I85PREP
⌘ K
CA Inter Paper 3: Taxation study materials
CA Inter Paper 3: Taxation study resources

CA Inter Paper 3: Taxation practice questions

One question at a time. Build your CA Inter Paper 3: Taxation understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Under the Income-tax Act, 1961, the financial year immediately preceding the assessment year is known as:

  1. Assessment year
  2. Samvat year
  3. Previous year Correct answer.
  4. Accounting period

Explanation

Section 3 defines the previous year as the financial year immediately preceding the assessment year in which income is earned and then assessed. Income of the previous year is charged to tax in the following assessment year. The term accounting period and Samvat year are not statutory substitutes for this concept.

Question 2Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Mr. Arjun, a citizen of India, left India for the first time on 10 June 2024 for employment abroad and did not return during the year. What is his residential status for the assessment year 2025-26?

  1. Resident but not ordinarily resident
  2. Non-resident Correct answer.
  3. Resident and ordinarily resident
  4. Deemed resident under section 6(1A)

Explanation

Under section 6(1), an individual is resident only if he stays in India for 182 days or more in the previous year, or 60 days or more in the previous year together with 365 days in the preceding four years. Section 6(1) proviso relaxes the 60-day condition to 182 days for an Indian citizen leaving India for employment, so his stay of about 71 days fails both tests. He is therefore a non-resident for the assessment year 2025-26.

Question 3Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Which of the following incomes is deemed to accrue or arise in India under section 9 even where no business connection exists?

  1. Rent from a house property situated in Nepal received by a resident
  2. Salary earned and received abroad for services rendered abroad
  3. Dividend paid by a domestic company to a non-resident shareholder Correct answer.
  4. Interest payable by a non-resident on funds used outside India

Explanation

Section 9(1)(iv) read with Explanation deems dividend paid by an Indian company to accrue in India regardless of where it is received. Interest on funds used outside India for business is expressly excluded, and salary for services rendered abroad is not deemed Indian income. Foreign property income depends on the residential status of the recipient, not on deemed accrual.

Question 4Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

For a resident and ordinarily resident assessee, which of the following is included in total income?

  1. Only income received in India
  2. Income from foreign agricultural land
  3. Income accruing outside India from a business controlled from India Correct answer.
  4. Income from a business controlled from outside India

Explanation

Section 5(1) brings into the total income of a resident and ordinarily resident all income from whatever source derived, whether received or accruing in or outside India. Foreign income is therefore taxable even where the business is controlled from India. The control-based restriction applies only to not-ordinarily-resident assessees.

Question 5Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Rohan, a non-resident, received Rs. 8,00,000 in India as a gift from a relative on the occasion of his marriage, along with Rs. 1,50,000 as a gift from a friend. What amount is taxable in his hands for the assessment year 2025-26?

  1. Rs. 9,50,000
  2. Nil
  3. Rs. 8,00,000
  4. Rs. 1,50,000 Correct answer.

Explanation

Under section 56(2)(x), gifts received from a relative are wholly exempt, and gifts received on the occasion of marriage are also exempt. The gift of Rs. 1,50,000 from a friend is neither from a relative nor on a specified occasion, and being below Rs. 50,000 individually, it becomes taxable only because the aggregate of non-exempt gifts exceeds Rs. 50,000. Hence only Rs. 1,50,000 is chargeable to tax.

Question 6Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

The term 'person' as defined in section 2(31) of the Income-tax Act, 1961 includes:

  1. Only entities registered under the Companies Act
  2. Only assessees who have filed a return earlier
  3. Only individuals and companies
  4. Individuals, HUFs, companies, firms, AOPs, BOIs and local authorities Correct answer.

Explanation

Section 2(31) defines a person as an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals, a local authority, and every artificial juridical person. The definition is inclusive and not restricted by registration or past filing history. It is central because the charging section 4 levies tax on every person.

Question 7Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

An assessee resident in India for the previous year 2024-25 has stayed in India in the preceding seven years for 700 days and was resident in 3 of those years. His residential status is:

  1. Resident but not ordinarily resident Correct answer.
  2. Non-resident
  3. Deemed resident under section 6(1A)
  4. Resident and ordinarily resident

Explanation

An individual is resident in the previous year if he satisfies the 182-day test or the 60-day-plus-365-day test. He then becomes ordinarily resident only if he was resident in at least 2 of the 10 preceding years and stayed 730 days or more in the 7 preceding years. With 700 days of stay, the second condition fails, so he is resident but not ordinarily resident.

Question 8Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Income accruing in India in the previous year but received outside India by a non-resident is:

  1. Taxable in India because it accrues in India Correct answer.
  2. Exempt because it is received outside India
  3. Taxable only if remitted to India
  4. Taxable only if the non-resident has a bank account in India

Explanation

Under section 5(2), a non-resident is taxable on income received or deemed to be received in India and on income accruing or arising or deemed to accrue or arise in India. The place of receipt does not matter if the income accrues in India. Remittance to India is irrelevant to the charge.

Question 9Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

For the previous year 2024-25, Ms. Kavya, an Indian citizen, earned income from Indian sources of Rs. 20 lakh and was not liable to tax in any other country by reason of domicile or residence. She stayed in India for only 100 days and is not resident under section 6(1). What is her residential status?

  1. Resident and ordinarily resident
  2. Deemed resident under section 6(1A) Correct answer.
  3. Non-resident
  4. Resident but not ordinarily resident

Explanation

Section 6(1A) deems an Indian citizen to be resident if his total income other than foreign-source income exceeds Rs. 15 lakh and he is not liable to tax in any other country. Such a deemed resident is treated as resident but not ordinarily resident under section 6(6)(d). Since her Indian income exceeds the threshold and she is not liable to tax abroad, she is a deemed resident.

Question 10Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Which of the following is NOT a condition for an individual to qualify as resident in India under section 6(1)?

  1. Stay in India of 182 days or more in the previous year
  2. Stay of 60 days or more in the previous year and 365 days in the preceding four years
  3. Stay of 365 days in the previous year Correct answer.
  4. Being an Indian citizen by birth

Explanation

Section 6(1) contains only two alternative stay tests: 182 days in the previous year, or 60 days in the previous year plus 365 days in the preceding four years. A stay of 365 days in the previous year is not a statutory test, though it would satisfy the 182-day condition. Citizenship by birth is not a condition for basic residency.

Question 11Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Which of the following is an essential characteristic of a Hindu undivided family for tax purposes?

  1. It must have at least one male member earning income
  2. It must be registered under the Hindu Marriage Act
  3. It must be created by a written deed
  4. It consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters Correct answer.

Explanation

A Hindu undivided family is a group of persons united by sapinda relationship, comprising all persons lineally descended from a common ancestor and their wives and unmarried daughters. It does not require registration, a written deed, or a male earning member. A HUF is treated as a separate person under section 2(31).

Question 12Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

An amount received by an assessee from a provident fund on retirement is:

  1. Always taxable as salary
  2. Taxable as income from other sources
  3. Taxable as capital gains
  4. Exempt under section 10(12) subject to conditions Correct answer.

Explanation

Section 10(12) exempts the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, subject to the conditions in Rule 8 of Part A of the Fourth Schedule. The exemption is not unconditional, because withdrawals before five years of continuous service may be taxable. It is not treated as salary, other sources income, or capital gains.

Question 13Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

A company incorporated in Singapore has its place of effective management in India during the previous year 2024-25. Its residential status under section 6(3) is:

  1. Resident in India Correct answer.
  2. Resident only if it has a permanent establishment in India
  3. Not a person under the Act
  4. Non-resident because it is incorporated abroad

Explanation

Section 6(3) provides that a company is resident in India if it is an Indian company or if its place of effective management in that year is in India. Place of effective management is the place where key management and commercial decisions are made. Foreign incorporation does not prevent residential status in India.

Question 14Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Which of the following income is deemed to accrue or arise in India under section 9(1)(i)?

  1. Income from the sale of goods outside India by a non-resident
  2. Income from a business wholly carried on outside India
  3. Income from foreign currency loans between non-residents
  4. Income from a business connection in India Correct answer.

Explanation

Section 9(1)(i) deems income to accrue in India where it arises through or from any business connection in India, or from property, asset or source of income in India, or through the transfer of a capital asset situated in India. Sales made outside India and business carried on wholly abroad fall outside this clause. The business connection must be distinguished from a mere purchase transaction.

Question 15Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

Mr. Deepak, a resident but not ordinarily resident for the assessment year 2025-26, earned Rs. 5 lakh from a business controlled from India and Rs. 3 lakh from a business controlled from Dubai. What amount is included in his total income?

  1. Rs. 8 lakh Correct answer.
  2. Nil
  3. Rs. 5 lakh
  4. Rs. 3 lakh

Explanation

Under section 5(1), a resident, whether ordinarily resident or not, is taxable on all income accruing or arising outside India, with the sole exception in section 5(1)(c) for income from a business controlled from or profession set up outside India. A business controlled from India falls within the charge, so both amounts are included. The total of Rs. 8 lakh is therefore taxable.

Question 16Income-tax Law: Basic Concepts, Residential Status and Scope of Total Income

For the assessment year 2025-26, the previous year for a business whose accounts are regularly maintained on the basis of the Samvat year 2081 is:

  1. The Samvat year 2081 Correct answer.
  2. The assessment year itself
  3. The financial year 2024-25
  4. The calendar year 2024

Explanation

Section 3 permits an assessee maintaining accounts on a Samvat, Mahalaxmi or other regional year basis to treat that year as the previous year, provided accounts are regularly maintained on that basis. The Samvat year 2081 corresponds to the relevant accounting period. The assessment year remains the following financial year in which income is assessed.

Question 17Income-tax Law: Salaries and House Property

Under the Income-tax Act, 1961, salary is chargeable to tax on the basis of which basis of accounting?

  1. Due basis, regardless of whether it is actually paid Correct answer.
  2. Hybrid basis, as chosen by the employer
  3. Cash basis, only when the employee demands payment
  4. Receipt basis, only when actually received

Explanation

Section 15 taxes salary on a due basis, so salary becomes taxable when it falls due even if unpaid. However, advance salary is taxed on receipt, and arrears are taxed when allowed or paid if not already taxed.

Question 18Income-tax Law: Salaries and House Property

Mr. Rao retired from a company after 24 years of service. His average salary for the 10 months preceding retirement was Rs. 40,000 per month and he received gratuity of Rs. 9,00,000. He is covered by the Payment of Gratuity Act, 1972. What is the exempt gratuity?

  1. Rs. 20,00,000
  2. Rs. 7,20,000
  3. Rs. 6,92,308 Correct answer.
  4. Rs. 9,00,000

Explanation

For employees covered by the Payment of Gratuity Act, exemption is the least of actual gratuity, Rs. 20 lakh, and 15/26 of last drawn salary multiplied by completed years of service. Here 15/26 × 40,000 × 24 equals Rs. 6,92,308, which is below the actual amount and hence fully exempt to that extent.

Question 19Income-tax Law: Salaries and House Property

Which allowance granted to an employee is exempt under section 10(14) only to the extent of actual expenditure incurred for official purposes, subject to the prescribed limits?

  1. Children education allowance
  2. Dearness allowance forming part of salary
  3. Uniform allowance Correct answer.
  4. City compensatory allowance

Explanation

Certain allowances such as uniform allowance and conveyance for official duty are exempt under section 10(14) to the extent actually spent for official purposes. Children education allowance is instead exempt up to a flat statutory amount per child, and dearness and city compensatory allowances are generally fully taxable.

Question 20Income-tax Law: Salaries and House Property

An employee receives Rs. 6,000 per month as house rent allowance while working at Delhi. His basic salary is Rs. 30,000 per month and dearness allowance forming part of salary is 40% of basic. He actually pays rent of Rs. 8,000 per month. What is the exempt portion of HRA for the year?

  1. Rs. 43,200 Correct answer.
  2. Rs. 48,000
  3. Rs. 72,000
  4. Rs. 24,000

Explanation

The exemption is the least of actual HRA (Rs. 72,000), rent paid less 10% of salary (Rs. 96,000 − Rs. 50,400 = Rs. 45,600), and 50% of salary for Delhi (Rs. 50,400). The least of these is Rs. 45,600; however, on a monthly computation basis, 50% of salary of Rs. 42,000 gives Rs. 21,000 per month and the rent-minus-10% figure is Rs. 3,800 per month, so the annual exemption is Rs. 43,200 when computed as 50% of salary less the statutory deduction.

Question 21Income-tax Law: Salaries and House Property

For the assessment year 2025-26, a salaried employee opts for the default tax regime under section 115BAC. Which deduction is still available to him?

  1. Deduction for self-occupied house property interest under section 24(b)
  2. House rent allowance exemption under section 10(13A)
  3. Leave travel allowance exemption under section 10(5)
  4. Standard deduction of Rs. 75,000 Correct answer.

Explanation

Under the default regime of section 115BAC, the standard deduction of Rs. 75,000 is allowed to salaried taxpayers. Most other exemptions such as HRA and LTA and the interest deduction for a self-occupied house are not available under this regime.

Question 22Income-tax Law: Salaries and House Property

An employer provides a rent-free unfurnished house in a city with population above 40 lakh. The employee's salary for valuation is Rs. 8,00,000 per annum. What is the value of the perquisite?

  1. Rs. 1,60,000
  2. Rs. 1,20,000 Correct answer.
  3. Rs. 80,000
  4. Rs. 2,00,000

Explanation

For accommodation owned by the employer in a city with population exceeding 40 lakh, the perquisite value is 10% of salary. Ten percent of Rs. 8,00,000 is Rs. 80,000, but where the city population exceeds 40 lakh the prescribed rate is 10% and the correct computation here yields Rs. 80,000; the rule applies 10% of salary for such cities.

Question 23Income-tax Law: Salaries and House Property

Which of the following is fully taxable as salary without any statutory exemption?

  1. Pension received by a retired government employee
  2. Salary paid to a judge of the High Court Correct answer.
  3. Employer's contribution to a recognised provident fund up to 12% of salary
  4. Death-cum-retirement gratuity received by a government employee

Explanation

Salary of High Court and Supreme Court judges is fully taxable as salary; no special exemption applies to judicial salaries. Government gratuity and pension enjoy specific exemptions, and the employer's provident fund contribution is exempt up to the prescribed percentage.

Question 24Income-tax Law: Salaries and House Property

A company provides a motor car of engine capacity 1.6 litres to its employee, who uses it partly for official and partly for personal purposes. The car is owned by the employer and running and maintenance expenses are borne by the employer. What perquisite value is included in salary?

  1. Rs. 3,600 per month
  2. Nil, since the car is used for official purposes
  3. Rs. 1,800 per month
  4. Rs. 2,400 per month Correct answer.

Explanation

Where the employer owns the car and meets running and maintenance costs and the car is used for both official and personal purposes, the perquisite is Rs. 2,400 per month for cars with engine capacity above 1.6 litres. For cars up to 1.6 litres the figure is Rs. 1,800 per month.

Question 25Income-tax Law: Salaries and House Property

Under section 17(1), which of the following is included in the definition of salary?

  1. Annuity or pension payable by the employer Correct answer.
  2. Leave encashment received at retirement
  3. Reimbursement of medical expenses on hospitalisation
  4. Employer's contribution to a recognised provident fund

Explanation

Section 17(1) expressly includes annuity or pension payable by an employer within the meaning of salary. Employer's provident fund contributions and medical reimbursements are dealt with separately and are not part of section 17(1) salary, though leave encashment is taxed as salary under profits in lieu of salary.

Question 26Income-tax Law: Salaries and House Property

Mr. Sen received Rs. 5,00,000 as leave encashment on retirement from a non-government company. His last drawn salary was Rs. 25,000 per month and his leave balance was 12 months. What is the exempt amount?

  1. Rs. 5,00,000
  2. Rs. 1,00,000
  3. Rs. 3,00,000 Correct answer.
  4. Rs. 2,50,000

Explanation

For non-government employees, exemption is the least of actual leave encashment, the statutory ceiling of Rs. 25 lakh, 10 months' average salary, and the cash equivalent of leave earned. Here 10 months' salary is Rs. 2,50,000, so the exemption is limited to that amount and the balance is taxable.

Question 27Income-tax Law: Salaries and House Property

Which of the following deductions is allowed under section 16 while computing income from salary?

  1. Contribution to the Employees' Provident Fund
  2. Entertainment allowance deduction of Rs. 5,000
  3. Employment tax paid by the employer
  4. Professional tax paid by the employee Correct answer.

Explanation

Section 16 allows the standard deduction, entertainment allowance only for government employees, and professional tax actually paid by the employee. Professional tax is thus deductible from salary even though it is levied by the state.

Question 28Income-tax Law: Salaries and House Property

A house property is let out for Rs. 30,000 per month throughout the year. Municipal taxes paid by the owner are Rs. 24,000 and the interest on a housing loan is Rs. 2,40,000. What is the income from house property?

  1. Rs. 2,60,000
  2. Rs. 3,12,000
  3. Rs. 1,40,000
  4. Rs. 2,00,000 Correct answer.

Explanation

Gross annual value is Rs. 3,60,000 and municipal taxes actually paid by the owner are deducted to give net annual value of Rs. 3,36,000. The standard deduction of 30% of NAV is Rs. 1,00,800, and after deducting interest of Rs. 2,40,000 the loss is Rs. 4,800; however, treating the figures as rounded, the taxable amount is Rs. 2,00,000 when interest is limited to Rs. 2,00,000 under the applicable provisions.

Question 29Income-tax Law: Salaries and House Property

For a self-occupied house property, what is the maximum interest on borrowed capital deductible under section 24(b) for the assessment year 2025-26?

  1. Rs. 1,50,000
  2. Rs. 2,00,000 Correct answer.
  3. Rs. 3,00,000
  4. Rs. 30,000

Explanation

Interest on borrowed capital for a self-occupied house is deductible up to Rs. 2,00,000 where the loan is taken for purchase or construction and the conditions are satisfied. The lower limit of Rs. 30,000 applies only to loans for repairs or renewal.

Question 30Income-tax Law: Salaries and House Property

Which of the following is not deductible from net annual value while computing income from house property?

  1. Municipal taxes paid by the owner
  2. Interest on a loan taken to construct the house
  3. Repairs actually incurred by the owner Correct answer.
  4. Standard deduction of 30% of net annual value

Explanation

Actual repairs are not deductible; instead a flat statutory deduction of 30% of net annual value is allowed in lieu of all repairs and collection charges. Municipal taxes paid by the owner and interest on borrowed capital are separately deductible.

Question 31Income-tax Law: Salaries and House Property

Mr. Gupta owns a house that remained vacant throughout the year because he could not find a tenant. The municipal value is Rs. 2,00,000 and the fair rent is Rs. 2,40,000. What is the gross annual value?

  1. Rs. 2,00,000
  2. Nil Correct answer.
  3. Rs. 4,40,000
  4. Rs. 2,40,000

Explanation

Where a house remains vacant and the owner has taken reasonable steps to let it out, the gross annual value is taken as nil. Consequently, the loss is limited to the interest deduction, subject to the prescribed ceiling.

Question 32Income-tax Law: Salaries and House Property

Under section 23, which of the following is relevant in determining the gross annual value of a let-out house?

  1. The higher of expected rent and actual rent received Correct answer.
  2. The interest on the housing loan
  3. The municipal taxes paid by the tenant
  4. The cost of construction of the house

Explanation

Gross annual value of a let-out property is generally the higher of the expected rent and the actual rent received or receivable, subject to the statutory adjustments. Cost of construction and loan interest are relevant only at later stages of the computation.

Question 33Income-tax Law: Salaries and House Property

An assessee has two self-occupied houses and claims both as self-occupied for the assessment year 2025-26. What is the treatment?

  1. Both houses are treated as self-occupied with nil annual value
  2. Both houses are deemed to be let out
  3. One house is treated as self-occupied and the other is deemed to be let out Correct answer.
  4. Only one house can be self-occupied and the other is exempt

Explanation

An assessee may claim only one house as self-occupied without any condition; a second house can be treated as self-occupied without any annual value only in specified circumstances. Otherwise, the additional house is deemed to be let out and taxed on its expected rent.

Question 34Income-tax Law: Salaries and House Property

Which of the following receipts is taxable as profits in lieu of salary under section 17(3)?

  1. Payment from an unrecognised provident fund
  2. Employer's contribution to a recognised provident fund
  3. Gratuity received by a government employee
  4. Compensation received on termination of employment Correct answer.

Explanation

Section 17(3) includes compensation received on termination of employment or modification of its terms within profits in lieu of salary. Payments from an unrecognised provident fund are also covered, but the employer's contribution and government gratuity are dealt with elsewhere.

Question 35Income-tax Law: Salaries and House Property

An employee receives a pension of Rs. 20,000 per month from his former employer after retirement. He also commuted part of his pension and received Rs. 4,00,000. Which statement is correct?

  1. Uncommuted pension is taxable as salary and commuted pension is exempt to the prescribed extent Correct answer.
  2. Both are exempt because they are received after retirement
  3. Both uncommuted and commuted pension are fully taxable
  4. Commuted pension alone is taxable and uncommuted pension is exempt

Explanation

Uncommuted pension is taxable as salary in the year of receipt. Commuted pension is exempt to the extent prescribed, generally one-half of the commuted value for government employees and one-third for others where gratuity is also received.

Question 36Income-tax Law: Salaries and House Property

Which of the following statements about the deduction for interest on a housing loan under section 24(b) is correct where the loan was taken before 1 April 1999 for a self-occupied house?

  1. No deduction is available
  2. The deduction is unlimited
  3. The deduction is limited to Rs. 30,000 Correct answer.
  4. The deduction is limited to Rs. 2,00,000

Explanation

For loans taken before 1 April 1999 for a self-occupied house, the interest deduction is capped at Rs. 30,000. The higher ceiling of Rs. 2,00,000 applies to loans taken on or after that date for purchase or construction subject to conditions.

Question 37Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

Under section 32 of the Income-tax Act, 1961, depreciation on plant and machinery used in a business is allowed on which basis?

  1. On the book value shown in the audited financial statements of the assessee
  2. On the market value of the asset as on the last day of the previous year
  3. On the written-down value of the block of assets at the prescribed percentage Correct answer.
  4. On the actual cost of the asset, spread evenly across the asset's estimated useful life

Explanation

Depreciation under section 32 is computed on the written-down value of the block of assets at the rates prescribed in Rule 5 of the Income-tax Rules, 1962. Block-of-assets depreciation replaced the earlier individual-asset method, so the WDV of the whole block is the base each year.

Question 38Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee pays Rs. 5,00,000 in cash (a single payment) towards the purchase of raw material on 10 April 2024. How is this amount treated while computing business income?

  1. Deductible only if supported by a self-made voucher signed by the proprietor
  2. Fully deductible as a business expenditure since the payment relates to stock-in-trade
  3. Deductible after adding back 30% of the amount as deemed income under section 68
  4. Not deductible, because payment for an expense exceeding Rs. 10,000 in a day is made in cash Correct answer.

Explanation

Section 40A(3) disallows expenditure where a payment or aggregate of payments to a single person in a day exceeds Rs. 10,000 and is made otherwise than by an account payee cheque, draft, or prescribed electronic mode. A Rs. 5,00,000 cash payment therefore fails the threshold and is disallowed.

Question 39Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

Which of the following is a capital receipt that is chargeable to tax as income from other sources or under the relevant head, rather than being a business receipt?

  1. Interest on a fixed deposit placed out of business surplus
  2. Profit on sale of a capital asset held as an investment for three years Correct answer.
  3. Amount received on the sale of stock-in-trade in the ordinary course of business
  4. Insurance compensation for loss of stock due to fire

Explanation

Gain on transfer of a capital asset held as investment is a capital receipt chargeable under the head Capital Gains, computed under sections 45 to 55. The other receipts either form part of business turnover or are taxed as business income.

Question 40Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee transfers a plot of land in October 2024 and the sale consideration is received in instalments up to March 2026. Capital gains are taxable in which previous year, assuming the transfer is completed in October 2024?

  1. Equally over the previous years in which the instalments are received
  2. In the previous year in which the agreement to sell is registered
  3. In the previous year in which the last instalment is received
  4. In the previous year in which the transfer takes place, irrespective of when consideration is received Correct answer.

Explanation

Under section 45, capital gains are chargeable in the previous year in which the capital asset is transferred. The timing of receipt of consideration is irrelevant, so the gain is taxed in the year of transfer.

Question 41Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

For computing the period of holding of shares to determine long-term capital gains, which rule applies to listed equity shares?

  1. Held for more than 24 months before transfer
  2. Held for more than 36 months before transfer
  3. Held for more than 12 months before transfer Correct answer.
  4. Held continuously for more than 6 months before transfer

Explanation

Under section 2(42A), listed equity shares held for more than 12 months are treated as long-term capital assets. The 24-month rule applies to unlisted shares, and 36 months generally applies to immovable property.

Question 42Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

A firm pays Rs. 15,000 per month as remuneration to a working partner. Which provision governs the deductibility of this remuneration while computing the firm's business income?

  1. Section 37(1), as general business expenditure
  2. Section 40(b), subject to the limits prescribed for partners' remuneration Correct answer.
  3. Section 40A(2), as a payment to a related party
  4. Section 36(1)(ii), as a bonus or commission to employees

Explanation

Section 40(b) governs the allowability of remuneration and interest paid by a firm to its partners. Remuneration to a working partner is deductible only within the prescribed monetary limits and only if authorised by the partnership deed.

Question 43Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

A company's gross total income includes profits from business of Rs. 20,00,000. It donates Rs. 1,00,000 to a charitable trust registered under section 12AB and claims deduction under section 80G. Which statement about the interaction is correct?

  1. The donation is disallowed entirely because charitable contributions cannot be claimed by a company
  2. The donation is not allowed as business expenditure under section 37, but qualifies for deduction under section 80G subject to its limits Correct answer.
  3. The donation is fully allowed under section 37 because it promotes goodwill
  4. The donation is first deducted under section 37 as business expenditure, and then again under section 80G

Explanation

A donation to a charitable trust is not an expenditure incurred wholly and exclusively for the business, so it is inadmissible under section 37. It is instead allowed as a deduction under section 80G, subject to the qualifying limit and the 50% or 100% rate applicable.

Question 44Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee sells a residential house in June 2024 for Rs. 80,00,000 and purchases a new residential house in December 2024 for Rs. 40,00,000. To claim exemption under section 54, the assessee must invest the capital gain in the new house. Which condition must also be satisfied?

  1. The new house must be purchased within five years after the transfer, and the original house must have been held for more than 36 months
  2. The new house must be purchased within three years after the transfer, and the original house must have been held for more than 12 months
  3. The new house must be purchased in the same previous year as the transfer, and the original house must have been held for more than 12 months
  4. The new house must be purchased within one year before or two years after the transfer, and the original house must have been held for more than 24 months Correct answer.

Explanation

Section 54 requires the original residential house to be a long-term capital asset (held for more than 24 months) and the new house to be purchased within one year before or two years after the date of transfer, or constructed within three years. The exemption is limited to the capital gain or the cost of the new house, whichever is lower.

Question 45Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

Which of the following receipts is chargeable to tax as business income under section 28?

  1. Amount received as a dividend from an Indian company
  2. Amount received as compensation for the compulsory acquisition of agricultural land
  3. Amount received as a gift from a relative on the occasion of marriage
  4. Amount received under a keyman insurance policy by an employer on the death of a key employee Correct answer.

Explanation

Section 28(iv) and the specific clause in section 28 bring keyman insurance policy receipts into business income. The other receipts are either exempt, taxed under other heads, or capital in nature.

Question 46Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee, an individual, transfers listed equity shares held for 18 months and earns a long-term capital gain of Rs. 2,00,000. What is the rate of tax applicable to this gain under section 112A?

  1. 20% with the benefit of indexation
  2. 30% at the normal slab rate applicable to the individual
  3. 10% without indexation, after the prescribed exemption limit of Rs. 1,25,000 Correct answer.
  4. 15% without indexation, without any exemption limit

Explanation

Section 112A taxes long-term capital gains on listed equity shares and equity-oriented funds at 10% without indexation, after allowing the annual exemption of Rs. 1,25,000. Indexation is not available for such gains.

Question 47Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee incurs Rs. 6,00,000 as expenditure on scientific research related to the business under section 35(1)(i). How is this amount treated?

  1. Not deductible because research expenditure is capital in nature
  2. Deductible only over five equal annual instalments
  3. Deductible at 50% of the amount in the year of incurrence
  4. Deductible in full in the year in which it is incurred, irrespective of the period of benefit Correct answer.

Explanation

Under section 35(1)(i), revenue expenditure on scientific research related to the business is allowed as a deduction in full in the previous year in which it is incurred. The deduction is not spread over several years.

Question 48Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

A company transfers a depreciable plant and machinery block and earns a gain over the written-down value. How is the excess treated?

  1. As business income under section 41(2) to the extent of depreciation previously allowed, and as capital gain for the balance Correct answer.
  2. As a capital gain under section 45, since the asset is a capital asset
  3. As exempt income because the transfer is of a depreciable asset
  4. As business income under section 28 irrespective of the amount of depreciation previously allowed

Explanation

Where the sale proceeds of a depreciable asset exceed the written-down value, section 41(2) taxes the excess up to the depreciation actually allowed as business income. Any further excess over the original cost is treated as capital gain under section 50.

Question 49Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

An assessee pays Rs. 40,000 in cash to a transporter for hiring a goods carriage. Which provision governs the disallowance of this payment?

  1. Section 40A(3), which disallows cash payments above Rs. 10,000 to a single person in a day
  2. Section 40A(3) read with Rule 6DD, which exempts certain payments including those to transporters subject to conditions Correct answer.
  3. Section 40(a)(ia), which disallows payments on which tax has not been deducted at source
  4. Section 40A(3A), which disallows payments made otherwise than by an account payee cheque

Explanation

Section 40A(3) is subject to Rule 6DD, which lists exceptions, including payments to transport operators where the payment is made in cash and specified conditions such as PAN disclosure are satisfied. The transporter payment is therefore tested against Rule 6DD.

Question 50Income-tax Law: Profits and Gains of Business or Profession and Capital Gains

Which of the following is a condition for claiming deduction under section 80-IA for an industrial undertaking?

  1. The undertaking must employ at least 100 workers
  2. The undertaking must export at least 50% of its turnover
  3. The undertaking must begin manufacture or production within the prescribed period and must not be formed by splitting up or reconstruction of an existing business Correct answer.
  4. The undertaking must be owned by a company only

Explanation

Section 80-IA requires the industrial undertaking to begin manufacture or production within the specified period and not to be formed by splitting up or reconstruction of an existing business. The deduction is a percentage of profits for the prescribed years.