Mr. Niraj, a resident individual aged 55 years, is an interior designer. He had also started a business of publishing of books on interior designing…

CA Intermediate · Taxation · PYQS · January 2026
Mr. Niraj, a resident individual aged 55 years, is an interior designer. He had also started a business of publishing of books on interior designing on 1st April, 2022 for providing in depth knowledge to the builders and home buyers. His total turnover and gross receipt from the business and profession was 16 crore during the financial year 2024-25. The net profit as per the profit and loss account after debiting/crediting the following items was - 1.27 crore: (i) He purchased an annual publication on interior design from the local market for 8,500 on 10th May, 2024 and paid whole of the amount in cash. He claimed depreciation @40% on the publication. (ii) Employee benefit expenses include a provision for gratuity of 8 lakh made as per the actuarial report, out of which 2 lakh has been paid on 30th December 2024,3 lakh has been paid on 31st January, 2025 and 3 lakh has been paid on 30th April, 2025 before the due date of filing return of income. (iii) Depreciation includes - 50,000 charged on installation of solar lighting system on 10th November, 2024 at the factory premises which is used in the publishing of books on interior designing. The cost of installation was 4 lakh. He also received subsidy of 1 lakh from the Government of India for the installation of solar lighting system. Additional Information: (a) Mr. Niraj paid 20 lakh as tuition fees from his own sources, including 2 lakh as development fees, to a foreign university for his son's postgraduate course. He has also paid 4 lakh as interest on an education loan of 35 lakh taken during the financial year 2024-25 from a bank for MBA course pursued by his daughter. (b) Mr. Niraj by oversight did not record depreciation of 1,500 on designer equipment in the books of account and, considering the amount insignificant, decided not to claim it. (c) He had transferred - 50,000 to his wife, Mrs. Sunita, in financial year 2022-23 without any consideration. This amount was given by Mrs. Sunita as a loan to Mr. Samrat. Mrs. Sunita earned - 20,000 as interest during previous year 2023-24, which she also lent to Mr. Samrat. During the financial year 2024-25, Mrs. Sunita received interest at 20% p.a. on 70,000. (d) His 17-year old daughter received 5 lakh for acting in a mythological TV show. The total income of Mrs. Sunita is 25 lakh (computed). (e) He sold a large printing machine, the only asset in the block, which was originally acquired for 3 lakh on 2nd October 2022 and depreciated at 15% per annum. The machine was sold on 1st July 2024 for 2 lakh. (f) During the previous year, he recruited 5 new regular employees on 1st June 2024, each receiving a monthly salary of 20,000 and 10 new regular employees joined on 1st July 2024, each receiving a monthly salary of 26,000. All the salaries were paid to employees by an account payee cheque and they participate in recognised provident fund. (g) Royalty of 4.9 lakh was paid to Mr. Joy, a non-resident, on 30th June 2023 for the use of his brand 'Neo Home' without deduction of tax at source. The tax was subsequently deducted and paid in the financial year 2024-25. Compute the total income of Mr. Niraj and determine his tax liability for the assessment year 2025-26 under both the default tax regime and the optional tax regime. Also, advise Mr. Niraj which regime is more beneficial to him.

Suggested Answer and Working Notes:

Computation of total income and tax liability of Mr. Niraj for A.Y. 2025-26 under default tax regime under section 115BAC Particulars ₹ ₹ ₹ I Profits and gains from business or profession Net profit as per profit and loss account 1,27,00,000 Add: Items of expenditure not allowable while computing business income - Depreciation on books [Depreciation is allowed @40% on books since the payment made in cash is less than - 10,000.] - Provision for gratuity [Provision of 8lakhs for gratuity based on actuarial report is not allowable as deduction. However, actual gratuity of 5lakhs paid during the P.Y. 2024-25 is allowable as deduction. Hence, the difference of 3lakhs has to be added back.] 3,00,000 - Depreciation on solar lighting system 50,000 3,50,000 1,30,50,000 Less: 100% of royalty paid to non-resident [100% of 4.9 lakhs of royalty paid to non-resident during the P.Y. 2023-24 without deducting the tax would have been disallowed while computing business income for P.Y.2023-24. Since the tax has been deducted and deposited in P.Y.2024-25,4.9 lakhs would be allowable as deduction in the A.Y.2025-26 as per the proviso to section 40(a)(i)] 4,90,000 1,25,60,000 [Note – If it is assumed that the subsidy of 1lakh received from the Government mentioned in point (iii) has also been credited to the profit and loss account, the same has to be reduced while computing business income. In such case, total income and tax liability under default tax regime would be - 1,21,42,750 and - 39,86,060, respectively and total income and tax liability under optional tax regime would be - 1,17,12,750 and - 39,78,290, respectively.] Less: Depreciation as per the Income-tax Rules, 1962 Normal depreciation Depreciation on solar lighting system [3lakhs @40% x 50%, since it is put to use for less than 180 days] [Subsidy received from Government for the asset would not form part of actual cost of asset.] 60,000 Depreciation on designer equipment [Deduction for depreciation is compulsory] 1,500 61,500 Additional depreciation Additional depreciation on solar lighting system used at factory premises [Not allowable under default tax regime] - 1,24,98,500 II Capital Gains Short term capital gain on transfer of printing machine [Since the block cease to exist] Full value of consideration 2,00,000 Less: WDV as on 1.4.2024 1,65,750 34,250 Cost of machinery 3,00,000 Less: Depreciation for P.Y. 2022-23 @15% 45,000 Less: Additional depreciation for P.Y. 2022-23 @20% 60,000 WDV as on 1.4.2023 1,95,000 Less: Depreciation for P.Y. 2023-24 @15% 29,250 WDV as on 1.4.2024 1,65,750 III Income from Other Sources Interest on amount transferred to wife, Mrs. Sunita [₹ 50,000 x 20%] [As per section 64(1)(iv), interest on amount transferred to spouse is to be included in the total income of transferor. Income from the accretion of transferred asset is not to be clubbed in the income of transferor.] 10,000 Income of minor daughter for acting in mythological TV Show [Not to be clubbed since it is from her skills and talent] 10,000 Gross Total Income 1,25,42,750 Less: Deduction under Chapter VI-A Deduction under section 80E [Not allowable under default tax regime] - Deduction under section 80JJAA [₹ 20,000 x 10 x 5 x 30%] 3,00,000 3,00,000 Total Income 1,22,42,750 Tax on 1,22,42,750 3,00,000 - 7,00,000 [4lakhs @5%] 20,000 7,00,000 - 10,00,000 [3lakhs @10%] 30,000 10,00,000 - 12,00,000 [2lakhs @15%] 30,000 12,00,000 - 15,00,000 [3lakhs @20%] 60,000 15,00,000 - 1,22,42,750 [₹ 1,07,42,750 @30%] 32,22,825 33,62,825 Add: Surcharge @15% [Since total income exceeds 1crore but does not exceed 2crores] 5,04,424 38,67,249 Add: HEC@4% 1,54,690 Tax liability 40,21,939 Tax liability (Rounded off) 40,21,940 Computation of total income of Mr. Niraj for A.Y. 2025-26 under the optional tax regime Particulars ₹ ₹ Total Income as per default tax regime u/s 115BAC 1,22,42,750 Less: Deduction under section 80C for tuition fees [Not allowed since it is paid to a foreign university] - Less: Deduction under section 80E for interest on education loan for his daughter 4,00,000 4,00,000 1,18,42,750 Less: Additional depreciation on solar lighting system [3lakhs x 20% x 50% since it is put to use for less than 180 days] 30,000 Total Income as per optional tax regime 1,18,12,750 Tax on 1,18,12,750 2,50,000 - 5,00,000 [₹ 2.50 lakhs @5%] 12,500 5,00,000 - 10,00,000 [5lakhs @20%] 1,00,000 10,00,000 - 1,18,12,750 [₹ 1,08,12,750 @30%] 32,43,825 33,56,325 Add: Surcharge @15% [Since total income exceeds 1crore but does not exceed 2crores] 5,03,449 38,59,774 Add: HEC@4% 1,54,391 Tax liability 40,14,165 Tax liability (Rounded off) 40,14,170 AMT liability of Mr. Niraj would be - 26,80,070 (18.5% of 1,21,12,750 + surcharge @15% + HEC @4%) on adjusted total income of 1,21,12,750 (₹ 1,18,12,750 +3,00,000, being deduction u/s 80JJAA). Since the tax liability of Mr. Niraj under optional tax regime is lower than the tax liability computed under section 115BAC, it would be beneficial for him to opt out of the default tax regime under section 115BAC for A.Y. 2025-26.

Topics: Paper 3A: Income Tax Laws

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