CA Inter Taxation - Income-tax Law MCQ Test 7: answer key

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

Scenario. Pranav Mehta, a resident individual, carries on a manufacturing business in Vadodara under the name Mehta Industrial Components. He follows the mercantile system of accounting and maintains regular books of account. His net profit for the previous year 2025-26, as per the statement of profit and loss, is Rs. 48,60,000 after charging all the following expenses. On 1 February 2026, he purchased raw materials worth Rs. 12,00,000 from a supplier registered as a micro enterprise under the MSMED Act, 2006. There was no written agreement prescribing the payment period. The goods were accepted on the same date, but Pranav settled the invoice only on 20 February 2026. Another invoice of Rs. 8,00,000 from a small enterprise was accepted on 1 March 2026, under a written agreement requiring payment within 30 days. This invoice was settled on 25 March 2026. During December 2025, Pranav credited professional consultancy charges of Rs. 1,20,000 to the account of an individual director who provided independent technical advice. No tax was deducted at source, although the entire amount was debited to the statement of profit and loss. The director's remuneration was not included in any other payment. Further, on 1 October 2025, Pranav acquired new manufacturing machinery for Rs. 20,00,000 and installed it immediately. The machinery was put to use for manufacturing operations from that date and continued to be used until 31 March 2026. Its applicable depreciation rate under the Income-tax Rules is 15%. Depreciation charged in the books on this machinery was Rs. 2,00,000. The business has no brought-forward losses or unabsorbed depreciation. All other expenditure is assumed to be allowable, and no other disallowance or adjustment is required. Pranav wants to determine the adjustments necessary to arrive at his business income for A.Y. 2026-27.

Examine the allowability of the expenditure of Rs. 12,00,000 payable to the micro enterprise and Rs. 8,00,000 payable to the small enterprise while computing Pranav's business income for P.Y. 2025-26.

1. Both amounts are allowable in P.Y. 2025-26 because both were actually paid during that previous year; section 43B(h) does not defer a payment to a later previous year when it is made within the current one. (correct answer)
2. The expenditure of Rs. 12,00,000 is allowable only in P.Y. 2026-27, whereas Rs. 8,00,000 is allowable in P.Y. 2025-26 because payment was made within the written agreement period.
3. Both amounts are allowable in P.Y. 2025-26 because section 43B permits payment up to the due date for filing the return of income.
4. The expenditure of Rs. 12,00,000 is allowable in P.Y. 2025-26, but Rs. 8,00,000 is allowable only in P.Y. 2026-27 because the supplier is a small enterprise.

Answer: A — Both amounts are allowable in P.Y. 2025-26 because both were actually paid during that previous year; section 43B(h) does not defer a payment to a later previous year when it is made within the current one.

Working. First invoice: payment on 20 February 2026 is beyond the 15-day MSMED period, so it is not allowed on accrual; however, it is allowed in the year of actual payment, which is still P.Y. 2025-26. Second invoice: payment on 25 March 2026 is within the written 30-day period and is also allowed in P.Y. 2025-26.

Explanation. Section 43B(h) prevents a deduction on accrual where payment to a micro or small enterprise is made after the MSMED period, but it allows the deduction in the previous year of actual payment. The ₹12,00,000 payment was late for accrual treatment, yet it was actually paid on 20 February 2026, within P.Y. 2025-26. The ₹8,00,000 payment was also made in that previous year. Hence neither deduction is deferred to P.Y. 2026-27.

Where it goes wrong. Assuming that a late payment within the same previous year is deferred to the next previous year, rather than to the previous year in which it is actually paid.

Authority. Section 43B(h); Section 15, MSMED Act, 2006

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

What amount is required to be disallowed from the consultancy charges of Rs. 1,20,000 credited to the director while computing business income for A.Y. 2026-27?

1. Rs. 1,20,000, because the entire consultancy expenditure becomes inadmissible when tax is not deducted.
2. Rs. 12,000, because only 10% of the consultancy charges is disallowed under section 40(a)(ia).
3. Rs. 36,000, because 30% of the expenditure is disallowed under section 40(a)(ia). (correct answer)
4. Nil, because consultancy charges paid to a director are outside the scope of tax deduction at source.

Answer: C — Rs. 36,000, because 30% of the expenditure is disallowed under section 40(a)(ia).

Working. Consultancy charges = Rs. 1,20,000. Disallowance under section 40(a)(ia) = Rs. 1,20,000 × 30% = Rs. 36,000.

Explanation. Director's fees or remuneration for professional or technical services attract deduction under section 194J without a monetary threshold for director remuneration. Failure to deduct the required tax attracts disallowance of 30% of the expenditure under section 40(a)(ia). The tempting full disallowance is incorrect because the provision restricts the disallowance to 30%, rather than the entire amount.

Where it goes wrong. Applying a full disallowance or confusing the applicable 30% disallowance with the TDS rate.

Authority. Section 194J; Section 40(a)(ia)

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

Determine the depreciation allowable on the new manufacturing machinery for P.Y. 2025-26, assuming the applicable depreciation rate is 15%.

1. Rs. 3,00,000, because the machinery is eligible for full depreciation at 15% of its actual cost. (correct answer)
2. Rs. 1,50,000, because machinery put to use for less than 180 days during the previous year qualifies for depreciation at half the prescribed rate.
3. Rs. 2,00,000, because depreciation charged in the books of account is allowable for income-tax purposes.
4. Rs. 1,20,000, because only 60% of the prescribed depreciation rate is available for machinery acquired during the second half of the year.

Answer: A — Rs. 3,00,000, because the machinery is eligible for full depreciation at 15% of its actual cost.

Working. 1 October 2025 to 31 March 2026 = 182 days. Actual cost = ₹20,00,000; full prescribed rate = 15%; depreciation = ₹20,00,000 × 15% = ₹3,00,000.

Explanation. Depreciation follows the prescribed income-tax rate, not book depreciation. Machinery put to use from 1 October 2025 through 31 March 2026 was used for 182 days, which is more than 180 days. The half-rate restriction therefore does not apply. Full depreciation at 15% on ₹20,00,000 is ₹3,00,000. Option b incorrectly treats the period as less than 180 days.

Where it goes wrong. Counting 1 October to 31 March as less than 180 days, instead of the actual 182 days.

Authority. Section 32(1); Rule 5, Income-tax Rules, 1962

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

Scenario. Raghav Malhotra, an Indian citizen employed as a software architect, accepted an overseas employment contract with a Singapore-based technology company. He departed from India on 10 September 2025 to take up the employment and remained outside India until 31 March 2026. During the previous year 2025-26, he was physically present in India for 130 days. His aggregate stay in India during the four immediately preceding previous years was 410 days. His Indian income, excluding income from foreign sources, amounted to Rs. 18,40,000. He had no Indian business or profession under his control. During the year, Raghav earned salary of Rs. 36,00,000 for services physically rendered in Singapore. His Singapore bank account also generated fixed-deposit interest of Rs. 2,40,000, which was credited to that account and was not received in India during the year. Separately, he received Rs. 3,00,000 as rent from a residential property situated in Pune, directly into his Indian bank account. He also received Rs. 1,20,000 in India from an Indian company as interest on debentures. On 15 February 2026, Raghav transferred Rs. 5,00,000 from his Singapore account to his Indian savings account. The amount represented accumulated savings from his overseas employment and did not include any new income earned during the year. His parents continue to reside in Jaipur, and he holds an Indian passport throughout the relevant period. Raghav believes that his Indian citizenship and substantial Indian income automatically make him a resident in India. He also assumes that every amount connected with his overseas employment must be included in his Indian total income. Determine the correct residential status and the tax implications of the different receipts for A.Y. 2026-27, applying the statutory provisions governing residence and scope of total income.

What is Raghav's residential status in India for P.Y. 2025-26?

1. Resident and ordinarily resident, because his stay in India during the four preceding previous years exceeds 365 days and he is an Indian citizen.
2. Resident but not ordinarily resident, because his Indian income exceeds Rs. 15 lakh and his stay in India exceeds 120 days.
3. Non-resident, because an Indian citizen leaving India for employment outside India is subject to the 182-day condition and his stay is only 130 days. (correct answer)
4. Resident and ordinarily resident, because the 60-day and 365-day conditions are satisfied independently of the purpose of departure.

Answer: C — Non-resident, because an Indian citizen leaving India for employment outside India is subject to the 182-day condition and his stay is only 130 days.

Working. Indian citizen leaving India for employment outside India. Stay in P.Y. 2025-26 = 130 days. Applicable residence threshold = 182 days. Since 130 < 182, Raghav is non-resident.

Explanation. An Indian citizen leaving India during the relevant previous year for employment outside India is covered by the exception to the general residence test. For this category, residence requires a stay of at least 182 days in India. Raghav stayed only 130 days. The 60-day plus 365-day test does not apply to him. His Indian income exceeding Rs. 15 lakh does not alter this employment-related exception.

Where it goes wrong. Applying the modified 120-day test for visiting Indian citizens or persons of Indian origin instead of the separate exception for an Indian citizen leaving for overseas employment.

Authority. Section 6(1); Section 6(1), Explanation 1(a) (employment outside India)

Question 5 · 2 marks · Chapter 2: Residence and Scope of Total Income; Chapter 1: Basic Concepts · hard

Which of the following correctly describes the taxability of Raghav's receipts for A.Y. 2026-27, considering his residential status?

1. His Singapore salary, Singapore bank interest and Indian rental income are all taxable because he is an Indian citizen.
2. His Singapore salary and Singapore bank interest are not taxable, while his Indian rental income and Indian debenture interest are taxable. (correct answer)
3. His Singapore salary is taxable because it is received outside India, but the Singapore bank interest is exempt because it arises outside India.
4. His Singapore salary is taxable because he transferred accumulated savings to India, while the Indian rental income is taxable only if received outside India.

Answer: B — His Singapore salary and Singapore bank interest are not taxable, while his Indian rental income and Indian debenture interest are taxable.

Working. Singapore salary for services abroad: not taxable in India. Singapore bank interest received abroad: not taxable in India. Indian rental income: taxable in India. Indian debenture interest: taxable in India. Remittance of accumulated savings: not fresh income.

Explanation. A non-resident is taxable on income received or deemed received in India and income accruing or arising or deemed to accrue or arise in India. Salary for services rendered in Singapore and foreign bank interest received outside India are not taxable merely because the recipient is an Indian citizen. Indian property rent and interest on Indian debentures are taxable. A subsequent remittance of accumulated savings is not fresh income.

Where it goes wrong. Confusing citizenship and remittance of accumulated savings with receipt of income in India, and overlooking the Indian-source income taxable in the hands of a non-resident.

Authority. Section 5(2); Section 9; Section 6(1)

Question 6 · 2 marks · Chapter 1: Basic Concepts; Chapter 2: Residence and Scope of Total Income · medium

Raghav argues that the Rs. 5,00,000 transferred from his Singapore bank account to India constitutes income of P.Y. 2025-26 merely because the amount was received in his Indian bank account during that year. Which statement is correct?

1. The entire Rs. 5,00,000 is taxable because every amount received in India during the previous year is income under section 5.
2. Only 50% of the amount is taxable because the remittance represents foreign income accumulated over different years.
3. The amount is exempt only if Raghav is resident and ordinarily resident in India.
4. The amount is not taxable merely on remittance because it represents accumulated savings from income already earned; remittance of capital does not constitute fresh income. (correct answer)

Answer: D — The amount is not taxable merely on remittance because it represents accumulated savings from income already earned; remittance of capital does not constitute fresh income.

Working. Remittance = Rs. 5,00,000. Nature = accumulated savings from earlier overseas earnings. No fresh income arises merely because the money is transferred to India during P.Y. 2025-26. Taxable amount on this remittance alone = Nil.

Explanation. The scope of total income under section 5 concerns income received or deemed received, or income accruing or arising, during the relevant previous year. A transfer of accumulated savings from a foreign bank account to India does not create a new income event. The fact that money enters an Indian bank account does not automatically convert previously accumulated capital into income of the current previous year.

Where it goes wrong. Treating every inward remittance as taxable income without distinguishing the remittance of accumulated capital from current-year income.

Authority. Section 5(2); Chapter 1: Meaning of Income and Previous Year

Question 7 · 2 marks · Chapter 3 Unit 5: Income from Other Sources · hard

Scenario. On 12 June 2025, Kavita purchased a residential plot in Jaipur from an unrelated individual for Rs. 60,00,000. The agreement fixing the consideration was executed on that date, and she transferred Rs. 5,00,000 through NEFT to the seller on the same day. The remaining consideration was paid subsequently. The stamp duty value on the agreement date was Rs. 67,00,000, whereas the value on the registration date, 20 December 2025, was Rs. 73,00,000. The Assessing Officer has not referred the property to a Valuation Officer. The plot is held as a capital asset and is not intended for trading.

Determine the amount, if any, chargeable to tax in Kavita's hands under the head 'Income from Other Sources' in respect of the purchase of the residential plot.

1. Rs. 13,00,000, because the difference between the registration-date stamp duty value and consideration is taxable.
2. Rs. 7,00,000, because the agreement-date stamp duty value exceeds the consideration by more than Rs. 50,000. (correct answer)
3. Nil, because the agreement-date stamp duty value can be considered and the difference does not exceed the higher of Rs. 50,000 and 10% of consideration.
4. Rs. 7,30,000, because 10% of the registration-date stamp duty value is chargeable as income from other sources.

Answer: B — Rs. 7,00,000, because the agreement-date stamp duty value exceeds the consideration by more than Rs. 50,000.

Working. Agreement-date stamp duty value = Rs. 67,00,000. Consideration = Rs. 60,00,000. Difference = Rs. 7,00,000. Threshold = Higher of Rs. 50,000 and 10% of Rs. 60,00,000 = Rs. 6,00,000. Since Rs. 7,00,000 exceeds Rs. 6,00,000, taxable income = Rs. 7,00,000. Correct answer: b.

Explanation. Because part of the consideration was paid through NEFT on the agreement date, the agreement-date stamp duty value of ₹67,00,000 may be used. It exceeds the ₹60,00,000 consideration by ₹7,00,000. The safe-harbour threshold is the higher of ₹50,000 and 10% of consideration, namely ₹6,00,000. Since the difference exceeds that threshold, the full ₹7,00,000 is taxable under section 56(2)(x).

Where it goes wrong. Applying the registration-date valuation without considering the permitted agreement-date valuation, or comparing the difference with Rs. 50,000 alone rather than the higher threshold.

Authority. Section 56(2)(x); Section 56(2)(x), proviso relating to agreement date stamp duty value

Question 8 · 1 marks · Chapter 7: Advance Tax, Tax Deduction at Source and Tax Collection at Source · medium

Scenario. On 18 January 2026, an automobile dealer in Indore sold a new motor vehicle to an individual customer for Rs. 14,50,000. The vehicle was sold at the retail level, and the dealer received Rs. 4,00,000 as an advance on 18 January and the balance on 10 February 2026. The customer paid part of the consideration in cash and the remainder through banking channels. The customer furnished a valid PAN, and no exemption from TCS is available.

What is the amount of tax collectible at source by the dealer on receipt of the advance of Rs. 4,00,000 on 18 January 2026?

1. Rs. 14,500, because TCS at 1% is collectible on the entire sale consideration when the sale agreement is executed.
2. Rs. 40,000, because TCS at 10% applies to the advance received on a high-value motor vehicle.
3. Nil, because TCS on a motor vehicle is applicable only when the entire sale consideration is received.
4. Rs. 4,000, because TCS at 1% is collectible on the amount of sale consideration received as advance. (correct answer)

Answer: D — Rs. 4,000, because TCS at 1% is collectible on the amount of sale consideration received as advance.

Working. Advance received = Rs. 4,00,000. Applicable TCS rate = 1%. TCS = Rs. 4,00,000 × 1% = Rs. 4,000.

Explanation. Under section 206C(1F), the seller must collect TCS at 1% on the sale consideration of a motor vehicle whose value exceeds Rs. 10 lakh. Collection is required at the time of receipt of sale consideration. Accordingly, TCS on the advance received is Rs. 4,000. The entire sale consideration is not the amount on which collection is made at this particular receipt.

Where it goes wrong. Collecting TCS on the entire consideration at the first instalment instead of applying the collection requirement at each receipt of sale consideration.

Authority. Section 206C(1F); CBDT Circular No. 22/2016 dated 8 June 2016