Notes:
1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Students were
not expected to produce answers with this extensive detail, which would not be possible in a 3 hour exam.
2. All references to legislation shown in square brackets are for information only and do not form part of the answer expected from
candidates.
Marks
1
Rs.
Rs.
8,000,000
05
200,000
10
400,000
100,000
10
10
(700,000)
7,300,000
Add backs
(i) Capital expenditure towards purchase of plot in Industrial
Estate [s.21(n)]
(ii) Amount received from supplier for delayed supply of goods
(Note 4)
(iii) Advance tax paid with utility bills [s.21(a)]
(iv) Salary paid on termination of an employee (Note 5)
(v) Accounting depreciation on Machine A (Note 6)
(vi) Donation paid to flood relief fund established by a social
worker (Note 7)
400,000
10
100,000
150,000
1,150,000
300,000
10
10
15
05
200,000
10
2,300,000
Admissible deductions
(i) Lease rentals paid for Machine A (Note 6)
(ii) Tax depreciation on Machine A (Note 6)
(200,000)
(75,000)
10
25
(275,000)
9,325,000
9,325,000
Note 1
Agricultural income Rs. 200,000
The land is situated in Pakistan and used for growing crops. Such income falls within the definition of
agricultural income and is not taxable.
Since the income is already net of all expenses and these have not been separately charged to the profit and
loss account, no expense relating to agricultural income needs to be added back. [s.41]
Note 2
Bad debt Rs. 400,000
The bad debt was claimed in the tax year 2005. However, since this was not allowed, it stands already taxed.
In the tax year 2011, when it is included in the income, its exclusion for tax purposes is essential to avoid
double taxation. [s.29 read with s.73]
Note 3
Exchange gain
The exchange gain of Rs. 100,000 is a notional gain, not yet realised. The Income Tax Ordinance, 2001
taxes real income and not notional income except where it is specifically mentioned in the Ordinance. Based
on this general principle, an unrealised exchange gain is not taxable. [Had there been a loss on account of
such conversion, the same would also have not been allowed as a deduction.] [s.2(29)]
15
Marks
Note 4
The amount received from the supplier for delayed supply of goods of Rs. 100,000 forms part of the profits
and gains of the business carried on by the company and is taxable. The amount received is not a capital
receipt. [s.19]
Note 5
Amounts paid to an employee on his termination
Rs.
100,000
50,000
400,000
600,000
1,150,000
Leave encashment
Payment in lieu of notice
Support money for finding a new job (outplacement support)
Compensation for premature termination
This amount falls within the definition of salary and the expenditure has been incurred for the purpose of
business. However, although the amount was paid through a crossed cheque, due to non-deduction of tax
on this amount, the expenditure is inadmissible. [s.21(c)]
Note 6
Machine A:
(a)
The depreciation charged to the accounts of Rs. 300,000 is not in accordance with the provisions of
the income tax law, hence not allowed as deduction. [s.22]
(b)
In the case of assets taken on a finance lease, the lease rentals [Rs. 200,000] are an admissible
deduction instead of depreciation.
(c)
After the asset is transferred to VPL at residual value, tax depreciation is admissible on it, in addition
to the lease rentals paid during the period it was held on a finance lease. [s.28 (1)(b) and s.22]
The tax written down value (TWDV) for the purpose of calculating the depreciation is the residual value
[and not its market value or its accounting written down value] as residual value is the consideration
that was paid [ss.76 & 77].
Tax depreciation is allowed for the full year, even if the asset is only used for a single day.
Tax depreciation at 15% of Rs. 500,000
(d)
Since the asset was already in use, it does not qualify for an initial allowance. [s.23]
Note 7
Donation paid Rs. 200,000
A donation is not business expenditure. However, donations to specific funds recognised by the
Commissioner and FBR are eligible for tax reliefs. Since the Fund to which a donation has been made is not
recognised as required under the law, informal appreciation or approval of the Fund does not change its
status for income tax purposes. Therefore, the donation is not an admissible deduction under the
circumstances. [s.61]
Explanation of items not included in the computation of taxable income above
(i)
(ii)
16
10
10
15
Marks
(b)
Rs.
9,325,000
(500,000)
8,825,000
3,088,750
05
500,000
1,000,000
250,000
125,000
(125,000)
(140,000)
(300,000)
(150,000)
2,373,750
15
05
10
05
70,000,000
(400,000)
69,600,000
696,000
Minimum tax at 1%
Minimum tax is not applicable as tax [Rs. 3,088,750] on the basis of taxable income is more than the
minimum tax [Rs. 696,000]. [s.113(1)]
(c)
05
10
05
10
70
1,150,000
Leave encashment
Payment in lieu of notice
Outplacement support
Compensation for premature termination
Salary
Tax payable on the above salary at 10%
10% of tax payable
115,000
10
11,500
10
Since in this case Rs. 25,000 is a higher sum than 10% of the amount of tax not deducted, a penalty of
Rs. 25,000 can be imposed by the Commissioner after observing the due process of law. [Sr. No.15 of Table
under s.182(1)]
(d)
05
15
40
(ii)
The Board can select a person or classes of persons for audit through computer balloting.
The computer balloting can be on either a random basis or a parametric basis. [s.214C]
15
The Commissioner can call for records or documents including books of accounts of VPL, as it is
required to maintain under the Ordinance, to conduct an audit of its tax affairs. In this case, however,
the Commissioner shall first record the reasons for his action and communicate them to the taxpayer
(VPL). [s.177 (1) & (2)]
15
17
Marks
VPL can still be selected for audit again in the tax year 2012 provided that there are reasonable grounds
for conducting such an audit. [s.177(7)]
10
Tutorial note: Once selected for audit, the audit can be conducted by the Commissioner or a firm of
chartered accountants or a firm of cost and management accountants within the scope defined by the
Board or the Commissioner, as the case may be.
40
30
(a)
Association of persons
An association of persons includes the following entities:
(i)
(ii)
(iii)
(iv)
a firm
a Hindu undivided family
any artificial juridical person
any body of persons formed under a foreign law
05
05
05
05
Tutorial note: the definition of an association of persons does not include a company, even though it may
be owned by more than one shareholder. [s.80(2)(a)]
20
(b)
(i)
Firm XYZ
Accounting year ended 30 June 2011
Tax year 2011
Computation of taxable income
Rs.
Net profit of the firm
Add: Income not included in net profit
Advance forfeited as per terms of the agreement [Note 1]
Rs.
400,000
25,000
05
10
25,000
Add: Inadmissible expenses
Salary and commission paid to X [Note 2]
Performance bonus paid to Y [Note 2]
Interest paid to Z [Note 2]
Distribution of food items to flood affected farmers [Note 3]
Fine paid to Engg. Development Board [Note 4]
Bad debt written off [Note 5]
Accounting depreciation on vehicle [Note 6]
600,000
100,000
200,000
100,000
25,000
50,000
230,000
05
05
05
10
10
10
10
1,305,000
Less:
Tax depreciation [Note 6]
225,000
10
(225,000)
1,505,000
376,250
Taxable Income
Tax liability of the firm at 25% of taxable income
Notes
Note 1
Advance forfeited Rs. 25,000
The advance received was forfeited as per the terms of the trade and so forms part of business profits
and gains, hence is to be added back in income of the firm. [s.19(1)]
Note 2
Amounts paid to partners of the firm Rs. 900,000
The amounts paid to partners in the form of interest, commission, salary [including bonus] and other
remuneration by the firm are not admissible deductions. [s.21(j)]
Note 3
Distribution of food items to flood affected farmers Rs. 100,000
Although the farmers are stated to be regular customers of the AOP, the expense was not incurred wholly
and exclusively for the purpose of business. It also does not qualify for tax relief as a donation being
not paid to an approved institution. [s.20 and s.61]
18
05
Marks
Note 4
Fine paid to Engineering Development Board Rs. 25,000
A fine paid for the violation of any law, rule or regulation is not an admissible expense. [s.21(g)]
Note 5
Bad debt written off
The amount was advanced as a loan and not previously offered for tax. The business of the AOP is also
not one of advancing loans, therefore the bad debt written off in the books does not fulfil the conditions
necessary for admissibility of the claim. Hence disallowed. [s.29(1)]
Note 6
Vehicle used by non-partner
Date of purchase of the vehicle
Cost of the vehicle
Rate of deprecation in accounts
Accounting depreciation for six months 2,300,000 x 20% x 6/12
1 January 2010
Rs. 2,300,000
20%
Rs. 230,000
As the above calculation is not as per the provisions of the Ordinance, hence disallowed. [s.22]
Admissible tax depreciation
Cost to be restricted for tax depreciation [s.22(13)(a)]
Rs. 1,500,000
Rs. 225,000
2.
3.
4.
(ii)
Salary paid to son of Partner Y who worked for the firm is an admissible expense. Since the
amount paid (Rs. 150,000) was below the taxable limit, non-deduction of tax does not render it
inadmissible.
15
A bad debt is admissible only when it has become irrecoverable and it is written off in the books
of accounts of the taxpayer. Since both the conditions were only met in the tax year 2011 and not
in the tax year 2009, the bad debt of Rs. 100,000 has been correctly claimed in the tax year
2011.
10
Generally any advance received in cash is treated as income under the head Income from other
sources. However, where an advance payment (Rs. 300,000) is received for the sale of goods or
supply of services, the same is not to be treated as income. [s.39 (3) & (4)]
10
Expenditure of Rs. 50,000 paid to the vocational training institute is an admissible expense as the
institute is run by a provincial government and trains industrial workers and the amount was paid
through a crossed cheque. [s.27]
10
13
(900,000)
605,000
Divisible income
05
Salary
Interest
Commission
Performance bonus
Divisible income in the ratio of 3:2:1
X
Rs.
300,000
300,000
302,500
902,500
19
Y
Rs.
Z
Rs.
200,000
100,000
201,667
301,667
100,833
300,833
05
05
05
05
15
Marks
Assessment of partners
X
Rs.
902,500
500,000
1,402,500
Y
Rs.
301,667
400,000
701,667
Z
Rs.
300,833
300,000
600,833
Tax rate
Tax on (B) above (C)
20%
280,500
10%
70,167
10%
60,083
100,000
40,000
30,000
05
10
15
Tutorial note: Although by virtue of s.92, the share of income from an association of person (AOP) is
not taxed again in the hands of a member, it is included in the other income of the member for the
purposes of determining the tax rate. [s.88] As a consequence of this treatment, other income may
attract a rate which is higher than the rate which otherwise would have been applicable on income
other than the share from the AOP.
70
(c)
Unexplained asset
(i)
(ii)
Where a person fails to offer an explanation about the nature and source of the investment or the
explanation offered is not satisfactory, adverse inference (of concealment of income) will be drawn by
the Commissioner and Rs. 5,000,000, being the cost of the asset at the time of purchase, will be
included in Ws income under the head Income from other sources.
10
The amount will be charged to tax in the tax year 2009, which is the relevant tax year with reference
to the date of purchase of the asset.
10
[Note: prior to the amendment in the Finance Act, 2010, such unexplained amount was charged to tax
in the tax year immediately preceding the financial year in which it was discovered by the
Commissioner.]
(iii) In the case of concealment of income, a penalty equal to the amount of tax which the person sought
to evade by concealment of income or Rs. 25,000, whichever is higher, shall be imposed. [Sr. No 12
of the Table in s.182(1)]
(a)
(i)
10
30
25
(ii)
05
05
05
05
05
05
30
Tutorial note: Capital gains on securities are treated as a separate block of income. Any loss arising
on the disposal of a security is not adjustable against any capital gain except one arising on the
disposal of another security. Further, such loss cannot be carried forward to the succeeding years.
[s.37A]
20
05
05
05
05
20
Marks
(b)
Mr Sajid
Accounting year ended 30 June 2011
Tax year 2011
Computation of taxable income
Rs.
Rs.
Taxable gain
100,000
100,000
300,000
500,000
Tax payable
7,500
10,000
0
17,500
(Note 1)
(Note 1)
(Note 1)
Total
15
15
15
(Note 2)
(Note 3)
(Note 4)
(Note 5)
(Note 6)
Rs.
75,000
50,000
56,250
181,250
(180,000)
1,250
345,000
346,250
Taxable income
Total tax liability
Tax on taxable income at 075%
2,597
Notes
Note 1
Capital gain and tax payable on securities
5,000 shares of ABC Ltd
The shares were exchanged with a debt, the fair market value (realisable value of the debt) on the date of
disposal of these shares was Rs. 150,000 [Rs. 200,000 bad debt Rs. 50,000]. The same is treated as
consideration received for the purpose of computation of capital gains. [s.77(1)]
Rs.
150,000
(50,000)
100,000
Consideration received
Cost
Capital gain
Tax at 75% [holding period more than six months but less than
one year]
Rs.
300,000
(200,000)
100,000
10,000
21
10
15
10
20
15
05
Marks
Note 2
KIM Ltd is not quoted on any stock exchange in Pakistan. Therefore, for tax purposes, it is treated as a private
limited company and not included in the definition of a security. [s.2(47) read with s.37A]
Rs.
600,000
(500,000)
100,000
75,000
700,000
(650,000)
50,000
The taxpayer being an individual is not a prescribed person to deduct tax on payment of commission. Any
expenditure incurred to acquire or dispose of an asset is treated as part of the cost of the asset. [s.76(2)(c)]
Note 4
Coin of Mughal Era
Rs.
150,000
(75,000)
75,000
56,250
Note 5
(i) The loss under the head Income from other sources of Rs. 400,000 cannot be brought forward.
Therefore, it cannot be set off against income of this year. [s.57]
(ii)
Although the loss from speculation business can be brought forward, it can only be set off against future
income from speculation business. Since there is no income from speculation business in the current
year, the loss of Rs. 100,000 cannot be set off. [s.58]
(iii) The capital loss arising from the sale of a taxable capital asset can be brought forward and set off against
future capital gains. Hence the capital loss of Rs. 180,000 on account of the sale of shares in the tax
year 2010 can be set off against the capital gains of the current year. [s.59]
Note 6
Salary income received in arrears from an ex-employer is taxable on a receipt basis. [s.12(1)] Since his
average rate of tax in the previous tax years was 15%, there is no benefit to Mr Sajid in giving notice to the
Commissioner to have his salary income assessed in the tax year 2009. [s.12(7)]
Capital gains or losses not included in the computation of capital gains
1.
2.
3.
Disposal of sculpture
Although there was a loss of Rs. 75,000 [Rs. 75,000 Rs. 150,000], a capital loss is not allowable
on a sculpture or any other work of art held as personal asset. [s.38(5)(b)].
10
10
22
10
15
20
Marks
4
(a)
10
However, such tax reduction is only available where the taxable income during the tax year other than income
on which the deduction of tax is the final tax, does not exceed Rs. 1,000,000.
10
Since for the tax year 2011 Mr Sulemans taxable income, excluding dividend, is less than Rs. 1,000,000,
he is eligible for a tax reduction of 50% on the amount of tax payable on his income from business as
below:
05
Rs.
60,000
30,000
However, there will be no reduction in the tax liability in respect of the dividend income as this falls in the
final tax regime [FTR]. [Sub-clause (1A) of Clause (1) of Part III of the Second Schedule]
(b)
05
40
15
Mr Daud and Mr Akmal have definite shares of 80:20, therefore they are to be assessed separately for their
respective share in income (and not as an association of persons) from this property as below:
05
(c)
10
Mr Daud
Rs.
Mr Akmal
Rs.
800,000
200,000
05
(0)
800,000
(0)
200,000
05
2,500
42,500
05
05
40
Provisional assessment
Where no compliance is made to a notice served by the Commissioner requiring a person to file a return of
income, the Commissioner is vested with the authority to frame a provisional assessment. Such provisional
assessment is treated as a final assessment after the expiry of 60 days from the date of service of the
provisional assessment order on the person.
10
Mr Wasif can prevent the provisional assessment from being treated as a final assessment by filing his return
of income for the tax year 2010 within 60 days of the service of the provisional assessment order.
10
(d)
10
30
is in the prescribed form and accompanied by the prescribed annexures, statements or documents;
10
(ii)
fully states all the relevant particulars or information as specified in the form of return, including a
declaration of the records kept by the taxpayer; and
10
23
Marks
(iii) is signed by the person, being an individual, or the persons representative specified in [s.172 of] the
Income Tax Ordinance, 2001.
[s.114(2) read with s.120(2)]
05
Invalid return
Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer
informing him of the deficiencies and directing him to provide such information, particulars, statement or
documents by such date as specified in the notice. In case of non-compliance of such notice, the return filed
shall be treated as an invalid return.
However, the deficiencies which can render a return invalid do not include incorrect amount of tax payable
on the taxable income as specified in the return or short payment of tax.
(a)
15
40
15
Rs.
2,754,000
05
05
2,754,000
05
1,972,901
20
2,754,000
(1,972,901)
781,099
Tax payable
05
Working:
Sales tax has been paid on purchases [Rs. 15,000,000] of raw material made from registered persons only.
Since the purchases were made for both taxable and non-taxable supplies, only such proportion of the input
tax as is attributable to the taxable supplies can be reclaimed [as per s.8]:
Rs. 15,000,000 x 17/117 x 38,200,000/42,200,000
Rs. 1,972,901
Since the amount of input tax paid during the tax period is less than 90% of the output tax, the full amount
of input tax is allowable. [s.8B]
Tutorial note: the same tax rate is applied whether taxable supplies are made to a registered person or an
unregistered person [s.3].
Explanations:
1.
2.
24
10
10
60
Marks
(b)
Further, where the Commissioner is satisfied that a registered person has issued fake invoices or has
otherwise committed tax fraud, he may blacklist such a person or suspend his registration by following the
procedure prescribed by the Board. [s.21 of the Sales Tax Act, 1990 and Rule 11 of the Sales Tax Rules,
2006]
25
25
15
40
10