Certificate in Accounting and Finance Stage Examination

August 19 ,2023
3 hour – 100 marks
Additional Reading Time – 15 minutes

CAF 2 -TAX PRACTICES

Mock
Instructions to examinee
(i) Answer All nine Questions
(ii) Answer in Black pen only
(iii) Attempt each Question on new page.
Question-1
Mr. Iqbal, joined as a Chief Engineer in a listed company Tameer Limited (TL) on 1 September 20X3.
He derived following emoluments during the tax year ended 30 June 20X4:
Rupees
Basic salary ( per month) 300,000
Milk allowance (per month) *10,000
* He bought milk of Rs. 7,000 per month.
In addition to the above emoluments, Mr. Iqbal was also provided the following:
(i) Bonus equal to one month basic salary. However, bonus amount was adjusted in proportion to
the duration of his stay in the company. The bonus amount was paid to him on 30 June 20X4.
(ii) A reimbursement of Rs. 36,000 in respect of driver‘s salary. Mr. Iqbal paid Rs. 60,000 to driver.
(iii) A fully furnished accommodation. The fair market value of the rent was Rs. 85,000 per month.
(iv) An amount of Rs. 50,000 was paid by TL to an approved pension fund.
(v) On 1 November 20X3, Iqbal obtained a loan of Rs. 7,000,000 @ 6% per annum. First installment
of Rs. 5,000,000 was repaid on 31 March 20X4 and remaining loan was waived by employer on
31 May 20X4.
Mr. Iqbal informed following further for the tax year 20X4:
(i) He received sales tax refund of Rs. 225,000 related to tax year 20X2. The amount included
Rs. 25,000 being compensation for delayed refund.
(ii) Iqbal started a partnership business with his elder brother on 1 February 20X4. Both of them
were sharing equally in the profit or loss of the business. The accounting profit of AOP is
Rs. 2,000,000 after adjusting monthly salary of Rs. 50,000 of Iqbal.
(iii) Annual rent of Rs. 800,000 is received from letting out a building on 1 Oct 20X3 to KK
Enterprise (including Rs. 5,000 per month for arranging two security guards for the building).
Following expenses were incurred by Mr. Iqbal in this year: Repairs Rs. 200,000, Fire insurance
premium Rs. 30,000, Ground rent Rs. 10,000, Security guard salary Rs. 8,000 and Interest of
Rs. 15,000 on a house loan.
(iv) During the year, Iqbal was surprised to receive Rs. 500,000 in cash (as gift) and a laptop worth
Rs. 200,000 from his wife. His wife holds National Tax Number.
(v) On 1 Jan 20X4, his bank account in UAE was credited with AED 49,500 (1AED = Rs. 72) for
dividend received from a UAE company. The amount is net off 10% tax. He brought 60% in
Pakistan.
(vi) On 1 July 20X3, Mr. Iqbal contributed Rs. 1,600,000 to an approved pension fund after obtaining
cash loan from his father of Rs. 300,000.
(vii) On 1 May 20X2 Iqbal received 3,000 shares, by way of a gift from his father, in Lucky Inc., a
company registered on Toronto Stock Exchange. On 1 January 20X0 his father had bought these
shares at a price of CAD 20 per share (equivalent to PKR 1,300 per share). The market value of
each share at the time of transfer to Iqbal was CAD 28 (equivalent to PKR 2,100 per share). On
15 June 20X4 Iqbal sold all shares in Lucky Inc. to an investor for CAD 32 per share and paid a
brokerage commission of CAD 0.2 per share to the stock broker. He also paid income tax of
CAD 1,500 to the tax authorities in Toronto. The exchange rate at the time of above transaction
was CAD 1 = PKR 90.
Required: Compute the income and tax payable by Mr. Iqbal for the tax year 30 June 20X4.
Note: Show all relevant exemptions, exclusions and disallowance (17)

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Question-2
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.
Following information is extracted from KL‘s records for year ended 30 June 2016:
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 in cash.
(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 court case filed by customer.
(iv) Rs.2,600,000 contributed to a foreign pension fund maintained for employees.
(v) Rs.1,800,000 on 1.11.2015 to improve features of production department software. Life is
indefinite.
(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:
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 car 30,000
Financial charges include the following:
(i) Mark-up of Rs.1,200,000 paid on a loan from bank for advancing 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 2016. KL purchased these shares in May 2015 at a cost of Rs.35 per share.
(ii) Rs. 0 gain for sale of vehicles to employees. Rs.2,450,000 is received from employees. The FMV
and tax WDV of cars was Rs.5,250,000 and Rs.3,320,000 respectively. These are sold at
accounting WDV.
(iii) Gain on sale of shares in ML (Pvt.) company. On 1.7.12 KL acquired 200,000 shares at Rs.50
per share. On 1.9.15 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 1.2.16 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 2014 and 2015 were as follows:
2015 2014
-----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 (except software and ramps) for TY 2016 is 1,500,000.
Required: Calculate income and tax payable by KL for year ended June 30, 2016. (show exclusions) (20)

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Question-3
a) Specify with reasons, whether the following independent acts may be considered as a tax evasion
or tax avoidance:
(i) In order to reduce his tax liability, Mr. Jaffer, a resident individual, paid a donation of
Rs. 100,000 to non-profit organanisation.
(ii) Sakhi Limited (SL) paid 50% of Ahmad‘s salary i.e. Rs. 50,000 in cash whereas the
remaining 50% of his salary was credited to his bank account. SL claimed Rs. 50,000 as
admissible deduction in its return of income.
(iii) In order to reduce her tax liability, Mrs. Shamim who runs her own business, paid higher
salary to her self, keeping in view that lower slab rates are applicable on salary income as
compared to income from business. (4.5)
b) Explain the provisions in constitution relating to Natural gas and hydro-electric power. (3.5)

Question-4
Khalida and Nasreen (K&N) is running business to manufacture beauty soaps and detergents with the
capital of Rs. 60 million. Khalida and Nasreen will share profits in the ratio of 70:30 respectively.
Following information is extracted from the records of K&N for financial year ended 30 June 2023.
Rupees in mill.
Total turnover (Excluding sales tax) 400
Cost of sales (180)
Gross profit 220
Operating expenses (78)
Interest expense (10)
Donation (12)
Other income 4
Profit before tax 124
(i) All sales are made to sales tax registered distributors except a sale of Rs. 157.3 million (inclusive
of sales tax @ 18% and further tax @ 3%) to Kabir Limited, an un-registered distributer.
(ii) Operating expenses include:
 salary of Rs. 5 million to Nasreen.
 Rs. 8 million loss on disposal of a machine. Machine was imported in TY 2021 for
Rs. 30 million (including Rs. 10 million custom duty and Rs. 5 million withholding tax).
A loan of 80,000 Pound was obtained on 1 March 2021 to finance the purchase and it
was fully repaid in same year on 1 May 2021. The disposal transaction took place on 1
March 2023 and the consideration received on disposal comprise of Rs. 20 million in
cash and a piece of land having fair value of Rs. 3 million. The fair value of machine at
time of disposal was Rs. 21 million.
(iii) Interest expense represent amount payable to Khalida on a loan utilized for business under an
agreement.
(iv) 20% Donations were made to charitable educational institutes, included in the Thirteenth
schedule of the Income Tax Ordinance, 2001. Remaining amount was given to Baji Saira a mutal
friend of the two who will help earthquake affected people in Turkey.
(v) Relevant exchange rates were as follows:
1 March 2021 1 Pound = PKR 315
1 May 2021 1 Pound = PKR 330
30 June 2021 1 Pound = PKR 325

Required: Calculate taxable income and tax payable by AOP for year ended 30 June 2023. Your
computation should start from sales figure. (10)

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 Question-5
Under the provisions of the Income Tax Ordinance, 2001 briefly describe the following:
(i) Mr. Amjad has received a show cause notice under section 122 and has filed an offer of
settlement. The oversight committee has decided the case and the taxpayer is satisfied
with the Committee decision.
Required: What action is now required at taxpayer‘s end? (4)
(ii) There is a dispute of ownership regarding a house owned by Mr. Kamran. The rental
income earned from renting out the house is Rs. 6,000,000 in TY 2012. The Civil court
decided on 15 May 2020 that it the property of Kamran. Commissioner issued an
assessment order on 12March 2021.
Required: Is Commissioner justified in issuing the notice after lapse of so much time? (2)
(iii) High Court has decided a question of law in favour of tax payer. The Commissioner has
some of the years pending in respect of same issue. Later on in April 2020 supreme Court
decided the case against taxpayer.
Required: What is the power available to Commissioner in this regard relating to
pending year and by which date Commissioner can exercise this power? (2)

Question-6
In December 2016, Kamran signed a future contract with Anjum for the purchase of 500 shares of PEL at Rs.
32 per share. The delivery was expected to be made in March 2017. Anjum also agreed to repurchase the entire
lot at the price prevailing on the date of sale.
In March 2017 price of PEL shares decreased to Rs. 29 per share and Kamran sold the entire lot to Anjum
without taking delivery.
Calculate gain/(loss) and specify head of income in the books of Kamran? (3)

Question-7
i. Explain the provisions relating to limitation on setoff and carry forward of losses? (3)
ii. Whether an agent will be considered as ―permanent establishment‖ under Income Tax
Ordinance, 2001? (3)
iii. If a leasing company disposes off an asset to lessee how it will calculate the consideration
received? (1)

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Question-8
Ghumman Associates (GA), a sole proprietor business, is registered under the Sales Tax Act, 1990 and is
engaged in multiple businesses. GA has a factory located in Faisalabad. GA has allocated 20% of its
factory area for the residences of its workers. Following information has been extracted from GA‘s
records for the month of February 2023:
Rupees
Supplies
Taxable goods to registered customers 5,000,000
Exempt goods to registered customers 800,000
Taxable goods to un-registered customers 1,500,000
Exports of taxable goods to South Africa 1,800,000
Exports of exempt goods to Malaysia 500,000

Purchases
Taxable goods from registered suppliers 1,900,000
Taxable goods from un-registered suppliers 900,000
Imports (exclusive of 20% custom duty) 4,000,000
Additional information:
(i) Supplies of taxable goods to registered customers include:
 80 units of product Alpha sold to a registered customer on 5 February 2023 at a price of
Rs. 500 per unit but after 3 days a dispute arose and GA agreed to:
- Accept the return of 30% of goods on 12 Feb and
- Reduce the price of remaining units by Rs. 80 per unit
 20 cartons of 40 Kg tea to a registered customer for Rs. 150 per kg. The customer will
pay cheque of Rs. 40,000 and hand over a license having fair value of Rs. 65,000.
 Goods worth Rs. 450,000 were supplied to Shaukat Industries at a trade discount of 15%.
GA normally provides discount at same percentage.
 Goods worth Rs. 200,000 were supplied to un-registered distributor, Abbas. However,
his NTN/NIC was not demanded from him at the time of sale.
(ii) Supplies of taxable goods to unregistered customers include sales of Rs. 250,000 to a person who
will use these goods for decorative purposes in his house.
(iii) Purchases from registered suppliers include:
 Goods worth Rs. 500,000 purchased from Jatt Brothers. The goods were delivered to GA
on 15 December 2022. However, input could not be claimed in December due to non-
availability of invoice. The invoice was received on 5 February 2023.
 Purchase of sulphuric acid worth Rs.100,000 which is used in exempt goods exported to
Malaysia.
 Purchase of electronic items amounting to Rs. 70,000. 30% were of inferior quality and
were returned.
(iv) Rs. 90,000 of balances had been outstanding since 12 August 2022. 70% of these were settled on
15 February 2023 and the remaining will be paid on 15 March 2023.
(v) A debit note of Rs. 230,000 was issued to a supplier from whom purchases of Rs. 800,000 were
made on 12 March 2022.
(iv) A machine was acquired for Rs. 2,800,000. The machine is solely used for making exempt goods
for local sale.
(v) Sales tax of Rs. 150,000 has been paid for the supply of electricity to the factory of GA.
(vi) Construction material of Rs. 2,000,000 has been purchased during the month. 60% of the
material was used for renovation of the factory building and the remaining was sold at a mark-up
of 20% on cost. The goods are ready; however the customer has not yet picked up the goods due
to an emergency.
All the above figures are exclusive of sales tax, except where it is specified otherwise. Sales tax is payable
at 18%.

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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 GA and input tax to be carried forward, if any, for the tax period
February 2023. (17)

Question-9
Queen Limited (QL), a registered importer, exporter and manufacturer, is primarily engaged in the
manufacture and export of a wide range of goods. Following activities were carried out by the company
during the year:
(i) 60,000 kg of chemical, sold at a price of Rs. 140 per kg. The value of chemical fixed by the
Federal Board of Revenue (FBR) was Rs. 135.
(ii) Import of 1,000 kg of un-manufactured goods from Brazil. The value assessed by the customs
authorities at import stage amounted to Rs. 880,000. The Federal excise tax paid on import is
Rs. 30,000.
(iii) Storage batteries purchased at a price of Rs. 650,000. QL paid the amount via online transfer of
money into supplier‘s business bank account. However, this account has not yet been declared by
the supplier to the Commissioner Inland Revenue.
(iv) QL being exporter for sales tax purposes, filed an application for refund of Rs. 186,000 on
account of input tax paid on raw material exported to Iran. The refund is expected to be received
soon. QL is also required to pay a default surcharge of Rs. 25,000 to the income tax department
for late filing of monthly withholding tax statement.
(v) In July 2017 QL sold certain taxable goods worth Rs. 535,000 to an un-registered wholesaler at a
wholesale price of Rs. 50 per pack and collected further tax at the rate of 3% of the value of
supplies. In November 2017, the internal auditor pointed out that these goods had an actual sale
price of Rs. 65 per pack to which customer agreed also.
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. (10)

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 Rates of Tax for Individuals andAssociation of Persons
(1) The rates of tax imposed on income of every individual and association of persons
except a salariedindividual shall be as set out in the following Table, namely:—
S. No Taxable Income Rate of Tax
1. Where taxable income does not exceedRs. 600,000 0%

2. Where taxable income exceeds Rs. 600,000 5% of the amount exceeding Rs. 600,000
but does not exceed Rs. 800,000
3. Where taxable income exceeds Rs. 800,000 Rs. 10,000 + 12.5% of the amount
but does not exceed Rs. 1,200,000 exceeding Rs. 800,000
4. Where taxable income exceeds Rs. 60,000 + 17.5% of the amount
Rs. 1,200,000 but does not exceedRs. exceeding Rs. 1,200,000
2,400,000
5 Where taxable income exceeds Rs. 2,400,000 Rs. 270,000 + 22.5% of the
but does not exceedRs. 3,000,000 amount exceeding Rs. 2,400,000
6 Where taxable income exceeds Rs. 405,000 + 27.5% of the
Rs. 3,000,000 but does not exceedRs.4,000,000 amount exceeding Rs. 3,000,000
7. Where taxable income exceeds Rs. 680,000 + 32.5% of the
Rs. 4,000,000 but does not exceed amount exceeding Rs. 4,000,000
Rs.6,000,000
Where taxable income exceeds Rs. 1,330,000 + 35% of the
8.
Rs.6,000,000 amount exceeding Rs. 6,000,000
(2) Where the income of an individual chargeable under the head ―‗salary‖ exceeds seventy-
five per cent of his taxable income, the rates of tax to be applied shall be as set out in the
following Table, namely:—
S. No Taxable Income Rate of Tax
(1) (2) (3)
Where taxable income does not exceed Rs. Rs. 0
1.
600,000
2. 2.5% of the amount exceeding
Where taxable income exceeds Rs. 600,000 but
does not exceed Rs. 1,200,000 Rs. 600,000
3. Where taxable income exceeds Rs. 1,200,000 but Rs. 15,000 + 12.5% of the
does not exceed Rs. 2,400,000 amount exceeding Rs. 1,200,000
4. Where taxable income exceeds Rs. 2,400,000 but Rs. 165,000 + 20% of the
does not exceed Rs. 3,600,000 amount exceeding Rs. 2,400,000
5. Where taxable income exceeds Rs. 3,600,000 but Rs. 405,000 + 25% of the
does not exceed Rs. 6,000,000 amount exceeding Rs. 3,600,000
6. Where taxable income exceeds Rs. 6,000,000 but Rs. 1,005,000 + 32.5% of the
does not exceed Rs. 12,000,000 amount exceeding Rs. 6,000,000
7. Rs. 2,955,000 + 35% of the
Where taxable income exceeds Rs. 12,000,000
amount exceeding Rs. 12,000,000

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 Rates of tax for immoveable property
Gain
S.No. Holding Period Open Constructed Flats
Plots Property
(1) (2) (3) (4) (5)
1. Where the holding period does not exceed one 15% 15% 15%
year
2. Where the holding period exceeds one year but 12.5% 10% 7.5%
does not exceed two years
3. Where the holding period exceeds two year but 10% 7.5% 0
does not exceed three years
4. Where the holding period exceeds three year 7.5% 5% -
but does not exceed four years
5. Where the holding period exceeds four years 5% 0 -
but does not exceed five years
6. Where the holding period exceeds five years but 2.5% - -
does not exceed six years
7. Where the holding period exceeds six years. 0% - -

Rates of tax for securities

Holding Period 2023 and
onwards
Securities acquired on Securities
or before 30.06.2022 acquired on or
after 01.07.2022
1. Where the holding period does not exceed one year 15%
2. Where the holding period exceeds one year but does
12.5%
exceed two years
3. Where the holding period exceeds two years but
12.5% 10%
does not exceed three years
Where the holding period exceeds three years but [Irrespective of the 7.5%
4. holding period]
does not exceed four years
Where the holding period exceeds four years but 5%
5.
does not exceed five years
Where the holding period exceeds five years but 2.50%
6.
does not exceed six years
7. Where the holding period exceeds six years 0%
Future commodity contracts entered into by 5%
8.
members of Pakistan Mercantile Exchange

Depreciation Rate
Assets Rate of
depreciation
Buildings (All types) 10%
Furniture and fittings, Plant and machinery – general, Motor vehicles and ships, 15%
Technical and professional books
Computers and allied items including printer, monitor and IT related plant and 30%
machinery
Aircrafts and aero engines 30%

Initial allowance Rate

Assets Rate
Plant and machinery 25%

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