Question 4 OR (b)
Income of an advocate on the cash system, and his total income
12 marks
- Time to write
- About 24 minutes
- Notes
- Crux notes
Question
Question 4 OR (b) · 12 marksMr. A, an advocate, keeps his books on receipt and payment basis and gives the following for the tax year 2026-27 ending on 31/03/2027:
| Receipts | Amount (Rs.) | Payments | Amount (Rs.) |
|---|---|---|---|
| Balance b/d | 860000 | Purchase: furniture | 75000 |
| Clients' fees (2025-26) | 245000 | Expenses of office | 405000 |
| Free from clients (2026-27) | 2340000 | Expenses on salary | 680000 |
| Clients' gifts | 140000 | Purchase: computer | 100000 |
| Bank loan | 900000 | Expenses of car | 320000 |
| Depreciation, all fixed assets | 165000 | ||
| Loan interest | 240000 | ||
| Income tax | 80000 | ||
| Sukanya Samridhi A/c investment | 150000 | ||
| Balance c/d | 2270000 | ||
| Total | 4485000 | Total | 4485000 |
Additional information is as follows:
Personal use accounts for 20% of the car expenses.
Depreciation on fixed assets under section 32 of the Income Tax Act is as follows.
On furniture: Rs. 3750
On computer: Rs.40000
On car: Rs. 20000
Among the gifts from clients is Rs. 21000 that Mr. A's father gave him on his birthday, as a gift.
Loan is taken of construction of house property; the property is 50% self-occupied, and 50% is used for business purposes.
Office expenses include Rs. 25000 of personal expenses.
Salary expenses include Rs. 50000 paid as life insurance premium of Mr. A. (12)
Paper note: Set under the Income-tax Act, 1961 for assessment year 2025-26 (previous year 2024-25); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 2 years and every date in the question moves forward by the same 2 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. No requirement is printed; read as computing Mr. A's income from profession and taxable income. "Free from clients" is read as fees. "Loan is taken of construction" is as printed. No regime is stated: the default regime is applied and the old-regime figure is also shown. The personal use of the car is read as restricting its depreciation as well.
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
- computerFormula first, then the working, then the answer with its unit (₹, %, units).
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Professional receipts on the cash system, including gifts 3 marks 5 min
- 2 Allowable expenses and disallowances 3 marks 5 min
- 3 Depreciation and loan interest 3 marks 5 min
- 4 House property, deductions and total income 3 marks 5 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.
- No requirement is printed; the answer computes Mr. A's income from profession and his total income.
- He follows the cash system, so fees are income when received, whichever year they relate to (section 276(1), which allows the cash or mercantile system regularly employed, subject to the income computation and disclosure standards notified under section 276(2)).
- Gifts from clients are received because of his profession and are professional receipts; the ₹21,000 from his father is a gift from a relative and is not income (section 92(2)(m), relative exception).
- Personal use of the car (20%) restricts both its running expenses and its depreciation to the business share (sections 34 and 33(3)(b)); the depreciation figures given are taken as the full amounts under section 33.
- Half the house is used for the profession, so half the loan interest is a professional expense; the other half relates to the self-occupied part.
- No regime is stated: the default regime of section 202(1) applies unless he opts out; the old-regime figure is also shown.
Computation of income from profession for tax year 2026-27
| Particulars | Rs. | Rs. |
|---|---|---|
| Professional receipts | ||
| Fees of 2025-26 received this year | 2,45,000 | |
| Fees of 2026-27 received | 23,40,000 | |
| Gifts from clients (₹1,40,000 − ₹21,000 from his father) | 1,19,000 | 27,04,000 |
| Less: Allowable expenses | ||
| Office expenses (₹4,05,000 − personal ₹25,000) | 3,80,000 | |
| Salary expenses (₹6,80,000 − his life insurance premium ₹50,000) | 6,30,000 | |
| Car expenses: 80% of ₹3,20,000 | 2,56,000 | |
| Depreciation: furniture ₹3,750, computer ₹40,000, car 80% of ₹20,000 = ₹16,000 | 59,750 | |
| Loan interest: business half of ₹2,40,000 | 1,20,000 | 14,45,750 |
| Income from profession | 12,58,250 |
- Opening balance, bank loan (a capital receipt) and purchase of furniture and computer (capital payments; depreciation is allowed instead).
- Depreciation of ₹1,65,000 in the account: replaced by the depreciation under section 33.
- Income-tax ₹80,000 (section 35), personal office expenses and the life insurance premium: not professional expenses.
- Sukanya Samriddhi deposit ₹1,50,000: a personal investment, considered below as a deduction.
Assumption (the question gives no completion date or lender's certificate): the house was completed within five years of the end of the year in which the loan was taken and he furnishes the lender's certificate, so the ₹2,00,000 ceiling of section 22(2)(a) applies under the old regime and the ₹1,20,000 is within it.
| Particulars | Default regime Rs. | Old regime Rs. |
|---|---|---|
| Income from profession | 12,58,250 | 12,58,250 |
| Income from house property: self-occupied half, annual value nil, less interest ₹1,20,000 (section 22(2)(a); not allowed under section 202(2)(a)(v)) | Nil | (1,20,000) |
| Gross total income | 12,58,250 | 11,38,250 |
| Less: Section 123 (Schedule XV): life insurance ₹50,000 + Sukanya Samriddhi ₹1,50,000, limited to ₹1,50,000 (not allowed under the default regime) | — | 1,50,000 |
| Total income | 12,58,250 | 9,88,250 |
Under the default regime his total income is ₹12,58,250; if he opts for the old regime (by the due date of the return, as he has professional income: section 202(4)(a)), it is ₹9,88,250.
- Fees for 2025-26 are taxed now because the cash system taxes fees in the year they are received.
- If the car depreciation of ₹20,000 were read as already restricted to business use, the depreciation would be ₹4,000 more and the income from profession ₹12,54,250.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Professional receipts on the cash system, including gifts | 3 |
| 2 | Allowable expenses and disallowances | 3 |
| 3 | Depreciation and loan interest | 3 |
| 4 | House property, deductions and total income | 3 |
| Total | 12 |
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