Worked Solution
✓ VerifiedNote: The question references a Profit & Loss account and specific additional information (amounts for stock, salaries, pension, interest, depreciation, etc.) that were not included in the prompt. The following answer presents the complete framework, legal treatment, and proforma that must be applied to those figures. Every adjustment required for a 15-mark question of this type is covered below.
Computation of Total Income of Mr. Kamal for AY 2025-26
(Resident and Ordinarily Resident, Age 58 — Old Regime, Section 44AB applies)
Step 1 — Income from Business & Profession (Section 28)
Start with Net Profit as per P&L Account and make the following adjustments:
Additions (Disallowances):
(a) Stock Valuation Adjustment (Section 145A of the Income-tax Act, 1961): Stock must be valued inclusive of tax, duty, cess, or fee paid. If the assessee has excluded taxes from closing stock valuation, the difference must be added back.
(b) Employer's Contribution to Pension/Recognised Provident Fund (Section 36(1)(iv) & 36(1)(iva)): Employer's contribution to a recognised provident fund is deductible only up to 12% of salary. Any contribution to an approved superannuation fund exceeding ₹1,50,000 per employee per annum is disallowed. The excess over permissible limits is added back.
(c) Interest on Personal Car Loan (Section 37(1)): Interest paid on a loan taken for a car used for personal purposes is a personal expenditure and is wholly disallowed. Only expenditure incurred exclusively for the purpose of business is deductible under Section 37(1).
(d) Depreciation as per Books: Book depreciation is added back entirely since it is replaced by Income-tax depreciation.
Deductions (Allowances):
(e) Depreciation as per Income-tax Rules (Section 32(1)(ii)): Written Down Value (WDV) method applies for all assets except power-generating units. The applicable block-wise rates as per Income-tax Rules must be applied.
(f) Additional Depreciation (Section 32(1)(iia)): Since Mr. Kamal is engaged in manufacturing of steel, additional depreciation of 20% of the actual cost of new plant & machinery (not second-hand, not office appliances, not road-transport vehicles) acquired and installed during the year is allowable. If used for less than 180 days in the year of acquisition, only 10% is allowed and the remaining 10% is allowed in the subsequent year.
(g) Loss of Scientific Research Asset (Section 35(1)(iv) read with Section 35(4)): Where a capital asset used solely for scientific research is sold, destroyed, or discarded, and the sale proceeds (if any) are less than the cost, the shortfall (i.e., WDV minus scrap value) is deductible as a revenue expenditure in the year of such event. If no sale proceeds arise, the full WDV is deductible. This is a specific deduction for an asset in respect of which no depreciation is separately claimed.
Income from Business & Profession = Net Profit ± Adjustments above
Step 2 — Capital Gains on Compulsory Acquisition of Industrial Land
Under Section 45(5) of the Income-tax Act, 1961, capital gains arising from the compulsory acquisition of a capital asset are chargeable in the previous year in which the compensation is first received. For land held for more than 24 months, it is a Long-Term Capital Asset.
Computation of LTCG:
Full Value of Consideration = Compensation received (as determined by government)
Less: Indexed Cost of Acquisition (using Cost Inflation Index for year of acquisition and year of transfer — FY 2024-25, CII = 363)
Less: Indexed Cost of Improvement (if any)
= Long-Term Capital Gain
Exemption under Section 54D: Since the land is an industrial land compulsorily acquired, and if Mr. Kamal has purchased another land and/or building for shifting or re-establishing the industrial undertaking within 3 years of the date of receipt of compensation, the capital gains to the extent reinvested are exempt under Section 54D. The exemption is the lower of (i) the capital gains or (ii) the cost of new land/building. Any unutilised amount must be deposited in CGAS before the due date of filing return.
Net Taxable LTCG = LTCG − Section 54D Exemption
Step 3 — Income from Other Sources: Interest on Enhanced Compensation
Under Section 56(2)(viii) of the Income-tax Act, 1961, interest received on enhanced compensation or on compensation upon compulsory acquisition is taxable under the head Income from Other Sources in the year of receipt.
A deduction of 50% of such interest is allowed under Section 57(iv), and no other deduction is permissible.
Taxable Interest = Interest received × 50%
Step 4 — Gross Total Income
GTI = Income from Business & Profession + Long-Term Capital Gains (net of Section 54D) + Income from Other Sources
Step 5 — Deductions under Chapter VI-A
No deduction under Chapter VI-A is available against long-term capital gains. Deductions such as Section 80C, 80D, etc. are available only against income other than LTCG taxable under special rates.
Total Income = GTI − Chapter VI-A Deductions
Step 6 — Computation of Tax Liability (Old Regime)
Mr. Kamal is 58 years old — he is not a Senior Citizen (threshold is 60 years). Standard slab rates apply:
- Up to ₹2,50,000: Nil
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
LTCG under Section 112 (indexed) is taxed at 20% with indexation (without slab benefit).
Add Surcharge: 10% if total income exceeds ₹50 lakhs; 15% if exceeds ₹1 crore; 25% if exceeds ₹2 crores; 37% if exceeds ₹5 crores (but capped at 15% for LTCG under Section 112).
Add Health & Education Cess: 4% on tax + surcharge.
Check Rebate under Section 87A: Applicable only if total income does not exceed ₹5,00,000 (old regime); rebate up to ₹12,500.
Final Tax Liability = Tax on Business Income (slab) + Tax on LTCG (20%) + Tax on IFOS (slab) − Rebate u/s 87A (if applicable) + Surcharge + HEC @ 4%
Write it like this
1The skeleton
- Open your answer with a labeled proforma header — write 'Computation of Total Income of Mr. Kamal for AY 2025-26' plus his status (ROR, 58 years, Old Regime, §44AB applicable) in the first 2 lines, because examiners allocate 1–2 marks just for correct identification of regime and residential status before your numbers even start.
- Start Business Income with 'Net Profit as per P&L' and work down in two columns (Add/Less) — never jump straight to adjusted figures; the examiner must see your starting point or the entire working looks fabricated and you lose follow-through marks.
- Cite the section alongside every single adjustment — §36(1)(iv) for PF, §37(1) for personal car interest, §32(1)(iia) for additional depreciation — because in a §44AB question the examiner is specifically checking whether you know the legal basis, not just the arithmetic.
- Treat LTCG under §45(5) as a separate head with a mini-proforma showing Full Value of Consideration → Indexed Cost → LTCG → §54D exemption in one clean block; mixing it into business income is an instant head-misclassification error that costs the entire capital gains sub-marks.
- Show §56(2)(viii) interest on enhanced compensation as a standalone line under IFOS, immediately followed by the 50% deduction under §57(iv) — if you forget to halve it you lose both the section mark and the computation mark in one shot.
- End with a structured tax computation table: slab tax on normal income + 20% on LTCG under §112 + surcharge check + 4% HEC, and explicitly state 'Mr. Kamal is 58 years — not a Senior Citizen, basic exemption ₹2,50,000' so the examiner doesn't have to guess your age logic.
2Examiner-rewarded phrases
3Common trap
The single biggest mark-killer here is treating the interest on enhanced compensation as part of capital gains and taxing it at 20% — it's a completely different head (IFOS under §56(2)(viii)) taxed at slab rates after the 50% deduction. Every year candidates conflate it with §45(5) and lose 3–4 marks in one go.