SKANS School of Accountancy

Principles of Taxation
Mid Term Exam

Level: CAF Total marks: 100

Time Allowed: 03:15
Question-1
Explain the tax treatment in following independent situation for the tax year 20X6
i) Mr. Ali is involved in providing tax services to corporate clients. He incurred repair expense on the
damaged roof of Rs. 12,000 in TY 20X2 and this amount was allowed as deduction then. This amount
is still appearing in balance sheet prepared on June 30, 20X6. (2)
ii) Mr. Akbar is an architect. He purchased a computer software for designing of buildings. Its useful life
is 31 years and cost is 2,000,000. This software was purchased on June, 1st 20X6. (2)
iii) Mr. Saqib has a manufacturing company. He entered into a forward contract for the purchase of raw
materials used in its business to guard against loss through price fluctuations. On the date of
maturity of the forward contract, he did not take delivery of the raw materials but the contract was
settled by a payment of Rs. 950,000. (2)
iv) Mr. Z started construction business in TY 20X6. Rs. 800,000 is spent on technical manager's visit to
korea. It was necessary for the firm's technical manager to travel to korea for selecting a
Construction Machine of Rs.2,000,000. The machine was received and it was put to use on May 1,
20X6. (2)
v) Commission of Rs. 20,000 was paid by Mr. Sajid to his employee but no tax was deducted by him. (2)
vi) Professional tax of Rs. 100,000 was paid by Mr. Ahsan to the Government of Punjab in cash. Such tax
is to be paid by every person who is engaged in the trading business in the territory of Punjab. He
considers it inadmissible as it is a tax paid to a provincial government. (2)
Question-2
Following transactions pertain to Karobar Limited (KL) which took place during the tax year 20X9:
(i) KL sold an immovable property for Rs. 50 million. The cost of the immovable property was Rs. 30
million. Tax depreciation of Rs. 6 million had been allowed on the immovable property up to the tax
year 20X9. (02)
(ii) On 1 January 20X9, KL entered into a forward contract for the purchase of raw materials to be used
in its business to guard against loss through price fluctuations. On the date of maturity of the
forward contract, KL did not take the delivery of the raw materials but the contract was settled by
making a payment of Rs. 500,000. (03)
(iii) A machine costing Rs. 1,800,000, being used in KL’s Sheikhupura factory was transferred to its
subsidiary in Iran. The fair market value and tax written down value of the machine on the date of
transfer were Rs. 2,500,000 and Rs. 600,000 respectively. (02)
Required: Explain the taxability of the above transactions.
Question-3
Profit before tax of Chaudhary Associates (CA) for the year ended 30 June 20X8 is Rs. 1,200,000.
Last year, CA had written off balances outstanding from two of its debtors namely Power International (PI) and
Global Limited (GL) which were partly allowed by the tax authorities.
PI GL
--------- Rupees ---------
Amounts written off 1,150,000 925,000
Allowed by tax authorities 825,000 240,000
During the current tax year, CA received Rs. 652,000 from PI and Rs. 346,000 from GL, in full settlement of their
debts.
In the light of the ITO, 2001 compute CA’s taxable income for the tax year 20X8. (05)
Question-4
a) In Income Tax Ordinance, 2001 the term “disposal” has a wider connotation than sale because it
includes exchange, relinquishment, and extinguishment. List the situations under which an asset owned
by a person shall be treated to have been disposed of. (05)
b) Certain types of payments by a private company to its shareholders can be treated as ‘dividend’ under
the Income Tax Ordinance, 2001. State the conditions necessary for the application of this rule and the
exceptions to such rule. (05)
c) Kaleem Limited (KL) is a listed company and its accounting year ends on 30 June. KL is now considering
to change its accounting year from 30 June to 30 September. Under the provisions of the Income Tax
Ordinance, 2001, state the requirements regarding change in tax year from normal to special. (03)

Question-5
A. Differentiate between deductible allowances and admissible deductions. Give three examples of each.
(06)
B. Entertainment expenditure is allowed as deduction in IFB subject to certain limits and restrictions.
Describe such limits and Conditions. (06)
Question-6
Saeed, a citizen of Pakistan, was working on a foreign vessel belonging to Delta Shipping Company (DSL) based
in Spain for the past three years. His monthly salary was USD 15,000 which was remitted to his Pakistani bank
account through normal banking channel. The amount received during the tax year 20X9 was converted to Pak
Rupees at an average exchange rate of USD 1 = PKR 131. On 1 October 20X8, he resigned from DSL and joined
Haris Pharma Limited (HPL) in Pakistan as a General Manager. He was offered following monthly salary and
allowance in HPL:
Basic Salary 600,000
Medical Allowance 66,000
In addition to the above, he was also provided the following:
i) Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion to the
duration of his stay in the company. The bonus amount was paid to him on 5 July 20X9.
ii) Two company maintained cars. Both cars were purchased on 1 October 20X8. The car costing Rs.
3,500,000 was used for official purposes whereas the car costing Rs. 1,900,000 was used for personal
purposes.
iii) Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food provided
to him during the year was Rs. 125,000.
iv) A special allowance of Rs. 20,000 per month to meet expenses wholly and necessarily incurred in the
performance of his official duties. Actual expenses incurred by him during the year were Rs. 150,000.
v) Provident fund contribution of Rs. 60,000 per month. An equal amount per month was also contributed
by Saeed to the fund.
Other information relevant to tax year 20X9 is as under:
On 1 December 20X8, Saeed obtained a loan of Rs. 25 million from a scheduled bank at 15% mark-up per
annum to acquire a residential house.
i) During the year, he received dividends of Rs. 575,000 from a listed company. The amount was net of
withholding income tax at the rate of 15% and Zakat of Rs. 62,500 deducted under the Zakat and Usher
Ordinance, 1980.
ii) Withholding tax deducted by HPL from Saeed’s salary during the tax year 20X9 amounted to Rs.
1,300,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under the
appropriate head of income, the total income, taxable income and net tax payable by or refundable to Saeed for
the tax year 20X9. (17)
Question-7
Jamil and Company (JC) is the sole trader of a branded tea in Pakistan. In addition to the trading business, JC is
also engaged in forward purchasing and selling of tea to reap the benefits of price fluctuation in local and
international markets.
Following information has been extracted from the records of JC for the year ended 30 June 20X9:
(i) Detail of trading and speculation businesses (forward purchase and sale) were as follows:
Trading Speculation
business business
------ Rs. in million ------
Gross revenue 400 200
+Gross profit 20 10
(ii) Total administrative and general expenses for the year amounted to Rs. 7.2 million. This amount includes a
penalty of Rs. 0.4 million paid to the custom authorities.
Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute JC’s taxable income / (loss) and
the amount of loss to be carried forward, if any, for the tax year 20X9. (06)
Question-8
a) On 25 August 20X8, the Officer of Inland Revenue has issued a notice to Rahat Foods (Private) Limited
(RFPL) to deposit withholding income tax of Rs. 1,950,000 in respect of loan amounting to Rs.
13,000,000 given to Nadeem Ahmad, a shareholder of RFPL, by treating the amount of loan as dividend.
The notice was served to the company on 30 August 20X8. According to RFPL’s records, the loan was
given to Nadeem Ahmad on 25 May 20X7 when accumulated profit of the company was Rs. 12,000,000.
Required : In the light of the provisions of the Income Tax Ordinance, 2001 explain whether you agree
with the notice issued to RFPL by the Officer of Inland Revenue.(05)
b) Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the
correct head of income for tax year 2019, in each of the following case:
Under an employee share scheme, 30,000 shares of Dawood Limited were issued to Qamar, on 1 August
2015 for Rs.30 each. According to the scheme, he was not allowed to sell/transfer the shares before
completion of three years from the date of issue. The face value of each share is Rs.10 per share. Fair
market value of each share on different dates was as follows:
1 August 2015 30 June 2018 31 July 2018
Rs.40 Rs.30 Rs.50
(04)
Question-9
a) State any five ways through which taxes can be used as a means for development. (04)
b) Describe any 4 major characteristics of taxation system. (05)
Question-10
a) Sajid retired from Sun Chemicals Limited (SCL) as a marketing manager with effect from 31 December
2019. He received the following amounts in final settlement from SCL:
(i) Leave encashment of Rs. 600,000.
(ii) Rs. 4,000,000 from unapproved provident fund. 50% of this amount was contributed by Sajid.
(iii) Un-approved gratuity of Rs. 2,500,000.
He also acquired the vehicle, provided to him by SCL, at accounting written down value of Rs. 500,000.
The market value of the vehicle at the time of retirement was Rs. 2,000,000.
Required: Under the Income Tax Ordinance, 2001 and Rules made thereunder, discuss the tax treatment
of the above benefits received by Sajid on retirement. (04)
b) Mr. Qayyum purchased an imported Plant for US$ 35,000 on 31 March, 2019 the exchange rates on
relevant dates are as follows:
March 31,2019 June 30,2019
Open Market rate 1 US $=Rs. 102 1 US $=Rs. 103
State Bank of Pakistan Rate 1 US $=Rs. 102.1 1 US $=Rs. 103.2
What is the cost of Plant? (02)
 c) Two buses were disposed off for Rs. 2.5 million. They were acquired in tax year 2019. The tax written
down value of buses at the beginning of the tax year 2020 was Rs. 2.4 million. The trucks were being
used partly i.e. 60% for business purpose. Tax rate of depreciation is 15%. Calculate tax gain on loss on
disposal of buses. (03)

Depreciation Rates
Assets Dep. Rates (%)
Buildings 10
Computer/ IT products/ Air crafts 30
Others ( Vehicles, P & M, furniture, ships, Technical or professional books) 15
Ramp build to provide access to disabled upto Rs. 250,000 100

Division1. For individual non-salaried case/AOP

Taxable Income Rate of Tax
1. Up to Rs. 400,000 0%
2. Rs. 400,000- Rs. 600,000 5% of the exceeding Rs. 400,000
3. Rs. 600,001 - Rs. 1200,000 Rs . 10,000 + 10% of the amount exceeding Rs. 600,000
4. Rs. 1200,001 - Rs. 2400,000 Rs . 70,000 + 15% of the amount exceeding Rs 1,200,000
5. Rs. 2400,001 - Rs. 3,000,000 Rs . 250,000 + 20% of the amount exceeding, 2,400,000
6. Rs. 3,000,000 - Rs. 4,000,000 Rs . 370,000 + 25% of the amount exceeding 3,000,000
7. Rs. 4,000,001 - Rs. 6,000,000 Rs . 620,000 + 30% of the amount exceeding Rs 4m
8. Over Rs. 6,000,000 Rs . 1,220,000 + 35% of the amount exceeding Rs 6m

Division 2. For individual salaried case

M Taxable Income Rate of Tax
1. Up to Rs. 600,000 0%
2. Rs. Rs. 600,001- Rs. 1,200,000 5% of the exceeding Rs. 600,000
3. Rs. Rs. 1,200,001- Rs. 1800,000 Rs . 30,000 + 10% of the amount exceeding Rs. 1,200,000
4. Rs. Rs. 1800,001- Rs. 2500,000 Rs 90,000 + 15% of the amount exceeding Rs 1,800,000
5. Rs. 2,500,001 - Rs. 3,500,000 Rs 195,000 + 17.5% of the amount exceeding, 2,500,000
6. Rs. Rs. 3,500,001- Rs. 5,000,000 Rs 370,000 + 20% of the amount exceeding 3,500,000
7. Rs. 5,000,001 - Rs. 8,000,000 Rs 670,000 + 22.5% of the amount exceeding Rs 5m
8. Rs. 8,000,001 - Rs. 12,000,000 Rs 1,345,000 + 25% of the amount exceeding Rs 8m
9 Rs. 12,000,001 - Rs. 30,000,000 Rs 2,345,000 + 27.5% of the amount exceeding Rs 12m
10 Rs. 30,000,001 - Rs. 50,000,000 Rs 7,295,000 + 30% of the amount exceeding Rs 30m
11 Rs. 50,000,001 - Rs. 75,000,000 Rs 13,295,000 + 32.5% of the amount exceeding Rs 50m
12 Exceeding Rs. 75,000,000 Rs 21,420,000 + 35% of the amount exceeding Rs 75m

Tax rate on income from property

Sr. Gross Amount of Rent
1 Up to Rs.200,000
2 Rs.200,001---Rs.600,000
3 Rs.600,001---Rs.1 m
4 Rs.1,000,001--- Rs.2 m
5 Rs.2,000,000--- Rs.4 m
6 Rs. 4,000,001--- Rs.6 m
7 Rs. 6,000,001 --- Rs.8 m
8 Exceeding Rs. 8 m
Rate of Tax
Nil
5% of the gross amount exceeding Rs.200,000
Rs.20,000 plus 10% of gross amount exceeding Rs.600,000
Rs.60,000 plus 15% of gross amount exceeding Rs.1 m
Rs.210,000 plus 20% of the gross amount exceeding Rs.2 m
Rs.610,000 plus 25% of the gross amount exceeding Rs.4 m
Rs.1,110,000 plus 30% of the gross amount exceeding Rs.6 m
Rs.1,710,000 plus 20% of the gross amount exceeding Rs.8 m