CA Inter Taxation - Income-tax Law MCQ Test 2: answer key

Question 1 · 2 marks · Chapter 3 Unit 3: Profits and Gains of Business or Profession · easy

Scenario. Mr. Raghav Mehta, a resident individual, operates a wholesale electrical goods business in Indore under the name Mehta Electricals. His turnover for the previous year 2025-26 is ₹2,86,00,000, of which ₹12,00,000 was received in cash and the remaining amount was received through prescribed electronic modes before the due date under section 139(1). He had first opted for presumptive taxation under section 44AD in AY 2025-26. During the current year, he is considering declaring business income under the presumptive scheme, although his accountant estimates that the actual profit as per books would be lower. His total income, excluding business income, is above the maximum amount not chargeable to tax. For the purposes of the following questions, assume that all other eligibility conditions are satisfied.

Determine whether Mr. Raghav is eligible to declare his business income under section 44AD for AY 2026-27, considering the turnover and cash-receipt conditions. Round the cash-receipt percentage to two decimal places.

1. Not eligible, since the maximum turnover limit under section 44AD is ₹2 crore in every case.
2. Not eligible, since cash receipts exceed 4% of total turnover.
3. Eligible, since turnover does not exceed ₹3 crore and cash receipts do not exceed 5% of total turnover. (correct answer)
4. Eligible only if cash receipts are completely eliminated during the previous year.

Answer: C — Eligible, since turnover does not exceed ₹3 crore and cash receipts do not exceed 5% of total turnover.

Working. Cash receipts = ₹12,00,000 Total turnover = ₹2,86,00,000 Cash receipts percentage = (12,00,000 / 2,86,00,000) × 100 = 4.1958% = 4.20% (rounded to two decimal places) Since 4.20% ≤ 5% and turnover of ₹2.86 crore ≤ ₹3 crore, the enhanced turnover condition is satisfied.

Explanation. The enhanced turnover threshold of ₹3 crore applies where aggregate cash receipts do not exceed 5% of total turnover or gross receipts. Raghav's cash receipts are approximately 4.20% of turnover, and his turnover is ₹2.86 crore. Both conditions are satisfied. Option (a) incorrectly applies the ordinary ₹2 crore threshold without considering the higher threshold available under the cash-receipt condition.

Where it goes wrong. Applying the ordinary ₹2 crore turnover ceiling without considering the higher ₹3 crore threshold subject to the 5% cash-receipt condition.

Authority. Chapter 3 Unit 3, Section 44AD, eligibility and enhanced turnover threshold, study material pp. 3.337-3.338

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

Assuming Mr. Raghav exercises the option under section 44AD, calculate his presumptive business income for AY 2026-27.

1. ₹22,88,000
2. ₹17,16,000
3. ₹17,88,000
4. ₹17,40,000 (correct answer)

Answer: D — ₹17,40,000

Working. Cash receipts = ₹12,00,000 Presumptive income on cash receipts = ₹12,00,000 × 8% = ₹96,000 Qualifying electronic receipts = ₹2,86,00,000 − ₹12,00,000 = ₹2,74,00,000 Presumptive income on electronic receipts = ₹2,74,00,000 × 6% = ₹16,44,000 Total presumptive income = ₹96,000 + ₹16,44,000 = ₹17,40,000. Total presumptive income = ₹17,40,000.

Explanation. Presumptive income is 8% of the receipts in cash and 6% of the receipts through prescribed banking or electronic modes within the stipulated time. Cash portion: ₹12,00,000 × 8% = ₹96,000. Electronic portion: ₹2,74,00,000 × 6% = ₹16,44,000. Total presumptive income is ₹17,40,000. Option (b) wrongly applies 6% to the whole turnover and option (a) wrongly applies 8% to the whole turnover.

Where it goes wrong. Applying 8% to all turnover or applying 6% to cash receipts instead of qualifying electronic receipts.

Authority. Chapter 3 Unit 3, Section 44AD, computation of presumptive income, study material pp. 3.337-3.338

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

Suppose Mr. Raghav declares business income lower than the presumptive income under section 44AD for AY 2026-27 and satisfies the condition relating to total income exceeding the maximum amount not chargeable to tax. What is the consequence for his eligibility to use section 44AD in subsequent assessment years?

1. He cannot claim section 44AD for the five assessment years immediately succeeding AY 2026-27, namely AY 2027-28 to AY 2031-32. (correct answer)
2. He can continue claiming section 44AD in AY 2027-28 by declaring at least 6% of turnover.
3. He cannot claim section 44AD for the next three assessment years only.
4. He loses eligibility permanently for all subsequent assessment years.

Answer: A — He cannot claim section 44AD for the five assessment years immediately succeeding AY 2026-27, namely AY 2027-28 to AY 2031-32.

Working. Assessment year of lower declaration = AY 2026-27. Five immediately succeeding assessment years: 1. AY 2027-28 2. AY 2028-29 3. AY 2029-30 4. AY 2030-31 5. AY 2031-32 The assessee cannot claim the benefit of section 44AD during these five subsequent assessment years, subject to the statutory conditions.

Explanation. Where an eligible assessee declares profits lower than the presumptive profits under section 44AD and the prescribed total-income condition is satisfied, the assessee becomes ineligible for the presumptive scheme for five subsequent assessment years. Since the lower declaration occurs in AY 2026-27, the restriction applies from AY 2027-28 through AY 2031-32. Option (c) incorrectly shortens the statutory restriction, while permanent exclusion under option (d) is also incorrect.

Where it goes wrong. Counting the five-year restriction from the year of lower declaration incorrectly, or confusing it with a permanent disqualification.

Authority. Chapter 3 Unit 3, Section 44AD, restriction following withdrawal from presumptive taxation, study material pp. 3.338-3.340

Question 4 · 2 marks · Chapter 3 Unit 4: Capital Gains · easy

Scenario. Ms. Kavya Nair, a resident individual, made investments in listed equity shares and an immovable property during the previous year 2025-26. She purchased listed equity shares of an Indian company on 10 June 2024 and sold them on 20 August 2025. Securities transaction tax was paid on both acquisition and transfer. Her long-term capital gain from these shares, after deducting eligible transfer expenses, is ₹2,05,000. Separately, she sold a plot of land on 1 October 2025, resulting in a long-term capital gain of ₹72,00,000. The land was acquired as a long-term capital asset. On 1 February 2026, she invested ₹55,00,000 in eligible bonds issued by NHAI, redeemable after five years. Assume that the investment satisfies all other conditions prescribed for exemption under section 54EC.

Determine the nature of the capital gain arising from the sale of Ms. Kavya's listed equity shares on 20 August 2025, considering their acquisition date.

1. Short-term capital gain, since the shares were held for not more than 24 months.
2. Long-term capital gain, since listed equity shares are treated as long-term capital assets when held for more than 12 months. (correct answer)
3. Short-term capital gain, since the shares were held for less than 36 months.
4. Long-term capital gain only if the shares were held for more than 24 months.

Answer: B — Long-term capital gain, since listed equity shares are treated as long-term capital assets when held for more than 12 months.

Working. Date of acquisition = 10 June 2024 Date of transfer = 20 August 2025 Holding period exceeds 12 months. Therefore, the shares are long-term capital assets.

Explanation. Under section 2(42A), listed securities on a recognised stock exchange are short-term capital assets when held for not more than 12 months. Shares acquired on 10 June 2024 and transferred on 20 August 2025 were held for more than 12 months. They therefore constitute long-term capital assets. Option (a) incorrectly applies the general 24-month holding period applicable to other capital assets.

Where it goes wrong. Applying the general 24-month holding period to listed equity shares instead of the 12-month period.

Authority. Chapter 3 Unit 4, Sections 2(42A) and 2(29A), classification of short-term and long-term capital assets, study material p. 3.379

Question 5 · 2 marks · Chapter 3 Unit 4: Capital Gains · medium

Calculate the tax payable on Ms. Kavya's long-term capital gain from listed equity shares under section 112A, ignoring surcharge and health and education cess. Assume no other adjustments are required.

1. ₹25,625
2. ₹2,05,000
3. ₹12,500
4. ₹10,000 (correct answer)

Answer: D — ₹10,000

Working. Long-term capital gain = ₹2,05,000 Less: Threshold under section 112A = ₹1,25,000 Taxable LTCG = ₹80,000 Tax = ₹80,000 × 12.5% = ₹10,000. Surcharge and cess are ignored as instructed.

Explanation. Section 112A taxes eligible long-term capital gains exceeding ₹1,25,000 at 12.5%. Kavya's taxable gain under this provision is ₹80,000 after applying the annual threshold. Tax is therefore ₹10,000. Option (a) incorrectly applies 12.5% to the entire capital gain without reducing the threshold, while option (c) uses an incorrect taxable amount.

Where it goes wrong. Ignoring the ₹1,25,000 threshold or applying the 12.5% rate to the entire gain.

Authority. Chapter 3 Unit 4, Section 112A, rate of tax and threshold for long-term capital gains, study material pp. 3.371 and 3.469

Question 6 · 2 marks · Chapter 3 Unit 4: Capital Gains · hard

Determine the amount of long-term capital gain chargeable to tax after allowing exemption under section 54EC for Ms. Kavya's investment in NHAI bonds. Assume all statutory conditions are satisfied and ignore other exemptions.

1. ₹22,00,000 (correct answer)
2. ₹27,00,000
3. ₹17,00,000
4. Nil

Answer: A — ₹22,00,000

Working. Long-term capital gain = ₹72,00,000 Amount invested in eligible NHAI bonds = ₹55,00,000 Maximum eligible investment under section 54EC = ₹50,00,000 Exemption = Lower of: (c) Capital gain: ₹72,00,000 (a) Eligible investment after statutory ceiling: ₹50,00,000 Exemption = ₹50,00,000 Taxable LTCG = ₹72,00,000 − ₹50,00,000 = ₹22,00,000.

Explanation. Section 54EC allows exemption to the extent of the lower of the eligible capital gain and the amount invested in specified bonds, subject to an aggregate investment ceiling of ₹50 lakh across the relevant previous year and subsequent previous year. Although Kavya invested ₹55 lakh within six months, the exemption cannot exceed ₹50 lakh. The taxable gain is therefore ₹22 lakh. Option (c) incorrectly allows the entire investment as an exemption.

Where it goes wrong. Allowing the full ₹55 lakh investment as exemption instead of applying the ₹50 lakh aggregate statutory ceiling.

Authority. Chapter 3 Unit 4, Section 54EC, quantum of exemption, investment period and maximum investment limit, study material pp. 3.442-3.443

Question 7 · 2 marks · Chapter 7: Advance Tax, Tax Deduction at Source and Tax Collection at Source · medium

Scenario. Orion Technologies Ltd., an Indian company, engaged a resident chartered accountant, Mr. Dev Malhotra, for professional consultancy services during the previous year 2025-26. The company paid him ₹42,000 in June 2025 and subsequently credited another ₹18,000 to his account under the heading 'Professional Consultancy Charges' in February 2026. The latter amount was credited to a suspense account pending final settlement. Both amounts relate to professional services.

Determine the TDS liability of Orion Technologies Ltd. under section 194J, assuming Mr. Dev has furnished his PAN and there are no other payments during the financial year. What amount of tax should be deducted and at what point?

1. No TDS is required because neither individual payment exceeds ₹50,000.
2. ₹4,200, deductible only on the first payment of ₹42,000.
3. ₹6,000, deductible when the additional ₹18,000 is credited to the suspense account in February 2026. (correct answer)
4. ₹1,800, deductible only on the additional ₹18,000.

Answer: C — ₹6,000, deductible when the additional ₹18,000 is credited to the suspense account in February 2026.

Working. First payment = ₹42,000 Subsequent credit = ₹18,000 Aggregate professional fees = ₹60,000 Threshold under section 194J = ₹50,000 Since ₹60,000 exceeds ₹50,000, TDS is attracted. TDS rate for professional services = 10% TDS = ₹60,000 × 10% = ₹6,000. Time of deduction: February 2026, when the additional amount is credited to the suspense account and the aggregate payment crosses the threshold.

Explanation. Professional fees exceeding ₹50,000 in aggregate during the financial year attract TDS under section 194J at 10%. The aggregate professional fee is ₹60,000. Credit to a suspense account is treated as credit to the payee, and deduction is required at the earlier of credit or payment. Thus, ₹6,000 is deductible when the February credit takes the aggregate above the threshold. Option (a) incorrectly considers each payment separately.

Where it goes wrong. Testing the ₹50,000 threshold separately for each payment and ignoring the rule treating suspense-account credit as payee credit.

Authority. Chapter 7, Section 194J, professional services, threshold, rate and time of deduction, study material pp. 7.35-7.36

Question 8 · 1 marks · Chapter 4: Income of Other Persons Included in Assessee's Total Income · easy

Scenario. Mr. Arvind Rao and his wife have a minor son, aged 16 years. During the previous year 2025-26, their son earned ₹90,000 by independently performing at music competitions and composing original musical arrangements. The income arose entirely from his own musical skill and talent. His parents have substantial taxable income from their respective occupations.

In whose hands should the ₹90,000 earned by Mr. Arvind's minor son be assessed under the clubbing provisions of the Income-tax Act, 1961?

1. Equally in the hands of both parents.
2. In the hands of the minor son, since the income arises from an activity involving his own skill and talent. (correct answer)
3. In the hands of the parent having the higher total income, after allowing exemption under section 10(32).
4. Entirely in the hands of the father, irrespective of the source of income.

Answer: B — In the hands of the minor son, since the income arises from an activity involving his own skill and talent.

Working. Income earned from musical performances and original musical arrangements = ₹90,000. The income arises from the minor's own skill and talent. Accordingly, the exception under section 64(1A) applies. Amount to be clubbed with either parent = Nil. Amount assessed in the minor's hands = ₹90,000.

Explanation. Section 64(1A) generally provides for clubbing a minor child's income with the income of the prescribed parent. However, income derived from manual work or an activity involving the minor's own skill, talent, specialised knowledge or experience is excluded from clubbing. Since the entire ₹90,000 arises from the son's independent musical skill and talent, it is taxable in his own hands. Option (c) overlooks this specific exception.

Where it goes wrong. Assuming that every type of income earned by a minor must be clubbed with a parent's income.

Authority. Chapter 4, Section 64(1A), exception for income from minor's skill or talent, study material pp. 4.13 and 4.21-4.22