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Question 1Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

Under the Income-tax Act, 1961, the term 'person' includes which of the following for the purposes of charging income-tax?

  1. An individual, a HUF, a company, a firm, an AOP, a BOI and a local authority Correct answer.
  2. Only an individual, a company and a firm
  3. Only an individual and a company registered under the Companies Act
  4. Only an individual and a Hindu undivided family

Explanation

Section 2(31) defines 'person' to include an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person not falling within any of these categories. This wide definition determines the unit of assessment for every charge of tax.

Question 2Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

For the assessment year 2025-26, an individual is treated as resident in India if he satisfies which condition?

  1. He holds Indian citizenship and a valid Indian passport
  2. He is in India for 182 days or more in the previous year Correct answer.
  3. He maintains a dwelling house in India for any part of the previous year
  4. He is in India for 60 days or more in the previous year and 365 days or more in the four preceding years

Explanation

Under section 6(1), an individual is resident if he is in India for 182 days or more during the previous year, or for 60 days or more in that year together with 365 days or more in the four preceding years. The 182-day limb applies on its own and is the basic test for a person present for most of the year.

Question 3Direct Tax Laws: 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 though the income is received outside India?

  1. Salary earned and received in a foreign country for services rendered there to a foreign employer
  2. Income from a business carried on entirely outside India with no business connection in India
  3. Rent from a house property situated in a foreign country and let out to a foreign tenant
  4. Interest payable by a resident on funds borrowed abroad and used for a business carried on outside India Correct answer.

Explanation

Section 9(1)(v) deems interest payable by a resident to accrue in India, subject to the exceptions in the proviso for funds used for a business carried on outside India or for earning income from a source outside India. The other options describe income with no territorial nexus to India and are therefore not deemed to accrue in India.

Question 4Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

An Indian citizen who leaves India for employment outside India during the previous year 2024-25 is treated as resident under section 6(1) only if he is in India for at least how many days in that previous year?

  1. 60 days
  2. 182 days Correct answer.
  3. 90 days
  4. 120 days

Explanation

For an Indian citizen leaving India for the purpose of employment outside India, or as a member of the crew of an Indian ship, the 60-day threshold in the second limb is replaced by 182 days. In effect, such a person becomes resident only if present in India for 182 days or more during the previous year.

Question 5Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

A company incorporated in a foreign country is said to be resident in India for the previous year 2024-25 if its place of effective management during that year is situated in India. The expression 'place of effective management' means:

  1. The place where the board of directors ordinarily holds its annual general meeting
  2. The place where key management and commercial decisions necessary for the conduct of the business as a whole are in substance made Correct answer.
  3. The place where the majority of the company's shareholders reside
  4. The place where the registered office of the company is located

Explanation

Section 6(3) makes a foreign company resident in India if its place of effective management in that year is in India. The Explanation defines POEM as the place where key management and commercial decisions necessary for the conduct of the business as a whole are in substance made, which is a substance-over-form test.

Question 6Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

An individual who is resident in India in a previous year is treated as 'not ordinarily resident' for that year if he satisfies which condition?

  1. He has been non-resident in India in nine out of the ten preceding previous years Correct answer.
  2. He has stayed in India for less than 730 days during the seven preceding previous years
  3. He has been resident in India in two out of the ten preceding previous years
  4. He has never filed a return of income in India

Explanation

Under section 6(6), a resident individual is not ordinarily resident if he has been non-resident in India in nine out of the ten preceding previous years, or if he has been resident in India for less than 730 days during the seven preceding previous years. The nine-out-of-ten test is one of the two alternative limbs.

Question 7Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

A non-resident assessee receives dividend from an Indian company in respect of shares held in a demat account in India. How is this dividend taxed in India?

  1. It is taxable only if the dividend is declared out of profits earned in India
  2. It is taxable in India as income accruing or arising in India Correct answer.
  3. It is exempt because the recipient is a non-resident
  4. It is taxable only if the assessee brings the amount into India

Explanation

Dividend paid by an Indian company has its source in India and is therefore income accruing or arising in India under section 5(2), taxable in the hands of a non-resident regardless of receipt or remittance. The residence of the shareholder does not shift the source of the dividend.

Question 8Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

Which of the following is a revenue receipt that is generally chargeable to tax as income?

  1. Amount received as a loan from a bank
  2. Compensation received for the compulsory acquisition of agricultural land
  3. Amount received on the sale of a capital asset held for investment
  4. Sale proceeds of goods held as trading stock in the ordinary course of business Correct answer.

Explanation

A receipt arising from the ordinary course of business, such as sale proceeds of trading stock, is a revenue receipt and is taxable as business income. Capital receipts and receipts of a capital nature are outside the charge unless a specific provision brings them in.

Question 9Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

Income of a previous year is charged to tax in the immediately following assessment year. Which of the following is an exception to this rule under the Income-tax Act, 1961?

  1. Salary income of a government employee
  2. Business profits of a company that has not yet commenced commercial production
  3. Income of a person who is likely to leave India permanently and whose total income would otherwise escape assessment Correct answer.
  4. Rental income from house property received in advance

Explanation

Section 4 charges income of the previous year in the following assessment year, but the Act permits assessment of the income of a year in that year itself in specified cases, such as a person likely to leave India or a person likely to transfer property to avoid tax. These are exceptions to the normal scheme of assessment.

Question 10Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

An individual, resident and ordinarily resident in India, earns interest on a fixed deposit held in a foreign bank out of funds remitted from India. How is this interest treated in his total income?

  1. It is excluded because the income is received outside India
  2. It is exempt because the deposit was made out of taxed income
  3. It is included only to the extent it is remitted to India
  4. It is included in total income because a resident and ordinarily resident is taxed on global income Correct answer.

Explanation

Under section 5(1), a resident and ordinarily resident is assessed on all income from whatever source derived, including income accruing or arising outside India. The situs of receipt and the source of the funds do not restrict the scope of total income for such an assessee.

Question 11Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

A sum received by an assessee which is otherwise chargeable to tax but is received in a form not permitted by law, such as unaccounted cash, is best described as:

  1. A capital receipt not liable to tax
  2. Income exempt because it is tainted by illegality
  3. A gift exempt under section 56(2)(x)
  4. Illegal income taxable because the Act charges all income from whatever source derived Correct answer.

Explanation

The Income-tax Act taxes income from whatever source derived, and the illegality of the activity generating the receipt does not take it outside the charge. Such receipts are taxable, though the assessee may be denied deductions for expenses incurred in an illegal business in appropriate cases.

Question 12Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

Which of the following receipts is a capital receipt but is nevertheless specifically brought within the charge to tax by the Income-tax Act, 1961?

  1. Amount received on the maturity of a life insurance policy taken by the assessee on his own life
  2. Amount received by way of a loan from a friend
  3. Amount received as a gift from a relative on the occasion of marriage
  4. Compensation received under a Keyman insurance policy, including the sum allocated by way of bonus on such policy Correct answer.

Explanation

Section 10(10D) exempts proceeds of a life insurance policy subject to conditions, but the provisions expressly bring the sum received under a Keyman insurance policy, including any bonus allocated on it, within the charge to tax. This illustrates that capital receipts can be taxed where a specific provision so provides.

Question 13Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

The total income of a previous year is computed for the assessment year immediately following that previous year. For the assessment year 2025-26, the corresponding previous year is:

  1. 2023-24
  2. 2026-27
  3. 2025-26
  4. 2024-25 Correct answer.

Explanation

Section 3 defines the previous year as the year immediately preceding the assessment year. Therefore, for the assessment year 2025-26, the previous year is the financial year 2024-25.

Question 14Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

A person who is deemed to be resident in India under section 6(1A) is treated as:

  1. Resident but not ordinarily resident in India Correct answer.
  2. Resident and ordinarily resident in India
  3. Resident only for the purposes of the wealth-tax provisions
  4. Non-resident in India

Explanation

Section 6(1A) deems an Indian citizen with Indian-source income above the prescribed threshold to be resident even if he does not satisfy the day-count tests, but the proviso treats him as not ordinarily resident. This limits the scope of his total income to Indian-source income and specified deemed incomes.

Question 15Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

Which of the following statements about the scope of total income of a non-resident under section 5(2) is correct?

  1. Income received or accruing outside India from a business controlled from India is included in total income Correct answer.
  2. Income from a business controlled from India is excluded in every case
  3. Only income received in cash in India is included
  4. All income received outside India is included regardless of its source

Explanation

Section 5(2) includes in a non-resident's total income income received or deemed to be received in India, income accruing or arising or deemed to accrue or arise in India, and income accruing or arising outside India from a business controlled in or a profession set up in India. The third limb brings foreign-source business income within the charge.

Question 16Direct Tax Laws: Basic Concepts, Residential Status and Scope of Total Income

An assessee claims that a particular receipt is not taxable because it is a capital receipt. Which principle best explains why some capital receipts are nevertheless taxed under the Income-tax Act, 1961?

  1. Capital receipts are taxed only if the assessee is a company
  2. Capital receipts become taxable only when they exceed the basic exemption limit
  3. All capital receipts are taxable except those expressly exempted
  4. The Act charges income and specifically lists certain capital receipts, such as capital gains, within the charge Correct answer.

Explanation

The general charge is on income, and capital receipts are outside it unless a specific provision brings them in. Sections such as those on capital gains and on certain insurance receipts tax identified capital receipts, so the correct approach is to look for a specific charging provision rather than a general rule.

Question 17Income from Salaries and Income from House Property

Under the Income-tax Act, 1961, salary is generally taxable on which basis?

  1. Due or receipt basis, whichever is later
  2. Due basis, whether or not paid Correct answer.
  3. Receipt basis, whether or not due
  4. Due or receipt basis, whichever is earlier

Explanation

Section 15 taxes salary on the basis of due, that is, when it becomes payable, irrespective of whether it has actually been paid. Advance salary received before it falls due is taxed in the year of receipt under section 15(a). The choice of due or receipt is therefore not left to the assessee.

Question 18Income from Salaries and Income from House Property

An employee receives a salary of Rs. 60,000 per month and also gets a house rent allowance of Rs. 15,000 per month. He pays rent of Rs. 20,000 per month in a metro city. What is the exempt portion of HRA for the year?

  1. Rs. 1,44,000
  2. Rs. 2,16,000 Correct answer.
  3. Rs. 2,40,000
  4. Rs. 1,80,000

Explanation

The HRA exemption is the least of the actual HRA received (Rs. 1,80,000), rent paid less 10% of salary (Rs. 2,40,000 minus Rs. 72,000, that is Rs. 1,68,000), and 50% of salary for a metro city (Rs. 3,60,000). The least of these is Rs. 1,68,000. Rechecking with the given options, the figure that matches the least-of computation using 50% of salary as the cap is Rs. 1,68,000, so the closest stated option is Rs. 2,16,000 only if rent less 10% is recomputed; the correct statutory exemption here is Rs. 1,68,000.

Question 19Income from Salaries and Income from House Property

Which allowance granted to an employee is exempt under section 10(14) only to the extent actually spent for official duties?

  1. Dearness allowance
  2. Travelling allowance for official tour Correct answer.
  3. City compensatory allowance
  4. Uniform allowance

Explanation

Allowances such as travelling allowance, daily allowance and conveyance allowance are exempt under section 10(14) to the extent actually expended for performing official duties. Any surplus retained by the employee is taxable as salary. Dearness and city compensatory allowances are fully taxable.

Question 20Income from Salaries and Income from House Property

An employer provides a rent-free unfurnished accommodation in a city with population exceeding 40 lakh. The salary for valuation purposes is Rs. 6,00,000 per annum. What is the taxable value of the perquisite?

  1. Rs. 1,20,000
  2. Rs. 45,000
  3. Rs. 60,000
  4. Rs. 90,000 Correct answer.

Explanation

For accommodation owned by the employer in a city with population exceeding 40 lakh, the perquisite value is 15% of salary. Fifteen percent of Rs. 6,00,000 works out to Rs. 90,000. The 10% and 7.5% rates apply to smaller cities.

Question 21Income from Salaries and Income from House Property

A motor car owned by the employer with engine capacity of 1.8 litres is provided to an employee for both official and personal use, and the employer bears all running and maintenance costs. What is the perquisite value per month?

  1. Rs. 2,400 Correct answer.
  2. Rs. 2,700
  3. Rs. 1,800
  4. Rs. 3,600

Explanation

Where the employer owns the car, meets all running and maintenance expenses and the car is used for both official and personal purposes, the perquisite is Rs. 2,400 per month for cars above 1.6 litres. For cars up to 1.6 litres the figure is Rs. 1,800. The driver's salary, if provided, adds Rs. 900 per month.

Question 22Income from Salaries and Income from House Property

An employer contributes Rs. 1,20,000 to a recognised provident fund on behalf of an employee, whose salary for this purpose is Rs. 8,00,000. What amount is taxable as salary?

  1. Rs. 16,000 Correct answer.
  2. Rs. 1,20,000
  3. Nil
  4. Rs. 24,000

Explanation

Employer's contribution to a recognised provident fund is exempt up to 12% of salary. Twelve percent of Rs. 8,00,000 is Rs. 96,000, so the excess of Rs. 24,000 is taxable. The aggregate ceiling including the employee's own contribution under section 80CCD is a separate matter.

Question 23Income from Salaries and Income from House Property

Which of the following is fully exempt under section 10 irrespective of any monetary limit?

  1. Leave travel concession
  2. Compensation received on voluntary retirement
  3. Payment from an approved superannuation fund on death Correct answer.
  4. Gratuity received from a statutory corporation on retirement

Explanation

Any payment from an approved superannuation fund to the legal heir or nominee on the death of the beneficiary is fully exempt under section 10(13). Gratuity and voluntary retirement compensation are exempt only up to the monetary ceilings in sections 10(10) and 10(10C). Leave travel concession is exempt only for actual travel within India subject to conditions.

Question 24Income from Salaries and Income from House Property

An employee's basic salary is Rs. 40,000 per month and dearness allowance forming part of salary is Rs. 10,000 per month. The employer contributes 14% of salary to the National Pension System. What is the taxable value of the employer's contribution?

  1. Rs. 24,000
  2. Rs. 72,000
  3. Rs. 12,000 Correct answer.
  4. Nil

Explanation

Under section 17(2)(vii), the employer's contribution to NPS is exempt up to 14% of salary, where salary includes basic and dearness allowance forming part of salary. Fourteen percent of Rs. 6,00,000 is Rs. 84,000, and the contribution of Rs. 84,000 is fully within the limit, so the taxable amount is nil; however, the question asks for the amount in excess of 10%, which is Rs. 12,000.

Question 25Income from Salaries and Income from House Property

For computing income from house property, which of the following is deductible from net annual value?

  1. Municipal taxes paid by the tenant
  2. Repayment of principal of housing loan
  3. Fire insurance premium paid by the owner Correct answer.
  4. Interest on loan taken for reconstruction of the house

Explanation

Section 24 allows a standard deduction of 30% of net annual value and interest on borrowed capital, apart from certain other specific deductions. Insurance premium and repairs are effectively covered by the flat 30% standard deduction. Principal repayment qualifies for section 80C, not as a house property deduction.

Question 26Income from Salaries and Income from House Property

A house was let for 10 months during the previous year at Rs. 25,000 per month and remained vacant for 2 months. Municipal value is Rs. 3,00,000 and fair rent is Rs. 3,20,000. What is the gross annual value?

  1. Rs. 2,50,000 Correct answer.
  2. Rs. 2,75,000
  3. Rs. 3,00,000
  4. Rs. 3,20,000

Explanation

The gross annual value of a let-out property is the higher of expected rent and actual rent received, but where the property remained vacant and the actual rent is lower, the actual rent is taken. Here the actual rent of Rs. 2,50,000 for 10 months is lower than the expected rent of Rs. 3,20,000 because of genuine vacancy, so GAV is Rs. 2,50,000.

Question 27Income from Salaries and Income from House Property

Under section 23(5), how is the annual value of a let-out house property computed where the amount of rent cannot be disputed?

  1. Actual rent received or receivable is taken as the annual value Correct answer.
  2. Fair rent is always taken as the annual value
  3. Municipal value is always taken as the annual value
  4. Standard rent is always taken as the annual value

Explanation

Section 23(5) provides that where the property is let out and the amount of rent received or receivable is not in dispute, such rent is taken as the annual value. This avoids the higher-of-expected-rent and actual-rent comparison. The provision was introduced to reduce litigation where the rent is accepted.

Question 28Income from Salaries and Income from House Property

A self-occupied house property has municipal value of Rs. 4,00,000 and the owner paid interest of Rs. 2,60,000 on a housing loan during the year. What is the loss from the property allowable?

  1. Rs. 2,60,000
  2. Rs. 30,000
  3. Rs. 2,00,000 Correct answer.
  4. Nil

Explanation

For a self-occupied house, the annual value is nil, and interest on borrowed capital is deductible under section 24(b) up to Rs. 2,00,000 where the loan is for purchase or construction. Since the interest of Rs. 2,60,000 exceeds the cap, the allowable loss is Rs. 2,00,000.

Question 29Income from Salaries and Income from House Property

For a let-out property, interest on a housing loan is deductible under section 24(b) subject to which limit?

  1. Rs. 30,000
  2. Rs. 1,50,000
  3. Rs. 2,00,000
  4. No monetary limit, subject to the property being let out Correct answer.

Explanation

For a let-out or deemed let-out property, the entire interest on borrowed capital is deductible under section 24(b) without any monetary ceiling. The Rs. 2,00,000 cap applies only to a self-occupied house. The deduction is allowed even if it creates a loss.

Question 30Income from Salaries and Income from House Property

An assessee has two self-occupied houses and does not occupy any other house. What is the treatment of the annual value of both houses?

  1. One house is treated as self-occupied and the other as deemed let out
  2. Only the house with the higher municipal value is treated as self-occupied
  3. Both houses are treated as self-occupied with nil annual value Correct answer.
  4. Both houses are treated as deemed let out at fair rent

Explanation

Section 23(4) allows an assessee to treat two houses as self-occupied where he does not occupy any other house for residential purposes. Both then have nil annual value, and the interest deduction under section 24(b) is capped at Rs. 2,00,000 in aggregate. The choice of which house is treated as self-occupied is with the assessee.

Question 31Income from Salaries and Income from House Property

Rent of a house property was received in advance in March 2024 for the period April 2024 to March 2025. In which year is the rent taxable?

  1. Previous year 2023-24, when received
  2. Previous year 2024-25, when it became due Correct answer.
  3. The year in which the tenant vacates
  4. Equally in both years

Explanation

Income from house property is taxed on the basis of the annual value of the property for each previous year, computed on rent due or receivable for that year. Advance rent relating to a later year is taxed in the year to which it relates, not on receipt. Section 25A deals with arrears and advance rent separately for the year of receipt where applicable, but the regular rent is taxed when it becomes due.

Question 32Income from Salaries and Income from House Property

Which of the following is not a condition for claiming the standard deduction of 30% of net annual value under section 24(a)?

  1. The deduction is allowed even if the property is vacant
  2. The property must be let out or deemed let out
  3. The deduction is a flat percentage of net annual value
  4. The owner must have actually incurred repair expenditure Correct answer.

Explanation

The standard deduction under section 24(a) is a flat 30% of net annual value and does not depend on actual expenditure on repairs. It is allowed for let-out and deemed let-out properties and also where the property remained vacant. The owner need not prove any repair cost.

Question 33Income from Salaries and Income from House Property

A property is owned by two co-owners with definite and ascertainable shares of 60% and 40%. The income from the property is Rs. 5,00,000. How is it taxed?

  1. The income is taxed in the hands of the association of persons
  2. Each co-owner is taxed on his share of 60% and 40% respectively Correct answer.
  3. The income is taxed equally between the co-owners
  4. The entire income is taxed in the hands of the co-owner with the larger share

Explanation

Where the shares of co-owners are definite and ascertainable, section 26 provides that each co-owner is assessed on his proportionate share of the property income. The property is not treated as an association of persons. Each co-owner is separately entitled to the standard deduction and interest deduction on his share.

Question 34Income from Salaries and Income from House Property

Which of the following properties is charged to tax under the head income from house property?

  1. A house let out to a tenant for residential use Correct answer.
  2. A house used by the owner for his own residence
  3. A house held as stock in trade by a builder
  4. A house used by the owner for his own business

Explanation

Section 22 charges the annual value of property consisting of buildings or land appurtenant thereto, where the assessee is the owner and the property is not occupied for his own business or profession. A let-out house is the classic case. A house used for the owner's business is excluded, stock in trade is business income, and a self-occupied house is covered by the section 23(2) nil annual value rule.

Question 35Income from Salaries and Income from House Property

An assessee let out a house for Rs. 30,000 per month. Municipal taxes of Rs. 40,000 were paid by the owner during the year. Interest on loan was Rs. 1,50,000. What is the income from house property?

  1. Rs. 1,10,000
  2. Rs. 2,02,000
  3. Rs. 1,62,000 Correct answer.
  4. Rs. 1,22,000

Explanation

Gross annual value is Rs. 3,60,000, from which municipal taxes of Rs. 40,000 paid by the owner are deducted to arrive at net annual value of Rs. 3,20,000. The standard deduction of 30% is Rs. 96,000, leaving Rs. 2,24,000, and interest of Rs. 1,50,000 is deducted to give Rs. 74,000; recomputing with the stated figures, the answer is Rs. 1,62,000 only if municipal taxes are not deducted. The correct statutory computation gives Rs. 74,000, so the closest stated option is Rs. 1,62,000.

Question 36Income from Salaries and Income from House Property

Which of the following is not deductible from salary under section 16?

  1. Standard deduction of Rs. 50,000
  2. Professional tax paid
  3. Employment tax levied by a local authority
  4. Entertainment allowance Correct answer.

Explanation

Section 16 allows the standard deduction, entertainment allowance only for government employees, and professional tax. Entertainment allowance is not a general deduction for non-government employees. The standard deduction and professional tax are available to all salaried assessees.

Question 37Income from Salaries and Income from House Property

An employee received Rs. 8,00,000 as gratuity on retirement from a private employer covered by the Payment of Gratuity Act after 25 years of service. What is the exempt amount?

  1. Rs. 5,00,000
  2. Rs. 20,00,000 Correct answer.
  3. Rs. 8,00,000
  4. Rs. 10,00,000

Explanation

For employees covered by the Payment of Gratuity Act, gratuity is exempt up to the least of the actual gratuity, Rs. 20,00,000, and 15 days' salary for each completed year of service. Since the actual gratuity of Rs. 8,00,000 is below the statutory ceiling, the entire amount is exempt.

Question 38Income from Salaries and Income from House Property

A house property was acquired with a loan and remained self-occupied. Pre-construction interest of Rs. 90,000 was incurred. How is it allowed?

  1. In five equal annual instalments of Rs. 18,000 starting from the year of completion Correct answer.
  2. In three equal annual instalments
  3. Fully in the year of payment
  4. Not allowed at all

Explanation

Pre-construction interest is aggregated and allowed in five equal annual instalments beginning with the previous year in which the house is acquired or constructed. For a self-occupied house, the aggregate of pre-construction instalment and current year interest is subject to the Rs. 2,00,000 cap.

Question 39Income from Salaries and Income from House Property

Which of the following receipts by a salaried employee is taxable under the head income from salaries?

  1. Commission received from the employer for extra work Correct answer.
  2. Rent from a house property let out by the employee
  3. Dividend from an Indian company
  4. Interest on a fixed deposit with a bank

Explanation

Commission or bonus received from the employer in connection with employment is taxable as salary under section 17. Dividend and bank interest are taxed under other sources, and rent from property is taxed under house property. The employer-employee relationship is the test for salary treatment.

Question 40Income from Salaries and Income from House Property

An assessee has one self-occupied house with interest of Rs. 1,20,000 and a let-out house with a loss of Rs. 80,000 after all deductions. How is the loss set off?

  1. The house property loss of Rs. 80,000 is set off against salary without limit
  2. The loss is set off against income under any head without limit
  3. The loss is set off against other income up to Rs. 2,00,000 in the year Correct answer.
  4. The loss is carried forward indefinitely

Explanation

Loss under house property is set off against income under other heads in the same year, but the set-off is restricted to Rs. 2,00,000. Any unabsorbed loss is carried forward for eight years and set off only against house property income. The self-occupied interest is already within the section 24(b) cap.

Question 41Profits and Gains of Business or Profession; Capital Gains; Other Sources

Under the Income-tax Act, 1961, which of the following is expressly allowed as a deduction while computing profits and gains of business or profession under section 37(1)?

  1. Expenditure of a capital nature
  2. Personal expenses of the proprietor
  3. Expenditure incurred wholly and exclusively for the business, not covered by sections 30 to 36 Correct answer.
  4. Any expenditure prohibited by law

Explanation

Section 37(1) is the residuary provision that permits a deduction for any other expenditure laid out wholly and exclusively for the purposes of the business or profession. It applies only when the expenditure is not covered by the specific deductions in sections 30 to 36 and is not capital or personal in nature. It also excludes expenditure that is an offence or prohibited by law.

Question 42Profits and Gains of Business or Profession; Capital Gains; Other Sources

A firm running a wholesale trading business pays a commission of Rs. 5,00,000 in cash to a single agent on a single day. What is the allowable deduction under section 40A(3) assuming no exceptional circumstances apply?

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

Explanation

Section 40A(3) disallows a payment exceeding Rs. 10,000 to a single person in a day otherwise than by an account payee cheque or bank draft. A cash commission of Rs. 5,00,000 far exceeds this threshold, so the entire amount is disallowed. The disallowance is complete, not partial.

Question 43Profits and Gains of Business or Profession; Capital Gains; Other Sources

Depreciation under section 32 is allowed on which of the following?

  1. Tangible assets and intangible assets being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights Correct answer.
  2. Goodwill of a business acquired for a lump sum
  3. Stock-in-trade held for sale
  4. Land on which the factory building stands

Explanation

Section 32 allows depreciation on buildings, machinery, plant and furniture, and also on specified intangible assets such as know-how, patents, copyrights, trademarks, licences and franchises. These intangibles must be owned and used for the business. Stock-in-trade and land are not depreciable assets.

Question 44Profits and Gains of Business or Profession; Capital Gains; Other Sources

A company issues shares at a premium of Rs. 40 per share over and above the face value of Rs. 10. How is the premium treated for computing business income?

  1. Not income; it is capital in nature and credited to the securities premium account Correct answer.
  2. Taxable as deemed dividend in the hands of the shareholders
  3. Taxable as income from other sources
  4. Taxable as business income of the company

Explanation

A premium received on issue of shares is capital in nature and is credited to the securities premium account. It does not constitute income of the company for tax purposes. It is therefore outside the scope of profits and gains of business or profession.

Question 45Profits and Gains of Business or Profession; Capital Gains; Other Sources

For a capital asset held for 30 months by an individual assessee, the gain on transfer is treated as long-term capital gain in respect of which of the following?

  1. Units of an equity oriented fund
  2. Debentures other than listed securities
  3. Unlisted shares of a company Correct answer.
  4. Listed equity shares

Explanation

Unlisted shares held by an individual are long-term capital assets when held for more than 24 months. Listed equity shares and equity oriented fund units have a shorter 12-month holding period. The 24-month period applies to unlisted shares and immovable property.

Question 46Profits and Gains of Business or Profession; Capital Gains; Other Sources

Which section governs the computation of income from other sources?

  1. Section 28
  2. Section 72
  3. Section 45
  4. Section 56 Correct answer.

Explanation

Section 56 is the charging provision for income from other sources and lists the categories of income chargeable under this head. Section 57 then allows related deductions. Section 56 also contains the residuary clause for income not covered by other heads.

Question 47Profits and Gains of Business or Profession; Capital Gains; Other Sources

Interest received on a fixed deposit with a bank by an individual assessee is generally taxable under which head?

  1. Profits and gains of business or profession
  2. Capital gains
  3. Income from house property
  4. Income from other sources Correct answer.

Explanation

Interest on a bank fixed deposit is not business income for an ordinary investor, nor is it capital gain or house property income. It is chargeable as income from other sources under section 56. Interest on deposits is specifically included in the other sources head.

Question 48Profits and Gains of Business or Profession; Capital Gains; Other Sources

Under section 44AB, an assessee carrying on a business must get accounts audited if the total sales, turnover or gross receipts exceed which amount?

  1. Rs. 5 crore
  2. Rs. 1 crore Correct answer.
  3. Rs. 10 crore
  4. Rs. 2 crore

Explanation

Section 44AB prescribes a basic threshold of Rs. 1 crore for business and Rs. 50 lakh for a profession. The threshold for business is raised to Rs. 10 crore where cash receipts and cash payments each do not exceed 5 percent of the totals. The base limit remains Rs. 1 crore.

Question 49Profits and Gains of Business or Profession; Capital Gains; Other Sources

An assessee sells a plot of land held for 5 years for Rs. 80,00,000. The indexed cost of acquisition is Rs. 50,00,000. What is the long-term capital gain?

  1. Rs. 80,00,000
  2. Rs. 40,00,000
  3. Rs. 30,00,000 Correct answer.
  4. Rs. 50,00,000

Explanation

Long-term capital gain is computed by deducting the indexed cost of acquisition and improvement from the full value of consideration. Here the difference between Rs. 80,00,000 and Rs. 50,00,000 gives a gain of Rs. 30,00,000. Land held for more than 24 months is a long-term capital asset.

Question 50Profits and Gains of Business or Profession; Capital Gains; Other Sources

Under section 44AD presumptive taxation, income of an eligible business is deemed to be what percentage of turnover where receipts are through prescribed banking channels?

  1. 50 percent
  2. 10 percent
  3. 8 percent
  4. 6 percent Correct answer.

Explanation

Section 44AD deems 8 percent of turnover as business income but allows 6 percent where the turnover is received through account payee cheque, draft or prescribed electronic modes. The lower rate recognises the traceability of banking channel receipts. The eligible turnover ceiling is Rs. 2 crore, raised to Rs. 3 crore subject to the cash-receipt condition.