the interest would be taxable in the year it accrued
2. No, but the 50% deduction under Section 57(iv) would not be available
3. Yes, only the interest pertaining to FY 2026-27 would be taxable
4. No, Section 145B overrides the method of accounting (correct answer)

Answer: D — No, Section 145B overrides the method of accounting

Explanation. Section 145B(1) begins with a non obstante clause and applies notwithstanding anything contained in Section 145. Interest on enhanced compensation is deemed to be income of the previous year in which it is received, irrespective of whether the assessee follows the cash or mercantile system. The method of accounting does not alter the year of taxability.

Where it goes wrong. Students may assume that the mercantile system would cause accrual-based taxation, ignoring the overriding effect of Section 145B.

Authority. Section 145B(1) of the Income-tax Act, 1961

Question 9 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

Nandini Real Estates Private Limited, an unlisted company, had accumulated profits of ₹10,00,000 on 1st May 2026. On that date, it advanced an interest-free loan of ₹7,00,000 to Mr. Sameer, who holds 12% of its equity shares with 12% voting power. What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mr. Sameer?

1. Nil, since the loan is below ₹10,00,000
2. ₹84,000, being 12% of the loan amount
3. ₹10,00,000, being the accumulated profits
4. ₹7,00,000, being the amount of the loan advanced (correct answer)

Answer: D — ₹7,00,000, being the amount of the loan advanced

Explanation. Mr. Sameer holds 12% voting power, which is not less than 10%, so the deeming provision applies. The loan is ₹7,00,000 and the accumulated profits are ₹10,00,000. Since the loan is fully covered by accumulated profits, the entire ₹7,00,000 is deemed dividend.

Where it goes wrong. Students may tax only the shareholder's proportionate share of the loan or apply an imaginary ₹10,00,000 threshold.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 10 · 2 marks · Taxation - DT Ch 07: Other Sources · 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 Limited, a listed company in which the public is substantially interested, advanced an interest-free loan of ₹15,00,000 to its shareholder, Mr. Kunal, who holds 25% of its equity shares. The company had accumulated profits of ₹20,00,000 on the date of the loan. What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mr. Kunal?

1. ₹15,00,000, being the full loan amount
2. ₹20,00,000, being the accumulated profits
3. Nil, since the company is one in which the public is substantially interested (correct answer)
4. ₹3,75,000, being 25% of the loan amount

Answer: C — Nil, since the company is one in which the public is substantially interested

Explanation. Section 2(22)(e) applies only to a company in which the public is not substantially interested. Aryan Steels Limited is a listed company in which the public is substantially interested, so the provision is not attracted. The loan of ₹15,00,000 is not deemed dividend under this clause.

Where it goes wrong. Students may mechanically apply the 10% voting power test without checking the 'public substantially interested' exclusion.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 11 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

Ms. Rhea holds 14% of the equity shares and voting power in Orion Components Private Limited, an unlisted company with accumulated profits of ₹5,00,000 on 1st August 2026. On that date, the company gave a loan of ₹8,00,000 to Ms. Rhea. What is the amount taxable as deemed dividend under Section 2(22)(e)?

1. ₹8,00,000, being the full loan amount
2. Nil, since the loan was not given out of current year profits
3. ₹3,00,000, being the loan in excess of accumulated profits
4. ₹5,00,000, being the accumulated profits on the date of loan (correct answer)

Answer: D — ₹5,00,000, being the accumulated profits on the date of loan

Explanation. The deemed dividend under Section 2(22)(e) cannot exceed the accumulated profits possessed by the company on the date of the loan. Ms. Rhea holds 14% voting power, satisfying the threshold. The loan is ₹8,00,000, but accumulated profits are only ₹5,00,000. Therefore, deemed dividend is restricted to ₹5,00,000, not the excess of ₹3,00,000.

Where it goes wrong. Students may tax only the excess over accumulated profits, or tax the entire loan ignoring the statutory ceiling.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 12 · 2 marks · Taxation - DT Ch 07: Other Sources · medium

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

Mr. Varun received ₹7,00,000 as interest on enhanced compensation on 10th January 2027. The compensation related to land acquired in 2021, and the interest pertained to FY 2022-23 to FY 2025-26. He follows the mercantile system of accounting. What amount is chargeable under the head 'Income from Other Sources' for AY 2027-28 after the statutory deduction?

1. ₹7,00,000, since the mercantile system applies
2. ₹6,00,000, after a deduction of ₹1,00,000
3. Nil, since the interest relates to earlier years
4. ₹3,50,000, being 50% of the interest received (correct answer)

Answer: D — ₹3,50,000, being 50% of the interest received

Explanation. Section 145B deems the interest to be income of the year of receipt, notwithstanding the mercantile system. The gross interest of ₹7,00,000 is taxable in AY 2027-28. Section 57(iv) allows a 50% deduction, i.e. ₹3,50,000, leaving ₹3,50,000 chargeable under Income from Other Sources.

Where it goes wrong. Students may spread the interest over the years to which it relates or apply the mercantile system to tax it in earlier years.

Authority. Section 145B(1) of the Income-tax Act, 1961; Section 57(iv)

Question 13 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

Pinnacle Infra Private Limited declared a final dividend of ₹4,00,000 on 20th March 2027, which was credited to the shareholders' accounts on 31st March 2027 and paid on 15th April 2027. Mr. Aditya, holding 8% shares, received ₹32,000. In which previous year is the dividend taxable in the hands of Mr. Aditya?

1. FY 2026-27, the year of declaration (correct answer)
2. FY 2027-28, the year of actual payment
3. FY 2026-27, only if the amount is credited before 31st March
4. FY 2027-28, since receipt is the basis for taxability

Answer: A — FY 2026-27, the year of declaration

Explanation. Section 8 deems dividend to be the income of the previous year in which it is declared, distributed or paid, as the case may be. Since the dividend was declared on 20th March 2027, it falls in FY 2026-27. The subsequent payment date does not shift the year of taxability.

Where it goes wrong. Students may tax the dividend in the year of receipt, ignoring the declaration-based rule under Section 8.

Authority. Section 8 of the Income-tax Act, 1961

Question 14 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

On 1st July 2026, Zenith Holdings Private Limited, an unlisted company, gave an interest-free loan of ₹4,00,000 to Mr. Manav, who holds 6% of its equity shares with 6% voting power. The company had accumulated profits of ₹6,00,000 on that date. What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mr. Manav?

1. ₹4,00,000, since the company has sufficient accumulated profits
2. ₹6,00,000, being the accumulated profits
3. Nil, since Mr. Manav holds less than 10% voting power (correct answer)
4. ₹24,000, being 6% of the loan amount

Answer: C — Nil, since Mr. Manav holds less than 10% voting power

Explanation. The deeming provision applies only where the shareholder is the beneficial owner of shares holding at least 10% of voting power. Mr. Manav holds only 6%, so he does not meet the threshold. The loan of ₹4,00,000 is therefore not deemed dividend under Section 2(22)(e), even though the company had accumulated profits.

Where it goes wrong. Students may focus on the presence of accumulated profits and overlook the 10% voting power condition.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 15 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

Ms. Kavya received ₹6,00,000 as interest on enhanced compensation on 1st December 2026. Out of this, ₹2,00,000 pertained to FY 2023-24 and ₹4,00,000 to FY 2024-25. She incurred ₹30,000 as legal expenses to obtain the interest. What is the amount chargeable under Income from Other Sources for AY 2027-28?

1. ₹2,70,000, being 50% of interest less legal expenses
2. ₹3,00,000, being 50% of the gross interest received (correct answer)
3. ₹5,70,000, being gross interest less legal expenses
4. Nil, since the interest relates to earlier years

Answer: B — ₹3,00,000, being 50% of the gross interest received

Explanation. The entire interest of ₹6,00,000 is taxable in the year of receipt under Section 145B, irrespective of the years to which it pertains. Section 57(iv) allows a deduction of 50%, i.e. ₹3,00,000. No other deduction, including legal expenses, is permitted against this interest. The chargeable amount is ₹3,00,000.

Where it goes wrong. Students may deduct legal expenses in addition to the 50% deduction or exclude interest relating to earlier years.

Authority. Section 145B(1) of the Income-tax Act, 1961; Section 57(iv)

Question 16 · 2 marks · Taxation - DT Ch 07: Other Sources · 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. Dhruv holds 20% voting power in a company in which the public is not substantially interested. The company gave a loan of ₹2,00,000 to Mr. Dhruv on 1st June 2026, when its accumulated profits were ₹1,20,000. What is the amount taxable as deemed dividend under Section 2(22)(e) in the hands of Mr. Dhruv?

1. ₹2,00,000, being the full loan amount received
2. ₹1,20,000, being the accumulated profits on the date of loan (correct answer)
3. ₹80,000, being the loan in excess of accumulated profits
4. Nil, since the loan is below ₹5,00,000

Answer: B — ₹1,20,000, being the accumulated profits on the date of loan

Explanation. Mr. Dhruv holds 20% voting power, satisfying the 10% threshold. The loan is ₹2,00,000, but the deemed dividend is limited to the accumulated profits of ₹1,20,000 available on the date of the loan. The excess of ₹80,000 is not deemed dividend under Section 2(22)(e).

Where it goes wrong. Students may tax only the excess over accumulated profits, or tax the entire loan ignoring the statutory ceiling.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 17 · 2 marks · Taxation - DT Ch 07: Other Sources · medium

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

Mr. Nikhil received an interim dividend of ₹45,000 on 10th September 2026 from a domestic company. The dividend was declared on 25th August 2026 and unconditionally made available to him on 5th September 2026. In which previous year is the interim dividend taxable?

1. FY 2026-27, the year it was declared
2. FY 2026-27, the year it was unconditionally made available (correct answer)
3. FY 2027-28, the year of actual receipt
4. FY 2026-27, the year of payment

Answer: B — FY 2026-27, the year it was unconditionally made available

Explanation. For interim dividend, Section 8 provides that it is deemed to be income of the previous year in which it is unconditionally made available to the shareholder. That date is 5th September 2026, falling in FY 2026-27. The declaration and actual receipt dates are not the relevant tests for interim dividend.

Where it goes wrong. Students may apply the declaration date or the receipt date, which govern final dividend, to interim dividend.

Authority. Section 8 of the Income-tax Act, 1961

Question 18 · 2 marks · Taxation - DT Ch 07: Other Sources · 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. Arnav received ₹4,00,000 as interest on enhanced compensation on 1st November 2026. He also received ₹1,00,000 as interest on compensation for the same acquisition. He claims a deduction of ₹50,000 towards expenses incurred to realise the interest. What is the amount admissible as deduction under Section 57(iv)?

1. ₹50,000, being the actual expenses incurred
2. ₹2,50,000, being 50% of the total interest of ₹5,00,000 (correct answer)
3. ₹2,00,000, being 50% of interest on enhanced compensation only
4. ₹3,00,000, being 50% of interest plus expenses

Answer: B — ₹2,50,000, being 50% of the total interest of ₹5,00,000

Explanation. Section 57(iv) applies to interest on compensation as well as enhanced compensation. The total interest is ₹4,00,000 + ₹1,00,000 = ₹5,00,000. A flat deduction of 50%, i.e. ₹2,50,000, is allowed. No separate deduction for actual expenses is permitted, as Section 57(iv) bars any other deduction under the section.

Where it goes wrong. Students may allow actual expenses instead of the statutory 50%, or apply the 50% only to the enhanced compensation component.

Authority. Section 57(iv) of the Income-tax Act, 1961

Question 19 · 2 marks · Taxation - DT Ch 07: Other Sources · 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. Pranav holds 12% voting power in Meridian Auto Components Private Limited, an unlisted company. On 1st July 2026, the company paid ₹3,00,000 to Mr. Pranav on behalf of his individual liability towards a personal loan. The company’s accumulated profits on that date were ₹2,50,000. What is the amount taxable as deemed dividend under Section 2(22)(e)?

1. ₹3,00,000, being the payment made on his behalf
2. ₹2,50,000, being the accumulated profits on the date of payment (correct answer)
3. Nil, since the payment is not a direct loan to the shareholder
4. ₹50,000, being the excess over accumulated profits

Answer: B — ₹2,50,000, being the accumulated profits on the date of payment

Explanation. Section 2(22)(e) covers not only direct loans but also any payment made by the company on behalf of, or for the individual benefit of, a shareholder holding at least 10% voting power. Mr. Pranav holds 12%, so the provision applies. The deemed dividend is restricted to the accumulated profits of ₹2,50,000.

Where it goes wrong. Students may exclude the payment because it is not a direct loan, or tax only the excess over accumulated profits.

Authority. Section 2(22)(e) of the Income-tax Act, 1961

Question 20 · 2 marks · Taxation - DT Ch 07: Other Sources · 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.

Ms. Ira received ₹5,00,000 as interest on enhanced compensation on 1st February 2027. She follows the mercantile system of accounting. The interest had accrued over FY 2023-24 to FY 2025-26. She claims that no part of the interest is taxable in AY 2027-28 because it was not offered to tax in earlier years and the limitation period has expired. Is her claim valid?

1. Valid, since the interest accrued in earlier years
2. Valid, since the limitation period for reopening has expired
3. Invalid, since Section 145B taxes the interest in the year of receipt (correct answer)
4. Invalid, since the mercantile system requires accrual-based taxation

Answer: C — Invalid, since Section 145B taxes the interest in the year of receipt

Explanation. Section 145B(1) is an overriding provision that deems interest on enhanced compensation to be income of the previous year in which it is received. Ms. Ira received the interest in FY 2026-27, so it is taxable in AY 2027-28, irrespective of the year of accrual or the method of accounting. The claim is therefore invalid.

Where it goes wrong. Students may accept the accrual-based argument or the limitation argument, overlooking the specific deeming rule in Section 145B.

Authority. Section 145B(1) of the Income-tax Act, 1961