Mr. Prakash, a resident individual aged 64 years, is in the business of manufacturing tyres. He prepares his accounts on mercantile basis. His…

CA Intermediate · Taxation · PYQS · May 2026
Mr. Prakash, a resident individual aged 64 years, is in the business of manufacturing tyres. He prepares his accounts on mercantile basis. His Statement of Profit and Loss showed a net profit of 1,20,00,000 for the year ended 31st March 2026 after debiting or crediting the following items: Depreciation as per books -10,00,000Interest paid on loan taken from a scheduled bank to buy pollution control equipment (see point (iii) in additional information). Amount of loan - 8,52,000 @10% p.a. which was taken on 1st June 2025. Entire interest paid was debited to the Statement of Profit and Loss.Purchase of raw materials includes an amount of 1,00,000 towards purchases made from a micro-enterprise (as per section 15 of the Micro, small, Medium Enterprises Development Act, 2006). The purchase was made on 1st February 2026, but the payment was made on 20th July 2026 (within the due date of filing of return of income). There was no agreement as regards the payment terms with the seller.Interest of 2,50,000 (gross) on enhanced compensation on compulsory acquisition of his factory building by the Government based on a court order. However, he actually received the amount in his bank account on 20th May 2026. 50,000 given as the contribution through an account payee cheque for a brochure of a political party actively working in the vicinity of factory and registered u/s 29A of the Representation of the People Act, 1951. 2,00,000 received as dividend from Indian companies during the year and credited to P&L. Interest of 65,000 was incurred on loan taken to earn dividend income has been debited to Statement of Profit and Loss account. All dividends were below the ambit of TDS provisions. Additional information: He had taken a housing loan from a scheduled bank for purchase of a flat for self-occupation on 1st April 2025. Interest of 2,15,000 and principal repayment of loan of 1,10,000 is reflected in his bank statement. Municipal tax of 20,000 was paid during the year from his savings bank account.A new machinery costing - 50,00,000 (first machinery in the 15% block) was purchased on 1st September 2024. It was installed and put to use on 24th October 2024. He did not own any other depreciable asset on the date of the acquisition of this machine.He also imported an air pollution control equipment (falling under 15% block), which was previously used outside India by the seller, at a cost of 10,00,000 on 1st June 2025. For this purpose, he took a loan from a scheduled bank amounting to 8,52,000 at an interest rate of 10% p.a. on 1st June 2025. The equipment was delivered on 15th September 2025 and was put to use on 1st October 2025.During the Financial Year 2023-24, the Central Government compulsorily acquired factory building which had been used by him for manufacturing rubber products for the past five years. He received compensation of 20,00,000 on 15th March 2025 and deposited the whole amount in the Capital Gains Account Scheme within the due date of filing the return of income. The building was purchased by him for 5,08,052 on 1st April 2018. The written down value (WDV) of the building block as on 31st March 2023 was - 3,00,000. He has shifted the production to a leasehold building till the purchase of new factory building. On 1st April 2025, Mr. Prakash purchased a new factory building which is falling under 10% block at a cost of 15,00,000. CII for FY 2023-24: 348, FY 2025-26:376 You are required to compute the total income and tax liability of Mr. Prakash under both the regimes and suggest the one which is more beneficial to him for the AY 2026-27 assuming he has never opted for the default tax regime since the relevant assessment year.

Suggested Answer and Working Notes:

Computation of total income and tax liability of Mr. Prakash for A.Y. 2026-27 under default tax regime under section 115BAC Particulars ₹ ₹ I Income from house property Gross annual value Nil Less: Municipal tax paid [Not allowable in case of self-occupied property] — Net annual value Nil Less: Interest on loan [Not allowable under default tax regime] — II Profits and gains from business or profession Net profit as per Statement of Profit and Loss 1,20,00,000 Add: Items of expenditure not allowable while computing business income - Depreciation as per books 10,00,000 - Interest on loan for acquisition of pollution control equipment [Interest from the date on which loan was borrowed till the date on which asset was first put to use not allowable as deduction. Accordingly, interest of 28,400 [8,52,000 x 10% x 4/12] has to be added back, since the same is debited to the statement of profit and loss] 28,400 - Payment to a micro enterprise for purchase of raw material [Not allowable as per section 43B(h) since payment was made to a micro enterprise and the same was not made within 15 days.] 1,00,000 - Expenditure in brochure of a political party [Expenditure in a brochure of a political party is not allowable as deduction from business profits.] 50,000 - Interest on loan taken to earn dividend 65,000 12,43,400 1,32,43,400 Less: Items credited but not taxable or taxable under other heads - Interest on enhanced compensation on compulsory acquisition 2,50,000 - Dividend from Indian companies 2,00,000 4,50,000 1,27,93,400 Less: Depreciation as per the Income-tax Rules, 1962 - Depreciation on machinery purchased in 2024-25 [₹ 41,25,000 x 15%] 6,18,750 Actual cost on 24.10.2024 50,00,000 Less: Depreciation for P.Y. 2024-25 (50lakhs x 15% x 50% since put to use for less than 180 days in P.Y. 2024-25) 3,75,000 Less: Additional depreciation for P.Y. 2024-25 (50lakhs x 20% x 50%, since put to use for less than 180 days in P.Y. 2024-25) 5,00,000 WDV as on 1.4.2025 41,25,000 - Depreciation on air pollution control equipment [₹ 10,28,400 (10lakhs + interest of 28,400) x 15%] 1,54,260 - Depreciation on factory building [15lakhs x 10%] 1,50,000 - Balance additional depreciation on machinery purchased in 2024-25 [Not allowable under default tax regime] — - Additional depreciation on air pollution control equipment [Not allowable under default tax regime] — 9,23,010 1,18,70,390 III Capital Gains Long term capital gain on compulsory acquisition of factory building is not taxable in P.Y. 2025-26 since the compensation was received in P.Y. 2024-25 and taxable in P.Y. 2024-25 — IV Income from Other Sources - Interest on enhanced compensation [Taxable in the P.Y. 2026-27, being the year of receipt of interest] 2,50,000 - Dividend from Indian companies 2,00,000 Less: Interest on loan of 65,000 [allowed to the extent of 20%] 40,000 1,60,000 Gross Total Income 1,20,30,390 Less: Deduction under Chapter VI-A Deduction under section 80C [Not allowable under default tax regime] — Deduction under section 80GGC [Not allowable under default tax regime] — Total Income 1,20,30,390 Tax on 1,20,30,390 4,00,000 - 8,00,000 [4lakhs @5%] 20,000 8,00,000 - 12,00,000 [4lakhs @10%] 40,000 12,00,000 - 16,00,000 [4lakhs @15%] 60,000 16,00,000 - 20,00,000 [4lakhs @20%] 80,000 20,00,000 - 24,00,000 [4lakhs @25%] 1,00,000 24,00,000 - 1,20,30,390 [₹ 96,30,390 @30%] 28,89,117 31,89,117 Add: Surcharge @15% [Since total income exceeds 1crore but does not exceed 2crores] 4,78,368 36,67,485 Add: HEC@4% 1,46,699 Tax liability 38,14,184 Tax liability (Rounded off) 38,14,180 Computation of total income and tax liability of Mr. Prakash for A.Y. 2026-27 under the optional tax regime of the Income-tax Act, 1961 Particulars ₹ ₹ Total Income as per default tax regime u/s 115BAC 1,20,30,390 Less: Deduction under section 80C for principal repayment of loan to bank 1,10,000 Less: Deduction under section 80GGC [Not allowable in respect of expenditure in brochure of political party] — 1,10,000 1,19,20,390 Less: Balance additional depreciation on machinery purchased in 2024-25 5,00,000 Less: Additional depreciation on air pollution control equipment [Not allowable since it was previously used outside India] — Less: Interest on loan for self-occupied property [allowed to the extent of 2lakhs] [Loss from house property can be set off against business income or income from other sources] 2,00,000 7,00,000 Total Income as per optional tax regime 1,12,20,390 Tax on 1,12,20,390 3,00,000 - 5,00,000 [2lakhs @5%] 10,000 5,00,000 - 10,00,000 [5lakhs @20%] 1,00,000 10,00,000 - 1,12,20,390 [₹ 1,02,20,390 @30%] 30,66,117 31,76,117 Add: Surcharge @15% [Since total income exceeds 1crore but does not exceed 2crores] 4,76,418 36,52,535 Add: HEC@4% 1,46,101 Tax liability 37,98,636 Tax liability (Rounded off) 37,98,640 Since the tax liability of Mr. Prakash 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. 2026-27.

Topics: Paper 3A: Income Tax Laws

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