Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Profits and Gains of Business or Profession – CA Inter Tax Question Bank is designed strictly as per the latest syllabus and exam pattern.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 1.
State with reason, whether the following statements are true or false with regard to the provisions of the Income-tax Act, 1961 for the
Assessment year 2021-22:
(a) Rural branches of the Cooperative banks are not allowed to claim provision for bad and doubtful debts.
(b) Depreciation is allowed only when it is claimed. (Nov 2008, 2 marks each)
Answer:
(a) False: Sub clause (a) of Section 36(1 )(viia) allows the Co-operative banks to claim deduction for provision for bad and doubtful debts in respect of advances made by rural branches of such banks. However the deduction should not exceed 10% of the aggregate average advances made by the rural branches of such banks computed in prescribed manner.

(b) False: Section 32 on depreciation provides that deduction on account of depreciation shall be made compulsorily, whether or not the assessee has claimed the deduction in computing his total income.
However, in this view, in Supreme Courts pronouncement in CIT v/s Mahendra Mills reported in 109 Taxman 226, it was held that an assessee has an option to claim depreciation and when he does not claim it, the Assessing Officer cannot thrust it upon him.
Depreciation need not be claimed as expenditure. But needs to be compulsorily deducted to compute next year opening WDV.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 2.
Answer the following with regard to the provisions of the Income-tax Act, 1961 :
Can an Assessing Officer make a request for withdrawal of approval which was granted to an institution by National committee for carrying out eligible project or scheme, eligible u/s 35AC of the Income-tax Act, 1961 ? (Nov 2008, 4 marks)
Answer:
Expenditure on eligible projects or scheme [Sec. 35AC]
Withdrawal of approval: Approval can be withdrawn if a few conditions are satisfied. The following points should be noted:
Consequences in the hands of payer: Deduction under Section 35AC shall not be denied merely on the ground that after the contribution made by the assessee to the institution mentioned in the Section 35AC the approval granted under this institution has been withdrawn, in other words, contribution to institution is qualified for deduction even if after the date of making contribution, the approval granted to the institution is withdrawn.

Question 3.
Answer the following questions with regard to the Provisions of the Income tax Act, 1961 :
State the concessions granted to transport operators from 1st October, 2011 onwards in the context of cash payments under Section 40A(3) and deduction of tax at source under Section 194-C. (May 2010, 4 marks)
Answer:
Section 40 A (3) provides for disallowance of exPenditure incurred in respect of which payment or aggregate of payments made to a person in a day exceeds ₹ 10,000, and such payment or payments are made otherwise than by account payee cheque or account payee bafk draftor ECS through Bank account or through such other prescribed eleotronic modes such as credit card, debit card, net banking, IMPS (lmmediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay.

This limit of ₹ 10,000 has been raised to ₹ 35,000 in case of payment made to transport operators for plying, hiring or ieasin9 goods carriages. Therefore, payment or aggregate of payments up t0 ₹ 35,000 in a day can be made to a transport operator otherwise th0n by way of account payee cheque or account payee bank draft, or use of electronic clearing system through a bank account or through such other prescribed electronic modes such as credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay., without attracting disallowance under Section 40A(3).

However, no deduction is required to be m£de from ar|y sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor, during the course of the business of plying, hiring or leasing goods carriages, if the contractor furnishes his permanent account number (PAN) to the person paying or crediting such sum

Question 4.
Answer sub-divisions :
State any four of the specified businesses eligible for deduction under Section 35AD of the Income-tax Act, 1961. (Nov 2011, 4 marks)
Answer:
Following are the specified business eligible for deduction under Section 35AD:

  • Setting up and operating cold chain facilities for specified products.
  • Setting up and operating warehousing facilities for storing agricultural produce.
  • Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facility being an integral part of such network.
  • Building and operating a new hotel of two star or above category, anywhere in India.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 5.
Name any four specified businesses covered under Section 35AD and state the fiscal incentives available to such businesses. (Nov 2014, 4 marks)
Answer:
Specified businesses covered under Section 35AD
The following specified businesses are eligible for investment linked tax deduction under Section 35AD:

  • setting-up and operating a cold chain facility;
  • setting-up and operating a warehousing facility for storing agricultural produce;
  • laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution including storage facilities being an integral part of such network;
  • building and operating a hotel of two-star or above category, anywhere in India;
  • building and operating a hospital, anywhere in India, with at least 100 beds for patients;
  • developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be and notified by the CBDT in accordance with the prescribed guidelines:
  • developing and building a housing project under a notified scheme for affordable housing framed by the Central Government or State Government;
  • production of fertilizer in India;
  • setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962;
  • bee-keeping and production of honey and beeswax; and
  • setting up and operating a warehousing facility for storage of sugar.
  • laying and operating a slurry pipeline for the transportation of iron ore or
  • setting up and operating a notified semi conductor wafer fabrication manufacturing unit.
  • developing or operating and maintaining or developing, operating and maintaining, any infrastructure facility

(Note: Any 4 of the above businesses may be given in the answer)
Fiscal incentives available in respect of such specified businesses:

  1. Capital expenditure incurred during the previous year, wholly and exclusively for such specified business (including capital expenditure incurred before commencement of operations and capitalized in the books of account on the date of commencement of operations) would be allowed as deduction from the business income.
    However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be eligible for deduction.
  2. 100% of such capital expenditure is allowed as deduction.
  3. Under Section 73A, the loss from specified business can be carried forward indefinitely for set-off against profits of the same or any other specified business. It is not essential that the return of income should be filed within the time specified under Section 139(1) for carrying forward such loss.

Question 6.
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2020 was ₹ 40 lacs. It purchased another asset of the same block on 01.11.2020 for ₹ 14.40 lacs and put to use on the same day. Saj Ltd. was amalgamated with Shirdi Ltd. with effect from 01.01.2021.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year ended on 31.03.2021 assuming the assets transferred to Shirdi Ltd. at ₹ 60 lacs. (Nov 2010, 8 marks)
Answer:
Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi Ltd. for P.Y. 2020-21
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 1

Notes:
1. The aggregate deduction, in respect of depreciation allowable to the amalgamating company and amalgamated company in the case of amalgamation shall not exceed in any case, the deduction calculated at the prescribed rates as if the amalgamation had not taken place. Such deduction shall be apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them.
2. The price at which the assets were transferred, i.e., ₹ 60 lacs, has no implication in the calculation of eligible depreciation.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 7.
Mr. Praveen Kumar has furnished the following particulars relating to payments made towards scientific research for the year ended 31-3-2021 :
(i) Payments made to K Research Ltd. ₹ 20 lacs
(ii) Payment made to LMN College ₹ 15 lacs
(iii) Payment made to OPQ College ₹ 10 lacs
Note : K Research Ltd. and LMN College are approved research institutions
and, these payments are to be used for the purposes of scientific research.
(iv) Payment made to National Laboratory ₹ 8 lacs
(v) Machinery purchased for in-house scientific research ₹ 25
(vi) Salaries to research staff engaged in in-house scientific research 12 Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while arriving at the business income of the assessee. (May 2011, 4 marks)
Answer:
Calculation Computation of deduction allowable under Section 35
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 2

Notes :
1. Deduction for in-house research and development
Only company assessees are entitled to weighted deduction @ 150% under Section 35(2AB) in respect of in-house research and development. However, in this case, the assessee is an individual. So, he would be entitled to deduction @ 100% of the revenue expenditure incurred under Section 35(1 )(i) and 100% of the capital expenditure incurred under Section 35(1 )(iv) read with Section 35(2), assuming that such expenditure is laid out or expended on scientific research related to his business.

2. Payment to OPQ College
Note in the question below item number (iii) clearly mentions that only K Research Ltd. and LMN College (mentioned in item (i) and (ii), respectively) are approved research institutions, it is a logical conclusion that OPQ College mentioned in item (iii) is not an approved research institution. Therefore, payment to OPQ College would not qualify for deduction under Section 35.

Note:
(Alternative Answer) Payment to K Research Ltd.

  • Any sum paid to a company registered in India which has as its main object scientific research, as is approved by the prescribed authority, qualifies for a weighted deduction of 100% under Section 35(1)(iia).
  • So, it is also possible to take a view that payment of ₹ 20 lakhs to K Research Ltd. qualifies for a weighted deduction of 100% under Section 35(1)(iia) since K Research Ltd. is a company.
  • The weighted deduction under Section 35(1 )(iia) would be ₹ 20 lacs (i.e., 100% of ₹ 20 lacs), in which case, the total deduction under Section 35 would be ₹ 91.50 lacs. deduction shall be apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them.
  • Payment to National Laboratory: The percentage of weighted deduction under Section 35(2AA) in respect of amount paid to National Laboratory is 150%.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 8.
Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1-1-2021.

(i) WDV of land as on 1-4-2020 ₹ 5,00,000
(ii) WDV of machinery as on 1-4-2020 ₹ 3,30,000
(iii) Patents acquired on 1-6-2020 ₹ 3,00,000
(iv) Building acquired on 12-3-2019 for which deduction was allowed under Section 35 AD. ₹ 7,00,000
(v) Above building was revalued as on the date of conversion into LLP as ₹ 12,00,000
(vi) Unabsorbed business loss as on 1-4-2020 (A.Y. 2016-17) ₹ 9,00,000

Though the conversion into LLP took place on 1-1-2021, there was disruption of business and the assets were put into use by the LLP only from 1st March, 2021 onwards.
The company earned profits of ₹ 8 lacs, prior to computation of depreciation. Assuming that the necessary conditions laid down in Section 47 (xiiib) of the I Income-tax Act, 1961 have been complied with, explain the tax treatment of j the above in the hands of the LLP. (May 2011, 8 marks)
Answer:
Tax treatment of depreciation and unabsorbed business loss of a private company on its conversion into a LLP : The LLP would be allowed to carry forward and set-off the business loss and unabsorbed depreciation of the predecessor company [Section 72A(6A)].

1. Depreciation
(i) The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place.
(ii) Such depreciation shall be apportioned between the predecessor company and the successor LLP in the ratio of the number of days for which the assets were used by them [Section 32(1)]
(iii) Therefore, depreciation has to be first calculated as if the conversion had not taken place and then apportioned between the company and the LLP in the ratio of the number of days for which the assets were used by them.
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 3
(iv) Allocation of depreciation : Depreciation on machinery and patents have to be apportioned between the company and the LLP in the ratio of the number of days for which the assets were used by them. Since patents were acquired only on 1.6.2020, it could have been used by the company for 214 days only. Therefore, the depreciation on assets has to be allocated between the company and LLP as
follows:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 4
Therefore, depreciation to be allowed in the hands of the company is ₹ 1,09,995 and depreciation to be allowed in the hands of the LLP is ₹ 14,505.

2. Unabsorbed busIness loss to be carried forward by the LLP.
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 5

3. Actual cost of assets to the LLP

  • The actual cost of the block of assets in case of the LLP shall be the WDV of the block of assets as in the case of the company on the date of conversion. The WDV as on 1.1.2020 for Machinery and Patents are ₹ 2,85,515 and ₹ 2,34,490, respectively, which would be the actual cost in the case of the LLP. WDV of Mach’nery as on 1.1.2021 = 3,30,000 – 44,485 = ₹ 2,85,515
    WDV of Patents as on 1.1.2021 = 3,00,000 – 65,510 = ₹ 2,34,490
  •  Land is rot a depreciable asset. The cost of acquisition of land to the LLP would be the cost for which the company acquired it, as increased by the cost of improvement.
  • In respect of the building, deduction had been allowed in the earlier year under Section 35AD. Hence, there is no question of depreciation during the current year. The actual cost of the building to the LLP would be Nil.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 9.
Rao and Jain, a partnership firm consisting of two partners, reports a net profit of ₹ 7,00,000 before deduction of the following items:
1. Salary of ₹ 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership).
2. Depreciation on plant and machinery under section 32 (computed) ₹ 1,50,000.
3. Interest on capital at 15% per annum (as per the deed of partnership).
The amount of capital eligible for interest ₹ 5,00,000.
Compute :
(i) Book-profit of the firm under Section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2021 -22 as per Section 40(b) of the Income-tax Act, 1961. (Nov 2011, 5 marks)
Answer:
(i) According to provisions of Explanation 3 to Section 40(b), book profit shall mean the net profit as per the Profit & Loss A/c for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm if the same has been already deducted while computing the net profit.
In the present situation the net profit given is. before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profits shall be as follows:

Computation of Book Profit of the firm under Section 40(b) of the Income-tax Act, 1961.
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 6

(ii) Salary actually paid to working partners = 20,000 × 2 × 12 = ₹ 4,80,000.
According to Section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits –

On the first ₹ 3,00,000 of book profit ₹ 1,50,000 or 90% of book profit,whichever is more
on the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners salary for the A.Y. 2021-22 in this case would be:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 7
Hence, allowable working partners’ salary for the A. Y. 2021 -22 as per the provisions of section 40(b)(v) is ₹ 3,84,000.

Question 10.
Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals) furnishes the following information for the year ended 31.03.2021:
(i) Municipal tax relating to office building ₹ 51,000 not paid till 30.09.2021.
(ii) Patent acquired for ₹ 20,00,000 on 01.09,2019 and used from the same month.
(iii) Capital expenditure on scientific research ₹ 10,00,000 which includes cost of land ₹ 2,00,000.
(iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in the books ₹ 5,00,000.
(v) Income tax paid ₹ 90,000 by the company in respect of non-monetary perquisites provided to its employees.
(vi) Provident fund contribution of employees ₹ 5,50,000 remitted in July 2020.
(vii) Expenditure towards advertisement in souvenir of a political party ₹ 1,50,000.
(viii) Refund of sales tax ₹ 75,000 received during the year, which was claimed as expenditure in an earlier year.
State with reasons the taxability or deductibility of the items given above under the Income-tax Act, 1961.
Note : Computation of total income is not required. (Nov 2011, 8 marks)
Answer:
1. According to Section 43B, municipal tax is not deductible for A.Y. 2021-22 since it is not paid on or before 30.09.2020, being the due date of filing the return for A.Y. 2021 -22.

2. Patent is an intangible asset eligible for depreciation @ 25%. Since it has been acquired and put to use for more than 180 days during the previous year 2020-21, full depreciation of ₹ 5,00,000 (i.e. 25% of ₹ 20,00,000) is allowable as deduction under Section 32.

3. Weighted deduction @ 150% is available under section 35(2AB) in respect of expenditure incurred by a company on scientific research on in-house research and development facility as approved by the prescribed authority, However, cost of land is not eligible for deduction. Deduction under section 35(2AB) = 150% of ^ 8 lakhs = ₹ 12,00,000. Note: It is presumed that the in-house research and development facility is approved by the prescribed authority and is hence, eligible for the weighted deducted @ 150% under Section 35(2AB).

4. Bad debts i.e., ₹ 5,00,000 written off in the books of account as irrecoverable is deductible under section 36(1)(vii).

5. As per Section 40(a)(v), income-tax of ₹ 90,000 paid by the company in respect of non-monetary perquisites provided to its employees, exempt in the employee’s hands under Section 10(10CC), is not deductible while computing business income of the employer- company.

6. The employee’ contribution to provident fund is taxable in the hands of the company since it is included in the definition of income under Section 2(24)(x).
As per Section 36(1 )(va), provident fund contribution of employees is deductible only if such sum is credited to the employee’s provident fund account on or before the due date under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. In this case, since it is remitted after the due date under the said Act, it is not deductible.
Note:
There is an alternate view that remittance of provident fund contribution of employees is deductible even though it is remitted beyond the due date under the Employees’ provident Fund and Miscellaneous Provisions Act, 1952, in case the same is remitted before the due date of filing return of income in view of the Delhi High Court decision in CIT v.s Aimil Ltd (2010) 312 ITR 508.

7. Expenditure towards advertisement in souvenir of a political party is disallowed under Section 37(2B) while computing business income. However, the same is deductible under Section 80GGB from gross total income.

8. Refund of a trading liability is taxable under Section 41(1), if a deduction was allowed in respect of the same to the taxpayer In an earlier year.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 11.
MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1-4-2020. The company incurred capital expenditure of ₹ 40 lakh during the period January, 2020 to March, 2020 exclusively for the above business, and capitalized the same in its books of account as on 1st April, 2020. Further, during the Previous Year 2020-21, it incurred capital expenditure of ₹ 2.5 crore (out of which ₹ 1 crore was for acquisition of land) exclusively for the above business. Compute the income under the heading “profits and gains of business or profession” for the assessment year 2021-22, assuming that MNP Ltd has fulfilled all the conditions specified for claim of deduction under Section 35AD and has not claimed any deduction under Chapter Vl-A under the heading “C.-Deductions in respect of certain incomes”. The profits from the business of running this hotel (before claiming deduction under Section 35AD) for the assessment year 2021-22 is ₹ 80 lakhs. Assume that the company also has another existing business of running a four-star hotel in Kanpur, which commenced operations 5 years back, the profits from which was ₹ 130 lakhs for assessment year 2021-22. (May 2012, 8 marks)
Answer:
Computation of income under the head “Profit and gains of business or profession” of MNP Ltd. for A.Y. 2021-22
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 8

Notes:
1. According to the provisions of Section 35AD, an assessee shall be allowed a deduction in respect of 100% of the capital expenditure incurred wholly and exclusively for the purpose of the specified business which, inter alia, includes the business in the nature of building and operating a new hotel of two-star or above category, anywhere in India. Therefore, the newly commenced four-star hotel business of MNP Ltd. qualifies for deduction under Section 35AD, since it has fulfilled all the conditions for claim of deduction under that section.

2. The expenditure on acquisition of land, however, does not qualify for deduction under Section 35AD.

3. The capital expenditure incurred prior to commencement of specified business shall be allowed as deduction under Section 35AD(1) in the year of commencement of specified business, if the same is capitalized in the books of accounts of the assessee on the date of commencement of its operations. Therefore, the expenditure of ₹ 40 lakh is allowable as deduction in A.Y. 2021-22, since it has been capitalized in the books of accounts of MNP Ltd. as on 1.4.2019.

4. As per Section 73A, the loss computed under Section 35AD in respect of a specified business can be set-off against the profit of another specified business. Building and operating a hotel of two-star and above category, anywhere in India, is a specified business, therefore, the loss from the business of new four-star hotel in Chennai can be set-off against the income of the existing four-star hotel in Kanpur.

Question 12.
Following is the profit and loss account of Mr. Q for the year ended 31-03-2021:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 9
Following additional informations are furnished:
(1) Repairs on building includes ₹ 1,00,000 being cost of laying a toilet roof.
(2) Interest payments include ₹ 50,000 on which TDS has not been deducted and penalty for contravention of Central Sales Tax Act of ₹ 24,000. Compute the income chargeable under the head “Profits and gains of Business or Profession” of Mr. Q for the year ended 31 -03-2021 ignoring depreciation. (Nov 2012, 8 marks)
Answer:
Computation of income under the head “Profits and gains of business
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 10

Note: Interest on company deposits may also be treated as business income presuming that the interest has been earned by Mr. Q out of available temporary surplus funds which are not immediately required for his business purposes but nevertheless meant only for Mr. Q’s business activities. In such a case, income under the head “Profit and gains of business or profession” would be ₹ 2,03,450.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 13.
Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He always opts to claim depreciation on written down value for income-tax purposes. From the following details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year 2021-22: (Nov 2013, 4 marks)

(₹ in lacs)
(i) Opening WDV of block (15% rate) 42
(ii) New machinery purchased on 12-10-2020 10
(iii) Machinery imported from Colombo on 12-4-2020. This machine had been used only in Colombo earlier and the assessee is the first user in India. 9
(iv) New computer installed in generation wing of the unit on 15-7-2020 2

Answer:
Computation of depreciation under section 32 for A.Y.2021-22
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 11

Note: The benefit of additional depreciation to new plant and machinery acquired and installed in power sector undertakings is available. Accordingly, additional depreciation is allowable in the case of any new machinery or plant acquired and installed by an assessee engaged, inter alia, in the business of generation or generation and distribution of power, at the rate of 20% of the actual cost of such machinery or plant.
Therefore, new computer installed in generation wing of the unit is eligible for additional depreciation @20%.
Since the new machinery was purchased only on 12.10.2020, it was put to use for less than 180 days during the previous year, and hence, only 10% (i.e., 50% of 20%) is allowable as additional depreciation.
However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person. Therefore, additional depreciation is not allowable in respect of imported machinery, since it was used in Colombo, before its installation by the assessee.

Question 14.
JK Ltd., a manufacturing company purchased the following Plant and Machinery.

Date of Acquisition and Installation Actual Cost (in ₹  Crores)
25-05-2020 90.00
31-08-2020 20.00
15-04-2021 120.00

From the above information compute the amount of depreciation available u/s 32(1), additional depreciation, if any and deduction u/s 32 AC for the Assessment Year 2021-22 and 2022-23. (May 2014, 8 marks)
Answer:
Computation of normal, additional depreciation and deduction u/s 32AC v available to JK Ltd.
For AY 2021 – 22 (PY 2020-21)
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 12
Note: Both normal and additional depreciation are available for full year as the P&M was put to use for more than 180 days.
Deduction u/s 32AC is not allowed as the installation is not before 31.03.2020
For AY 2022-23 (PY 2021 -22)
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 13

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 15.
Mr. Gopi carrying on business as proprietor converted the same into a limited company by name Gopi Pipes (P) Ltd. from 01-07- 2020. The details of the assets are given below:

Block-I WDV of plant & machinery (rate of depreciation @ 15%) 12,00,000
Block- II WDV of building (rate of depreciation.® 10%) 25,00,000

The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2020 for ₹ 10,00,000. It has been doing the business from 01-07-2020. Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for the assessment year 2021-22.
Note: Ignore additional depreciation. (Nov 2014, 4 marks)
Answer:
Computation of depreciation allowable to Mr.Gopi for A.Y. 2021-22
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 14

Computation of depreciation allowable to Gopi Pipes (P) Ltd. for A.Y. 2021-22
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 15

Note:
As per the fifth proviso to Section 32(1), in the case of conversion of sole proprietary concern into a company as per Section 47(xiv), the depreciation should be first calculated for the whole year as if no succession had taken place. Thereafter, the depreciation should be apportioned between the sole proprietary concern and the company in the ratio of the number of days for which the assets were used by them. It is assumed that in this case, the conditions specified in Section 47(xiv) are satisfied.

Question 16.
State with reasons, the allowability of the following expenses incurred by MN Limited, a wholesale dealer of commodities, under the Income Tax Act, 1961 while computing Profit & Gains from business or profession for the Assessment Year 2021-22.
(i) Construction of school building in compliance with CSR activities amounting to ₹ 5,60,000.
(ii) Purchase of building for setting up a warehousing facility for storage of food grains amounting to ₹ 4,50,000.
(iii) Interest on loan paid to Mr. X (a resident) ₹ 50,000 on which tax has not been deducted.
(iv) Commodity transaction tax paid ₹ 20,000 on sale of bullion. (Nov 2015, 8 marks)
Answer:
Allowability of the expenses incurred by MN Ltd., a wholesale dealer in commodities, while computing profits and gains from business or profession:
(i) Construction of school building in compliance with CSR activities:
Under section 37(1), only expenditure not being in the nature of capital expenditure or personal expense and not covered under Sections 30 to 36, and incurred wholly and exclusively for the purposes of the business is allowed as a deduction while computing business income. However, any expenditure incurred by an assessee on the activities relating .to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence, shall not be allowed as deduction under Section 37.

Accordingly, the amount of ₹ 5,60,000 incurred by MN Ltd. towards construction of school building in compliance with CSR activities shall not be allowed as deduction under Section 37.

Note: The Explanatory Memorandum to the Finance (No.2) Bill, 2014, however, clarifies that CSR expenditure, which is of the nature described in Sections 30 to 36, shall be allowed as deduction under these sections subject to fulfilment of conditions, if any, specified therein.
Under Section 35AC, 100% deduction is allowable in respect of the expenditure incurred on eligible projects/schemes specified under Rule 11K, which includes, inter alia, any project or scheme for construction of school buildings primarily for children belonging to the economically weaker sections of the society, as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendation of the National Committee, being a committee constituted by the Central Government, from amongst persons of eminence in public life.
Therefore, if the expenditure of ₹ 5,60,000 on construction of school building is incurred for children belonging to the economically weaker sections of the society and the other conditions mentioned under Section 35AC are fulfilled by MN Ltd., it can claim deduction of such expenditure under Section 35AC.

(ii) Purchase of building for setting up a warehousing facility for storage of food grains:
MN Ltd. would be eligible for investment-linked tax deduction under Section 35AD @ 100% in respect of amount of ₹ 4,50,000 invested in purchase of building for setting up a warehousing facility for storage of food grains.
Therefore, the deduction under Section 35AD while computing business income would be ₹ 4,50,000.

(iii) Interest on loan paid to Mr. X (a resident) ₹ 50,000 on which tax has not been deducted:
₹ 15,000, being 30% of ₹ 50,000, would be disallowed under section 40(a)(ia) while computing the business income of MN Ltd. for non-deduction of tax at source under Section 194A on interest of ₹ 50,000 paid by it to Mr. X.
The balance ₹ 35,000 would be allowed as deduction under Section 36(1 )(iii), assuming that the amount was borrowed for the purposes of business.

(iv) Commodities transaction tax of ₹ 20,000 paid on sale of bullion:
Commodities transaction tax paid in respect of taxable commodities transactions entered into in the course of business during the previous year is allowable as deduction, provided the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.
Taking that income from this commodities transaction is included while computing the business income of MN Ltd., the commodity transaction tax of ₹ 20,000 paid is allowable as deduction under Section 36(1)(xvi).

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 17.
Venus Ltd., engaged in manufacture of pesticides, furnishes the following particulars relating to its manufacturing unit at Chennai (for the year ending 31 -3-2021):

(₹  in lacs)
Opening WDV of Plant and Machinery 20
New machinery purchased on 1-9-2020 10
New car purchased on 1-12-2020 8
Computer purchased on 3-1-2021 4

Additional information:

  • All assets were put to use immediately.
  • Computer has been installed in the office.
  • During the year ended 31 -3-2020, a new machinery had been purchased on 31-10-2019, for ₹ 10 lacs.
  • Additional depreciation, besides normal depreciation, had been claimed thereon.
  • Depreciation rate for machinery may be taken as 15%.

Compute the depreciation available to the assessee as per the provisions of the Income-tax Act, 1961 and the WDV of different blocks of assets as on 31-3-2021. (May 2016, 8 marks)
Answer:
Computation of written down value of block of assets of Venus Ltd. as on 31.03.2021:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 16

Notes:
1. As per Section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005, by an assessee engaged, inter alia, in the business of manufacture or production of any article or thing, at the rate of 2C% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia,:
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.
In view of the above provisions, additional depreciation cannot be claimed in respect of:
(i) Car purchased on 1.12.2020 and
(ii) Computer purchased on 3.1.2021, installed in office.
In the absence of any specific restriction in law, that the balance additional depreciation relating to plant and machinery acquired during the previous year 2019-20 and put to use for less than 180 days during that year can be claimed in the next previous year i.e., P.Y. 2020-21 (A.Y.2021 -22), being the year in which this beneficial provision become effective.
Further, the Karnataka High Court has, in CIT v. Rittal India Pvt. Ltd. (2016) 380 ITR 428, up held that the balance additional depreciation (not claimed in the year of acquisition) is allowable in the immediately succeeding previous year, since additional depreciation is a one-time benefit to encourage industrialisation and the relevant provisions have to be construed reasonably and purposively.
Based on this view, the total depreciation in respect of plant and machinery for A.Y. 2021-22 would be ₹ 8.10 lacs i.e., ₹ 7.10 lacs plus the balance additional depreciation of ₹ 1 lac, being 10% of ₹ 10 lacs [in respect of new machinery purchased on 31.10.2019] allowed as deduction in the previous year 2020-21.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 18.
Mr. Rangamannar resides in Delhi. As per new rule in the city, private cars can be plied in the city only on alternate days.
He has purchased a car on 21 -09-2020, for the purpose of his business as per following details:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 17
He estimates the usage of the car for personal purposes will be 25%. He is advised that since the car has run only on alternate days, half the depreciation, which is otherwise allowable, will be actually allowed. He has started using the car immediately after purchase.
Determine the depreciation allowable on car for the AY 2021 -22, if this is the only asset in the block.
Rate of depreciation may be taken at 15%
If this car were to be used in the subsequent Assessment Year 2021 -22 on the same terms and conditions above, what will be the depreciation allowable? Assume that there is no change in the legal position under the Income -Tax Act, 1961. (Nov 2014, 4 marks)
Answer:

Particulars
Since the car was put to use for more than 180 days in the P.Y. 2020-21, full depreciation® 15% is allowable on the actual cost of ₹ 15,36,000, which is the total price (inclusive of GST). However, the depreciation actually allowed would be restricted to 75%, since 25% of usage is estimated for personal use, on which depreciation is not allowable.
Depreciation for P.Y. 2020-21 = 15% × ₹ 15,36,000 × 75% =
Written Down Value as on 1.4.2021 = ₹ 15,36,000 – ₹ 1,72,800= ₹ 13,63,200
1,72,800
Depreciation for P.Y. 2020-21 = 15% × ₹ 13,63,200 × 75% = 1,53,360

Note: As per section 17(5) of the CGST Act, 2017/Delhi GST Act, 2017, input tax credit would not be available in respect of motor vehicles except if they are used for making taxable supply of such vehicles or for transportation of goods or passengers or for imparting training on driving, flying navigating such vehicles. In this case, the question mentions that the car is the only asset in the block. In the absence of any information in the question to the contrary, it is logical to assume that the car is not used for making the above taxable supplies. Accordingly, input tax credit would not be available and hence, GST would form part of actual cost of car. The above solution has been worked out accordingly.
However, input tax credit would be available if it is assumed that the car is used in making the above taxable supplies or in transportation of goods, the answer would be as follows

Alternative Answer:

Particulars
Since the car was put to use for more than 180 days in the P.Y. 2020-21, full depreciation @ 15% is allowable on the actual cost of ₹ 12 lakh (exclusive of GST of ₹ 3,36,000), assuming that input tax credit is available in respect of GST.

Further, the depreciation actually allowed would be restricted to 75%, since 25% of usage is estimated for personal use, on which depreciation is not allowable.

Depreciation for P.Y. 2020-21 = 15% × ₹ 12,00,000 x 75% = 1,35,000
Written Down Value as on 1.4.2020 = ₹ 12,00,000 – ₹ 1,35,000 = ₹ 10,65,000
Depreciation for P.Y.2020-21 = 15% × ₹ 10,65,000 × 75% = 1,19,813

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 19.
Mr. Prakash is in the business of operating goods vehicles. As on 1st April, 2020, he had the following vehicles:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 18
Compute his income under section 44 AE of the Income Tax Act, 1961 for A.Y. 2021-22 (Nov 2019, 4 marks)
Answer:
Computation of Income of Mr. Prakash u/s 44AE for the AY 2021-22
Since Mr. Prakash does not own more than 10 vehicles at any time during the previous year 2019-20, he is eligible to opt for presumptive taxation scheme under Section 44AE. ₹ 1,000 per ton of gross vehicle weight or unfaden weight per month or part of the month for each heavy goods vehicle and ₹ 7,500 per month or part of month for each goods carriage other than heavy goods vehicle, owned by him would be deemed as his profits and gains from such goods carriage.
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 19

Question 20.
A car purchased by Dr. Soman on 10.08.2017 for ₹ 5,25,000 for personal use is brought into professional use on 1.07.2020 by him, when its market value was ₹ 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year 2021-22 assuming the rate of depreciation to be 15%.
Answer:
As per Section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee. The purchase price of ₹ 5,25,000 is, therefore, the actual cost of the car to Dr. Soman. Market value (i.e. ₹ 2,50,000) on the date when the asset is brought into professional use is not relevant. Therefore, amount of depreciation on car as per Section 32 for the A.Y.2021-22 would be ₹ 78,750, being ₹ 5,25,000 × 15%.

Note: Explanation 5 to Section 43(1) providing for reduction of notional depreciation from the date of acquisition of asset for personal use to determine actual cost of the asset is applicable only in case of building which is initially acquired for personal use and later brought into professional use. It is not applicable in respect of other assets.

Question 22.
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during F.Y. 2020-21 at the cost shown against each item. Calculate the amount of depreciation that can be claimed from his professional income for A.Y. 2021- 22:
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 20
Answer:
Computation of depreciation allowable for A.Y. 2021-22
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 21

Notes:
1. Computation of depreciation
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 22

2. Where an asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days, the deduction on account of depreciation would be restricted to 50% of the prescribed rate. In this case, since Mr. Dhaval commenced his practice in the P.Y. 2020-21 and acquired the assets during the same year, the restriction of depreciation to 50% of the prescribed rate would apply to those assets which have been put to use for less than 180 days in that year, namely, laptop and computer software.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 23.
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor vehicles on 1.1.2020. The manufacturing unit was set up on 1.5.2020. He commenced his manufacturing operations on 1.6.2020. The total cost of the plant and machinery installed in the unit is ₹ 120 crore. The said plant and machinery included second hand plant and machinery bought for ₹ 20 crore and new plant and machinery for scientific research relating to the business of the assessee acquired at a cost of ₹ 15 crore.
Compute the amount of depreciation allowable under Section 32 of the Income-tax Act, 1961 in respect of the assessment year 2021 -22. Assume that all the assets were purchased by way of account payee cheque.
Answer:
Computation of depreciation allowable for the A. Y.2021 -22 in the hands of Mr. Gamma
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 23

Notes:
1. As per Section 35(2)(iv), no depreciation shall be allowed in respect of plant and machinery purchased for scientific research relating to assessee’s business, since deduction is allowable under Section 35 in respect of such capital expenditure.

2. As per Section 32(1 )(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005 by an assessee engaged in, inter alia, the business of manufacture or production of any article or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia:
(i) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
(ii) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profit and gains of business or profession” of any one previous year.

In view of the above provisions, additional depreciation cannot be claimed in respect of:
(i) Second hand plant and machinery;
(ii) New plant and machinery purchased for scientific research relating to assessee’s business in respect of which the whole of the capital expenditure can be claimed as deduction under section 35(1 )(iv) read with Section 35(2) (ia)&(iv).

Question 24.
Mr. X, set up a manufacturing unit in Warangal in the state of Telangana on 01.06.2020. It invested ₹ 30 crore in new plant and machinery on 1.6.2020. Further, it invested ₹ 25 crore in the plant and machinery on 01.11.2020, out of which ₹ 5 crore was second hand plant and machinery. Compute the depreciation allowable under section 32. Is Mr. X entitled for any other benefit in respect of such investment? If so, what is the benefit available?
Answer:
1. As per the Second proviso to Section 32(1)(ii), where an asset acquired during the previous year is put to use for less than 180 days in that previous year, the amount deduction allowable as normal depreciation and additional depreciation would be restricted to 50% of amount computed in accordance with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on 1.11.2020 is restricted to 7.5% (being 50% of 15%) and additional depreciation is restricted to 17.5% (being 50% of 35%).

2. The balance additional depreciation of ₹ 3.5 crore, being 50% of ₹ 7 crore (35% of ₹ 20 crore) would be allowed as deduction in the A.Y.2022-23.

3. As per Section 32(1 )(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or production of any article or thing. In this case, since new plant and machinery acquired was installed by a manufacturing unit set up in a notified backward area in the State of Telengana, the rate of additional depreciation is 35% of actual cost of new plant and machinery. Since plant and machinery of ₹ 20 crore was put to use for less than 180 days, additional depreciation® 17.5% (50% of 35%) is allowable as deduction. However, additional depreciation shall not be allowed in respect of second hand plant and machinery of ₹ 5 crore.
Likewise, the benefit available under Sections 32AD would not be allowed in respect of second hand plant and machinery.
Accordingly, additional depreciation and investment allowance under Sections 32AD have not been provided on ₹ 5 crore, being the actual cost of second hand plant and machinery acquired and installed in the previous year.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 25.
X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme referred to in Section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the employees. Compute the amount of deduction allowable under Section 36(1)(iva), if the basic salary of the employees aggregate to ₹ 10 lakh. Would disallowance under Section 40A(9) be attracted, and if so, to what extent?
Answer:
Computation of deduction u/s 36(1) (iva) and disallowance u/s 40A(9)

Particulars
Basic Salary

Dearness Allowance@40% of basic salary [DA forms part of pay]

10,00,000

4,00,000

Salary for the purpose of Section 36(1 )(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of ₹ 10 lakh) 2,00,000
Less: Permissible deduction under Section 36(1)(iva) (10% of basic salary plus dearness pay = 10% of ₹ 14,00,000 = ₹ 1,40,000) 1,40,000
Excess contribution disallowed under Section 40A(9) 60,000

Question 26.
During the financial year 2020-21, the following payments/expenditure were made/ incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2020 was ₹ 99 lacs):
(i) Interest of ₹ 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at source;
(ii) ₹ 3,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iii) Commission of ₹ 16,000 was paid to Mr. Vidyasagar on 2.7.2020 without deduction of tax at source.
Briefly discuss whether any disallowance arises under the provisions of Section 40(a)(ia) of the Income-tax Act, 1961.
Answer:
Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the same to the credit of the Central Government within the stipulated time limit.
1. The obligation to deduct tax at source from interest paid to.a resident arises under Section 194A in the case of an individual, whose total turnover in the immediately preceding previous year, i.e., P.Y. 2019-20 exceeds ₹ 100 lakhs. Thus, in present case, since the turnover of the assessee is less than ₹ 100 lakhs, he is not liable to deduct tax at source. Hence, disallowance under section 40(a)(ia) is not attracted in this case.

2. The disallowance of 30% of the sums payable under Section 40(a)(ia) would be attracted in respect of all sums on which tax is deductible under Chapter XVII-B. Section 192, which requires deduction of tax at source from salary paid, is covered under Chapter XVII-B. The obligation to deduct tax at source under section 192 arises, in the hands all assessee-employer even if the turnover amount does not exceed ₹ 100 lakhs in the immediately preceding previous year. Therefore, in the present case, the disallowance under Section 40(a)(ia) is attracted for failure to deduct tax at source under Section 192 from salary payment. However, only 30% of the amount of salary paid without deduction of tax at source would be disallowed.

3. The obligation to deduct tax at source under section 194-H from commission paid in excess of ₹ 15,000 to a resident arises in the case of an individual, whose total turnover in the immediately preceding previous year, i.e., P.Y.2019-20 exceeds ₹ 100 lakhs. Thus, in present case, since the turnover of the assessee is less than ₹ 100 lakhs, he is not liable to deduct tax at source u/s 194H. He is also not required to default TDS u/s 194M, since aggregate amount of commission does not exceed 50 lakh during P.Y. 2020-21 .Therefore, disallowance under Section 40(a)(ia) is not attracted in this case.

Question 27.
A firm has paid ₹ 7,50,000 as remuneration to its partners for the P.Y.2020-21, in accordance with its partnership deed, and it has a book profit of ₹ 10 lakh. What is the remuneration allowable as deduction?
Answer:
The allowable remuneration calculated as per the limits specified in section 40(b)(v) would be:

Particulars
On first ₹ 3 lakh of book profit [₹ 3,00,000 × 90%]
On balance ₹ 7 lakh of book profit [₹ 7,00,000 × 60%] 
2,70,000
4,20,000
6,90,000

The excess amount of ₹ 60,000 (i.e., ₹ 7,50,000 – ₹ 6,90,000) would be disallowed as per section 40(b)(v).

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 28.
Vinod is a person carrying on profession as film artist. His gross receipts from profession are as under:

Financial year 2017-18 ₹  1,15,000
Financial year 2018-19 ₹  1,80,000
Financial year 2019-20 ₹  2,10,000

What is his obligation regarding maintenance of books of accounts for Assessment Year 2021-22 under section 44AA of Income-tax Act, 1961?
Answer:
Section 44AA(1) requires every person carrying on any profession, notified by the Board in the Official Gazette (in addition to the professions already specified therein), to maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Income-tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required to maintain specified books of accounts:
(i) if his gross receipts in all the three years immediately preceding the relevant previous year has exceeded ₹ 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it is likely to exceed ₹ 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a notified profession. Since his gross receipts have not exceeded ₹ 1,50,000 in financial year 2017-18, the requirement under section 44AA to compulsorily maintain the prescribed books of account is not applicable to him.
Mr. Vinod, however, required to maintain such books of accounts as would enable the Assessing Officer to compute his total income.

Question 29.
Mr. Praveen engaged in retail trade, reports a turnover of ₹ 1,98,50,000 for the financial year 2020-21. His income from the said business as per books of account is computed at ₹ 13,20,000. Retail trade is the only source of income for Mr. Praveen A.Y. 2020-21 was the first year for which he declared his business income in accordance with 44AD.
(i) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax for the assessment year 2021-22?
(ii) If so, determine his income from retail trade as per the applicable presumptive provision. *
(iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, “what are his obligations under the
Income-tax Act, 1961?
(iv) What is the due date for filing his return of income under both the options?
Answer:
(i) Yes. Since his total turnover for the F.Y.2020-21 is below ₹ 200 lakhs, he is eligible to opt for presumptive taxation scheme under section 44AD in respect of his retail trade business.

(ii) His income from retail trade, applying the presumptive tax provisions under Section 44AD, would be ₹ 15,88,000, being 8% of ₹ 1,98,50,000.
Alternative view: It can be assumed that Mr. Praveen has received whole the amount of turnover by cheque or bank draft or use of electronic clearing system. In that case, his income from retail trade, applying the presumptive tax provisions under Section 44AD, would be ₹ 11,91,000, being 6% of ₹ 1,98,50,000.

(iii) Mr. Praveen had declared profit for the previous year 2019-20 in accordance with the presumptive provisions and if he does not opt for presumptive provisions for any of the five consecutive assessment years i.e., A.Y. 2021 -22 to A.Y. 2025-26, he would not be eligible to claim the benefit of presumptive taxation for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance the presumptive provisions i.e. if he does npt opt for presumptive taxation in say P.Y. 2020-21, then he would .not be eligible to claim the benefit of presumptive taxation for A.Y. 2022-23 to A.Y. 2026-27. Consequently, Mr. Praveen is required to maintain the books of accounts and get them audited under section 44AB, since his income exceeds the basic exemption limit.

(iv) In case he opts for the presumptive taxation scheme under Section 44AD, the due date would be 31st July, 2021.
In case he does not opt for the presumptive taxation scheme, he is required to get his books of account audited, in which case the due date for filing of return^vould be 31st October, 2021.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 30.
Examine with reasons, whether the following statements are true or false, with regard to the provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2021 for ₹ 25,000 through a cheque duly crossed as “& Co.” is hit by the provisions of section 40A(3).
(b) (i) It is a condition precedent to write off in the books of account, the amount due from debtor to claim deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia, from the amounts payable to a resident as rent or royalty, will result in disallowance while computing the business income where the resident payee has not paid the tax due on such income.
Answer:
(a) True: In order to escape the disallowance specified in section 40A(3), payment in respect of the business expenditure ought to have been made through an account payee cheque. Payment through a cheque crossed as “& Co.” will attract disallowance under section 40A(3).

(b) (i) True: It is mandatory to write off the amount due from a debtor as not receivable in the books of account, in order to claim the same as bad debt under section 36(1 )(vii). However, where the debt has been taken into account in computing the income of the assessee on the basis of ICDSs notified under section 145(2), without recording the same in the accounts, then, such debt shall be allowed in the previous year in which such debt becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the said purpose.
(ii) True: Section 40(a)(ia) provides that failure to deduct tax at source from rent or royalty payable to a resident, in accordance with the provisions of Chapter XVII-B, will result in disallowance of 30% of such expenditure, where the resident payee has not paid the tax due on such income.

Question 31.
What are the provisions related to 44AE of the Income Tax Act 1961?
Answer:
(i) Eligible business: This section provides for estimating business income of an owner of goods carriages from the plying, hire or leasing of such goods carriages;
(ii) Eligible assessee: The scheme applies to persons owning not more than 10 goods vehicles at any time during the previous year;
(iii) Presumptive Income: The estimated income from each goods vehicle, being a heavy goods vehicle or other than heavy goods vehicle would be:

Goods Carriage Presumptive Income
Heavy goods vehicle ₹ 1,000 per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month during which such vehicle is owned by the assessee for the previous year.
Other than heavy goods vehicle ₹ 7,500 for every month or part of a month

(iv) All other deduction deemed to be allowed: The assessee will be deemed to have been allowed the deductions under sections 30 to 38. Accordingly, the written down value of any asset used for the purpose of the business of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for each of the relevant assessment years.
(v) Salary and interest to partners is allowed: Where the assesse is a firm, the salary and interest paid to its partner are allowed to be deducted subject to the conditions and limit specified under section 40(b).
(vi) Not requirement to maintain books of accounts and get the accounts audited: The. assessee joining the scheme will not be required to maintain books of account under section 44AA and get the accounts audited under section 44AB in respect of such income.
(vii) Option to claim lower profits: An assessee may claim lower profits and gains than the deemed profits and gains specified in sub-section (1) of that section subject to the condition that the books of account and other documents are kept and maintained as required under sub-section (2) of Section 44AA and the assessee gets his accounts audited and furnishes a report of such audit as required under section 44AB.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 12.
Mr. X commenced the business of operating goods vehicles on 1.4.2020. He purchased the following vehicles during the P.Y.2020-21. Compute his income under Section 44AE for A.Y.2021-22.

Gross Vehicle Weight (in kilograms) Number Date of purchase
7,000 2 10.04.2020
6,500 1 15.03.2021
10,000 3 16.07.2020
11,000 1 02.01.2021
15,000 2 29.08.2020
15,000 1 23.02.2021

Would your answer change if the goods vehicles purchased in April, 2020 were put to use only in July, 2020?
Answer:
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2020-21, he is eligible to opt for presumptive taxation scheme under Section 44AE. ₹ 1,000 per ton of gross vehicle weight or unladen weight per month or part of the month for each heavy goods vehicle and ₹ 7,500 per month or part of month for each goods carriage other than heavy goods vehicle, owned by him would be deemed as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kg.
Profits and Gains of Business or Profession – CA Inter Tax Question Bank 24
The presumptive income of Mr. X under Section 44AE for A.Y.2021 -22 would be:
₹ 6,82,500, i.e., 55 × ₹ 7,500, being for other than heavy goods vehicle + 18 × ₹ 1,000 × 15 ton being for heavy goods vehicle.
The answer would remain the same even if the two vehicles purchased in April, 2020 were put to use only in July, 2020, since the presumptive income has to be calculated per month or part of the month for which the vehicle is owned by Mr. X.

Multiple Choice Questions

Question 1.
Which is the charging section of income under the head profits and gains of business or profession?
(a) Section 15
(b) Section 24
(c) Section 28
(d) Section 17
Answer:
(c) Section 28

Question 2.
Income of a trade or professional association, from specific service, performed for its members shall be:
(a) exempt
(b) taxable under the head business and profession
(c) taxable under the head income from other sources
(d) None of the above
Answer:
(b) taxable under the head business and profession

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 3.
Raman and Co. a partnership firm, received ₹ 5 Lacs from an insurance co. under keyman insurance policy consequent to demise of partner Pramod. The amount of premium ₹ 2,30,000 paid earlier was claimed as deduction u/s 37 by the firm. The amount received from the insurance co. is:
(a) Tax free u/s 10(10D)
(b) Fully taxable as income
(c) ₹ 2,70,000 is taxable
(d) ₹ 2,30,000 is taxable
Answer:
(b) Fully taxable as income

Question 4.
Under the head “Profits and Gains of Business and Profession” the method of accounting that should be followed by an assessee is:
(a) Cash system only
(b) Mercantile system only
(c) Hybrid system only
(d) Cash system or mercantile system only
Answer:
(d) Cash system or mercantile system only

Question 5.
Depreciation rate for computer-
(a) 20%
(b) 60%
(c) 40%
(d) 100%
Answer:
(b) 60%

Question 6.
Opening WDV of the block of assets was ₹ 15,00,000. During the year, asset was acquired under this block on 15th June, 2020 amounting to ₹ 10,00,000. Rate of depreciation of the block is 15%. Calculate the amount of depreciation available during the previous year for the block.
(a) ₹ 3,25,000
(b) ₹ 3,75,000
(c) ₹ 3,00,000
(d) ₹ 2,25,000
Answer:
(b) ₹ 3,75,000

Question 7.
Atin & Co., a sole proprietary concern, was converted into a Company on 1 -9-2020. Before the conversion, the sole proprietary concern had a Block of Plant and Machinery (Rate of Depreciation 15%), whose WDV as on 1-4-2020 was ₹ 3,00,000. On 1st April, itself a new Plant of the same Block was purchased for ₹ 1,20,000. After the conversion, the Company has purchased the same type of Plant on 1-1-2021 for ₹ 1,60,000. Compute the depreciation that would be allocated between the sole proprietary concern and the successor company.
(a) ₹ 26,408: ₹ 48,592
(b) ₹ 0:₹ 75,000
(c) ₹ 75,000: ₹ 0
(d) No depreciation for this year
Answer:
(a) ₹ 26,408: ₹ 48,592

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 8.
Sunil acquired a building for ₹ 15 Lacs in June, 2017 in addition to cost of land beneath the building of ₹ 3 Lacs. It was used for personal purposes until he commenced business in June, 2020 and since then it was used for business purposes. The amount of depreciation eligible in his case for the AY 2021 -22 would be:
(a) ₹ 1,50,000
(b) ₹ 75,000
(c) ₹ 37,500
(d) ₹ 1,21,500
Answer:
(d) ₹ 1,21,500

Question 9.
Where an asset used for scientific research for more than three years is sold without having being used for other purposes, then the sale proceeds to the extent of the cost of the asset already allowed- as deduction u/s 35 in the past shall be treated as-
(a) Business Income
(b) Long Term Capital Gain
(c) Short-term Capital Gain
(d) Exempted Income
Answer:
(a) Business Income

Question 10.
If donation is made to a National Laboratory or a University or l.l.T with the specific direction that scientific research should be for an approved programme, the amount of deduction shall be:
(a) 150% of the donation so made
(b) 100% of the donation so made
(c) 200% of the donation so made
(d) 175% of the donation so made
Answer:
(c) 200% of the donation so made

Question 11.
In case of companies, capital expenditure incurred for the purpose of promoting family planning amongst the employees would be deductible to the extent of
(a) Equal to 1 /5th in each year for five years
(b) Equal to 1/6th in each year for 6 years
(c) Equal to 1 /4lh in each year for 4 years
(d) Equal to 1/10th in each year for 10 years
Answer:
(a) Equal to 1 /5th in each year for five years

Question 12.
Interest on capital of or loan from partner of a firm is allowed as deduction to the firm to the extent of:
(a) 18% p.a.
(b) 12% p.a. even if it is not mentioned in partnership deed
(c) 12% p.a. or at the rate mentioned in partnership deed whichever is less.
(d) 6% p.a.
Answer:
(c) 12% p.a. or at the rate mentioned in partnership deed whichever is less.

Question 13.
When a cash payment of ₹ 15,000 is made on 10th May, 2020 towards purchase of raw material effected in earlier years, i.e. on 5th June, 2018, the amount liable for disallowance u/s 40A(3) would be-
(a) ₹ 15,000
(b) ₹ 30,000
(c) ₹ 45,000
(d) ₹ 60,000
Answer:
(b) ₹ 30,000

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Question 14.
The books of accounts are to be kept and maintained for a period of how many years from the end of the relevant assessment year.
(a) 6 years
(b) 5 years
(c) 8 years,
(d) Unlimited period
Answer:
(a) 6 years

Question 15.
Under Section 40A(3) which of the following payment for an expenditure incurred would not be admissible as deduction from business income-
(a) ₹ 5,000 paid in cash to transporter
(b) ₹ 5,000 paid in cash to a dealer in the morning and ₹ 10,000 paid in cash to the same dealer in the evening
(c) ₹ 40,000 sent through NEFT to the bank account of the dealer for goods purchased
(d) ₹ 9,000 paid through bearer cheque to the dealer for goods purchased.
Answer:
(b) ₹ 5,000 paid in cash to a dealer in the morning and ₹ 10,000 paid in cash to the same dealer in the evening

Profits and Gains of Business or Profession Notes

Amendment of section 35 [Scientific Research]
In section 35 of the Income-tax Act, with effect from the 1st day of June, 2020,
(b) after the fourth proviso occurring after clause (iv), the following provisos shall be inserted, namely:
“Provided also that every notification under clause (ii) or Clause (iii) in respect of the research association, university, college or other institution or under clause (iia) in respect of the company issued on or before the date on which this sub-section has come into force, shall be deemed to have been withdrawn unless such research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) makes an intimation in such form and manner, as may be prescribed, to the prescribed income-tax authority within three months from the date on which this proviso has come into force, and subject to such intimation the notification shall be valid for a period of five consecutive assessment years beginning with the assessment year commencing on or after the 1st day of April, 2021: Provided also that any notification issued by the Central Government under clause.(ii) or clause (iia) or clause (iii), after the date on which the Finance Bill, 2020 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding five assessment years as may be specified in the notification.”;

(ii) after sub-section (1), the following sub-section shall be inserted, namely:
“(1A) Notwithstanding anything. contained in sub-section (1), the research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) of sub-section (1) shall not be entitled to deduction under the respective clauses of the said sub-section, unless such research association, university, college or other institution or company-

(i) prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the said prescribed income-tax authority or the person authorised by such authority such statement in such form, verified in such manner, setting forth such particulars and within such time, as may be prescribed:
Provided that such research association, university, college or other institution or the company may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed; and

(ii) furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Amendment of section 35AD.
In section 35AD of the Income-tax Act, – now it will be optional scheme for the assessee. If he opts for 35AD then specific provision of 35AD will apply otherwise the normal provision of business profession will apply.

Further, any expenditure in respect of which payment or aggregate of payment made to a person of an amount exceeding ? 10,000 in a day otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through such other prescribed electronic mode would not be eligible for deduction. The prescribed electronic modes include credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [Notification No. 8/2020 dated 29.01.2020]

Deduction for commodities transaction tax paid in respect of taxable commodities transactions [Section 36(1)(xvi)]
(a) The Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT) to be levied on taxable commodities transactions entered into in a recognised stock exchange, vide Chapter VII of the Finance Act, 2013.
(b) For this purpose, a ‘taxable commodities transaction’ means a transaction of sale of commodity derivatives or sale of commodity derivatives based on prices or indices of prices of commodity derivatives or option on commodity derivatives or option in goods in respect of commodities, other than agricultural commodities, traded in recognised stock exchange.

Section 43CA
Stamp duty value of land and building to be taken as the full value of consideration in respect of transfer, even if the same are held by the transferor as stock- in-trade [SECTION 43CA]
(a) Section 43CA has been inserted as an anti-avoidance measure to provide that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable (i.e., the stamp duty value) shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.
However, if the stamp duty value does not exceed 110% [w.e.f. 01.04.2021 rate is 110%] of the consideration received or accruing then, such consideration shall be deemed to be the full value of consideration for the purpose of computing profits and gains from transfer of such asset.
Further, where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of ‘registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer instead of on the date of registration for such transfer, provided at least a part of the consideration has been received by way of an account payee cheque/ account payee bank draft or use of ECS through a bank account or through such other prescribed electronic modes on or before the date of the agreement.

(ii) The Assessing Officer may refer the valuation of the asset to a valuation officer as defined in section 2(r) of the Wealth-tax Act, 1957 in the following cases-
(1) Where the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the authority for payment of stamp duty exceeds the fair market value of the property as on the date of transfer and
(2) the value so adopted or assessed or assessable by such authority has not been disputed in any appeal or revision or no reference has been made before any other authority, court or High Court.

(iii) Where the value ascertained by the Valuation Officer exceeds the value adopted or assessed or assessable by the Stamp Valuation Authority, the value adopted or assessed or assessable shall be taken as the full value of the consideration received or accruing as a result of the transfer.
The term ‘assessable’ has been defined to mean the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.

Payments in excess of ₹ 10,000 made otherwise than through prescribed modes [40A(3)]
According to section 40A(3), where the assessee incurs any expenditure, in respect of which payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft or use of electronic system through bank account or through such other prescribed electronic modes exceeds ? 10,000, such expenditure shall not be allowed as a deduction.
The prescribed electronic modes are credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
The provision applies to all categories of expenditure involving payments for goods or services which are deductible in computing the taxable income.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

AUDIT OF ACCOUNTS OF CERTAIN PERSONS CARRYING ON BUSINESS OR PROFESSION [SECTION 44AB]
(i) Requirement of Tax Audit: It is obligatory for the persons mentioned in column (2) of the table below, carrying on business or profession, to get his accounts audited before the “specified date” by a Chartered Accountant, if the conditions mentioned in the corresponding row of column (3) are satisfied

Persons When tax audit is required?
1 2 3
I In case of a person carrying on business
(a) In case of a person carrying on business If his total sales, turnover or gross receipts in business > ₹ 1 crore in the relevant PY

Note – The requirement of audit u/s 44AB,does not apply to a person who declares profits and gains on presumptive basis u/s 44AD and his total sales, turnover, or’ gross receipts does not exceed ₹ 2 crore.

If in case of such person carrying on business –

(i) Aggregate cash receipts in the relevant PY < 5% of total receipts (incl. receipts for sales, turnover, gross receipts); and

(ii) Aggregate cash payments in the relevant PY < 5% of total payments (incl. amount incurred for expenditure)

If his total sales, turnover or gross receipts in business > ₹ 5 crore in the relevant PY
In case of an assessee covered u/s 44AE i.e., an assessee engaged in the business of plying, hiring or leasing goods carriages who owns not more than 10 goods carriages at any time during the P.Y. If such assessee claims that the profits and gains from business in the relevant P.Y. are lower than the profits and gains computed on a presumptive basis u/s 44AE [i.e., ₹ 1000 per ton of gross vehicle weight or unladen weight in case of each heavy goods vehicle and ₹ 7,500 for each vehicle, other than heavy goods vehicle, for every month Or part of the month for which the vehicle is owned by the assessee].
In case of an eligible assessee carrying on business, whose total turnover, sales, gross receipts < ₹ 200 lakhs, and who has opted for section 44AD in any earlier PY (say, P.Y.2019- 20) If he declares profit for any of the five successive PYs (say, P.Y.2020-21) not in accordance with section 44AD (i.e., he declares profits lower than 8% or 6% of total turnover, sales or gross receipts, as the case may be, in that year), then he cannot opt for section 44AD for five successive PYs after the year of such default (i.e., from P.Y.2021 -22 to P.Y.2025-26). For the year of default (i.e., P.Y.2020-21) and five successive previous years (i.e., P.Y.2021-22 to P.Y.2025-26), he has to maintain books of account u/s 44AA and get them audited u/s 44AB, if his income exceeds the basic exemption limit.
In case of persons carrying on profession
In case of a person carrying on profession If his gross receipts in profession > ₹ 50 lakh in the relevant PY
In case of an assessee carrying on a notified profession under section 44AA(1) i.e., legal medical, engineering, accountancy, architecture, interior decoration, technical consultancy, whose gross receipts ≤; ₹ 50 lakhs If such resident assessee claims that the profits and gains from such profession in the relevant PY are lower than the profits and gains computed on a presumptive basis u/s 44ADA (50% of gross receipts) and his income exceeds the basic exemption limit in that PY.

(i) Audit Report: The persons mentioned above would have to furnish by the specified date a report of the audit in the prescribed forms. For this purpose, the Board has prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD containing forms of audit report and particulars to be furnished therewith.

(ii) Accounts audited under other statutes are considered: In cases where the accounts of a person are required to be audited by or under any other law before the specified date, it will be sufficient if the person gets his accounts audited under such other law before the specified date and also furnish by the said date the report of audit in the prescribed form in addition to the report of audit required under such other law.

Thus, for example, the provision regarding compulsory audit does not imply a second or separate audit of accounts of companies whose accounts are already required to be audited under the Companies Act, ‘ 2013. The provision only requires that companies should get their accounts audited under the Companies Act, 2013 before the specified date and in addition to the4-report required to be given by the auditor under the Companies Act, 2013 furnish a report for tax purposes in the form to be prescribed in this behalf by the CBDT.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

(iii) Specified date: The expressioh “specified date” in relation to the accounts of the previous year or years relevant to any assessment year means the date one month prior to the due date for furnishing the return of income under section 139(1).
The due date for filing return of income in case of assessees (other than companies) who are required to get their accounts audited is 31 st October of the relevant assessment year. Hence, the specified date for tax audit would be 30th September of the relevant assessment year

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS [SECTIONS 44AD/44ADA/44AE]
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Note: If a person is not covered under presumptive tax provisions mentioned above, audit of books of account u/s 44AB is mandatory, if, in a case where he carries on business, his total sales, turnover or gross receipts in business > ₹ 1 crore in that P.Y. and in a case where he carries on profession, his gross receipts in profession > ₹ 50 lakh in that P.Y.

Profits and Gains of Business or Profession – CA Inter Tax Question Bank

Meaning of certain terms for the purpose of section 44AE:

Term Meaning
Heavy goods vehicle any goods carriage, the gross vehicle weight of which exceeds 12,000 kilograms.
Gross vehicle weight total weight of the vehicle and load certified and registered by the registering authority as permissible for that vehicle.
Unladen weight the weight of a vehicle or trailer including all equipment ordinarily used with the vehicle or trailer when working but excluding the weight of driver or attendant and where alternative parts or bodies are used the unladen weight of the vehicle means the weight of the vehicle with the heaviest such alternative body or part

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