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CMA Intermediate · Direct and Indirect Taxation · Profits and Gains of Business or Profession

Gulf Petro Ltd carries on petroleum extraction in India under an agreement with the Central Government. For the tax year it deposited ₹30 lakh in a site restoration account within the tax year. Its profits from the business before any deduction under the Site Restoration Fund Schedule are ₹100 lakh. Assuming all other conditions are met, what deduction is allowed under paragraph 1 of Schedule X?

The deduction is ₹20 lakh. Schedule X allows the lower of the amount deposited and 20% of business profits computed before this deduction. Here the deposit is ₹30 lakh and 20% of ₹100 lakh is ₹20 lakh, so the 20% cap restricts the claim.

  1. A₹30 lakh
  2. B₹20 lakhCorrect
  3. C₹10 lakh
  4. D₹50 lakh

Explanation

The deduction is the lesser of the amount deposited (₹30 lakh) and 20% of the profits before the deduction (20% × ₹100 lakh = ₹20 lakh). The lower figure is ₹20 lakh. Allowing the full deposit of ₹30 lakh ignores the 20% ceiling.

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