Question 4
Total income and tax of a proprietor from his Profit and Loss Account (as set, 1961 Act, AY 2022-23)
11 marks
- Time to write
- About 22 minutes
From an older CBCS paper
Question
Question 4 · 11 marksFrom the Profit and Loss Account of X (aged 31 years; resident) for the year ended 31st March, 2022, ascertain his total income and his tax liability for the assessment year 2022-23:
| Rs. | Rs. | ||
|---|---|---|---|
| The general expenses | 13,400 | The gross profit | 8,15,500 |
| The bad debts | 22,000 | The commission | 8,600 |
| The advance tax | 5,000 | The brokerage | 37,000 |
| The insurance | 600 | The sundry receipts | 2,500 |
| The salary to staff | 260,000 | The bad debts recovered (earlier allowed as deduction | 11,000 |
| The salary to X | 48,000 | Interest on the debentures (i.e., net amount of Rs. 22,500 + TDS of Rs. 2,500) | 25,000 |
| Interest on the overdraft | 4,000 | Interest on deposits with a company (non-trade) (the net interest of Rs. 11,700 + TDS of Rs. 1,300) | 13,000 |
| Interest on the loan to Mrs. X | 42,000 | ||
| Interest on the capital of X | 23,000 | ||
| The depreciation | 48,000 | ||
| The advertisement expenditure | 7,000 | ||
| Contribution to the employees recognized provident fund | 13,000 | ||
| The net profit | 4,26,600 | ||
| 9,12,600 | 9,12,600 |
The other information is as follows:
The amount of depreciation allowable is Rs. 37,300 according to the Income-tax rules; it includes depreciation on the permanent sign board.
The advertisement expenditure includes Rs. 3,000, being the cost of a permanent sign board fixed on the office premises.
(iii)Income of Rs. 2,04,500, which accrued during the previous year, has not been recorded in the Profit and Loss Account.
(iv)X pays a premium of Rs. 6,000 on his own life insurance policy of Rs. 70,000.
The general expenses include:
Rs. 500 given to Mrs. X, for the arrangement of a party in honour of a friend who has recently arrived from Canada;
Rs. 1,000, being a contribution to a political party.
- The loan was taken from Mrs. X for the payment of arrears of income-tax.
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. No marks are printed for this part; 11 for the whole question. The bracket after "allowed as deduction" is not closed in the print and stays so. "260,000" is printed with Western grouping. Both sides of the account total 9,12,600.
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
- total incomeHead 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 Advance tax, proprietor's salary and interest on capital 1½ marks 3 min
- 2 Interest on the loan from Mrs. X; sign board and depreciation 2 marks 4 min
- 3 General expenses: party and political contribution 1 mark 2 min
- 4 Unrecorded income; interest taken to other sources 1½ marks 3 min
- 5 Gross total income, sections 80C and 80GGC 2 marks 3 min
- 6 Tax liability, advance tax and TDS 2 marks 3 min
- 7 Treatment of the other items 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 22 minutes for 11 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.
- Regime. X has not opted for section 115BAC (Finance Act, 2020, section 53), the question being silent; the result under section 115BAC is at the end.
- Payments. The bad debts are written off as irrecoverable in the accounts; the contribution to the recognised provident fund is paid by the due date; the contribution to the political party is paid otherwise than in cash.
- Unrecorded income. The ₹2,04,500 that accrued in the year but is not in the accounts is read as business income (X follows the mercantile system).
Computation of income from business
| Particulars | ₹ |
|---|---|
| Net profit as per the Profit and Loss Account | 4,26,600 |
| Add: items debited but not allowable | |
| Advance tax (section 40(a)(ii)) | 5,000 |
| Salary to X, the proprietor (drawings, not an expense) | 48,000 |
| Interest on the loan from Mrs. X, taken to pay arrears of income tax (not for the business; section 36(1)(iii)) | 42,000 |
| Interest on X's own capital | 23,000 |
| Depreciation as per the books | 48,000 |
| Cost of the permanent sign board in advertisement expenditure (capital; its depreciation is in the ₹37,300) | 3,000 |
| Paid to Mrs. X for a party for a friend (personal) | 500 |
| Contribution to a political party (not a business expense; deducted under section 80GGC) | 1,000 |
| Income accrued in the year but not recorded | 2,04,500 |
| Total | 8,01,600 |
| Less: items credited but not business income; allowable items not debited | |
| Interest on debentures, gross (income from other sources) | 25,000 |
| Interest on deposits with a company, gross (income from other sources) | 13,000 |
| Depreciation allowable under the Act | 37,300 |
| Total | 75,300 |
| Profits and gains of business | 7,26,300 |
- Allowed as debited: general expenses (after the two items above), bad debts written off (section 36(1)(vii)), insurance, salary to staff, interest on the overdraft (borrowed for the business), the rest of the advertisement expenditure, and the employer's contribution to the recognised provident fund (section 36(1)(iv), paid in time, section 43B).
- Bad debts recovered, ₹11,000: allowed earlier, so taxable as business income (section 41(4)); left in the profit.
- Commission, brokerage and sundry receipts: earned in the business; left in the profit.
- Interest income: taken out of the business profit and taxed under Income from other sources at the gross figures (₹22,500 + ₹2,500 and ₹11,700 + ₹1,300); the tax deducted is credited against his tax.
| Particulars | ₹ |
|---|---|
| Profits and gains of business | 7,26,300 |
| Income from other sources: interest on debentures | 25,000 |
| Income from other sources: interest on company deposits | 13,000 |
| Gross total income | 7,64,300 |
| Less: section 80C, life insurance premium ₹6,000 (within 10% of the ₹70,000 sum assured, section 80C(3A); within the ₹1,50,000 limit of section 80C(1) and section 80CCE) | 6,000 |
| Less: section 80GGC, contribution to a political party | 1,000 |
| Total income, assessment year 2022-23 | 7,57,300 |
| Particulars | ₹ |
|---|---|
| Tax on ₹7,57,300: ₹12,500 + 20% of ₹2,57,300 (Finance Act, 2022, First Schedule, Part I, Paragraph A) | 63,960 |
| Rebate under section 87A (total income above ₹5,00,000) | Nil |
| Add: health and education cess at 4% (Finance Act, 2022, section 2(11)) | 2,558.40 |
| Tax and cess | 66,518.40 |
| Tax liability, rounded (section 288B) | 66,520 |
| Less: advance tax paid | 5,000 |
| Less: tax deducted at source (₹2,500 + ₹1,300) | 3,800 |
| Tax payable | 57,720 |
If the facts are read otherwise
- X opts for section 115BAC: no deduction under sections 80C and 80GGC (section 115BAC(2)(i)); total income ₹7,64,300; tax ₹12,500 + 10% of ₹2,50,000 + 15% of ₹14,300 = ₹39,645; with cess, tax liability ₹41,230. As X has business income, the option would have to be exercised by the due date of the return (section 115BAC(5)(i)).
Where the 11 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Advance tax, proprietor's salary and interest on capital | 1.5 |
| 2 | Interest on the loan from Mrs. X; sign board and depreciation | 2 |
| 3 | General expenses: party and political contribution | 1 |
| 4 | Unrecorded income; interest taken to other sources | 1.5 |
| 5 | Gross total income, sections 80C and 80GGC | 2 |
| 6 | Tax liability, advance tax and TDS | 2 |
| 7 | Treatment of the other items | 1 |
| Total | 11 |
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