Tax Law MCQs for Judiciary, Page 2

Correct answer: D. Section 234B applies: interest at 1% per month simple interest from April 1 of the assessment year to the date of payment of tax on the shortfall (assessed tax minus advance tax paid, if advance tax paid is less than 90% of assessed tax); Section 234C may also apply for deferment of specific instalments - failing to pay 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15 each attracts 1% per month for 3 months (1 month for the last instalment)

Advance tax provisions (Sections 207-211) require taxpayers whose estimated tax liability exceeds Rs 10,000 to pay advance tax in instalments. Failure to do so attracts two separate interest provisions: Section 234B: applies when the total advance tax paid during the year is less than 90% of the 'assessed tax' (total tax liability as finally assessed, minus TDS). Interest is charged at 1% per month (or part of month) simple interest from April 1 of the assessment year to the date of actual payment. Even if the assessee pays the full tax before filing the return (say in July), they will have incurred Section 234B interest for April, May, June, July - 4 months on the shortfall. Section 234C: applies for each instalment shortfall during the year - if the assessee fails to pay 15% by June 15, 45% by September 15, 75% by December 15, interest at 1% per month applies on the shortfall for 3 months for each of these instalments (1 month for the March instalment). Section 234A: applies for late filing of the return - 1% per month from the due date of filing to the actual filing date on the assessed tax minus advance tax/TDS. These interest provisions are mandatory and cannot be waived.

Source note: Sections 207-211, 234B, 234C, Income Tax Act 1961

Correct answer: D. Commissioner of Income Tax (Appeals) [cit(A)] → Income Tax Appellate Tribunal [itat] → High Court (substantial questions of law only, Section 260A) → Supreme Court; the itat is the final fact-finding body and its factual findings cannot be re-examined by the High Court or Supreme Court

The income tax appellate structure provides for multiple tiers of review. First appeal: CIT(A) under Section 246A - the taxpayer can appeal assessment orders, penalty orders, and certain other orders to the Commissioner of Income Tax (Appeals); the CIT(A) has full power to confirm, vary, or reverse the AO's decision; from AY 2023-24, Faceless Appeals are the norm under Section 250. Second appeal: ITAT under Section 253 - appeal from the CIT(A)'s order; the Tribunal can be constituted with one member (for small cases) or two members (Accountant Member + Judicial Member); special benches of three members can be constituted for important questions; ITAT decisions are binding on lower authorities and are the final fact-finding forum. Third tier: High Court under Section 260A - only on 'substantial questions of law', not re-examination of facts; the order of the High Court is binding on authorities within its jurisdiction. Final tier: Supreme Court under Section 261 or Article 136. Rectification under Section 154 is also available for correction of mistakes apparent from the record at all levels.

Source note: Sections 246A, 250, 253, 260A, 261, Income Tax Act 1961

Correct answer: A. Section 43B specifies categories of expenses (including taxes, duties, cess, employee's contribution to pf/esi/labour welfare funds, bonus, commission, interest on loans from financial institutions, and leave encashment) that are deductible only in the year in which they are actually paid, regardless of the year in which the liability was incurred; if the employer accrues these liabilities but pays them after the due date of filing returns, the deduction is denied for that year and allowed only in the year of actual payment

Section 43B of the Income Tax Act, 1961 is an important anti-avoidance provision for business income computation. It operates as an exception to the normal accrual-basis accounting for business income: specific categories of liabilities can only be deducted when they are actually paid, even if they have been accrued or charged in the profit and loss account in an earlier year. The categories covered include: (a) taxes, duties, cess, levies (if paid before due date of filing); (b) employer's contributions to PF, ESI, gratuity fund, and other welfare funds; (c) bonus and commission to employees; (d) interest on loans from public financial institutions, state financial corporations, or scheduled banks; (e) leave encashment; (f) sum payable to Indian Railways for use of railway assets. A proviso (inserted to benefit small businesses) allows deduction on payment made before the due date of filing the return of income. Section 43B was a significant legislative response to the practice of companies accruing large liabilities (especially PF, ESI, and tax dues) in the accounts to reduce taxable income without actually paying them.

Source note: Section 43B, Income Tax Act 1961

Correct answer: C. The expenditure must not be capital in nature; it must be laid out or expended wholly and exclusively for the purposes of the business or profession.

Section 37(1) of the Income Tax Act, 1961 provides that any expenditure (not being expenditure of the nature described in Sections 30-36 and not being capital expenditure or personal expenses) 'laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession.' The three conditions for Section 37(1) deduction are: (1) Not capital expenditure - if it creates an enduring benefit or asset, it is capital and cannot be deducted under Section 37(1) (though it may be eligible for depreciation under Section 32); (2) Not a personal expense - the expenditure must be for the business, not for the assessee's personal benefit; (3) Wholly and exclusively for business purposes - there must be a direct nexus between the expenditure and the business; if an expenditure has a mixed purpose (part business, part personal), it cannot be deducted. The Explanation to Section 37(1) (inserted by Finance Act 2014) clarifies that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business.

Source note: Section 37(1), Income Tax Act 1961

Correct answer: B. Any payment or aggregate of payments made to a single person in a single day for a business expenditure exceeds Rs 10,000 in cash (i.e., otherwise than by account payee cheque, account payee demand draft, or electronic clearing system through a bank account); the limit is Rs 35,000 for payments to transporters; the purpose is to promote digital payments and create an audit trail for business expenditures

Section 40A(3) of the Income Tax Act, 1961 is an anti-avoidance provision aimed at discouraging cash transactions in business and creating a traceable audit trail. The section disallows a deduction for business expenditure where payment (or aggregate of payments on a single day to a single person) exceeds Rs 10,000 and is made otherwise than by account payee cheque, account payee demand draft, or electronic clearing system (ECS). For payments to transporters of goods, the limit is Rs 35,000. Rule 6DD of the Income Tax Rules provides certain exceptions - for example, payments to agricultural produce cultivators, payments in areas where banking facilities are not available, and certain government-notified situations. The CBDT has also clarified that payments through NEFT, RTGS, UPI, and other electronic modes qualify as acceptable modes for Section 40A(3) purposes. The section was significantly tightened over the years: the pre-demonetisation limit was Rs 20,000; it was reduced to Rs 10,000 from FY 2017-18. Section 40A(3A) provides that where the expenditure was deducted in an earlier year and the payment is subsequently made in cash, the cash payment amount is deemed profit in the year of payment.

Source note: Section 40A(3), Income Tax Act 1961; Rule 6DD, Income Tax Rules 1962

Correct answer: B. Even if a business is carried on only for a part of the previous year (for example, a business started in December or a business discontinued in June), the profits from that period are taxable in the assessment year; the phrase prevents taxpayers from avoiding tax by carrying on business for a short period and arguing the income was not earned 'during the year'

The phrase 'at any time during the previous year' in Section 28(i) of the Income Tax Act, 1961 ensures comprehensive coverage of business income regardless of when in the year the business is conducted. Whether a business operates for the full year, is started mid-year, or is discontinued during the year, the profits arising from the period of operation are fully taxable in the assessment year. There is no prorating requirement - the taxable income is whatever profits were earned during the period of operation, assessed as the income of the previous year. This principle prevents tax avoidance through deliberate structuring of business durations. For discontinued businesses, Section 176 provides for provisional assessment of income in the year of discontinuation if the Assessing Officer believes recovery of tax may be delayed. The phrase also captures seasonal businesses, project-based businesses, and any other business with irregular operational periods.

Source note: Section 28(i), Income Tax Act 1961

Correct answer: D. Capital receipts not chargeable to income tax under business income; the damages were compensation for delay in the coming into existence of a capital asset (the cement plant), not compensation for business operations; as capital receipts, they were not taxable in the absence of a specific charging provision - Section 28(ii)(e) was subsequently enacted to cover such receipts

In CIT v. Saurashtra Cement Ltd. (SC, 2010), the Supreme Court addressed whether liquidated damages received for delay in delivery of a cement plant were taxable. The court applied the capital/revenue distinction: the damages were paid because the profit-making apparatus (the cement plant) was delayed in coming into existence. Since the receipt was on account of loss of potential from a capital asset (not from normal business operations), the court held it was a capital receipt. Capital receipts were generally not taxable under business income unless specifically brought within Section 28. This created a significant tax planning opportunity: business entities could receive compensation on business contract modifications or terminations and characterise them as capital receipts to escape taxation. The Finance Act 2014 addressed this by inserting Section 28(ii)(e), which specifically charges to business income any compensation received 'at or in connection with the termination or the modification of the terms and conditions of any contract relating to his business.' This amendment overrides the capital receipt argument for such compensation, making it taxable regardless of the capital-revenue characterisation.

Source note: Section 28(ii)(e), Income Tax Act 1961; CIT v. Saurashtra Cement Ltd. (SC, 2010)

Correct answer: D. Professionals specified in Section 44AA(1) (including legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration professions, and other notified professions) must maintain prescribed books if: (i) their gross receipts in any one of the three immediately preceding years exceeded Rs 1.5 lakhs; or (ii) they are newly setting up a profession and their likely gross receipts in the first year will exceed Rs 1.5 lakhs; for businesses (non-professionals), different thresholds apply

Section 44AA of the Income Tax Act, 1961 imposes an obligation to maintain books of account and prescribes different requirements for different categories of assessees. For persons carrying on 'specified professions' listed in Section 44AA(1) (which includes legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and such other professions as may be prescribed), books must be maintained if gross receipts in any of the three immediately preceding years exceeded Rs 1.5 lakhs. For persons carrying on non-specified professions or business (not covered by Section 44AA(1)), books must be maintained if income from business/profession exceeds Rs 1.2 lakhs or total sales/turnover exceeds Rs 10 lakhs in any of the three preceding years. Additional requirements: prescribed books (like cash book, journal, ledger) must be maintained at the place of business/profession; they must be maintained for a minimum of 6 years from the end of the relevant assessment year. Assessees opting for presumptive taxation under Sections 44AD or 44ADA are exempt from the Section 44AA requirement as long as they stay within the presumptive scheme.

Source note: Section 44AA, Income Tax Act 1961

Correct answer: C. Is an 'impermissible avoidance arrangement' - one that creates rights or obligations that are not normally created between parties dealing at arm's length, lacks commercial substance (the main purpose is to obtain a tax benefit), is carried out in a manner not normally employed for bona fide purposes, or misuses the provisions of the it Act; the tax authorities may re-characterise or disregard the arrangement and determine the tax consequences as if the arrangement had not been entered into

Chapter X-A (Sections 95-102) of the Income Tax Act, 1961, which came into force from Assessment Year 2018-19, codifies the General Anti-Avoidance Rule (GAAR). An 'impermissible avoidance arrangement' is defined in Section 96 as an arrangement whose main purpose is to obtain a tax benefit, and which creates rights and obligations that are not normally created between parties dealing at arm's length; lacks commercial substance (Section 97: factual or economic effect but not legal effect corresponds to tax benefit); is entered into or carried out in a manner that would not normally be employed for bona fide purposes; or misuses or abuses the provisions of the IT Act. If GAAR applies, the Assessing Officer may: disregard, combine, or re-characterise the steps of the arrangement; ignore the legal form and look at the substance; deny the tax benefit; and determine the tax liability as if the arrangement had not been entered into. The GAAR threshold requires that the tax benefit in an arrangement exceeds Rs 3 crores (Section 102(10)). The provisions are not intended to apply to arrangements that represent legitimate tax planning with genuine commercial substance.

Source note: Sections 95-102, Income Tax Act 1961

Correct answer: C. The Finance Act 2021 amended Section 32 to exclude goodwill from the definition of 'block of assets' and from depreciable assets; goodwill is no longer eligible for depreciation under Section 32 with effect from Assessment Year 2021-22; goodwill of a business or profession is explicitly excluded from intangible assets eligible for depreciation

In Smifs Securities Ltd. v. CIT (SC, 2012), the Supreme Court held that goodwill constitutes a 'business or commercial right' and thus qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii), which covers 'patents, copyrights, trademarks, licences, franchises, or any other business or commercial right of similar nature.' This created a significant tax benefit: when businesses were acquired in mergers or acquisitions, the excess purchase price allocated to goodwill could be depreciated at 25% per annum on WDV basis, substantially reducing tax liability. The Finance Act 2021 reversed this position with effect from AY 2021-22: it explicitly amended Section 32 to state that no depreciation shall be allowed in respect of goodwill of a business or profession; it also removed goodwill from the definition of 'block of assets.' This amendment reflects the government's view that goodwill has an indeterminate useful life, does not deteriorate, and was being used primarily for tax arbitrage in business acquisitions rather than for any genuine economic reason. The change was applied prospectively from AY 2021-22.

Source note: Finance Act 2021; Section 32, Income Tax Act 1961; Smifs Securities Ltd. v. CIT (SC, 2012)

Correct answer: C. Tax has not been deducted at source (tds) on the payment (or if deducted, has not been deposited with the government); the deduction is denied in the year in which the liability is incurred; once the tds is deducted and deposited in a subsequent year, the deduction is allowed in that subsequent year

Section 40(a)(i) of the Income Tax Act, 1961 provides that any sum paid or payable to a non-resident that is chargeable to tax in India is not deductible as a business expense if tax has not been deducted at source under Chapter XVII-B. The provision operates as an enforcement mechanism for TDS compliance: if an Indian company pays royalties, fees for technical services, or other amounts to a non-resident without deducting TDS (Chapter XVII-B obligations), the payment is disallowed as a business deduction. The disallowance is reversed in the year in which the TDS is actually deducted and deposited. The provision is linked to Section 201(1) (treatment of persons failing to deduct tax). Section 40(a)(ia) has a parallel provision for domestic payments (to residents): if TDS is not deducted or deposited, 30% of the payment is disallowed (not 100%). The Finance Act 2014 reduced the disallowance for domestic TDS defaults from 100% to 30% for Section 40(a)(ia), aligning the treatment with the practical reality that most domestic businesses make payments to residents and 100% disallowance was considered excessive.

Source note: Section 40(a), Income Tax Act 1961

Correct answer: D. Business with total turnover exceeding Rs 1 crore (or Rs 10 crores where 95% or more of transactions are digital) must get a tax audit under Section 44AB(a); professionals with gross receipts exceeding Rs 50 lakhs must get a tax audit under Section 44AB(b); persons declaring lower-than-presumptive income under Sections 44AD, 44AE, etc.

Section 44AB of the Income Tax Act, 1961 mandates a tax audit by a Chartered Accountant for: (a) Business: when total sales, turnover, or gross receipts in business exceed Rs 1 crore in the previous year; however, the limit is enhanced to Rs 10 crores if 95% or more of all transactions (both payments and receipts) are conducted through digital modes or account payee cheques - this incentive for digitisation was introduced by Finance Act 2021; (b) Profession: when gross receipts in profession exceed Rs 50 lakhs; (c) Persons opting out of presumptive taxation or declaring less income than the presumptive rates under Sections 44AD, 44AE, 44ADA; (d) Persons with business loss who seek to carry it forward but total income exceeds the basic exemption limit. The tax audit under Section 44AB is separate from the statutory audit under the Companies Act. The Chartered Accountant provides a report in Form 3CA/3CB and Form 3CD, which must be filed by the prescribed due date (typically October 31 of the assessment year). Penalty for failure to get a tax audit (Section 271B) is 0.5% of total sales/turnover/gross receipts or Rs 1.5 lakhs, whichever is less.

Source note: Section 44AB, Income Tax Act 1961

Correct answer: A. Section 44AD applies to eligible businesses (not professions; not businesses like transportation, agency, or plying hiring of goods carriages covered by other sections) with total turnover not exceeding Rs 3 crores in the financial year; income is presumed to be 8% of total turnover (or 6% for turnover received through digital modes); the assessee is exempt from maintaining books of account and from tax audit under Section 44AB if they opt in; they can declare lower income but then must maintain books and get a tax audit

Section 44AD of the Income Tax Act, 1961 was introduced to reduce compliance burden for small businesses. Key features: (a) Eligible assessee: an individual, HUF, or partnership firm (not a company or LLP) engaged in any business except those specifically excluded (plying/hiring/leasing goods carriages under Section 44AE, certain agency businesses, businesses earning commission/brokerage); (b) Turnover limit: total turnover or gross receipts not exceeding Rs 3 crores (enhanced from Rs 2 crores for digital-heavy transactions by Finance Act 2023); (c) Presumptive income: 8% of total turnover or gross receipts (reduced to 6% for the portion received by account payee cheque, digital payment modes, or bank transfer); (d) The assessee is exempt from maintaining books of account under Section 44AA and from tax audit under Section 44AB; (e) An assessee can choose not to apply Section 44AD (declaring lower income), but must then maintain books and get a tax audit; (f) Once the assessee declares income under Section 44AD, opting out in subsequent years triggers a requirement to maintain books for 5 years. Section 44ADA applies similarly to professionals with receipts up to Rs 75 lakhs at 50% presumptive income rate.

Source note: Section 44AD, Income Tax Act 1961

Correct answer: B. Only against speculative business income (not against non-speculative business income or any other head); a speculative business is treated as a separate business for set-off purposes.

Section 43(5) of the Income Tax Act, 1961 defines a 'speculative transaction' as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer. Losses from a speculative business are subject to a more restricted set-off regime: (a) Current year: speculative business loss can only be set off against speculative business income in the same year (Section 73); it cannot be set off against non-speculative business income, salary, house property income, capital gains, or other sources; (b) Carry forward: if unable to be set off in the current year, speculative losses are carried forward for only 4 assessment years (as opposed to 8 years for non-speculative business losses); and (c) Future set-off: carried-forward speculative losses can only be set off against speculative business income, not against regular business income or any other head. The rationale for the restricted treatment is that speculation is treated as a separate, distinct activity from genuine business, and losses from speculation should not be allowed to shield genuine business profits from tax. This restriction applies particularly to intraday trading in shares (which is speculative by definition under Section 43(5)).

Source note: Sections 43(5), 73, Income Tax Act 1961

Correct answer: A. International transactions between associated enterprises (related parties) where any one of the parties is a non-resident or a permanent establishment in India; the arm's length principle applies - the consideration for the international transaction must be computed having regard to what independent parties dealing at arm's length would have agreed

Transfer pricing provisions under Sections 92 to 92F of the Income Tax Act, 1961, implemented in line with OECD Transfer Pricing Guidelines, regulate pricing of international transactions between related parties (associated enterprises). The core principle is the arm's length standard: the price or profit from an international transaction between associated enterprises must reflect what unrelated enterprises dealing at arm's length would have agreed under similar conditions. Key features: (a) International transactions: transactions between an enterprise and its associated enterprise (as defined in Section 92A) where at least one party is a non-resident; (b) Associated enterprises: two entities are associated if one directly or indirectly participates in the management, control, or capital of the other (Section 92A); (c) Methods: Transfer Pricing Officers (TPOs) use prescribed methods (CUP, RPM, cost plus, profit split, TNMM) to determine arm's length prices; (d) APAs: Advance Pricing Agreements (Sections 92CC, 92CD) allow taxpayers to agree transfer pricing methodology in advance with the CBDT; (e) Specified Domestic Transactions (Section 92BA): certain high-value domestic transactions between related parties are also subject to transfer pricing if the aggregate value exceeds Rs 20 crores. Transfer pricing adjustments have been a major source of tax disputes in India involving multinational companies.

Source note: Sections 92-92F, Income Tax Act 1961

Correct answer: B. 30% without any deduction except for the cost of acquisition; losses from one vda cannot be set off against income from another vda or any other income.

Section 115BBH of the Income Tax Act, 1961 (inserted by Finance Act 2022, effective from AY 2023-24) specifically addresses income from transfer of Virtual Digital Assets (VDAs), defined in Section 2(47A) as any information, code, number, or token generated through cryptographic means or otherwise with a particular type of economic value. The key features of the VDA taxation regime: (a) Flat tax rate of 30% on income from transfer of any VDA; (b) No deduction for any expenditure except the cost of acquisition of the VDA; general business expenses, interest on loans taken to buy VDAs, etc. are not deductible; (c) No set-off of losses from one VDA against profits from another VDA (unlike business losses which can be set off against other business income); (d) No carry forward of VDA losses; (e) TDS at 1% under Section 194S on payments on transfer of VDA above specified thresholds (implemented from July 2022). The strict regime was introduced partly to discourage speculation in crypto assets and partly for revenue purposes. The pre-2022 treatment was uncertain; in Raunaq Prakash Jain v. ITO (2024), a court addressed pre-VDA regime crypto gains, holding that they were taxable as capital gains.

Source note: Sections 115BBH, 2(47A), Income Tax Act 1961; Finance Act 2022

Correct answer: A. If the actual consideration received or accruing from the transfer of land or building is less than the stamp duty value (the value adopted or assessed by the stamp duty authority for the purpose of payment of stamp duty), then the stamp duty value is deemed to be the full value of consideration for computing capital gains; this prevents underreporting of sale prices in property transactions

Section 50C of the Income Tax Act, 1961 is a significant anti-avoidance provision targeting the common practice of underreporting property transaction values (black money component). When an assessee transfers land or building or both, and the actual consideration received is less than the stamp duty value (the value adopted or assessed by the stamp duty authority - such as the circle rate/ready reckoner rate), Section 50C deems the stamp duty value to be the full value of consideration for computing capital gains. This prevents sellers from declaring a low price for white money tax purposes while accepting a larger undisclosed (black money) portion. Key protections for genuine cases where market value may be lower than circle rate: (a) The assessee can challenge the stamp duty value by claiming the fair market value on the date of transfer is lower, in which case the AO must refer the matter to a Valuation Officer (Section 50C(2)); (b) Finance Act 2020 introduced a tolerance band of 10%: if the stamp duty value does not exceed 110% of the actual consideration, the actual consideration is accepted (not 50C deemed value). There is a corresponding provision under Section 56(2)(x) for the buyer - if the buyer acquires property at below stamp duty value, the difference is taxed as income in the buyer's hands.

Source note: Section 50C, Income Tax Act 1961

Correct answer: D. Rs 350 per share (Rs 500 - Rs 150): under Section 112A, the grandfather protection uses the higher of actual cost (Rs 100) or fmv on January 31, 2018 (Rs 150) as the cost of acquisition, subject to being capped at the actual sale price; cost = Rs 150; ltcg = Rs 500 - Rs 150 = Rs 350 per share

This question applies the grandfather provision under Section 112A of the Income Tax Act, 1961 for computing LTCG on listed equity shares acquired before February 1, 2018. The grandfather provision: the cost of acquisition for shares held as on January 31, 2018 is the higher of: (a) actual cost of acquisition (Rs 100); and (b) FMV on January 31, 2018 (Rs 150) - but this FMV-based cost is capped at the actual sale price. Since FMV (Rs 150) > actual cost (Rs 100), the cost of acquisition is Rs 150. LTCG per share = Sale price (Rs 500) - Cost of acquisition (Rs 150) = Rs 350. LTCG per share is Rs 350. Total LTCG = Rs 3,50,000. Under Section 112A, the first Rs 1.25 lakh (from Budget 2024, previously Rs 1 lakh) of LTCG is exempt. Taxable LTCG = Rs 3,50,000 - Rs 1,25,000 = Rs 2,25,000. Tax = 12.5% of Rs 2,25,000 = Rs 28,125 (plus applicable health and education cess). There is no indexation benefit for Section 112A gains.

Source note: Section 112A, Income Tax Act 1961; Finance Act 2018

Correct answer: A. The cost for which the previous owner acquired the asset (or the fair market value on April 1, 2001 if the asset was acquired before that date) - this is the 'step-up' or 'hold-over' basis; the recipient inherits the previous owner's cost, allowing the full chain of appreciation to be preserved in the cost base

Section 49(1) of the Income Tax Act, 1961 provides that in cases where the capital asset was acquired by the previous owner through certain modes (gift, will, inheritance, distribution at partition, acquisition by a charitable institution), the cost of acquisition for the current assessee is 'deemed to be the cost for which the previous owner of the property acquired it.' This 'hold-over basis' or 'substituted cost' rule preserves the tax history of the asset: when the recipient eventually sells the asset, the entire gain from the original acquisition cost is taxed. For assets acquired before April 1, 2001 (the base date introduced in Finance Act 2001), Section 55(2)(b) allows the taxpayer to use the fair market value on April 1, 2001 as the cost of acquisition, which eliminates the need to trace costs back further and reflects inflation in asset values. The period of holding for the purposes of short-term/long-term classification also includes the period for which the previous owner held the asset (Section 2(42A)), so the holding period is inherited along with the cost.

Source note: Sections 49(1), 55(2)(b), 2(42A), Income Tax Act 1961

Correct answer: B. The capital gain must be invested in: purchasing a new residential house within one year before or two years after the date of transfer; or constructing a new house within three years.

Section 54 of the Income Tax Act, 1961 provides one of the most commonly used capital gains exemptions. Key conditions: (a) Assessee: only individuals or HUFs; (b) Asset sold: a long-term residential house property (building or land with building, used for residential purposes); (c) Investment: the capital gain amount must be invested in purchasing a residential house within 1 year before or 2 years after the date of transfer, or in constructing a new house within 3 years; (d) Lock-in: the new house must not be transferred within 3 years of purchase/construction (otherwise the exemption is reversed in the year of sale); (e) The assessee must not own more than one residential property other than the new one on the date of transfer of the original property (introduced by Finance Act 2019 - prior to this, there was no such restriction); (f) If the full capital gain is not invested, the exemption is proportionate; any uninvested amount must be deposited in the Capital Gains Account Scheme bank before the due date of filing returns. Section 54F provides a similar exemption for sale of any long-term capital asset (other than a house) with investment in a house.

Source note: Section 54, Income Tax Act 1961

Correct answer: C. Adjust the cost of acquisition for inflation, thereby reducing the taxable capital gain; since part of the nominal gain on a capital asset is merely the effect of general price inflation (not a real increase in value), indexation ensures that only the real (inflation-adjusted) gain is taxed; the indexed cost = original cost x (CII of year of sale / CII of year of acquisition)

Section 48 of the Income Tax Act, 1961 provides for the deduction of indexed cost of acquisition and indexed cost of improvement in computing long-term capital gains. The Cost Inflation Index (CII) is notified by the Central Government for each financial year, starting from FY 2001-02 (base year, index = 100). The indexed cost is computed as: Original Cost x (CII of year of transfer / CII of year of acquisition or 2001-02, whichever is later). Indexation benefits are available only for long-term capital assets; short-term gains cannot be indexed. Importantly, indexation benefits have been restricted or removed for certain asset classes by subsequent Finance Acts: the Finance Act 2018 removed indexation for LTCG on listed equity shares (Section 112A); the Finance Act 2024 removed indexation on sale of immovable property (now taxed at 12.5% without indexation vs 20% with indexation under the earlier regime, with a grandfather provision for properties held as on July 23, 2024). Indexation is still available for unlisted shares, debt mutual funds acquired before April 1, 2023, and other specified assets.

Source note: Section 48, Income Tax Act 1961; Cost Inflation Index notifications

Correct answer: C. Ltcg on listed equity shares exceeding Rs 1.25 lakh (enhanced from Rs 1 lakh in Budget 2024) in a year is taxable at 12.5% (enhanced from 10% in Budget 2024) without the benefit of indexation; the first Rs 1.25 lakh of ltcg per year is exempt; grandfather protection is available for gains accrued up to January 31, 2018

The Finance Act 2018 removed Section 10(38)'s exemption for LTCG on listed equity shares (STT-paid) and introduced Section 112A to tax such gains. The Finance Act 2024 (Budget 2024) further modified the rates. Current position under Section 112A: LTCG exceeding Rs 1.25 lakh (per year, aggregate across all such transactions) from listed equity shares, units of equity-oriented mutual funds, and units of business trusts (where STT is paid) is taxable at 12.5% without indexation. The grandfather clause provides that for assets held as on January 31, 2018, the cost of acquisition is the higher of: actual cost, or fair market value as on January 31, 2018 (capped at the actual sale price) - this ensures gains accrued before the regime change are not taxed. STCG on listed equity shares (where STT is paid) under Section 111A: was 15%, enhanced to 20% by Finance Act 2024. The short-term/long-term demarcation for listed equity shares remains at 12 months. The rate changes in Budget 2024 represented a modest increase in equity tax burden to align with the government's policy of broadening the tax base on capital market gains.

Source note: Sections 112A, 111A, Income Tax Act 1961; Finance Act 2018, 2024

Correct answer: B. There must be a transfer of a capital asset by the assessee; the transfer must be during the previous year.

Section 45(1) of the Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax as 'capital gains.' The essential ingredients are: (1) Transfer of a capital asset - Section 2(14) defines capital asset broadly as any property held by the assessee, including immovable property, shares, securities, jewellery, and rights - but excluding certain items like stock-in-trade, rural agricultural land, personal effects (movable property for personal use), and specific items listed in Section 2(14); (2) Transfer - Section 2(47) defines 'transfer' broadly to include sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, and conversion of capital asset to stock-in-trade; (3) Profit or gain - the gain is calculated as sale consideration minus cost of acquisition, cost of improvement, and transfer expenses; (4) Chargeable - certain transfers are specifically exempt (Section 47: transfers on amalgamation, succession, gift to relatives, etc.). The nature and period of holding determine whether gains are short-term or long-term.

Source note: Section 45(1), Income Tax Act 1961

Correct answer: D. The year in which the enhanced compensation is actually received; the enhanced compensation (additional amount received over the original award, whether from a court order, award, or government decision) is taxable in the previous year in which it is received; the cost of acquisition for the enhanced compensation is nil

Section 45(5) of the Income Tax Act, 1961 addresses the specific scenario of capital gains from compulsory acquisition of capital assets by the government or local authority. The provision was necessitated by the long time gap often seen between the initial acquisition and the receipt of final enhanced compensation. Key rules: (a) Initial compensation: the capital gain is computed and taxed in the year in which the compensation is first received (previous year of receipt); (b) Enhanced compensation: any compensation received by way of enhanced award or court order in subsequent years is taxable in the year of receipt; the cost of acquisition of the enhanced compensation is zero (the entire enhanced amount is capital gain); (c) Indexation: indexation benefit is available based on the year of original acquisition; (d) For agricultural land compulsorily acquired: if it is agricultural land in a rural area (not urban), the capital gains exemption under Section 10(37) may apply. This provision ensures that tax is collected as and when compensation is actually received, which is more equitable than taxing a notional gain in the year of acquisition when the actual amount may not have been received.

Source note: Section 45(5), Income Tax Act 1961