Question 3 (a)
Business income from the profit and loss account, and total income
12 marks
- Time to write
- About 24 minutes
- Notes
- Crux notes
Question
Question 3 (a) · 12 marksMr. A's Profit and Loss Account for the tax year ended on 31/03/2027 is given below.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Stock, opening | 445500 | By Sales | 2450800 |
| To Purchases | 1619000 | By Rent Received on let out Property | 320000 |
| To Salaries & Wages | 874500 | By Debentures (X Co. Ltd.), interest on | 42000 |
| To Expenses, general | 128500 | By Gift from Father | 65000 |
| To Expenses for sales promotion | 145800 | By Income Tax Refund, interest on | 3000 |
| To Depreciation, provision for | 32500 | By Doubtful Debts recovered | 15000 |
| To Reserve for Debenture Redemption | 40000 | By Stock, closing | 360000 |
| To Duty, Central Excise | 55000 | By Loss, net | 85000 |
| Total | 3340800 | Total | 3340800 |
Other information:
Wages included a bonus of Rs. 150000 not paid till the due date of filing the income tax return.
Purchases included the payment made to acquire machinery of Rs. 300000, made by account payee cheque.
General expenses included Rs. 60000 spent on repair of a car used (3/4th) for business and personal purposes; 1/4th of the use is for purposes that are personal.
General expenses also included Rs. 10000 of municipal taxes paid for a house property (let out) whose rental income is taken to business income. The rent received credited to the P&L account is a gross amount, with no deduction claimed.
Sales promotion expenses included Rs. 45000 spent on samples distributed free to customers, and Rs. 15000 on gifts to relatives of Mr. A.
The recovered doubtful debts pertain to tax year 2024-25, and were allowed as a deduction in that year.
Depreciation as calculated under section 32 is Rs. 25000 (including depreciation on the newly acquired machinery)
Opening stock is overstated by 10%; closing stock is understated by 10%.
Compute the taxable income of Mr. A for the tax year 2026-27, assuming that in the tax year he invested Rs. 180000 in public provident fund and that the due date of filing the return is 31st July, 2027. Mr. A is not opting for alternative tax regime. (12)
Paper note: Set under the Income-tax Act, 1961 for assessment year 2024-25 (previous year 2023-24); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 3 years and every date in the question moves forward by the same 3 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. "Mr. A is not opting for alternative tax regime" is read as computing under the old (optional) regime, as against the default regime. The car "used (3/4th) for business and personal purposes; 1/4th for personal purposes" is read as three-fourths business use.
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
- assuming that in the tax year…The paper fixes this: use it as given, and say so in your answer.
- 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 2 min
- 1 Adjustments to the net loss bonus, capital, personal and reserve items, stock 5 marks 8 min
- 2 Items credited but taxed under other heads or not chargeable; depreciation 2½ marks 4 min
- 3 Income from house property 1½ marks 3 min
- 4 Income from other sources and gross total income 1½ marks 3 min
- 5 Deduction for public provident fund and total income 1½ marks 2 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 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.
- Mr. A has opted out of the default regime, so the deduction for the public provident fund is available (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)).
- The central excise duty of ₹55,000 was paid during the tax year, so it is allowed (section 37).
- The rent of ₹3,20,000 is the annual value of the let-out house; no other value is given.
- Opening stock overstated by 10% means the stated figure is 110% of the true figure; closing stock understated by 10% means the stated figure is 90% of the true figure.
Computation of income from business for tax year 2026-27
| Particulars | Rs. | Rs. |
|---|---|---|
| Net loss as per profit and loss account | (85,000) | |
| Add: items debited but not allowable or to be adjusted | ||
| Bonus not paid by the due date of the return (section 37(2)(d) and (3)) | 1,50,000 | |
| Machinery included in purchases: capital expenditure (section 34(1)) | 3,00,000 | |
| Car repairs: personal one-fourth (₹60,000 × 1/4) | 15,000 | |
| Municipal taxes of the let-out house (allowed under house property) | 10,000 | |
| Gifts to relatives: personal expense | 15,000 | |
| Provision for depreciation (allowed as computed under section 33 below) | 32,500 | |
| Debenture redemption reserve: an appropriation of profit | 40,000 | |
| Opening stock overstated (₹4,45,500 − ₹4,45,500 × 100/110) | 40,500 | |
| Closing stock understated (₹3,60,000 × 100/90 − ₹3,60,000) | 40,000 | 6,43,000 |
| 5,58,000 | ||
| Less: items credited but not business income, and allowances | ||
| Rent from let-out property (taxed under Income from house property) | 3,20,000 | |
| Interest on debentures (taxed under Income from other sources) | 42,000 | |
| Gift from father (from a relative: not chargeable, section 92(3)(a)) | 65,000 | |
| Interest on income-tax refund (taxed under Income from other sources) | 3,000 | |
| Depreciation under section 33 (including the new machinery) | 25,000 | 4,55,000 |
| Income from business | 1,03,000 |
The recovery of doubtful debts of ₹15,000, allowed as a deduction in the earlier year, is income of the year of recovery (section 38(1)(d)); it is already in the profit and loss account, so no adjustment is needed. The samples distributed free to customers, ₹45,000, are a business expense and remain allowed.
| Particulars | Rs. |
|---|---|
| Annual value (rent received, section 21(1)) | 3,20,000 |
| Less: Municipal taxes paid by the owner (section 21(3)) | 10,000 |
| Net annual value | 3,10,000 |
| Less: Standard deduction at 30% (section 22(1)(a)) | 93,000 |
| Income from house property | 2,17,000 |
| Particulars | Rs. |
|---|---|
| Interest on debentures of X Co. Ltd. | 42,000 |
| Interest on income-tax refund | 3,000 |
| Income from other sources | 45,000 |
| Particulars | Rs. |
|---|---|
| Income from business | 1,03,000 |
| Income from house property | 2,17,000 |
| Income from other sources | 45,000 |
| Gross total income | 3,65,000 |
| Less: Deduction for public provident fund, ₹1,80,000 restricted to ₹1,50,000 (section 123, Schedule XV) | 1,50,000 |
| Total income (taxable income) | 2,15,000 |
- Bonus: a deduction for bonus to employees is allowed only in the year of actual payment, or in the same year if paid by the due date of the return for the tax year. It was not paid by then, so it is added back; it will be allowed in the year in which it is paid. The question sets that due date at 31st July, 2027, and the answer follows it. Under section 263(1), as substituted by the Finance Act, 2026, a business assessee whose accounts need no audit has until 31 August 2027 (31 October 2027 if they must be audited). If not (the bonus was paid after 31 July but by that later date), it is allowed this year: a business loss of ₹47,000 is set off against the other heads, gross total income ₹2,15,000 and total income ₹65,000.
- Machinery: payment by account payee cheque means the cash-payment limit (section 36(4)) does not apply, but the cost is capital; depreciation of ₹25,000 under section 33 already includes the new machinery.
- Car repairs: only the business share, three-fourths, is allowed (section 34(1)).
- Stock: correcting the opening stock to ₹4,05,000 and the closing stock to ₹4,00,000 raises the profit by ₹40,500 and ₹40,000.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Adjustments to the net loss (bonus, capital, personal and reserve items, stock) | 5 |
| 2 | Items credited but taxed under other heads or not chargeable; depreciation | 2.5 |
| 3 | Income from house property | 1.5 |
| 4 | Income from other sources and gross total income | 1.5 |
| 5 | Deduction for public provident fund and total income | 1.5 |
| Total | 12 |
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