Unit 10 Income-tax and Corporate Tax Planning PYQ’s 9 Sep 2026 Shift 2

The correct answer is: Rs. 1,20,000.

Under the Income Tax Act, 1961, specific provisions exist to prevent tax evasion through the transfer of assets to a spouse. When a husband gifts money to his wife and she invests it in her business, the income generated from such gifted capital is subject to clubbing provisions under Section 64(1)(iv), calculated in proportion to the gifted capital relative to the total capital as on the first day of the relevant previous year.

Key Points

• Determination of Capital for Assessment Year 2026-27:
  • The relevant Previous Year (PY) for Assessment Year (AY) 2026-27 is 2025-26.
  • According to the Income Tax Rules, for clubbing of business income, the ratio of capital must be taken as on the first day of the previous year (i.e., 01.04.2025).
• Calculation of Capital as on 01.04.2025:

• Proportion of Gifted Capital:
  • The amount gifted by Mr. A and invested in the business is Rs. 2,00,000.
  • Total capital as on the first day of the previous year (01.04.2025) = Rs. 6,50,000.
• Clubbing Calculation for PY 2025-26:
  • Profit earned during PY 2025-26 = Rs. 3,90,000.
  • Income to be clubbed = Profit × (Gifted Capital as on 01.04.2025 ÷ Total Capital as on 01.04.2025).
  • Income to be clubbed = 3,90,000 × (2,00,000 ÷ 6,50,000).
  • Income to be clubbed = 3,90,000 × (4 ÷ 13) = Rs. 1,20,000.

Additional Information

• Section 64(1)(iv): This section provides that if an individual transfers an asset (other than house property) to their spouse without adequate consideration, any income arising from such asset shall be included in the total income of the transferor.
• Accretion to Assets: It is a settled principle that only the income from the transferred asset is clubbed. Income generated from the accretions (like the profit of Rs. 1,50,000 earned by Mrs. A) is not clubbed in the hands of the transferor. This is why the denominator includes the previous year’s profit, but the numerator only includes the original gift.
• Timing of Investment: Since the gift was invested during the PY 2024-25, it did not form part of the capital on 01.04.2024. Therefore, no income was clubbed for the AY 2025-26. The clubbing starts from the year where the gifted amount exists in the capital at the commencement of the year.

The correct answer is: Rs. 2000.

Political parties in India are granted tax exemptions on their income under specific provisions of the Income Tax Act, provided they comply with transparency and reporting requirements regarding the donations they receive. These regulations are designed to curb the influence of black money in political funding and ensure accountability.

Key Points

• Section 13A of the Income Tax Act:
  • This section provides tax exemption to political parties on income from house property, other sources, capital gains, and voluntary contributions.
  • To avail of this exemption, the party must be registered under Section 29A of the Representation of the People Act, 1951.
• Cash Donation Limit:
  • As per the amendment introduced via the Finance Act 2017 (which remains the standard for subsequent assessment years including 2025), no political party can receive a donation exceeding Rs. 2,000 in cash from a single person.
  • Any donation above this threshold must be received via cheque, demand draft, electronic clearing system (ECS), or through electoral bonds (subject to prevailing legal status).
• Record Maintenance:
  • Political parties are required to maintain a record of each voluntary contribution in excess of Rs. 20,000, including the name and address of the donor.
  • However, the specific restriction on cash transactions is strictly capped at Rs. 2,000 to promote digital and traceable transactions.
• Audit Requirements:
  • The accounts of the political party must be audited by a Chartered Accountant to qualify for the exemption.

Additional Information

• Objective of the Limit:
  • The limit was reduced from Rs. 20,000 to Rs. 2,000 following recommendations from the Election Commission of India to enhance transparency in election funding.
• Submission of Reports:
  • Political parties must submit a report of donations to the Election Commission before the due date for filing income tax returns to claim the exemption under Section 13A.

The correct answer is ‘Not Ordinarily Resident’

The residential status of an individual in India is determined under Section 6 of the Income Tax Act, 1961. To determine the status for the Assessment Year (AY) 2026-27, we must evaluate the stay of the individual during the Previous Year (PY) 2025-26 and preceding years.

Key Points

• Step 1: Determining ‘Resident’ Status for PY 2025-26:
  • An individual is a Resident if they satisfy any one of the basic conditions:
    1. Stay in India during the relevant PY is 182 days or more.
    2. Stay in India during the relevant PY is 60 days or more AND 365 days or more during the 4 preceding PYs.
  • For X in PY 2025-26:
    • Stay in PY 2025-26 = 75 days (Satisfies the 60-day criteria).
    • Stay in 4 preceding years (2021-22 to 2024-25) = 130 + 80 + 13 + 210 = 433 days (Satisfies the 365-day criteria).
  • Since X satisfies the second basic condition, X is a Resident.
• Step 2: Determining ‘Ordinarily Resident’ (ROR) vs ‘Not Ordinarily Resident’ (RNOR):
  • A Resident becomes Resident and Ordinarily Resident (ROR) only if they satisfy BOTH additional conditions:
    1. Resident in India in at least 2 out of 10 preceding PYs.
    2. Stay in India for 730 days or more during the 7 preceding PYs.
  • Checking Condition 2 (7-year stay) for X:
    • Total stay from PY 2018-19 to PY 2024-25:

• Since 433 days is less than 730 days, X fails the second additional condition.

• As X fails one of the additional conditions, the status is Resident but Not Ordinarily Resident (RNOR).

Additional Information

• Non-Resident (NR): An individual who does not satisfy any of the basic conditions under Section 6(1).
• Deemed Resident: Under Section 6(1A), an Indian citizen with total income (other than foreign sources) exceeding 15 lakh rupees is deemed a resident if they are not liable to tax in any other country, regardless of days stayed. Such persons are always RNOR.
• Significance: An RNOR is generally not taxed in India on income that accrues or arises outside India, unless it is derived from a business controlled in or a profession set up in India.

The correct answer is: A-II, B-I, C-IV, D-III.

Key Points

Additional Information

• Winnings from Horse Races (Section 194BB):
  • Tax is deducted at a flat rate of 30% if the winnings exceed Rs. 10,000. Since Mr. S received Rs. 15,000, the 30% rate applies.
• Dividend Income (Section 194):
  • For a resident individual, TDS on dividend income is deducted at 10% if the total dividend paid by a company during a financial year exceeds Rs. 5,000.
• Non-furnishing of PAN (Section 206AA):
  • If the deductee does not furnish their Permanent Account Number (PAN) to the deductor, tax shall be deducted at the higher of the following rates: (i) Rate specified in the relevant provision of the Act; (ii) Rate or rates in force; or (iii) 20%.
• Insurance Commission (Section 194D):
  • TDS on insurance commission is deducted at 5% for individuals. However, under specific Finance Act amendments and depending on the status of the payee (like domestic companies), the rate can be 2%. In the context of this matching exercise, D-III is the only logical fit.

The Correct answer is: A, B and D only

Key Points

• Statement A: The property should consist of a building or land appurtenant thereto:
  • This statement is correct.
  • Under Section 22 of the Income Tax Act, the chargeability to tax under this head is restricted to ‘buildings’ or ‘lands appurtenant thereto’ (like gardens, garages, or parking spaces attached to the building).
  • Income from letting out vacant land (without a building) is generally taxed under ‘Income from Other Sources’ or ‘Profits and Gains of Business or Profession’.
• Statement B: It should not be used by the assessee for his business or profession:
  • This statement is correct.
  • If a property is used by the owner for the purpose of any business or profession carried on by him, the annual value of such property is not taxable under ‘Income from House Property’.
  • The rationale is that the notional rent or utility of such property is already accounted for in the business profits.
• Statement C: The property should be a mortgaged property:
  • This statement is incorrect.
  • Whether a property is mortgaged or free from encumbrances has no bearing on its taxability under this head.
  • A mortgage only affects the deduction of interest (under Section 24b) if the loan was taken for purchase, construction, repair, or renewal of the property.
• Statement D: The assessee should be the owner of the property:
  • This statement is correct.
  • The tax is levied on the owner (including ‘deemed owner’ under Section 27).
  • If a person is not the owner (e.g., a tenant sub-letting a property), the income derived is not taxed under ‘Income from House Property’ but under ‘Income from Other Sources’.

Additional Information

• Basis of Charge (Section 22):
  • The fundamental basis of charge is the Annual Value of the property. Even if the property is not actually let out, its inherent capacity to earn income is taxed (except for specified self-occupied properties).
• Deemed Ownership (Section 27):
  • In certain cases, the legal owner may not be the person taxed. For instance, an individual transferring property to a spouse (without adequate consideration) or a holder of an impartible estate is treated as the deemed owner for tax purposes.

The correct answer is: C, B, D, A, F, E.

Key Points

Under the Income Tax Act, 1961, specifically while computing ‘Profits and Gains of Business or Profession’, there is a specific priority order for the set-off of current and brought forward losses and allowances against the business profits of the current year. The sequence is as follows:

• Current Year Depreciation (C): This is the first item to be deducted from the current year’s gross business income.
• Current Year Capital Expenditure on Scientific Research (B): Allowed under Section 35, this expenditure (to the extent allowed) is set off after current year depreciation.
• Brought Forward Business Loss (D): Under Section 72, business losses carried forward from previous years are set off next, provided the business is still carried on. These can be carried forward for a maximum of 8 assessment years.
• Unabsorbed Depreciation (A): Under Section 32(2), if the profits are insufficient to cover depreciation, it becomes unabsorbed and can be carried forward indefinitely. It is set off after brought forward business losses.
• Unabsorbed Capital Expenditure on Scientific Research (F): This follows the same treatment as unabsorbed depreciation and is set off after it.
• Unabsorbed Capital Expenditure on Family Planning (E): This is the final item in the priority list for set-off against business profits.

Additional Information

• Priority Logic: The logic behind this order is that Brought Forward Business Losses have a time limit of 8 years for set-off, whereas Unabsorbed Depreciation and Scientific Research Expenditure can be carried forward indefinitely. Therefore, the law allows the taxpayer to exhaust the time-bound losses (Business Loss) before the perpetual ones (Unabsorbed Depreciation).
• Section 32(2): Deals with the carry forward and set-off of unabsorbed depreciation. It is deemed to be part of the depreciation allowance for the succeeding year.
• Section 72: Governs the carry forward and set-off of business losses other than speculation losses.

The Correct answer is: A, C and D only

Key Points

• Price Applied in a Transaction (Statement A):
  • This statement is correct.
  • The Arm’s Length Price (ALP) is fundamentally the price that is or would be charged for a specific transaction involving the transfer of goods, services, or intangible property.
  • Without a transaction, the concept of a transfer price or an arm’s length price cannot be applied.
• Transaction between Related Persons (Statement B):
  • This statement is incorrect as a condition to constitute ALP.
  • While ALP is used to evaluate transactions between related persons (associated enterprises), the price itself is defined by what unrelated parties would do.
  • Transactions between related persons are often subject to controlled conditions, which ALP seeks to adjust or verify against market standards.
• Uncontrolled Conditions (Statement C):
  • This statement is correct.
  • The Arm’s Length Principle states that the price should be the same as if the parties were acting under uncontrolled conditions.
  • Uncontrolled conditions refer to a setting where the parties are independent and act in their own best interest, free from the influence of a common parent company or relationship.
• Transaction between Unrelated Persons (Statement D):
  • This statement is correct.
  • By definition, the Arm’s Length Price is the price that is paid in a comparable transaction between unrelated (independent) parties.
  • It serves as the benchmark to ensure that tax liabilities are not shifted between jurisdictions through artificial pricing.
• Controlled Conditions (Statement E):
  • This statement is incorrect.
  • Controlled conditions exist when the parties to a transaction are related. ALP is specifically designed to replace or adjust prices set under controlled conditions with those that would prevail under uncontrolled market conditions.

Additional Information

• Arm’s Length Principle (ALP):
  • The ALP is the international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes.
  • It is based on the comparability analysis, where a controlled transaction is compared to an uncontrolled transaction to see if the conditions are similar.
• Methods to Determine ALP:
  • Common methods include the Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), and Transactional Net Margin Method (TNMM).
  • These methods aim to find the most reliable market-based price to prevent tax evasion through transfer pricing.

The correct answer is: A-III, B-IV, C-II, D-I.

Key Points

Additional Information

• Brought forward loss of a firm succeeded by another firm: Under Section 78 of the Income Tax Act, when a change occurs in the constitution of a firm (succession), the firm is not entitled to carry forward so much of the loss as is attributable to the share of a retired or deceased partner. In cases of succession of one firm by another (except by inheritance), the successor firm cannot carry forward the losses of the predecessor firm. Hence, the time limit is None.
• Long-term Capital Loss: According to Section 74, if a long-term capital loss cannot be fully set off in the current assessment year, it can be carried forward for 8 assessment years immediately succeeding the assessment year in which the loss was first computed. It can only be set off against long-term capital gains.
• Speculation Loss: As per Section 73, losses incurred in a speculation business can only be set off against profits from another speculation business. Such losses can be carried forward for a maximum of 4 assessment years.
• Loss from specified business: Under Section 35AD, certain businesses (like cold chain facilities, warehouses for agricultural produce, etc.) are categorized as specified businesses. Any loss from such businesses can be carried forward for an unlimited period until it is fully set off against profits from any specified business.
• Unabsorbed Depreciation: Similar to losses from specified businesses, unabsorbed depreciation can also be carried forward for an unlimited period and can be set off against any head of income (except salary).

The correct answer is ‘Business Loss of Rs. 10,000 only’

Under the Income Tax Act, 1961, the provisions for Set-off and Carry Forward of Losses allow an assessee to adjust losses from one source against income from another source or head, subject to specific restrictions and conditions.

Key Points

• Inter-head Set-off (Section 71):
  • If an assessee incurs a loss under any head of income (other than Capital Gains), they are entitled to set off such loss against income from any other head in the same Assessment Year.
  • In this case, the Business Loss of Rs. 1,20,000 can be set off against the Income from House Property of Rs. 1,10,000.
• Calculation of Unabsorbed Loss:
  • Total Business Loss = Rs. 1,20,000
  • Income from House Property = Rs. 1,10,000
  • Loss set off in current year = Rs. 1,10,000
  • Remaining Unabsorbed Business Loss = Rs. 1,20,000 – Rs. 1,10,000 = Rs. 10,000.
• Carry Forward of Business Loss (Section 72):
  • If a business loss cannot be fully set off in the current year due to insufficient income under other heads, the remaining balance is carried forward to subsequent years.
  • Therefore, the assessee can carry forward the remaining Business Loss of Rs. 10,000.

Additional Information

• Time Limit for Carry Forward: A non-speculative business loss can be carried forward for a maximum of 8 Assessment Years immediately succeeding the assessment year in which the loss was first computed.
• Condition for Carry Forward: To carry forward the business loss, the return of income must be filed on or before the due date prescribed under Section 139(1).
• Future Set-off: Once a business loss is carried forward, it can only be set off against Profits and Gains of Business or Profession in future years; it cannot be set off against any other head of income in subsequent years.

The correct answer is – Rs. 11.92 crore

Key Points

• Nature of Capital Gain
  • The house was purchased on 01.11.2023 and sold on 16.07.2025.
  • The holding period is less than 24 months; therefore, it is treated as a Short-Term Capital Asset.
  • The gain is taxable as Short-Term Capital Gain (STCG).
• Computation of Short-Term Capital Gain
  • Sale consideration: ₹14 crore
  • Less: Transfer expenses
    • Commission = 2% of ₹14 crore = ₹28 lakh
  • Net sale consideration: ₹14 crore – ₹0.28 crore = ₹13.72 crore
  • Less: Cost of acquisition: ₹1.80 crore
  • Taxable Short-Term Capital Gain = ₹13.72 crore – ₹1.80 crore = ₹11.92 crore
• Investment in New House
  • The investment of ₹12 crore in a new house does not provide exemption because Section 54 exemption is available only for Long-Term Capital Gain.
  • Since the asset is a short-term capital asset, the entire gain remains taxable.

Additional Information

• Cost Inflation Index (CII) and Fair Market Value
  • The market value as on 01.04.2001 is not considered because the property was purchased by X in 2023.
  • Fair market value as on 01.04.2001 is relevant only for assets acquired before that date.
• Section 54 Exemption
  • Available when an individual transfers a long-term residential house property and invests the capital gain in another residential house.
  • It does not apply to short-term capital gains.
• Capital Gain Classification
  • Residential house held for more than 24 months: Long-Term Capital Asset.
  • Residential house held for 24 months or less: Short-Term Capital Asset.