SKANS School of Accountancy

Principal of Taxation
MOCK
Level 2 Examination 13th August, 2018
Total marks:100
Time Allowed:3 Hour 15 minutes

Question No 1:
Ahmed is employed as a manager by Azmat Pvt. Ltd, and the following information is available
for tax year 2018:
1. During the tax year 2018, Ahmed was paid
(RS.)
Salary 100.200/month
House Rent Allowance 50,000/month
Medical Allowance 20,000/month

2. In addition to his salary, Ahmed has been paid the following bonuses:
Amount Date of payment In respect of the six-month period
Rs. ended
40,600 25 August 2017 30 June 2017
80,100 20 March 2018 30 December 2017
20,900 25 August 2018 30 June 2018
3. During the period 1 July to 31 August 2017, Ahmed used his private car for private
and business journeys. He was reimbursed by Azmat Pvt. Ltd 55 paisa per mile for the
following mileage:

Miles
Normal daily travel between home and Azmat Pvt. Ltd’s offices 4,000
Travel between home and the premises of Azmat Pvt. Ltd’s clients
(none of the clients' premises were located near the offices of Azmat) 2,000
)?Pvt. Ltd)

4. On 1st November 2018, Azmat Pvt. Ltd provided Ahmed with a car which has list price of
Rs. 900,000. It is 30% used for office work.
5. During January 2018, Ahmed spent ten nights overseas for company business. Azmat
Pvt. Ltd paid Ahmed a daily allowance of £10 (1£ = Rs. 150) for personal incidental
expenses.
6. In July 2017 He was granted an employee stock option to purchase up to 15,000 shares
in Ahmed Ltd’s holding company, in Bermuda, at an option price of USD 3 per share.
She exercised the option in Sep. 18 to purchase 8,000 shares when market price of the
shares was USD 5 per share. In Dec. 18 she sold 6,000 shares at a price of USD 8.5 per
share. [Assume USD 1 = PKR 102].
7. Donation of Rs. 54,000 were paid to charitable institution listed in the second schedule of
the Income Tax Ordinance, 2001.
Other information:
 1. Since 1.11.2017, she and her friend Ahmed has let out one house. Both own the
house in equal proportion. The net receipt is as follows:
Date received/paid Rs.
23 October 2017 Advertising for tenants (600)
25 October 2017 Non-adjustable deposit 10,400
25 October 2017 Rent for the quarter ended 31 January 2018 15,600
1 November 2017 Insurance for the year ended 31 October 2018 (1,200)
2 February 2018 Rent for the quarter ended 30 April 2018 15,600
20 March 2018 Repairs following a flood (12,800)
Rent of remaining period of current tax year is still receivable.
2. She paid following in TY 2018:
• Rs. 50,000 in voluntary pension scheme and
• interest of Rs. 30,000 for renovation of her home in DHA.
• a cash loan to her uncle of Rs. 50,000.

Required:
Calculate taxable income and tax liability of Mr Ahmed for Tax Year 2018 also give relevant
notes? (18)

Question No 2:
Define the following Under the provisions of the Income Tax Ordinance, 2001:

(i) Derivative product (03)

(ii) Securities (03)

Question No 3:
King and Lamda (equal partners) are running a partnership firm in Pakistan since long named KL
Enterprise. Both Mr. King and Mr. Lamda are UK nationals. During current tax year King did not visited
Pakistan, however Lamda visited Pakistan twice for 10 days for taking business decisions. Firm is
engaged in the business of manufacturing and supply of wide range of products. Following
information is extracted from KL’s records for year ended 30 June 2018: Rs.
Sales 90,000,000
Profit before taxation 45,385,000
Administrative and selling expenses include the following:
(i) Marketing expense of Rs. 90,000 in total paid to 10 persons equally without tax deduction.
(ii) Legal expenses of Rs.1,000,000 in respect of a dispute over territorial rights.
(iii) Rs.3,000,000 paid in respect of an unsuccessful marketing campaign.
(iv) Rs.2,000,000 contributed to a foreign pension fund maintained for employees.
(v) Rs.1,800,000 paid on 1.11.2017 to improve the features of production department software.
(vi) Rs.650,000 in respect of the cost of two ramps. The ramps were built for disabled persons.
(vii) Accounting depreciation and amortization amounts to Rs. 1,875,000.
(viii) Motor expenses as follows:
Rs.
Total Cost of running Lamda’s car. (It is used 70% for private journeys) 50,000
Cost of running another motor car used by the production manager 80,000
Parking fines paid to Government on production manager’s car 30,000
Financial charges include the following:
(i) Mark-up of Rs.1,200,000 paid on a loan for advancing concessional loans to employees.
(ii) Mark-up of Rs.9,000,000 on short term loan obtained for working capital.
Other income includes the following:
(i) Gain on sale of 30,000 shares in Blue listed company. These are sold for Rs.120 per share
in March 2018. KL purchased these shares in May 2015 at a cost of Rs.35 per share.
(ii) Rs. 17,00,000 gain for sale of vehicles to employee was recorded in books. Rs.2,450,000 is
received from employee. The FMV and tax WDV was Rs.5,250,000 and Rs.3,320,000
respectively. It is sold at accounting WDV.
(iii) Gain on sale of shares in ML (Pvt.) company. On July 1, 2014 KL acquired 200,000 shares
at Rs.50 per share. On September 1, 2017 KL sold 100,000 shares at price of Rs.85 per
share to a foreign investor. The market value at that time was Rs.80 per share. On
F e b r u a r y 1 , 2 0 1 8 KL sold remaining shares for Rs.75 per share to a local investor. The
market value at time of sale was Rs.78 per share. The gain recorded in books is equal to
actual sale proceeds less cost.
(iv) Bad debt recovery of Rs. 90,000 which was not previously allowed as deduction.
(v) Foreign source business income of Rs. 600,000.
Other information:
1. The assessed losses brought forward from tax years 2016 and 2017 were as follows:
2017 2016
-----Rupees-----
Business loss before depreciation 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
2. Tax paid on foreign income is Rs. 70,000.
3. Tax depreciation and amortization on assets capitalized for TY 2016 is 1,500,000.

Required:
Calculate income and tax payable by KL for Tax year ended June 30, 2018. (20)

Question No 4:
(a) List down the responsibilities of tax administrators emanating from best ethical practices.
(04)
(b) How does ‘National Finance Commission’ constitute? Also state the duties performed by the
National Finance Commission’ (05)

Question No 5:
a) Mr. Umer a citizen of America has entered into an employment agreement with PTCL for 5
year contract from 1-July-2017 to 30-June-2022. In TY 2018 he earned salary income of Rs.
600,000 in Pakistan and Rs. 900,000 income from business in America. Explain the tax
treatment in TY 2018. (02)

b) What advantage he can gain if his employment contract is of 2 years? (02)

Question No 6:
Under the provisions of the Income Tax Ordinance, 2001 describe the following:
(i) meaning of the term ‘Associates’. (02)
(ii) circumstances in which a member of an association of persons and the
association may be regarded as associates. (02)
(iii) situation in which members of an association of persons may not be regarded as
associates. (02)

Question No 7:
Rehman Limited (RL) is engaged in the business of production and supply of large variety of consumer
goods. Following data has been extracted from RL’s records for the month of May 2018:
Rupees
Purchases:
Raw material:
• from local registered suppliers 8,000,000
• from local un-registered suppliers 2,000,000
• Import 900,000
Supplies:
Local:
• taxable supplies to registered persons 7,200,000
• taxable supplies to un-registered persons 3,500,000
• exempt goods 250,000
Export to Malta 600,000
Additional information:
(i) RL imported specific machinery at Rs. 1,000,000 from Taiwan.
(ii) Input tax of Rs. 40,000 pertaining to the raw materials purchased in April 2018 could
not be claimed due to an oversight.
(iii) Taxable supplies to registered persons include the following:
• Sale of goods with a value of Rs. 30,000 is sold to associate for Rs. 20,000.
The associate give a similar concession when RL purchase goods from him.
• An advance is received on 18th May of Rs. 10,000 for delivery of taxable goods
to be made on 25th June.
• 400 kg of special brand of tea supplied to FM Enterprises at a wholesale price of
Rs. 500 per kg. This Tea is sold in the market at a retail price of Rs. 700 per kg.
Tea is covered under Third Schedule.
• Supplies of Rs. 2,000,000 to a PIA airline for consumption for flight
proceeding Kuwait.
(iv) On 20th May RL entered into a hire purchase agreement for sale of goods having
value of Rs. 40,000. No amount was received till the end of May.
(v) Goods of Rs. 30,000 were supplied to director free of cost.
(vi) RL donated some items to a local high school having fair value of Rs. 22,000.
(vii) A creditor of Rs. 12,000 in respect of 01 December 2017 purchase is still
outstanding. Its input was properly claimed in the month of December 2017.
(viii) A car was purchased from registered person having value of Rs. 800,000.
(ix) Bad debts of Rs. 20,000 were written off.
(x) Sub-standard supplies of Rs. 50,000 were returned to vendors. Proper debit/credit
notes were raised in this regard.
(xi) Input credit brought forward from previous month isRs.50,000.
(xii) All the above figures are exclusive of sales tax, wherever applicable.
 Required: In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder,
compute the amount of sales tax payable by or refundable to RL for the tax period May 2018.
(17)

Question No 8:
Maroof filed his return of income for tax year 2017 on 30 September 2017. On 15 August 2018
he received a show cause notice from the Commissioner Inland Revenue u/s 122 for
amendment of the assessment order issued on self-assessment basis.
Required:
Under the provisions of the Income Tax Ordinance, 2001 briefly describe:
(a) the circumstances under which an assessment order treated as issued on self-assessment
basis may be amended by the Commissioner. (05)
(b) the situations in which the Commissioner may be barred from amending the original
assessment order. (05)

Question No 9:
a) Mr. Salman has taken a life insurance policy from State Life Insurance. His Tax Consultant him to
avail tax credit on life insurance premium. In this regard, Mr. Salman has certain queries with
respect to tax credit. Briefly explain the following queries in the light of section 62 of the Income
Tax Ordinance, 2001:

i. What are the requirements to avail tax credit on life insurance premium and who can
avail such credit? (02)
ii. How tax credit is computed for payment of life insurance premium? (02)

Question No 10:
Supreme Limited (SL), a registered importer, exporter and manufacturer, is primarily
engaged in the manufacture and export of a wide range of consumer durables. Following
activities were carried out by the company during the year:

(i) At the time of preparing sales tax return for the month of January 2018, it was found
that an input tax credit pertaining to June 2017 inadvertently remained unclaimed.
An adjustment was, therefore, claimed in January 2018 without any intimation to
the sales tax authorities.
(ii) Electricity bill of Rs. 100,000 for June 2018 was paid in cash. The company however, did
not claim the related input tax credit as cash transactions exceeding Rs 50,000 are
inadmissible.
(iii) Goods of which the market price was Rs. 500,000 were supplied to Superior
Industries Ltd (SIL). SIL settled the transaction by paying Rs. 400,000 in cash and by
giving goods of Rs. 20,000 to SL. The value of the supply was shown as Rs. 400,000 in
the accounts.
Required:
In the light of the provisions of Sales Tax Act, 1990 advise the management of the company as to
the chargeability/ adjustment of sales tax in each of the above situations. (06)
For salaried individuals