CA Inter Taxation - Income-tax Law MCQ Test 13: answer key

Question 1 · 2 marks · Profits and Gains of Business or Profession · medium

Scenario. Mr. Devansh Rathi is a proprietor manufacturing precision components at Pune. For the previous year 2025-26, he pays tax under the default regime of section 115BAC. The opening written-down value of his plant and machinery block, eligible for 15 per cent depreciation, was Rs 24,00,000 on 1 April 2025. He bought a new plant for Rs 6,00,000 and put it to use on 18 November 2025. Another new plant costing Rs 3,00,000 was acquired and installed in his office on 10 January 2026. All these assets were bought by account payee cheque. On 12 March 2026 he credited Rs 8,00,000 to M/s Kalpana Designs for product design services; tax was deductible under section 194J, but no tax was deducted and the payee neither filed a return nor paid the tax. On 29 December 2025 he paid Rs 33,000 in cash to a goods-carriage operator for transporting finished goods. On 7 February 2026 he paid Rs 12,000 in cash to a local supplier for packing material. He also paid Rs 5,000 by credit card for fire insurance on the factory shed and Rs 40,000 by bank transfer towards the principal of a business loan. The profit and loss account debited depreciation of Rs 3,90,000. Devansh has no brought-forward business loss or unabsorbed depreciation.

What amount, if any, is disallowed under section 40(a)(ia) for AY 2026-27 on the Kalpana Designs payment?

1. Rs 8,00,000 is disallowed, because the entire design payment fails the tax-deduction condition once no tax is deducted at source.
2. Rs 2,40,000 is disallowed, because thirty per cent of the design payment is hit when tax is neither deducted nor paid by the return due date. (correct answer)
3. Rs 2,40,000 is disallowed, because thirty per cent is hit only if the payee has not filed a return of income.
4. Nil is disallowed, because the payment was credited in March 2026 and tax could be deducted in April 2026.

Answer: B — Rs 2,40,000 is disallowed, because thirty per cent of the design payment is hit when tax is neither deducted nor paid by the return due date.

Working. Disallowance = 30 per cent of Rs 8,00,000 = Rs 2,40,000.

Explanation. Section 40(a)(ia) disallows thirty per cent of a resident payment on which tax is deductible but not deducted, or not paid by the section 139(1) due date. The payee did not file a return or pay the tax, so the deeming relief for the payer is not available. The tempting option with the same figure fails because the statutory consequence does not depend on the payee not filing a return.

Where it goes wrong. The same Rs 2,40,000 figure appears with a wrong condition about the payee's return.

Authority. Section 40(a)(ia)

Question 2 · 2 marks · Profits and Gains of Business or Profession · medium

What is the total disallowance under section 40A(3) for AY 2026-27 from the two cash payments?

1. Rs 45,000, because both cash payments cross the Rs 10,000 limit for a payment made in cash on a single day.
2. Rs 33,000, because the goods-carriage payment crosses the Rs 10,000 limit for cash payments to a transport operator.
3. Rs 12,000, because the packing-material payment crosses Rs 10,000 while the Rs 33,000 goods-carriage payment is within its Rs 35,000 limit. (correct answer)
4. Nil, because both payments were made to business parties for business purposes and no single payment exceeds Rs 10,000.

Answer: C — Rs 12,000, because the packing-material payment crosses Rs 10,000 while the Rs 33,000 goods-carriage payment is within its Rs 35,000 limit.

Working. Transport payment Rs 33,000 is within Rs 35,000, so no disallowance. Packing-material payment Rs 12,000 exceeds Rs 10,000, so disallowance is Rs 12,000.

Explanation. For payments to a goods-carriage operator, the cash-payment limit is Rs 35,000, so the Rs 33,000 payment is outside section 40A(3). The Rs 12,000 packing-material payment to the supplier is above the ordinary Rs 10,000 limit and is wholly disallowed. The tempting Rs 45,000 option wrongly applies the Rs 10,000 limit to the transport payment.

Where it goes wrong. The higher Rs 35,000 limit for transport operators is easy to overlook.

Authority. Section 40A(3)

Question 3 · 2 marks · Profits and Gains of Business or Profession · hard

What is the depreciation allowable on the plant and machinery block for AY 2026-27, ignoring the profit and loss account figure?

1. Rs 4,27,500, because the opening block gets 15 per cent and both new plants get 7.5 per cent for use below 180 days. (correct answer)
2. Rs 4,95,000, because the opening block and both new plants are eligible for 15 per cent for the full year even though one plant was put to use late.
3. Rs 4,50,000, because the January plant is treated as used for the full year while the November plant is not.
4. Rs 3,60,000, because no depreciation is allowed on any plant put to use for less than 180 days during the year of acquisition.

Answer: A — Rs 4,27,500, because the opening block gets 15 per cent and both new plants get 7.5 per cent for use below 180 days.

Working. Opening block: Rs 24,00,000 x 15 per cent = Rs 3,60,000. November plant: Rs 6,00,000 x 7.5 per cent = Rs 45,000. January plant: Rs 3,00,000 x 7.5 per cent = Rs 22,500. Total = Rs 4,27,500.

Explanation. Depreciation is mandatory. The opening block was used for the full year, so it gets 15 per cent. Both new plants were put to use for less than 180 days in the year of acquisition, so each gets half of 15 per cent, that is 7.5 per cent. Under the default regime, additional depreciation is not available, and the book depreciation figure is irrelevant for this computation.

Where it goes wrong. The office installation does not remove normal depreciation, but it does affect additional depreciation, which is anyway unavailable here.

Authority. Section 32; Section 32(1)(ii); Section 115BAC

Question 4 · 2 marks · Residence and Scope of Total Income · hard

Scenario. Mr. Rohan Mehta, an Indian citizen, was in India from 1 April 2025 to 18 September 2025. On 18 September 2025 he left for Japan to join an employer there, and he did not return during the previous year 2025-26. During the four previous years before 2025-26, he had stayed in India for 600 days. His salary for the Japan job was Rs 28,00,000, received in Japan. He also earned interest of Rs 70,000 from a fixed deposit with a Pune bank. Ms. Sana Kapoor, a person of Indian origin settled in the United Kingdom, came to India on 22 May 2025 and went back on 23 September 2025. During the four previous years before 2025-26, her stay in India was 480 days. Her total income for 2025-26, other than income from foreign sources, was Rs 16,20,000, which included rent from a Pune flat and Indian dividend. She also received salary of Rs 40,00,000 from her UK employer for services rendered in the UK; the salary was credited in London and was not for a business controlled in India or a profession set up in India. Sana has no other Indian income and does not claim any deduction under Chapter VI-A. Both Rohan and Sana want to know their position for AY 2026-27 under the Income-tax Act, 1961. Rohan's interest was credited in his Pune account on 31 March 2026.

What is Mr. Rohan Mehta's residential status for AY 2026-27?

1. Resident and ordinarily resident, because his stay in the four preceding years was 600 days and he has Indian interest income.
2. Resident but not ordinarily resident, because an Indian citizen leaving for employment is always treated as resident when four-year stay is 600 days.
3. Non-resident, because he did not stay in India for 182 days and his Indian interest is the only income taxable in India.
4. Non-resident, because an Indian citizen leaving for employment abroad must stay 182 days in the previous year, and 171 days do not meet that test. (correct answer)

Answer: D — Non-resident, because an Indian citizen leaving for employment abroad must stay 182 days in the previous year, and 171 days do not meet that test.

Working. Days in India: April 30 + May 31 + June 30 + July 31 + August 31 + September 18 = 171 days. Less than 182 days, so non-resident.

Explanation. An Indian citizen who leaves India for employment is governed by the 182-day basic condition, not the 60-day plus four-year condition. Rohan was in India for 171 days in 2025-26, so he is a non-resident even though his four-year stay was 600 days. The option giving non-resident status for the wrong reason about interest income is tempting but not the governing test.

Where it goes wrong. The 600-day figure is a distractor because the special 182-day rule applies to an Indian citizen leaving for employment.

Authority. Section 6(1); Section 6(6)

Question 5 · 2 marks · Residence and Scope of Total Income · hard

What is Ms. Sana Kapoor's residential status for AY 2026-27?

1. Resident and ordinarily resident, because her total income other than foreign sources is above Rs 15,00,000 and her stay in the four preceding years is 480 days.
2. Resident but not ordinarily resident, because a person of Indian origin visiting India with such income and stay becomes RNOR under section 6(6). (correct answer)
3. Non-resident, because she stayed only 125 days, which is below 182 days, and her UK salary is foreign income.
4. Deemed resident, because every person of Indian origin with foreign salary above Rs 15,00,000 is deemed resident under section 6(1A).

Answer: B — Resident but not ordinarily resident, because a person of Indian origin visiting India with such income and stay becomes RNOR under section 6(6).

Working. Stay: May 22 to May 31 = 10 days; June 30; July 31; August 31; September 23; total 125 days. Four-year stay 480 days. Income other than foreign sources Rs 16,20,000 exceeds Rs 15,00,000. RNOR under section 6(6).

Explanation. For a person of Indian origin visiting India, the 182-day rule is relaxed where total income other than foreign-source income exceeds Rs 15,00,000 and the stay is 120 days or more with 365 days in the preceding four years. Sana meets those tests. Because she is covered by the special visiting rule, she is RNOR, not ordinarily resident. The deemed-resident provision needs an Indian citizen and is not attracted here.

Where it goes wrong. The 125-day stay looks short, but the special 120-day rule applies because income other than foreign sources exceeds Rs 15,00,000.

Authority. Section 6(6); Section 6(1)

Question 6 · 2 marks · Residence and Scope of Total Income · medium

For AY 2026-27, how is Sana's Pune rent and UK salary treated in her total income?

1. The Pune rent is included in her total income, while the UK salary is not included because it is not from a business controlled in India or a profession set up in India. (correct answer)
2. Both the Pune rent and the UK salary are included, because a resident but not ordinarily resident is taxed on global income for AY 2026-27.
3. Neither the Pune rent nor the UK salary is included in her total income, because she stayed in India for less than 182 days in the previous year and her salary is foreign income.
4. The UK salary is included only if it is remitted to India, while the Pune rent is always exempt for a person of Indian origin settled abroad.

Answer: A — The Pune rent is included in her total income, while the UK salary is not included because it is not from a business controlled in India or a profession set up in India.

Working. Pune rent: Indian-source, included. UK salary: foreign-source not from business controlled in India or profession set up in India, excluded for RNOR.

Explanation. Sana is RNOR. An RNOR is taxed on income received or accruing in India and on foreign income only if it is derived from a business controlled in India or a profession set up in India. The Pune rent is Indian-source income and is included. The UK salary is not from such a business or profession, so it is outside her total income. Remittance is not the test for RNOR.

Where it goes wrong. Global taxation applies to ROR, not to RNOR; remittance is not the governing test.

Authority. Section 5; Section 6(6)

Question 7 · 2 marks · Aggregation of Income, Set-off and Carry Forward of Losses · hard

Scenario. Ms. Rhea, a resident individual aged 39, opts out of the default regime under section 115BAC for AY 2026-27. She has salary income of Rs 6,00,000, loss from a let-out house property of Rs 3,40,000, profit from a speculative business of Rs 80,000, current-year loss from a non-speculative business of Rs 1,20,000 and long-term capital gain of Rs 1,50,000. She also has a brought-forward short-term capital loss of Rs 40,000. She has no other income and claims no Chapter VI-A deduction. What is her total income for AY 2026-27?

What is Ms. Rhea's total income for AY 2026-27?

1. Rs 5,10,000, because the unabsorbed non-speculative business loss of Rs 40,000 is carried forward and not set against the long-term capital gain.
2. Rs 4,30,000, because the entire house-property loss of Rs 3,40,000 is set against salary and the capital loss is ignored.
3. Rs 4,70,000, after setting off Rs 2,00,000 house-property loss, Rs 1,20,000 business loss and Rs 40,000 brought-forward short-term capital loss. (correct answer)
4. Rs 4,10,000, because the speculative profit is fully absorbed by the business loss and no capital loss is allowed against long-term capital gain.

Answer: C — Rs 4,70,000, after setting off Rs 2,00,000 house-property loss, Rs 1,20,000 business loss and Rs 40,000 brought-forward short-term capital loss.

Working. Salary Rs 6,00,000 - house-property loss allowed Rs 2,00,000 = Rs 4,00,000; house-property loss c/f Rs 1,40,000. Speculation profit Rs 80,000 - business loss Rs 80,000 = nil; balance business loss Rs 40,000. LTCG Rs 1,50,000 - Rs 40,000 = Rs 1,10,000; - STCL Rs 40,000 = Rs 70,000. Total income = Rs 4,00,000 + Rs 70,000 = Rs 4,70,000.

Explanation. Under the optional regime, house-property loss can be set against other heads only up to Rs 2,00,000; the balance is carried forward. The non-speculative business loss can be set against the speculative profit and then against the long-term capital gain. The brought-forward short-term capital loss can be set against that gain. The tempting Rs 5,10,000 option wrongly carries forward Rs 40,000 business loss instead of using it against capital gain.

Where it goes wrong. The Rs 2,00,000 cap on house-property loss and the order of using business loss and capital loss both matter.

Authority. Section 71; Section 71B; Section 72; Section 73; Section 74

Question 8 · 1 marks · Basic Concepts · hard

Scenario. Mr. Neel grows coffee in India. He sells coffee grown and cured by him for Rs 18,00,000 and incurs Rs 6,00,000 on growing and curing. He also sells coffee grown, cured, roasted and grounded by him for Rs 25,00,000 and incurs Rs 9,00,000 on that process. He has no other business income and does not opt out of the default regime. What is his business income chargeable to tax for AY 2026-27?

What is Mr. Neel's business income chargeable to tax for AY 2026-27?

1. Rs 3,00,000, because only the first sale is business income at 25 per cent and the second sale is entirely agricultural.
2. Rs 6,40,000, because only the second sale is business income at 40 per cent and the first sale is entirely agricultural.
3. Rs 12,00,000, because both sales are fully business income as the coffee was processed before sale.
4. Rs 9,40,000, because the first profit is taxed at 25 per cent and the second profit at 40 per cent under Rule 7B. (correct answer)

Answer: D — Rs 9,40,000, because the first profit is taxed at 25 per cent and the second profit at 40 per cent under Rule 7B.

Working. First sale: Rs 18,00,000 - Rs 6,00,000 = Rs 12,00,000; business at 25 per cent = Rs 3,00,000. Second sale: Rs 25,00,000 - Rs 9,00,000 = Rs 16,00,000; business at 40 per cent = Rs 6,40,000. Total business income = Rs 9,40,000.

Explanation. Rule 7B applies different fractions to coffee grown and cured and to coffee grown, cured, roasted and grounded. The first profit is Rs 12,00,000, of which 25 per cent is business income. The second profit is Rs 16,00,000, of which 40 per cent is business income. The option showing only one sale as business income ignores the separate rule for the other process.

Where it goes wrong. Both sales are partly agricultural and partly business; neither is wholly exempt or wholly taxable.

Authority. Rule 7B; Section 2(1A)