Business income from the profit and loss account, set-off and total income

Assumptions

1. Mr. A is taxed under the old (optional) regime, as the question says (section 202(4)). As he has business income, the option is to be exercised, in the manner the rules prescribe, by the due date under section 263(1) for furnishing his return of tax year 2026-27; once exercised it applies to later tax years, it may be withdrawn only once, for a tax year other than the one for which it was exercised, and after that he can never opt out again unless he ceases to have income from business or profession, when the option of clause (b) is open (section 202(4)(a)(i)-(iv)).
2. The customs duty of ₹75,000 was paid during the tax year, so it is allowed (section 37). A duty is allowed only in the year it is paid, or in the year it is due if paid by the due date of the return, which the question sets at 31/07/2027 (section 37(2)(a), (3)). Under section 263(1), as substituted by the Finance Act, 2026, a business assessee whose accounts need no audit has until 31 August 2027; no payment in the question falls between the two dates, so the result is the same. If it was paid later, it is disallowed this year: business loss ₹24,600, gross total income ₹7,98,900, total income ₹6,78,900.
3. The short-term capital gain of ₹8,10,000 is not on equity shares sold with securities transaction tax, so it is taxed at the normal rates and the deduction for PPF may be set against it.
4. The gratuity is paid directly to the retiring employee, not to a gratuity fund. The actual-payment rule does not reach it: section 37(2)(b) covers only what an employer contributes to a provident, superannuation or gratuity fund, or to another fund for employees' welfare. Section 29(1)(d), on the other hand, allows a provision made to pay any gratuity that becomes payable in the tax year. The question does not say when the employee retired. It is taken, as the likelier reading, that he retired in tax year 2026-27, since the gratuity is shown as outstanding at the year's end with every payment falling after it; the gratuity then became payable in that year, so the whole of it is allowed in that year, whatever the date of payment, and nothing is added back. If not (he retires in a later tax year), the ₹1,50,000 is only a provision for gratuity not yet payable, which section 29(2)(a) disallows, and it is allowed in the year it becomes payable: the whole ₹1,50,000 is added back, giving business income of ₹50,400 (a profit, so no loss to set off), gross total income ₹8,73,900 and total income ₹7,53,900. The question's payment dates suggest it intends the actual-payment reading; that reading's figures are given at the end.

Computation of business income for tax year 2026-27

Computation of total income

Notes on the adjustments

1. Gratuity: on the retirement assumed in tax year 2026-27 (assumption 4), the ₹30,000 (paid 15/05/2027), ₹50,000 (30/07/2027) and ₹70,000 (25/09/2027) all became payable in that year and are allowed in it (section 29(1)(d)); the due date of the return does not matter, because section 37(2)(b) covers only contributions to a fund. No deduction is then allowed again when they are paid out of the provision (section 29(2)(b)).
2. Salary to the spouse: she is a relative of Mr. A, so a specified person (section 36(3)(a)(i), Table, Sl. No. 1). Section 36(2) disallows only the part of a payment to a specified person that the Assessing Officer finds excessive or unreasonable when judged by the fair market value of the services, the legitimate needs of the business, or the benefit derived by or accruing to the assessee. ₹2,00,000 is what she was entitled to for the same services with XYZ Ltd., so it is not excessive and no part is disallowed. Being professionally qualified (MBA) and paid for that work, her salary is not clubbed with Mr. A's income either.
3. Stock: the true closing stock is ₹2,00,000 and the true opening stock ₹1,90,000; correcting both raises the profit by ₹20,000 and lowers it by ₹19,000.
4. Discounts received of ₹40,000 are business income and stay in the profit.
5. Cash payment: where a payment, or the aggregate of payments made to a person in a day, exceeds ₹10,000 and is not made through a specified banking or online mode, the expenditure is disallowed in full (section 36(4)). The limit is ₹35,000 only for payments for plying, hiring or leasing goods carriages (section 36(6)), which this purchase is not. Section 36(7) lifts this rule only in the cases and circumstances prescribed by the Rules, having regard to the banking facilities available, business expediency and other relevant factors; nothing in the question places this payment in such a case, so the whole ₹18,000 is disallowed.
6. PPF: the deposit qualifies as a contribution to an account with a provident fund set up and notified by the Central Government, the account being taken to be in Mr. A's own name (an individual's own, spouse's or child's name qualifies; Schedule XV, paragraph 1(e)).

The other reading of the gratuity

If the gratuity were a sum allowed only when actually paid (section 37, the reading the question's payment dates suggest, although section 37(2)(b) reaches only contributions to a fund, as note 4 above explains), the ₹70,000 paid on 25/09/2027, after the due date of the return, would be added back: business loss ₹29,600, gross total income ₹7,93,900, total income ₹6,73,900.