CA Inter Taxation - Income-tax Law MCQ Test 15: answer key

Question 1 · 2 marks · Chapter 3 Unit 1: Salaries · hard

Scenario. Raghav Menon, aged 44, is a resident individual employed with Meridian Traders Pvt. Ltd. in Mumbai and also runs a proprietorship, Menon Traders. He pays tax under the default regime under section 115BAC for A.Y. 2026-27. Salary particulars for P.Y. 2025-26 are: basic Rs. 82,000 per month; dearness allowance Rs. 18,000 per month, the entire amount forming part of retirement benefits; entertainment allowance Rs. 5,000 per month; commission Rs. 1,20,000; employer contribution to NPS Rs. 1,50,000. The employer provides rent-free unfurnished accommodation owned by it in Mumbai; no rent is recovered. It also provides a car of 1.8 litre engine with driver, used partly for official and partly for personal purposes, all running expenses being met by the employer. The employer paid Rs. 90,000 for medical treatment and stay abroad of Raghav and Rs. 25,000 for travel of Raghav and one attendant; RBI permits Rs. 1,00,000 for treatment and stay, and Raghav's gross total income before including this expenditure is above Rs. 8,00,000. Professional tax of Rs. 2,500 was paid by the employer. Menon Traders' net profit is Rs. 6,80,000 after debiting depreciation of Rs. 1,25,000, which includes additional depreciation of Rs. 40,000; depreciation allowable under the Act is Rs. 1,12,000. The profit also includes a cash payment of Rs. 40,000 to a goods transport operator, GST of Rs. 18,000 paid on 15 December 2026, and salary of Rs. 60,000 to Raghav's brother, of which Rs. 15,000 is unreasonable. No other adjustment is required.

What is Raghav's income chargeable under the head Salaries for A.Y. 2026-27 under the default regime?

1. Rs. 16,29,100, because the medical travel expenditure is fully exempt and the employer NPS contribution is excluded.
2. Rs. 16,54,100, because the taxable medical travel is added and standard deduction is Rs. 75,000. (correct answer)
3. Rs. 17,29,100, because the employer NPS contribution and standard deduction are both ignored.
4. Rs. 16,79,100, because the employer NPS is deducted before computing salary income.

Answer: B — Rs. 16,54,100, because the taxable medical travel is added and standard deduction is Rs. 75,000.

Working. Basic 9,84,000 + DA 2,16,000 + entertainment 60,000 + commission 1,20,000 + employer NPS 1,50,000 = 15,30,000. RFA 10% of 13,20,000 = 1,32,000. Car 3,300 x 12 = 39,600. Medical travel taxable 25,000. Professional tax 2,500. Gross salary 17,29,100. Less standard deduction 75,000 = 16,54,100.

Explanation. Gross salary includes basic, DA, entertainment allowance, commission, employer NPS, rent-free accommodation at 10% of salary of Rs. 13,20,000, car perquisite at Rs. 3,300 per month, taxable medical travel of Rs. 25,000 and professional tax paid by employer. Gross salary is Rs. 17,29,100; standard deduction under section 16(ia) is Rs. 75,000. Taxable salary is therefore Rs. 16,54,100. The medical treatment and stay are within the RBI limit, but travel is taxable because gross total income before that expenditure exceeds the Rule 3D limit.

Where it goes wrong. Adding the entire medical expenditure abroad or ignoring the Rule 3D gross total income limit gives a wrong figure.

Authority. section 17(2)(iii); Rule 3C; section 17(2)(iv); section 16(ia); Rule 3D

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

What is Raghav's business income from Menon Traders for A.Y. 2026-27 under the default regime?

1. Rs. 7,51,000, because the cash transport payment is allowable up to Rs. 35,000 under Rule 6DD and the late GST payment is added back.
2. Rs. 7,26,000, because the additional depreciation is allowed and the transport payment is allowed.
3. Rs. 7,66,000, because book depreciation is replaced, and the cash transport, late GST and excess brother salary are disallowed. (correct answer)
4. Rs. 7,81,000, because only the excess over Rs. 35,000 of transport payment is disallowed.

Answer: C — Rs. 7,66,000, because book depreciation is replaced, and the cash transport, late GST and excess brother salary are disallowed.

Working. 6,80,000 + 1,25,000 - 1,12,000 + 40,000 + 18,000 + 15,000 = 7,66,000.

Explanation. Book depreciation of Rs. 1,25,000 is added back and depreciation of Rs. 1,12,000 is allowed, a net increase of Rs. 13,000. The cash payment of Rs. 40,000 to a transport operator exceeds the Rs. 35,000 limit and is disallowed. GST paid after the due date is disallowed under section 43B. The unreasonable salary to the brother is disallowed to the extent of Rs. 15,000. Business income is Rs. 7,66,000.

Where it goes wrong. The transport limit is Rs. 35,000 for a goods transport operator, not Rs. 10,000.

Authority. section 40A(3); section 43B; section 40A(2); section 32

Question 3 · 2 marks · Chapter 3 Unit 1: Salaries · hard

What amount of the medical expenditure met by the employer is taxable as a perquisite in Raghav's hands for A.Y. 2026-27?

1. Nil, because the whole expenditure is exempt as the treatment cost is within the RBI limit and he is a specified employee for perquisite purposes.
2. Rs. 1,15,000, because the entire expenditure on treatment, stay abroad and travel of the patient and attendant is a taxable perquisite in his hands.
3. Rs. 40,000, because travel expenditure exceeding Rs. 10,000 is taxable while treatment and stay abroad remain exempt within the RBI limit.
4. Rs. 25,000, because treatment and stay abroad are within the RBI limit, but travel is taxable since his gross total income exceeds Rs. 2,00,000. (correct answer)

Answer: D — Rs. 25,000, because treatment and stay abroad are within the RBI limit, but travel is taxable since his gross total income exceeds Rs. 2,00,000.

Working. Treatment and stay abroad: ₹90,000, within RBI limit of ₹1,00,000, hence exempt. Travel of Raghav and one attendant: ₹25,000; gross total income before including this expenditure exceeds ₹2,00,000, hence travel exemption is not available. Taxable perquisite = ₹25,000.

Explanation. Under the proviso to section 17(2), treatment and stay abroad are exempt to the extent permitted by the RBI, while travel is exempt only if gross total income before including the expenditure does not exceed ₹2,00,000. His treatment and stay of ₹90,000 is within the RBI limit of ₹1,00,000, so it is exempt. Travel of ₹25,000 is fully taxable because his gross total income exceeds ₹2,00,000. Hence only ₹25,000 is a taxable perquisite.

Where it goes wrong. Treating the RBI limit as the only condition gives Nil, but the separate ₹2,00,000 gross-total-income threshold makes the travel component taxable.

Authority. Section 17(2), proviso, clause (vi)(B), Income-tax Act, 1961

Question 4 · 2 marks · Chapter 3 Unit 4 and Chapter 5 · hard

Scenario. Meera Iyer, resident aged 41, has opted out of the default regime. Her salary income computed is Rs. 3,60,000. Her proprietorship incurred a current-year business loss of Rs. 1,20,000. During P.Y. 2025-26 she sold unlisted shares held for 30 months, earning long-term capital gain of Rs. 5,40,000. She sold listed equity shares with STT paid, held for 20 months, at a long-term capital loss of Rs. 90,000. She also sold listed equity shares with STT paid, held for 8 months, at short-term capital gain of Rs. 1,80,000, and jewellery held for 10 months at short-term capital loss of Rs. 70,000. On 1 April 2025 she gifted Rs. 6,00,000 to her husband, who kept it in a bank fixed deposit and earned interest of Rs. 54,000. Her minor son, aged 12, earned interest of Rs. 18,000 on a fixed deposit made from a gift received from his grandfather. Meera's income before clubbing is higher than her husband's. Her husband has salary income of Rs. 2,80,000. The minor son has no disability. All capital assets were held as investments and not as stock-in-trade. No deduction under Chapter VI-A is claimed.

What is Meera's net long-term capital gain after setting off the long-term capital loss but before any inter-head set-off?

1. Rs. 4,50,000, because the long-term capital loss is set off before any inter-head adjustment. (correct answer)
2. Rs. 5,40,000, because the long-term capital loss on STT-paid equity shares cannot be set off against any taxable capital gains.
3. Rs. 4,40,000, because the current business loss is set off against long-term gain first.
4. Rs. 3,60,000, because the short-term capital loss is also set off against long-term gain.

Answer: A — Rs. 4,50,000, because the long-term capital loss is set off before any inter-head adjustment.

Working. 5,40,000 - 90,000 = 4,50,000.

Explanation. Long-term capital loss of Rs. 90,000 can be set off against long-term capital gain of Rs. 5,40,000. The net long-term capital gain is Rs. 4,50,000. The current business loss is an inter-head adjustment and is considered after intra-head set-off. The short-term capital loss is set off against short-term capital gain.

Where it goes wrong. Mixing inter-head set-off of business loss with intra-head capital loss set-off gives Rs. 4,40,000.

Authority. section 70; section 74

Question 5 · 2 marks · Chapter 4: Clubbing of Income · medium

What amount is included in Meera's total income by applying the clubbing provisions?

1. Rs. 54,000, because only the spouse's interest is clubbed and the minor's interest is taxed separately.
2. Rs. 72,000, because both interest amounts are clubbed without any exemption.
3. Rs. 70,500, because spouse interest and minor interest less Rs. 1,500 are clubbed. (correct answer)
4. Rs. 18,000, because the spouse has independent income and only the minor's interest is clubbed.

Answer: C — Rs. 70,500, because spouse interest and minor interest less Rs. 1,500 are clubbed.

Working. 54,000 + 18,000 - 1,500 = 70,500.

Explanation. Interest of Rs. 54,000 on the fixed deposit made from the gift to the spouse is clubbed under section 64(1)(iv). Minor son's interest of Rs. 18,000 is clubbed under section 64(1A) with Meera because her income before clubbing is higher. Exemption under section 10(32) is Rs. 1,500. The clubbed amount is Rs. 70,500.

Where it goes wrong. Forgetting the Rs. 1,500 exemption under section 10(32) gives Rs. 72,000.

Authority. section 64(1)(iv); section 64(1A); section 10(32)

Question 6 · 2 marks · Chapter 5: Set-off and Carry Forward of Losses · hard

What is Meera's total income for A.Y. 2026-27?

1. Rs. 8,80,500, because the business loss is set off only against long-term gain.
2. Rs. 8,70,500, because salary, net long-term gain and clubbed income are aggregated after set-off. (correct answer)
3. Rs. 8,30,500, because the business loss is set off against salary before capital gains.
4. Rs. 9,90,500, because the entire business loss is ignored and no set-off is allowed.

Answer: B — Rs. 8,70,500, because salary, net long-term gain and clubbed income are aggregated after set-off.

Working. STCG 1,80,000 - STCL 70,000 = 1,10,000. Business loss 1,20,000: set 1,10,000 against STCG, 10,000 against LTCG. LTCG 4,50,000 - 10,000 = 4,40,000. Total 3,60,000 + 4,40,000 + 70,500 = 8,70,500.

Explanation. Short-term capital loss of Rs. 70,000 is set off against short-term capital gain of Rs. 1,80,000, leaving Rs. 1,10,000. Business loss of Rs. 1,20,000 is set off against that short-term gain and the balance Rs. 10,000 against long-term gain, leaving long-term gain of Rs. 4,40,000. Salary Rs. 3,60,000 plus long-term gain Rs. 4,40,000 plus clubbed income Rs. 70,500 gives Rs. 8,70,500.

Where it goes wrong. Business loss cannot be set off against salary, but it can be set off against capital gains.

Authority. section 71; section 72; section 74; section 64

Question 7 · 2 marks · Chapter 2 and Chapter 7 · hard

Scenario. Ms. Eva, a German citizen, came to India for the first time on 12 May 2025 and left on 8 October 2025, staying 150 days. She had not visited India earlier. On 20 September 2025, an Indian company paid her Rs. 8,00,000 for consultancy services used at its Pune plant. The payment was made to her bank account in Germany. She has no other income in India and no fixed base in India.

What is the correct tax position for the payment made by the Indian company to Ms. Eva?

1. She is non-resident, and the company must deduct tax under section 195 as the consultancy is used in India. (correct answer)
2. She is resident but not ordinarily resident, and no tax is deductible because payment is abroad.
3. She is non-resident, and no tax is deductible because she rendered the service outside India.
4. She is resident, and tax is deductible under section 194J on the professional fee.

Answer: A — She is non-resident, and the company must deduct tax under section 195 as the consultancy is used in India.

Working. Stay 150 days; no earlier visits; non-resident. Consultancy used in Pune plant; deemed accrual in India. TDS under section 195 applies.

Explanation. Ms. Eva is not an Indian citizen or person of Indian origin and stayed only 150 days, so she is non-resident under section 6(1). Fees for technical services, including consultancy, are deemed to accrue in India where the services are utilised in India, even if rendered outside India. Tax is therefore deductible under section 195.

Where it goes wrong. The place of payment or place of rendering service does not decide deemed accrual when the service is used in India.

Authority. section 6(1); section 9(1)(vii); section 195 (check)

Question 8 · 1 marks · Chapter 7: Advance Tax · medium

Scenario. Mr. Om, a resident individual aged 66, has income from bank interest and rent. He has no income chargeable under the head Profits and gains of business or profession. For P.Y. 2025-26, his tax payable after TDS is Rs. 18,000.

Is Mr. Om liable to pay advance tax for P.Y. 2025-26?

1. Yes, because tax payable after TDS exceeds Rs. 10,000.
2. Yes, because every resident individual above 60 must pay advance tax.
3. No, because interest and rent are taxed only through TDS.
4. No, because a resident individual aged 60 or more without business income is exempt from advance tax. (correct answer)

Answer: D — No, because a resident individual aged 60 or more without business income is exempt from advance tax.

Working. Age 66; no business income; tax after TDS Rs. 18,000. Senior-citizen exemption applies; no advance tax.

Explanation. Section 208 generally requires advance tax where tax payable is Rs. 10,000 or more. However, a resident individual aged 60 or more during the previous year and having no income under the head Profits and gains of business or profession is not liable to pay advance tax. Mr. Om qualifies for this exemption.

Where it goes wrong. The Rs. 10,000 threshold is generally relevant, but the senior-citizen exemption applies here.

Authority. section 207; section 208