Profits and Gains of Business: 18 Real CA Inter MCQs + Answers

Correct answer: C. Intangible assets (Patents, Trademarks, Copyrights, Licences) are classified separately from tangible plant and are depreciated at 25% p.a. under the written-down value method. This is a high-frequency exam question because students often confuse it with the 15% rate for general plant. Remember: Intangible = 25%.

Correct answer: B. A partner's remuneration (salary + interest on capital) is taxable as Profits and Gains of Business or Profession, not as a salary under Section 17. This is because a partner is not an employee but a co-owner sharing profits. The salary is simply a mechanism to distribute share of profits.

Correct answer: C. Temporary structures (wooden sheds, temporary buildings erected for a specific project) are depreciated at 40% p.a. because they have a short useful life and significant obsolescence risk. This distinguishes them from permanent concrete structures (5%) or general plant (15%). Exam tip: If the structure is temporary or project-specific, think 40%.

Correct answer: C. Animals (cattle, horses, etc.) are not treated as plant even if used in a business. Ships, books (if not for resale but for reference in a profession), and vehicles are all plant. This is a tricky negation question—examiners use it to test whether you know the exceptions to plant classification.

Correct answer: B. Under Section 40A(3), any single cash payment exceeding ₹10,000 for a business expense is entirely disallowed. A crossed cheque (even if not account payee) is not treated as a proper banking channel; only account payee cheques/digital payment qualify. Since ₹12,000 exceeds ₹10,000, the entire amount is disallowed—not just the excess of ₹2,000. This is a common trap for students.

Correct answer: A. The maximum partner salary is the lower of (a) ₹1,50,000 per partner per annum, or (b) 90% of Book Profit. Here, 90% of ₹8,00,000 = ₹7,20,000. But ₹1,50,000 per partner is the annual cap, so if there are 4 working partners, max = 4 × ₹1,50,000 = ₹6,00,000. However, the standard exam answer treats the ₹1,50,000 limit per partner; for a single scenario, verify the number of partners. The answer ₹6,60,000 suggests 90% of ₹7,33,333 (a derived figure)—always check current year limits with ICAI material as these are subject to change.

Correct answer: B. Contributions to an unapproved gratuity fund are not deductible in the year of contribution. To be deductible, the gratuity scheme must be approved by the Income Tax Commissioner. If the fund is not approved, no deduction is allowed even if the money is eventually paid to employees. This ensures the assessee cannot get premature deduction for uncertain future liabilities.

Correct answer: B. Section 35(2B) allows deduction for revenue nature research only if the company opts for the standard regime (not default regime). If the company has remained in the default regime, no deduction is available for research expenses. This is a critical filing strategy question—examiners test whether you know the regime-specific restrictions on deductions.

Correct answer: B. Under Section 40(a)(iii), any penalty or fine imposed by law is always disallowed as a deduction, regardless of whether it is characterised as a "penalty" or "fine" or any other name. Customs penalties, GST penalties, income tax penalties—all are disallowed. The nature (revenue or capital) does not matter; the disallowance is absolute.

Correct answer: A. Expenditure on family planning (revenue nature) is fully deductible under Section 37(1) if it is incurred for the welfare of employees and is reasonable. This is not CSR, which is disallowed; this is direct staff welfare. The entire ₹1,00,000 is allowed as it is a legitimate business expense for employee health and family planning awareness.

Correct answer: B. Insurance claims received in respect of assets used in a specified business (Section 35AD applies to infrastructure and certain businesses) are taxed as business income, not capital gains. The insurance money replaces the asset that was used for business operations, so the receipt is business income. This is a common point of confusion—students often treat insurance claims as capital gains.

Correct answer: B. Under Section 40A(2), remuneration paid to a relative for services is restricted to the market value of those services. Since the market rate for the clerical work is ₹10,000, only ₹10,000 is deductible; the excess of ₹5,000 is disallowed. This prevents tax avoidance by inflating payments to family members. "Relative" includes spouse, children, and siblings.

Correct answer: B. Under Section 35D, preliminary expenses of a specified business can be written off over 5 years (20% per annum). However, the deduction is capped at 5% of the cost of the project. Here, 5% of ₹4,00,000 = ₹20,000 can be deducted per year for 5 years. The excess (₹5,00,000 − ₹4,00,000 = ₹1,00,000) is disallowed forever. This is a calculation-heavy question that tests both the formula and your conceptual clarity.

Correct answer: B. Book Profit is calculated as Net Profit + Disallowed items. Here, partner salary is already debited in arriving at Net Profit (₹2,00,000). To compute Book Profit, we add back the partner salary: ₹2,00,000 + ₹6,00,000 = ₹8,00,000. Book Profit is then used to check if the partner salary is within the 90% limit and ₹1,50,000 cap. This is fundamental—many students confuse "profit before salary" with "Book Profit."

Correct answer: B. Under Section 40A(3), the limit on cash payments is ₹10,000 per transaction. A single cash payment of ₹11,000 exceeds this limit, so the entire ₹11,000 is disallowed—not just the excess of ₹1,000. This is a bright-line rule designed to encourage banking transactions and prevent cash-based tax evasion. The disallowance applies to all cash payments above ₹10,000, regardless of the nature of expense (unless specifically exempted by rule).

Correct answer: B. Corporate Social Responsibility (CSR) expenditure is explicitly disallowed under Section 37(1) as a deduction. Even though CSR spending may benefit society and the business environment, it is not considered an expense incurred in the course of earning income. Companies cannot claim tax deduction for CSR spending; the spending is post-tax. This was a major clarification in the 2012 CSR amendments to the Companies Act and Income Tax Act.

Correct answer: A. Under Section 35(5), research and development losses incurred before the commencement of a specified business can be carried forward and set off against profits of the business in the year of commencement onwards. Here, the loss was in 2024 (before business start on 01.04.2025), so it is allowed as a deduction in 2025. This incentivises upfront R&D investment before the business goes live. Verify the current definition of "specified business" in your ICAI material.

Correct answer: B. Under Section 40A(3), if multiple cash payments are made on the same day for a single expense or a related series of expenses, they are treated as one transaction. Here, four payments of ₹8,000 each on the same day = ₹32,000 aggregate, which exceeds ₹10,000. The entire ₹32,000 is disallowed. This prevents splitting of payments to evade the ₹10,000 limit. The key phrase is "same day" and "single expense"—examiners test whether you understand substance over form.