Tax Law MCQs for Judiciary, Page 3

Correct answer: C. Sale of listed shares by a shareholder in the open market through a stock exchange (where securities transaction tax is paid)

Section 47 of the Income Tax Act, 1961 specifies categories of transfers that are deemed not to be 'transfers' for capital gains purposes, meaning no capital gains tax arises at the time of these transactions. Exempted transactions include: (a) Gift - Section 47(iii): transfer by way of gift, will, or bequest; (b) Inheritance - Section 47(iv) deals with distribution by holding company; Section 47(iii) covers transfers by will; (c) Amalgamation - Section 47(vi): transfer of capital asset in a scheme of amalgamation by an amalgamating company to the amalgamated company; and (d) Numerous other categories covering succession, demerger, conversion of debentures to shares, etc. Critically, the sale of listed shares through a recognised stock exchange (option B) is NOT a Section 47 exempt transaction - it is a regular capital gains event. LTCG from such sales is taxable under Section 112A at 12.5% (above Rs 1.25 lakh), and STCG is taxable at 20% under Section 111A. Section 47 exempts the transfer itself (so no capital gains at the time of gift or inheritance), but the recipient inherits the original cost base and holding period under Section 49.

Source note: Section 47, Income Tax Act 1961

Correct answer: B. Short-term capital gain (deemed stcg) under Section 50 regardless of the actual period of holding of the asset; depreciable assets always give rise to stcg on transfer, not ltcg, because the Written Down Value method of depreciation already accounts for the cost of the asset over time

Section 50 of the Income Tax Act, 1961 provides a special computation mechanism for capital gains arising from the transfer of a depreciable capital asset (any asset on which depreciation has been or is being claimed). The key rule is: (a) If the consideration received on transfer of an asset in a block results in the WDV of the block becoming negative (or the block ceasing to exist), the excess is treated as short-term capital gain; (b) The gain from a depreciable asset is always STCG regardless of the period of holding - this is a deeming provision that overrides the general LTCG classification based on holding period. The rationale is that depreciation deductions have progressively reduced the asset's book value (WDV) over its life; the gain on sale (consideration minus WDV) represents the 'excess depreciation' that was claimed over the asset's actual economic decline, plus any genuine appreciation. Since the depreciation deductions were against ordinary business income (higher slab rates), symmetry requires the gain on reversal to also be taxed as STCG (at slab rates). If depreciation had not been claimed, the asset's LTCG would be taxed at a lower rate with indexation - but Section 50 prevents this advantage for depreciated assets.

Source note: Section 50, Income Tax Act 1961

Correct answer: D. Long-term capital gains from any long-term capital asset can be exempted under Section 54EC by investing in specified bonds (issued by nhai, recl, or other notified entities) within 6 months of the date of transfer; the maximum investment (and thus maximum exemption) is Rs 50 lakhs per financial year; the bonds must be held for a minimum of 5 years (3 years before Finance Act 2018); if the bonds are transferred before the lock-in period, the exemption is revoked

Section 54EC of the Income Tax Act, 1961 provides a capital gains exemption for long-term capital gains (from any long-term capital asset, not just immovable property) invested in specified long-term bonds issued by notified public sector entities. Key features: (a) Asset sold: any long-term capital asset (originally including both movable and immovable property, but Finance Act 2018 restricted it to only immovable property for gains after April 1, 2018); (b) Investment window: 6 months from date of transfer (not from end of financial year); (c) Maximum exemption: Rs 50 lakhs (aggregate investment in a financial year across all transactions) - Finance Act 2014 introduced this cap; previously, the cap was Rs 50 lakhs per transfer; (d) Lock-in period: 5 years from the date of investment (increased from 3 years by Finance Act 2018); premature encashment or pledge/transfer of bonds results in reversal of exemption; (e) The 6-month window may cross into the next financial year - the Rs 50 lakh limit applies to the financial year in which the investment is made; if the investment spans two financial years, each year's Rs 50 lakh limit applies. Currently, NHAI, RECL, and Power Finance Corporation issue Section 54EC bonds.

Source note: Section 54EC, Income Tax Act 1961

Correct answer: A. Section 54F requires reinvestment of the entire net sale consideration (not just the capital gain portion) in a new residential house; the exemption is proportionate if only part of the net consideration is invested; additionally, the assessee must not own more than one residential property other than the new one on the date of transfer of the original asset; the original asset can be shares, jewellery, commercial property, etc.

Section 54F of the Income Tax Act, 1961 is a more demanding version of the Section 54 residential property reinvestment exemption. The key differences: (a) Asset sold: Section 54 applies when a residential house property is sold; Section 54F applies when any long-term capital asset (other than a residential house) is sold - shares, jewellery, commercial property, etc.; (b) Amount to be invested: Section 54 requires reinvestment of the capital gains amount; Section 54F requires reinvestment of the entire net sale consideration (full proceeds, not just the gain) to get full exemption; if only part of the consideration is invested, the exemption is proportional; (c) Property restriction: Section 54F requires that the assessee must not own more than one residential property (other than the new one) on the date of transfer - if more than one property is owned, Section 54F exemption is not available; this is more restrictive than Section 54; (d) Conditions for new house: same as Section 54 - purchase within 1 year before or 2 years after, or construction within 3 years; lock-in of 3 years. Both sections require deposit in Capital Gains Account Scheme for any unutilised consideration/gain before the tax return filing date.

Source note: Sections 54, 54F, Income Tax Act 1961

Correct answer: B. Money received without consideration: the entire amount is taxable if it exceeds Rs 50,000 in a year (aggregate of all such receipts).

Section 56(2)(x) of the Income Tax Act, 1961 (the current 'gift tax' provision) was introduced by Finance Act 2017 (replacing the earlier Section 56(2)(vii) and (viia)). It brings within the scope of 'income from other sources' the receipt of: (a) money without consideration - if aggregate value in a year exceeds Rs 50,000, the entire amount is taxable (not just the excess over Rs 50,000); (b) immovable property without consideration - the stamp duty value is taxable if it exceeds Rs 50,000; (c) immovable property for inadequate consideration - the stamp duty value minus consideration is taxable if it exceeds Rs 50,000; (d) movable property without consideration - fair market value is taxable; (e) movable property for inadequate consideration - FMV minus consideration is taxable if it exceeds Rs 50,000. Exemptions: gifts from relatives (spouse, sibling, sibling of spouse, parents, children, spouse's parents, lineal ascendants and descendants); gifts received on the occasion of marriage; gifts by will or inheritance; gifts from local authority; gifts from registered trust; and certain transactions specified in Section 56(2)(x) proviso. The 'relative' definition is specified in the Explanation and determines whether a gift is exempt.

Source note: Section 56(2)(x), Income Tax Act 1961

Correct answer: D. More than 12 months; listed equity shares and equity-oriented mutual fund units held for more than 12 months are treated as long-term capital assets.

The period of holding required for long-term capital asset status differs by asset class under the Income Tax Act, 1961: (a) Listed equity shares, equity-oriented mutual fund units, units of a business trust, and zero coupon bonds: more than 12 months = long-term; (b) Immovable property, unlisted shares, and all other assets: more than 24 months = long-term (reduced from 36 months for immovable property by Finance Act 2017); (c) Debt mutual fund units: prior to Finance Act 2023 amendment, more than 36 months was required for long-term classification; post the Finance Act 2023 amendment, all debt mutual fund gains are taxable as short-term capital gains regardless of holding period, at slab rates. LTCG on listed equity shares/equity MF: 10% under Section 112A on gains exceeding Rs 1 lakh, without indexation benefit, applicable from FY 2018-19 onwards (Section 10(38) exemption was removed). STCG on listed equity shares/equity MF (where STT is paid): 15% under Section 111A. The budget 2024 further modified rates: STCG under Section 111A raised to 20% and LTCG under Section 112A remains 12.5% after the first Rs 1.25 lakh of gains.

Source note: Sections 111A, 112, 112A, 2(42A), Income Tax Act 1961; Finance Acts 2017, 2018, 2023, 2024

Correct answer: A. If the expenditure is made to acquire or bring into existence a capital asset or an enduring advantage for the business, it is capital expenditure; if it is made to run or work the business with a view to producing profits (without creating a new capital asset or advantage), it is revenue expenditure - the test is the aim and object of the expenditure and its character, not whether it is a large amount or a one-time payment

The capital-revenue expenditure distinction is one of the most litigated areas of income tax law because the Income Tax Act does not define these terms. Honda Siel Cars India Ltd. v. CIT (SC, 2017) consolidated the existing jurisprudence and articulated the key principles: (1) If expenditure is for acquiring or bringing into existence a capital asset or an enduring advantage for the business, it is capital; (2) If expenditure is for running the business or working it to produce profits (without creating a new capital asset), it is revenue; (3) The aim and object of the expenditure determines its character; (4) 'Once and for all' payment and 'enduring benefit' are indicators but not conclusive tests - what matters is the character of the advantage sought; (5) The character of the asset surrendered in exchange (if any) and whether a new asset or advantage of an enduring nature was created are important; (6) The same type of expenditure can be capital in one case and revenue in another depending on the specific business context. The Supreme Court also affirmed the Empire Jute principle: if an expenditure improves the efficiency of trading operations without touching the fixed capital (the profit-making structure), it is revenue even if the benefit endures.

Source note: Honda Siel Cars India Ltd. v. CIT (SC, 2017); Empire Jute Co. v. CIT; Section 28, Income Tax Act 1961

Correct answer: D. A tax with a purpose; it is a tax connected to a specific object or earmarked for a particular use.

In State of West Bengal v. Kesoram Industries Ltd. (SC, 2004), the Supreme Court addressed the character of various levies described as 'cess' and held that cess is commonly understood as a tax with a purpose - a levy connected to a specific object or earmarked for a particular use. The Court clarified that the word 'cess' is not a term of art in law; it is commonly used to denote an additional tax used for a particular purpose. Whether a cess is a 'tax' or a 'fee' in the constitutional sense depends on the substantive character of the levy rather than its name. Cesses like the Swachh Bharat Cess, Krishi Kalyan Cess, and Health and Education Cess are calculated as percentages of another tax (making them 'taxes on a tax') and their proceeds, while earmarked in the budget for identified purposes, are deposited into the Consolidated Fund. The Deewan Chand Builders analysis (whether there is a specific service for a specific class) applies equally to cess. The Court noted that constitutional allocation to Consolidated Fund vs. Public Account is also a relevant factor.

Source note: State of West Bengal v. Kesoram Industries Ltd. (SC, 2004); Deewan Chand Builders v. Union of India

Correct answer: A. Lose its exemption under Section 11 for income of the year(s) in which it is unregistered; without valid registration under Section 12AB, the trust's income is no longer exempt and is taxable at the maximum marginal rate; re-registration restores the exemption prospectively but does not cure past non-compliance

The Finance Act 2020 revamped the registration regime for charitable trusts by replacing the old Sections 12A/12AA with the new Section 12AB (effective April 1, 2021). All existing trusts registered under the old provisions were required to apply for fresh registration under Section 12AB by a specified cut-off date. If a trust fails to renew its registration under Section 12AB: (a) The trust loses the benefit of exemption under Section 11 (income applied for charitable purposes is exempt) and Section 12 (corpus donations exempt); (b) The trust's income is taxable like any other non-exempt entity at the applicable rates; (c) The registration is not retroactively granted - a belated application is granted only from the date of application, not retrospectively. The mandatory re-registration every 5 years (previously registration was perpetual under Section 12A) was introduced to ensure periodic compliance verification: trusts must demonstrate that they continue to genuinely carry on charitable activities. Similar re-registration requirements were introduced for Section 80G approvals (allowing donors to claim deduction for donations) to ensure donors only claim deductions for donations to currently active and compliant charitable organisations.

Source note: Section 12AB, Income Tax Act 1961; Finance Act 2020

Correct answer: B. Every levy of tax must be backed by a statute enacted by the competent legislature; an executive order, notification, or administrative direction alone cannot authorise the levy or collection of a tax, and any such unauthorised levy is void

Article 265 of the Constitution of India is the foundational provision of Indian tax law, establishing the rule of law in taxation. It provides that 'no tax shall be levied or collected except by authority of law,' meaning every imposition must find its sanction in a validly enacted statute. The provision has two dimensions: first, there must be statutory authority for the levy (the charging provision); second, there must be statutory authority for the collection (the procedure). A notification, circular, or executive instruction that goes beyond the statute cannot authorise tax. The Supreme Court in Commissioner of Sales Tax v. Sai Publication Fund (2002) and numerous other decisions has held that the taxing statute must clearly identify the subject matter of the tax, the person liable, the rate, and the measure of the tax. Article 265 operates as a constitutional guarantee against arbitrary or unlawful exaction and applies to all taxes - direct and indirect - levied by both the Union and the States.

Source note: Article 265, Constitution of India

Correct answer: D. Standard deduction under Section 16(ia) of Rs 50,000 (as currently applicable) or the amount of salary, whichever is less - this is a flat deduction available to all employees regardless of actual expenditure

Section 16 of the Income Tax Act, 1961 provides three deductions from salary income: (ia) a standard deduction of Rs 50,000 (or the salary amount, whichever is less) - a flat deduction available to all salaried employees and pensioners without requiring documentation of any specific expenditure; (ii) entertainment allowance for government employees only (one-fifth of salary or Rs 5,000, whichever is less, subject to further conditions); and (iii) profession tax (employment tax) levied by or under any law - deductible for employees in states that levy profession tax. The standard deduction under Section 16(ia) was restored in Budget 2018 (having been earlier removed) and increased to Rs 50,000 from AY 2020-21 onwards. It replaced the earlier transport allowance and medical reimbursement exemptions, simplifying the tax calculation for salaried individuals. The entertainment allowance deduction (Section 16(ii)) is restricted to government employees because the Act assumes private sector employees will claim business entertainment under the business/profession head if applicable. Profession tax is deductible because it is a legitimate statutory obligation imposed on the employee.

Source note: Section 16, Income Tax Act 1961

Correct answer: C. Rs 1.5 lakhs per year (for an individual or huf) - eligible investments include contribution to pf, ppf, nsc, elss, payment of life insurance premium, tuition fees for children, repayment of housing loan principal, tax saver fd (5-year), nps Tier-1 contribution (along with Section 80CCD), nps, scss, and Sukanya Samriddhi Account; the deduction is from the gross total income and reduces the taxable income

Section 80C of the Income Tax Act, 1961 provides a deduction for a wide variety of investments and expenditures. The aggregate maximum deduction under Section 80C is Rs 1.5 lakhs per annum for individuals and HUFs. The extensive list of qualifying investments and payments includes: (a) Employee's contribution to Provident Fund (EPF, GPF, PPF); (b) Subscription to National Savings Certificate; (c) Investment in ELSS (Equity Linked Savings Scheme) mutual funds; (d) Life insurance premiums (for self, spouse, and children); (e) Repayment of housing loan principal; (f) Tuition fees for full-time education of children (up to 2 children) in India; (g) NSC interest reinvestment; (h) 5-year Tax Saving FD with scheduled banks and post offices; (i) Sukanya Samriddhi Account deposits; (j) Senior Citizen Savings Scheme; (k) National Pension System Tier-1 contributions (also qualifying for Section 80CCD). The Rs 1.5 lakh limit is an aggregate limit across all Section 80C investments - not Rs 1.5 lakh for each category. Section 80CCC (pension premiums) and Section 80CCD(1) (NPS) are also part of the Rs 1.5 lakh aggregate limit, though NPS has an additional Rs 50,000 under Section 80CCD(1B). Not available under the new tax regime (Section 115BAC).

Source note: Section 80C, Income Tax Act 1961

Correct answer: A. Section 80CCD(1B) provides an additional deduction of up to Rs 50,000 for contributions to nps Tier-1 made by an individual on their own behalf - this is in addition to the Rs 1.5 lakh limit under Sections 80C, 80CCC, and 80CCD(1); thus, the maximum additional nps deduction under 80CCD(1B) is Rs 50,000 per year, making the total nps-linked deduction potentially Rs 2 lakhs

Section 80CCD of the Income Tax Act, 1961 has three sub-sections addressing NPS: (a) Section 80CCD(1): Employee's or self-employed person's own contribution to NPS Tier-1 - deduction up to 10% of salary (for employees) or 20% of gross total income (for self-employed), subject to the overall Rs 1.5 lakh limit under Section 80CCE (aggregate of 80C + 80CCC + 80CCD(1)); (b) Section 80CCD(1B): Employee's voluntary contribution to NPS Tier-1, over and above their mandatory contribution - additional deduction of up to Rs 50,000 per year, which is OUTSIDE the Rs 1.5 lakh limit under Section 80CCE; this is an independent, additional deduction that can bring the total savings-linked deduction to Rs 2 lakhs per year; (c) Section 80CCD(2): Employer's contribution to NPS on behalf of the employee - deductible up to 14% of salary for Central Government employees, 10% for others; this deduction has NO upper limit for employees; it is also available in the new tax regime (Section 115BAC), making employer NPS contribution a tax-efficient benefit. Section 80CCD(1B) is particularly popular among taxpayers who have maximised Section 80C and are looking for additional deductions.

Source note: Sections 80CCD, 80CCE, Income Tax Act 1961

Correct answer: B. Rs 75,000 in total: Rs 25,000 for self, spouse, and dependent children; and Rs 50,000 for parents above 60 years (senior citizen parents).

Section 80D of the Income Tax Act, 1961 provides a deduction for premiums paid for medical insurance policies. The structure is: (a) Self, spouse, and dependent children: Rs 25,000 per year (Rs 50,000 if the policyholder or insured is a senior citizen aged 60 and above); (b) Parents: an additional Rs 25,000 (Rs 50,000 if either parent is a senior citizen aged 60 and above) - this is a separate limit, additional to the self/family limit; (c) Preventive health check-up: a sub-limit of Rs 5,000 within the overall limit can be claimed for preventive health check-ups (this is not for insurance premiums but for the check-up cost itself, and can be paid in cash). For an individual below 60 whose parents are above 60, the total maximum deduction is Rs 25,000 (self/family) + Rs 50,000 (senior citizen parents) = Rs 75,000. The deduction is not available under the new tax regime (Section 115BAC), pushing taxpayers with significant health insurance to calculate whether the old or new regime is more beneficial overall. The premium must be paid by any mode other than cash (except for preventive health check-up).

Source note: Section 80D, Income Tax Act 1961

Correct answer: D. 100% of the donation amount, with no qualifying limit - pmnrf is a government-established fund receiving 100% deduction without any cap on the qualifying limit

Section 80G of the Income Tax Act, 1961 provides deductions for donations to approved funds and charitable institutions, with deductions at varying rates and with or without qualifying limits. Category 1: 100% deduction without qualifying limit - donations to the Prime Minister's National Relief Fund, PM Cares Fund (established during COVID-19), National Defence Fund, Jawaharlal Nehru Memorial Fund, National Children's Fund, and Central government or state government funds for relief of earthquake, flood, or other natural calamities; Category 2: 50% deduction without qualifying limit - donations to Jawaharlal Nehru Memorial Fund, Prime Minister's Drought Relief Fund, Indira Gandhi Memorial Trust, etc.; Category 3: 100% deduction subject to qualifying limit (10% of adjusted gross total income) - donations to certain approved institutions such as regional rural banks; Category 4: 50% deduction subject to qualifying limit (10% of adjusted gross total income) - donations to most other approved charitable organisations. Donations in kind (goods) do not qualify; only monetary donations are covered. From AY 2018-19, donations to non-government entities must be in the institution's own bank account to qualify for deduction, and donations above Rs 2,000 must not be made in cash.

Source note: Section 80G, Income Tax Act 1961

Correct answer: B. The items in Section 2(24) are illustrations that bring within the definition items that may not otherwise qualify; the definition is open-ended, and receipts or accruals of economic value not explicitly listed may also constitute income if they have the character of income in ordinary parlance; the inclusive definition prevents tax avoidance by artificial structuring that attempts to characterise income as something not within the list

Section 2(24) of the Income Tax Act, 1961 defines 'income' using the word 'includes' followed by a lengthy enumeration covering: profits and gains; dividends; perquisites; profits in lieu of salary; capital gains under Section 45; winnings from lotteries; sums received under Keyman insurance policies; and numerous other specific items. The use of 'includes' makes the definition inclusive, not exhaustive. This means that: (a) the listed items are within the definition of income; and (b) items not listed may also be income if they have the essential character of income in ordinary language and are not specifically exempted. The inclusive definition serves anti-avoidance purposes: it prevents taxpayers from structuring payments in unusual forms (such as payments in kind, non-cash perquisites, or non-recurring benefits) to argue that they do not fall within the definition. However, the definition covers income, not all receipts: capital receipts are generally outside the definition of 'income' for computation purposes unless specifically included. The total income for tax purposes is the income computed under the five heads in Section 14.

Source note: Section 2(24), Income Tax Act 1961

Correct answer: A. Any gratuity, annuity, pension, fees, commissions, perquisites, profits in lieu of or in addition to any salary or wages, advance of salary, leave encashment, and contributions by the Central Government or employer to a pension scheme under Section 80CCD - all of which are expressly included in Section 17(1)

Section 17(1) of the Income Tax Act, 1961 provides an inclusive definition of 'salary' by enumeration: it includes (i) wages; (ii) annuity or pension; (iii) gratuity; (iv) fees, commissions, perquisites, or profits in lieu of or in addition to salary or wages; (v) advance of salary; (va) payment for leave not availed (leave encashment); (vi) annual accretion to balance in recognised provident fund to the extent taxable; (vii) transferred balance in recognised provident fund; and (viii) contributions by the Central Government or employer to a pension scheme under Section 80CCD. The definition is deliberately broad to ensure comprehensive coverage of all employment-related receipts. The use of 'includes' means this is not exhaustive, and other employment benefits of similar character may also be 'salary.' Dividends from shares held by an employee, interest on personal bank deposits, and rental income are not salary - they arise from investments, not the employment relationship. Section 17 has sub-sections for perquisites (17(2)) and profits in lieu of salary (17(3)).

Source note: Section 17(1), Income Tax Act 1961

Correct answer: D. The Income Tax Act uses the Written Down Value (wdv) method for most assets under the block-of-assets concept: assets of the same class and rate are grouped into a 'block'; depreciation is calculated at prescribed rates on the wdv of the entire block at the end of the year; the actual asset is not depreciated individually; and Section 32(1)(iia) provides additional depreciation of 20% for new plant and machinery used in manufacturing/production (not for office equipment or vehicles)

Section 32 of the Income Tax Act, 1961 governs depreciation deduction for income tax purposes, using a Written Down Value (WDV) method under the block of assets concept. The key features are: (a) Block of Assets: all assets of the same category (for example, all computers, all general plant and machinery, all buildings) are grouped into a single 'block,' and depreciation is calculated on the aggregate WDV of the block; this simplifies computation as individual assets do not need to be tracked once placed in a block; (b) WDV method: depreciation for the year = WDV at the beginning of the year + cost of assets added during the year - consideration received on sale of assets × applicable depreciation rate; (c) if WDV of a block becomes nil or the block ceases to exist, any surplus is a Short Term Capital Gain under Section 50; (d) Additional Depreciation under Section 32(1)(iia): 20% of the cost of new plant and machinery acquired during the year for eligible industrial undertakings (manufacturing, production of goods), allowing accelerated deduction for productive capital investment. The depreciation rates under the Income Tax Act differ significantly from accounting depreciation rates under Schedule II of the Companies Act.

Source note: Section 32, Income Tax Act 1961; IT Rules Schedule on Depreciation

Correct answer: C. The surcharge on income tax levied under Article 271, and taxes on income from agriculture; surcharges and cesses levied by Parliament go exclusively to the Union Consolidated Fund and are not shared with States

Article 270 of the Constitution provides for the distribution of tax proceeds between the Union and the States, implemented through the Finance Commission's recommendations. The taxes covered under Article 270 include income taxes (other than those assigned to States and the surcharge) and Union excise duties. However, Article 271 specifically provides that surcharges on these taxes go exclusively to the Consolidated Fund of India and are not distributed to States. Similarly, cess revenues (such as the Health and Education Cess) are excluded from the divisible pool under Article 270, a point that has generated significant controversy: States have complained that the Union's increasing reliance on cesses and surcharges (which are not shareable) reduces the divisible pool available for distribution to States. The Fifteenth Finance Commission highlighted this issue and recommended that the ratio of cesses and surcharges to total tax collection be limited.

Source note: Articles 270, 271, Constitution of India

Correct answer: C. Whichever is more beneficial to the taxpayer prevails - Section 90(2) provides that where the Central Government has entered into a dtaa, the provisions of the Act shall apply to the extent they are more beneficial to the assessee; this 'beneficial rule' allows taxpayers to choose the more favourable of the domestic law or dtaa provisions

Section 90(2) of the Income Tax Act, 1961 provides the fundamental rule for resolving conflicts between the Income Tax Act and a DTAA: the provisions of the IT Act shall apply to the assessee only to the extent they are more favourable than the DTAA. This means: if the DTAA provides a lower withholding tax rate on dividends (say 10%) compared to the domestic law rate (say 20%), the taxpayer can opt for the DTAA rate of 10%; conversely, if the domestic law exempts certain income that the DTAA might tax, the domestic law exemption applies. This 'beneficial rule' reflects India's policy of not disadvantaging taxpayers through its own DTAAs. However, the General Anti Avoidance Rule (GAAR) under Chapter X-A can override DTAA benefits where the arrangement is impermissible. The Multilateral Instrument (MLI), to which India is a signatory since 2017 with effect from 2019, has modified principal purpose tests in many Indian DTAAs, limiting DTAA benefits where the principal purpose of an arrangement is to obtain a tax benefit. Tax Residency Certificates (TRCs) are now mandatory for claiming DTAA benefits, with additional conditions under Section 90(4) and (5).

Source note: Section 90(2), Income Tax Act 1961; OECD MLI

Correct answer: C. Assessments are conducted digitally and anonymously through the National Faceless Assessment Centre - the assessee does not know which city or officer handles their case; all notices, responses, and orders are through the income tax portal; no face-to-face interaction occurs; this eliminates the scope for corruption and harassment while creating a complete digital audit trail

Section 144B of the Income Tax Act, 1961 operationalises the Faceless Assessment Scheme that was launched in August 2020 and fully implemented from September 2020. The scheme has three core components: (a) Anonymity - cases are randomly allocated to assessment units across India by an automated allocation system; the assessee and their advisor do not know the location of the assessing team; (b) Digitisation - all communication occurs through the income tax portal (e-filing portal); notices are issued electronically, responses are uploaded digitally, documents are submitted online; (c) Separation of functions - separate review units and technical units verify the work of the assessment unit, providing a quality check without the assessee or the original assessor knowing. The scheme covers all scrutiny assessments under Section 143(3), reassessments, and best judgment assessments under Section 144. Exceptions to faceless assessment exist for: search/seizure-related assessments; international tax and transfer pricing; assessments of black money (foreign assets). The Faceless Appeals Scheme under Section 250 extends the same principles to first appellate proceedings before the CIT(Appeals).

Source note: Section 144B, Income Tax Act 1961; Faceless Assessment Scheme 2021

Correct answer: A. The Finance Act passed by Parliament each year, which specifies the rates of income tax applicable for each assessment year; the Income Tax Act provides the charging mechanism and computational machinery while the Finance Act annually specifies the applicable rates

Section 4(1) of the Income Tax Act, 1961 charges income tax for each assessment year 'in accordance with and subject to the provisions of this Act.' However, the section refers to 'any Central Act' specifying the rates - this 'Central Act' is the Finance Act passed annually by Parliament (typically in February/March and enacted before April 1 of the new financial year). The Finance Act contains the Income Tax Rates Schedule (typically Part I, II, III of the First Schedule), which specifies: the tax slabs for individuals, HUFs, and AOPs; the rate for domestic companies and foreign companies; the rate for cooperative societies and local authorities; and the applicable surcharge percentages. The Income Tax Act, 1961 itself provides all the substantive provisions: the charging section, the heads of income, the deductions, the assessment and appeal procedures, and the penalty provisions. The Finance Act amends the Income Tax Act as required and sets the annual rates. This two-statute system (the permanent charging statute + the annual Finance Act) is a distinctive feature of Indian income tax law.

Source note: Section 4(1), Income Tax Act 1961; Finance Act (annual)

Correct answer: C. Actual gratuity received; Rs 20 lakhs (the current limit).

Section 10(10) of the Income Tax Act, 1961 provides a three-tier framework for gratuity exemption: (a) For government employees (Central and State Government, Defence, and local authority employees): entire gratuity is exempt without limit. (b) For employees covered by the Payment of Gratuity Act, 1972: the exempt amount is the least of - (i) actual gratuity received; (ii) Rs 20 lakhs (enhanced from Rs 10 lakhs by the Payment of Gratuity (Amendment) Act, 2018); and (iii) 15 days' salary based on last drawn salary for each completed year of service, calculated as (Last drawn salary / 26) x 15 x Number of years of service. (c) For other employees not covered by the Payment of Gratuity Act: the exempt amount is the least of - (i) actual gratuity received; (ii) Rs 20 lakhs; and (iii) half month's salary for each completed year of service. 'Salary' for this purpose means basic salary plus dearness allowance. The purpose of the gratuity exemption is to provide tax-free retirement benefits to employees for long service, recognising the welfare function of gratuity payments.

Source note: Section 10(10), Income Tax Act 1961; Payment of Gratuity Act 1972

Correct answer: D. Income from Salaries (Sections 15-17); Income from House Property (Sections 22-27).

Section 14 of the Income Tax Act, 1961 establishes the five heads of income under which all income must be classified for computation: (1) Salaries - governed by Sections 15-17, covering all employment income including wages, pensions, gratuity, perquisites, and profits in lieu of salary; (2) Income from House Property - governed by Sections 22-27, covering annual value of buildings and land appurtenant; (3) Profits and Gains of Business or Profession - governed by Sections 28-44D, covering business and professional income; (4) Capital Gains - governed by Sections 45-55A, covering gains from transfer of capital assets; and (5) Income from Other Sources - governed by Sections 56-59, a residuary head covering income not falling under any other head. The classification is mandatory: a taxpayer cannot choose which head to use for income that falls under a specific head. The classification matters because each head has different deduction rules, different rates (for certain items like capital gains), and different set-off rules for losses.

Source note: Section 14, Income Tax Act 1961