Business income from a trading and profit and loss account, with disallowances

Assumptions

1. The municipal taxes of ₹8,000 are on the house Mr. X lives in, so they are a personal expense.
2. Mrs. X is a relative (section 2(94)) and so a specified person (section 36(3)(a)(i), Table, Sl. No. 1). No market value is given for her services. Assumed: the Assessing Officer, having regard to the fair market value of the services, the legitimate needs of the business and the benefit derived by or accruing to him from them (section 36(2)(a), (b) and (c)), finds the whole ₹1,50,000 excessive or unreasonable because she does not hold the qualification needed to look after the books, so all of it is disallowed (section 36(2), formerly section 40A(2)(a)). The Act disallows "so much of the expenditure as considered excessive or unreasonable by him" (section 36(2)); the whole goes only on that finding (see The other reading).
3. The depreciation on the car is within the ₹42,000 allowed under section 33; only the running expenses are split for private use.

Computation of profits and gains of business or profession for tax year 2026-27

Notes on each adjustment

1. Advertisement. Diaries and calendars given to customers (₹10,000) promote the business and are allowed. The son's birthday party (₹5,000) is personal and is added back.
2. Car. Only the business share (two-thirds) of the running expenses is allowed (section 34).
3. Taxes. Income-tax is not a deduction (section 35). Municipal tax on a personal residence is not a business expense. Customs duty is deductible only on actual payment, but a payment made by the due date of the return (16/09/2027) counts for the year (section 37(3)): ₹10,000 paid on 31/07/2027 is allowed; ₹5,000 paid on 20/09/2027 is allowed only in the year of payment and is added back now. The other taxes in the account (₹18,000) are allowed.
4. Depreciation. Only depreciation under section 33 (formerly section 32), ₹42,000, is allowed; the ₹10,000 extra in the books is added back.
5. Life insurance premium. It is Mr. X's personal expense; he may claim it under section 123 (Schedule XV) in computing total income under the old regime, not as a business expense.
6. Payment to Mrs. X. The whole ₹1,50,000 is disallowed on the Assessing Officer's finding, under section 36(2), that the entire payment is excessive or unreasonable, since she lacks the qualification for the work (assumption 2).
7. Credits. Dividend and debenture interest are taxed under Income from other sources; the income-tax refund is a return of a tax not allowed earlier, so it is not income. Discount received (₹10,000) is a business receipt and stays. Audit fee, rates and rent, wages and other expenses are allowed in full.

The other reading

If only the excess over a reasonable amount were disallowed, the business income would be ₹4,18,333 less the amount found reasonable: for example, ₹3,58,333 if ₹60,000 a year were accepted as reasonable (₹90,000 disallowed), and ₹2,68,333 if the whole ₹1,50,000 were found reasonable (nothing disallowed). The question gives no such value, so the whole payment is disallowed above.