Certificate in Accounting and Finance Stage Examinations

The Institute of 6 March 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Principles of Taxation
Q.1 Mushtaq is a sole proprietor of Mushtaq Enterprises (ME) engaged in the business of
manufacturing of different products. ME’s profit and loss account shows profit before
taxation of Rs. 1.8 million for the year ended 30 June 20X7. A review of ME’s records has
revealed the following information.

(i) ME employs five salesmen. Rs. 22,000 per month were paid to each salesman in cash
which includes reimbursement of Rs. 6,000 per month incurred on entertainment of
customers at the business premises.
(ii) Administrative expenses include Rs. 150,000 which were paid to a research institute
in China for the purpose of developing a new product.
(iii) Accounting loss on the sale of patents was Rs. 65,000. The tax written down value of
these patents at the beginning of the year was Rs. 430,000 and these were sold for
Rs. 524,000. Amortization charged to the profit and loss account on these patents for
the current year was Rs. 25,000.
(iv) Receivables from Atif and Aslam which had been written off in the previous year
were recovered. Details are as follows:

Atif Aslam
------ Rupees ------
Claimed bad debts in last tax return 800,000 1,200,000
Allowed by tax authorities last year 550,000 600,000
Amount recovered during the year 700,000 400,000

(v) ME has opened a sales office in Dubai. In this respect, furniture costing Rs. 850,000
with written down value (WDV) of Rs. 650,000 was shifted to Dubai office. The tax
WDV of the furniture at the beginning of the year was Rs. 610,000.
(vi) Accounting depreciation for the year is Rs. 580,450. However, no depreciation has
been provided on the following fixed assets purchased on 1 March 20X7:

Rupees
Furniture 200,000
Used machinery imported from Germany 500,000

(vii) Tax depreciation for the year, prior to the adjustments mentioned in (vi) above,
amounted to Rs. 456,400.
(viii) Advance tax paid u/s 147 was Rs. 200,000.
(ix) The assessed business losses of tax year 20X1 brought forward in year 20X7 are
Rs. 830,000. These include unabsorbed tax depreciation amounting to Rs. 705,000.

Other transaction of Mushtaq

On 1 June 20X7, he sold 6,000 shares for Rs. 432,000 out of 15,000 shares which he
received on 1 May 20X4, on the death of his father. The fair market value of shares on the
date of transfer to Mushtaq was Rs. 25 per share.

Required:
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder, compute
taxable income and net tax payable by or refundable to Mushtaq for the year ended
30 June 20X7. (16)
 Principles of Taxation Page 2 of 5

Q.2 (a) Explain the term ‘disposal of assets’ as referred to in the Income Tax Ordinance, 2001. (05)

(b) Saleha is a resident person. She disposed of the following assets during the tax year
20X7.

(i) A painting which she inherited from her father was sold for Rs. 1,250,000. The
market value of the painting at the time of inheritance was Rs. 1,550,000. The
painting was purchased by her father for Rs. 1,000,000. (02)
(ii) She sold jewellery for Rs. 2,300,000 which was purchased by her husband in
March 20X5 for Rs. 1,300,000 and gifted to her on the same date. (02)
(iii) She disposed of her car for Rs. 1,800,000. The car was being used for the
purposes of her business. The tax written down value of the car at the beginning
of tax year 20X7 was Rs. 1,600,000. The rate of depreciation for tax purposes is
20%. (02)
(iv) On 20 October 20X6 she sold a dining table to Faheem for Rs. 18,000 which
she had purchased on 15 May 20X5 for Rs. 15,000 for her personal use. (02)

Required:
Under the provisions of the Income Tax Ordinance, 2001, discuss the taxability of
each of the above transactions in the context of capital gain/loss.

Q.3 (a) On 1 June 20X6 Dawood and Dewan jointly purchased a bungalow for
Rs. 35 million. They paid the amount in the ratio of 65:35 respectively. To arrange
funds for the deal, Dawood borrowed Rs. 3,000,000 in cash from Shameem who is in
the business of lending money. The rate of interest is agreed @ 20% per annum.

On 1 July 20X6, the house was let out to a company at annual rent of Rs. 4,500,000
inclusive of an amount of Rs. 75,000 per month for utilities, cleaning and security. For
providing these services Dawood and Dewan paid Rs. 35,000 per month. During the
tax year 20X7 they also paid Rs. 10,000 as collection charges and Rs. 230,000 for
administering the property.

Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income
for the tax year 20X7. (08)

(b) Najam had purchased a house in 20X2 for Rs. 20 million.

On 1 July 20X6, Najam entered into an agreement with Zameer for sale of the house
for Rs. 25 million. As per the terms of the agreement, Najam received Rs. 5 million on
the day the contract was signed and balance amount was to be paid on
30 September 20X6. However, due to financial difficulties, Zameer failed to pay the
balance amount on the due date and consequently, Najam forfeited the advance in
accordance with the terms of the agreement.

On 15 February 20X7 Najam sold the house to Farid for Rs. 30 million.

Required:
Advise Najam about the taxability of the above transaction under the Income Tax
Ordinance, 2001. (04)

Q.4 (a) State the duties of National Finance Commission. (04)

(b) List the taxes and duties which may be raised under the authority of Parliament. Also
list various types of taxes which are covered under the scope of legislation of the
Provinces. (06)
 Principles of Taxation Page 3 of 5

Q.5 (a) List the persons who are required to file a tax return under the provisions of the
Income Tax Ordinance, 2001. (06)

(b) In the light of the provisions of the Income Tax Ordinance, 2001:

(i) Identify the circumstances under which the Commissioner of Income Tax may
require a person to furnish a return of income for a period of less than twelve
months. (03)
(ii) State the consequences if a person fails to furnish the return as required in (i)
above. (03)

Q.6 Zahid, the sole proprietor of FG and company, is a resident individual and is in the process
of filing his wealth statement for the tax year 20X7. The relevant information is as under:

(i) Assets and liabilities disclosed in the wealth statement for the tax year 20X6 were as
follows:

Rupees
Assets
Agriculture land in Hyderabad 5,000,000
Residential property in DHA Karachi 3,000,000
Investment in shares of listed companies 1,100,000
Business capital – FG & Co. 4,000,000
Motor vehicle 1,540,000
Cash at bank 600,000
Cash in hand 300,000
15,540,000
Liabilities
Bank loan (1,500,000)
Net assets 14,040,000

(ii) Details relating to FG & Co. are as follows:

Rupees
Income from business for the tax year 20X7 2,540,000
Drawings during the year 450,000

(iii) Balance of cash in hand and at bank, as on 30 June 20X7 amounted to Rs. 157,500
and Rs. 730,000 respectively.
(iv) Transactions carried out by Zahid during the year were as follows:

Paid an advance of Rs. 1,000,000 against purchase of a bungalow for
Rs. 10,000,000.

Sold shares of a listed company for Rs. 350,000. The shares were purchased on
1 May 20X6 for Rs. 50,000. Capital gain tax collected by NCCPL amounted to
Rs. 37,500.

Gifted shares of a listed company to his brother. The shares were purchased by
Zahid in 20X2 at a cost of Rs. 100,000 whereas market value of the shares at the
time of gift was Rs. 150,000.

Paid Rs. 200,000 towards principal amount of the bank loan.

Personal expenses amounted to Rs. 2,075,000.

Net receipts against agricultural income amounted to Rs. 2,500,000.

Required:
Prepare Zahid’s wealth statement and wealth reconciliation statement for the tax year 20X7. (07)
 Principles of Taxation Page 4 of 5

Q.7 Jahangir Ali (JA) is registered under the Sales Tax Act 1990. JA runs multiple businesses.
Following information has been extracted for the month of February 2017:

Rupees
Supplies
Taxable goods exported to Qatar 100,000
Taxable goods to registered customers 750,000
Taxable goods to unregistered customers 550,000

Purchases
Taxable goods from registered suppliers 3,000,000
Exempt goods from registered suppliers 70,000
Taxable goods from unregistered suppliers 95,000

The following further information is available:

(i) Taxable goods supplied to registered customers include goods amounting to

Rs. 300,000 supplied to an associated company at a special discount of 25%.
(ii) Taxable goods supplied to unregistered customers include goods worth Rs. 100,000
supplied to Saleem Brothers (SB). JA did not charge any sales tax from SB as it has
submitted an undertaking that it is a cottage industry and exempt from sales tax under
the Sixth Schedule of the Sales Tax Act, 1990.
(iii) Taxable goods purchased from registered suppliers include:

goods worth Rs. 320,000 purchased from Akram Limited who was blacklisted on
25 February 2017 due to issuance of flying invoices.

goods purchased from ZA Traders amounting to Rs. 30,000. ZA Traders did not
declare this amount in its tax return for the month of February 2017.

a new machine purchased for Rs. 500,000 which was commissioned into
operation during February 2017.

office equipment of Rs. 200,000, purchased for the warehouse.
(iv) Goods pledged with a bank were sold by the bank in an auction for Rs. 1,000,000.
The normal selling price of these goods was Rs. 1,200,000.
(v) Excess of input tax over output tax brought forward from January 2017 was
Rs. 110,000.

Rate of sales tax is 17%. All figures are exclusive of sales tax.

Required:
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the
amount of sales tax payable by or refundable to JA and the amount of sales tax to be carried
forward, if any, for the tax period February 2017. (17)

Q.8 (a) Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, identify the
circumstances in which:
(i) a registered person is not allowed to reclaim or deduct input tax paid. (06)
(ii) a registered person may be liable for deregistration. (03)

(b) On 2 June 2016, Abid Limited inadvertently issued a tax invoice with an incidence of
sales tax amounting to Rs. 25,000 as against the applicable tax of Rs. 45,000. The error
was detected on 15 February 2017 i.e. after expiry of 180 days.

Advise Abid Limited in the light of Sales Tax Rules, 2006. (04)

(THE END)
 Principles of Taxation Page 5 of 5

EXTRACTS FROM THE INCOME TAX ORDINANCE, 2001

THE FIRST SCHEDULE
Tax Rates for Every Individual and Association of Person Except for Salaried Taxpayer
S. No. Taxable income Rate of tax
Rs. 7,000 + 10% of the amount
3. Exceeds Rs. 500,000 but does not exceed Rs. 750,000
exceeding Rs. 500,000
Rs. 32,000 + 15% of the amount
4. Exceeds Rs. 750,000 but does not exceed Rs. 1,500,000
exceeding Rs. 750,000
Rs. 144,500 + 20% of the amount
5. Exceeds Rs. 1,500,000 but does not exceed Rs. 2,500,000
exceeding Rs. 1,500,000
Rs. 344,500 + 25% of the amount
6. Exceeds Rs. 2,500,000 but does not exceed Rs. 4,000,000
exceeding Rs. 2,500,000

Capital Gains on disposal of Securities

S. No. Period Rate of tax
1. Where holding period of a security is less than twelve months 15%
Where holding period of a security is twelve months or more but
2. 12.5%
less than twenty-four months
Where holding period of a security is twenty-four months or more
3. 7.5%
but the security was acquired on or after 1st July, 2012

Capital Gains on disposal of Immovable Property

S. No. Period Rate of tax
6. Where holding period of immovable property is up to three years 5%
Where holding period of immovable property is more than three
7. 0%
years

THE THIRD SCHEDULE

Part I
Depreciation Rates
1. Building (all types) 10%
2. Furniture and fittings 15%
3. Plant and machinery 15%
4. Motor vehicles (all types) 15%
5. Computer hardware 30%

Part II
Initial Allowance and First Year Allowance
The rate of initial allowance shall be 25% for plant and machinery and 15% for building.