Question 5
Business income from a Profit and Loss Account whose debit side does not add up, and total income (as set, 1961 Act, AY 2022-23)
10 marks
- Time to write
- About 20 minutes
From an older CBCS paper
Question
Question 5 · 10 marksUsing the following information that X has furnished for the previous year 2021-22, compute his total income in respect of the assessment year 2022-23:
The Profit and Loss Account for the year ended 31st March 2022 is given below:
| Particulars | Rs. | Particulars | Rs. |
|---|---|---|---|
| The Purchases | 1,80,000 | The Gross Turnover | 10,00,000 |
| The Office expenses | 45,000 | Bad Debts recovered (which were earlier allowed as deduction) | 6,000 |
| The Audit fees | 10,000 | Custom duty recovered (which was earlier not allowed as deduction) | 4,000 |
| The Household expenses | 3,000 | Gift received from friends | 12,000 |
| Depreciation on the Plant and Machinery | 34,000 | Gift from Parents | 25,000 |
| Contribution to the employees' Recognised Provident Fund | 1,00,000 | Interest on the securities | 5,000 |
| Bonus to the staff | 20,000 | The Income tax refund | 2,000 |
| Income Tax paid | 40,000 | ||
| Donations to the national Defence Fund | 2,000 | ||
| Life Insurance premium paid on his own life | 20,000 | ||
| Capital expenditure incurred on scientific research | 25,000 | ||
| Provision made for Bad debts | 12,000 | ||
| The Net profit | 3,28,000 | ||
| 10,54,000 | 10,54,000 |
The additional information is as follows:
Depreciation on plant and machinery according to the income tax provisions is Rs. 36,000.
Bonus to the staff is paid in the following manner:
Rs. 10,000 paid on 5th October, 2021
Rs. 5,000 paid on 30th July, 2022
Rs. 5,000 paid on 1st August, 2022
The due date of furnishing the return of income is 31st July, 2022
Audit fees is paid by bearer cheque.
Income tax refund includes an amount of Rs. 500 as interest on tax refund.
He contributes an amount of Rs. 25,000 to the Public Provident Fund. (10)
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2022-23 (previous year 2021-22), with the dates as printed. As printed, the left-hand side of the account does not add up to the printed total: its thirteen amounts sum to 8,19,000 against 10,54,000 (the right-hand side adds up to 10,54,000); the figures stand as printed and the answer states how it reads this.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- computeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Reading of the account 1 mark 2 min
- 2 Items added back: household, tax, donation, premium, provision, depreciation 2½ marks 4 min
- 3 Bonus under section 43B; audit fee under section 40A(3) 2 marks 4 min
- 4 Items deducted: customs duty, gifts, interest, refund 2 marks 4 min
- 5 Total income with sections 80C and 80G 2½ marks 4 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 20 minutes for 10 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- The account. The thirteen debit amounts add up to ₹8,19,000, not the printed ₹10,54,000; the credit side does add up to ₹10,54,000. The likelier cause is a debit item of ₹2,35,000 missing from the print (the printed net profit of ₹3,28,000 balances the account only with it). The computation therefore starts from the printed net profit of ₹3,28,000, and the missing ₹2,35,000 is read as an allowable business expense. The result if the net profit is the one misprinted is at the end.
- X. A resident individual carrying on the business, with no other income. Section 115BAC is not opted for (Finance Act, 2020, section 53). The option counts only if exercised in the prescribed manner: with the section 139(1) return by a person with no business or professional income, or on or before the section 139(1) due date by one who has such income (section 115BAC(5)).
- Payments. The contribution to the recognised provident fund is read as paid within the year (or by the due date of the return); the life insurance premium is within 10% of the sum assured; the interest on securities is the gross amount; the gifts from friends are the only gifts from non-relatives in the year.
Computation of income from business
| Particulars | ₹ |
|---|---|
| Net profit as per the Profit and Loss Account | 3,28,000 |
| Add: items debited but not allowable | |
| Household expenses (personal) | 3,000 |
| Depreciation as per the books | 34,000 |
| Bonus paid on 1st August, 2022, after the due date of the return (section 43B) | 5,000 |
| Income tax paid (section 40(a)(ii)) | 40,000 |
| Donation to the National Defence Fund (not a business expense; deducted under section 80G) | 2,000 |
| Life insurance premium on his own life (personal; deducted under section 80C) | 20,000 |
| Provision for bad debts (section 36(1)(vii) allows only debts written off) | 12,000 |
| Total | 4,44,000 |
| Less: items credited but not business income, or not taxable | |
| Customs duty recovered, not allowed earlier (section 41(1) taxes only what was allowed) | 4,000 |
| Gift from friends (₹12,000, not above ₹50,000; section 56(2)(x)) | 12,000 |
| Gift from parents (from relatives; outside section 56(2)(x)) | 25,000 |
| Interest on securities (income from other sources) | 5,000 |
| Income tax refund (a refund is not income; its ₹500 of interest is income from other sources) | 2,000 |
| Depreciation allowable under the Act | 36,000 |
| Total | 84,000 |
| Profits and gains of business | 3,60,000 |
- Bonus (section 43B): of the ₹20,000, ₹10,000 was paid on 5th October, 2021 and ₹5,000 on 30th July, 2022, on or before the due date of the return (31st July, 2022), so both are allowed, the evidence of payment being read as sent with the return (proviso to section 43B); the ₹5,000 paid on 1st August, 2022 is allowed only in 2022-23.
- Audit fees paid by bearer cheque, ₹10,000: a payment otherwise than by account payee cheque, draft or electronic clearing is disallowed only where it exceeds ₹10,000 to a person in a day (section 40A(3)). ₹10,000 does not exceed it, so the fee is allowed.
- Bad debts recovered, ₹6,000: they were allowed earlier, so their recovery is business income (section 41(4)); left in the profit.
- Capital expenditure on scientific research, ₹25,000: capital expenditure on scientific research related to the business is deductible in full (section 35(1)(iv) and (2)); left as debited.
- Contribution to the recognised provident fund, ₹1,00,000: the employer's contribution is allowed (section 36(1)(iv)), being paid in time (section 43B(b)).
- Depreciation: the books' ₹34,000 is added back and the ₹36,000 allowable under the Act is deducted.
| Particulars | ₹ |
|---|---|
| Profits and gains of business | 3,60,000 |
| Income from other sources: interest on securities | 5,000 |
| Income from other sources: interest on income tax refund | 500 |
| Gross total income | 3,65,500 |
| Less: section 80C (life insurance premium 20,000 + Public Provident Fund 25,000, the PPF account taken to be in his own name, section 80C(2)(v); within the ₹1,50,000 limit of section 80C(1) and section 80CCE) | 45,000 |
| Less: section 80G (National Defence Fund, 100%, no qualifying limit) | 2,000 |
| Total income, assessment year 2022-23 | 3,18,500 |
If the facts are read otherwise
- The net profit misprinted, no item missing: the profit that balances the account as printed is ₹10,54,000 − ₹4,91,000 = ₹5,63,000, which raises business income by ₹2,35,000 to ₹5,95,000; gross total income ₹6,00,500 and total income ₹5,53,500.
Where the 10 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Reading of the account | 1 |
| 2 | Items added back: household, tax, donation, premium, provision, depreciation | 2.5 |
| 3 | Bonus under section 43B; audit fee under section 40A(3) | 2 |
| 4 | Items deducted: customs duty, gifts, interest, refund | 2 |
| 5 | Total income with sections 80C and 80G | 2.5 |
| Total | 10 |
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