GCAOFFICIAL.

TK
Al-Hamd Academy
Taxation
Final Test
Module C

Compiled by Shahrooz Khan

21st February 2011

100 Marks 3 hours

Question 1:
Mr. and Mrs. Axe are equal partners in Burq Enterprises (BE). The firm is engaged in the
manufacturing and supply of electric generators. Following figures have been extracted from the
accounting records of the firm for the tax year 2011:
Sales of generators
Less: Cost of sales
Gross profit
Less: Admin and selling expenses
Finance cost
Profit before taxation

Rs. in 000
574,200
429,520
144,680
96,300
9,000

105,300
39,380

Following further information is also available from the records:

(i)

The generator sales are inclusive of sales tax of Rs.79.2 million (recoverable from the
customers).

(ii)

Cost of sales includes sales tax Rs.63 million and withholding taxes on utilities bills of Rs.2.3
million.

(iii)

Admin and selling expenses include salary of Rs.500,000 paid to each partner every month.

(iv)

Finance cost includes interest of Rs.1.2 million paid to Mrs. Axe on her capital account.

(v)

On 1.1.2011 Mr. Axe started using one of the office equipment at his residence. The market
price of the equipment at that time was Rs.1.5 million with a tax WDV of Rs.1 million. No
adjusting entry was made in the accounts except that no depreciation was charged on that
equipment. Accounting depreciation on other items was in line with tax rules for depreciation.

(vi)

On 1.7.2010 Axe let out his apartment to a close relative at a monthly rent of Rs.10,500. The
fair market rent in the area was Rs.12,250. He also received a non-adjustable deposit of
Rs.110,000. Another non-adjustable deposit of Rs.85,000 received from an earlier tenant in
July 2008 was refunded.

(vii)

Axe purchased a new building for Rs.14,000,000 in which a new flour milling plant had been
installed and leased the property on 1.11.2010 to Bhola on a composite lease rent of
Rs.400,000 per month. The consideration paid as specified in the purchase deed was
Rs.9,000,000 for the building and Rs.5,000,000 for the plant installed in the building.

(viii) Axe purchased 50,000 shares of Rs.10 each, of an unlisted public company in July 2005 @
Rs.150 per share. In August 2006 he received bonus shares in the ratio of 1 bonus share for

Page 1 of 4

By: Ms. Ambreen Mukhtar

every 5 shares held. In May 2011 he sold 80% of his bonus shares at a price of Rs.135 per
share.
(ix)

On the death of Axes father in the year 2004, Axe had inherited two oil paintings. The two
paintings, A and B, were valued by an expert art dealer at the time of his fathers death at
Rs.1,700,000 and Rs.100,000 respectively. On 11.6.2011 Axe sold painting A for
Rs.1,448,000 and painting B for Rs.1,000,000. The paintings had been retained by Axe for
his own use in the intervening period.

Required: In the light of the provisions of Income Tax Ordinance, 2001, compute the taxable
income of Burq Enterprises and also tax liability of Mr. Axe
(Marks 21)
Question 2:
In view of the provisions of Income Tax Ordinance, 2001 and the stated rules, determine the
residential status of the following persons for the tax year ended 30.6.20X2 under the given
circumstances:
(i)

Mr. Mahiwal came to Pakistan for the first time on a special assignment from his company on
1.4.20X1 and left the country on 30.9.20X1.

(ii)

Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada
on 29.12.20X1 to assume his responsibilities as a CFO. In June, 20X2 his company sent him to
India on a training workshop. On 30.6.20X2 on his way back to Canada he had to stay in
Karachi for a whole day in transit.

(iii)

Mr. Baber, a Federal Government Employee was posted to the Pakistan mission in Geneva from
1.7.20X1 to 30.6.20X2.

(iv)

Mr. Francis, a sugar dealer in Brazil, came to Pakistan on 31.7.20X1. During his visit he stayed
at Lahore for 60 days and spent the rest of the days in Karachi. He left the country on
31.1.20X2. Assume that the Commissioner has granted him permission to use calendar year as
a special tax year.
(Marks 8)

Question 3:
(a) In the light of the provisions of Income Tax Ordinance, 2001, describe the conditions which
need to be satisfied before a person can claim deduction for a bad debt. (Marks 3)
(b)

Barn Ltd (BL) wrote off a debt amounting to Rs.500,000 in June 2007. A suit was, however,
filed by the company for the recovery of the debt. Tax authorities allowed Rs.350,000 as a
deduction in tax year 2007. In tax year 2011, court adjudicated the case in favour of BL. In
view of the provisions of Income Tax Ordinance, 2001 compute the amount which would be
added to income or expense, as the case may be, if the company:
(i) Recovers Rs.200,000
(ii) Recovers Rs.120,000

Page 2 of 4

(Marks 4)

By: Ms. Ambreen Mukhtar

Question 4:
Briefly describe the provisions of withholding tax from payment to non-residents and payments from
approved pension fund
(Marks 10)
Question 5:
(a) As a tax consultant of Mirza Textile Mills Ltd, you filed its return of income for tax year 2007 on
30.11.2007. Subsequently, you were informed by the Chief Financial Officer that he forgot to
include certain sales figures in the accounts related to the tax year 2006.
Required: Explain the requirements for filing of revised return under the given circumstances.
(Marks 4)
(b)

An appeal filed by FAL (Pvt) Ltd against the order passed by the Commissioner Appeals is
pending before the Appellate Tribunal. Meanwhile, on the application filed by the Company,
FBR has appointed a committee for the resolution of dispute. On the recommendations of the
Committee, the FBR has passed an order whereby the Companys tax liability has been reduced
by 50%.

Required: Explain to the management of the Company that in case they decide to make payment of
tax in accordance with the FBRs order, what action they should take?
(Marks 4)
Question 6:
Mr. ABK has received a notice from the tax authorities declaring him a legal representative of his
deceased uncle, Mr. YMN. Mr. ABK has approached you and sought your expert advice on the
following issues:
(i) What does the term legal representative mean?
(Marks 2)
(ii) Taxation of income earned by Mr. YMN prior to his death and the extent of tax liability of Mr. ABK
in respect of such income.
(Marks 3)
(iii) Legality of the tax assessment proceeding pending against Mr. YMN at the time of his death.
(Marks 3)
Question 7:
Badshah (Pvt) Ltd (BPL) possesses 100% shareholding of Wazir (Pvt) Ltd (WPL) and Diwalia (Pvt) Ltd
(DPL). DPL suffered a loss of Rs.5 million during the tax year which it intends to surrender in favour
of BPL.
Required: State the conditions which need to be satisfied for availing the benefit of group relief.
(Marks 9)
Question 8:
(a) Describe the provisions of Sales Tax Act, 1990 relating to the maintenance and keeping of
records by a registered person making taxable supplies.
(Marks 9)
(b)

Describe input tax and output tax as defined in the Sales Tax Act, 1990.

Page 3 of 4

(Marks 5)

By: Ms. Ambreen Mukhtar

Question 9:
Kamyab Engineering Ltd (KEL) is registered under the Sales Tax Act, 1990. The company is engaged
in the manufacture and supply of appliances. Following information has been extracted from the
records of KEL for the month of November 2010:
Rs. in 000
Purchases:
Local:
? components from registered suppliers
70,700
? components from un-registered suppliers
15,250
Import of finished goods (inclusive of custom duty and FED)

10,000

Supplies:
Manufactured goods:
? local taxable supplies to registered persons
? local taxable supplies to un-registered persons
? exempt goods
? export to Malaysia

40,000
24,000
11,000
13,000

Commercial imports

12,500

Following additional information is also available:

(i) Supplies from commercial imports include appliances of Rs.2,040,000 which were
sold on instalment basis to an industrial consumer at a mark-up of 2%.
(ii)

Imported appliances worth Rs.100,000 were provided to the companys managing

director for use at his residence included in the above figures.

(iii) Sales tax of Rs.60,000, Rs.21,000 and Rs.26,000 was paid in cash on account of
electricity, gas and mobile phone bills respectively.
(iv) Sales tax of Rs.85,000 was paid by the company on purchase of uniforms for its line
staff.
(v)

An amount of Rs.200,000 on account of purchases made from a registered supplier is

outstanding since May 2010. The related input tax was accounted for in the relevant
tax period.

Sales tax is payable @ 17%. All the above figures are exclusive of sales tax, wherever applicable.
Ignore special procedure rules for commercial imports.
Required: Sales tax payable / refundable and input tax credit to be c/f, if any.

Page 4 of 4

(Marks 15)

By: Ms. Ambreen Mukhtar

Note: Students are strongly advised to focus on the presentation of the practical questions and
proper explanation inclusion or exclusion of each item in question.
Alhamd Academy
Solution for Final Test - Taxation
Module C

Held on 21st February 2011

Solution Q No 1
Burq Enterprises
Resident AOP
Tax year 2011
Computation of taxable income
Rs.
Income from Business
Accounting profit before tax

39,380,000

Adjustments:
Less: Sales tax included in generator sales (Note 1)
Add: Sales tax paid on cost of sales
Advance tax paid on utility bills (Note 2)
Admin & selling expenses (partners salary)
Finance Cost
Gain on disposal (Note 3)
Taxable Income

79,200,000
63,000,000
2,300,000
12,000,000
1,200,000
500,000
39,180,000

Income tax @ 25%

Divisible income

9,795,000
29,385,000

Mr Axe
Resident individual
Tax year 2011
Computation of taxable income and tax liability
Income from Other Sources
Rental Income from building together with plant and
Machinery 400,000 x 8
Less: Initial allowance on plant & machinery
2,500,000
Depreciation on
Building
900,000
plant & machinery
375,000
Dividend income bonus shares (Note 4) FTR

Rs.

3,200,000

(3,775,000)
(575,000)
(575,000)

Income from capital gain

Gain on disposal of bonus shares 8,000 x (135-10) x 75% (Note 4)
750,000
Gain on disposal of paintings (1,000,000 100,000) x 75% (Note 5)
675,000
1,425,000

Income from property (separate block of income)

Rental income 12,250 x 12
Unadjusted deposit {110,000 (85,000x2/10)} / 10
Taxable income including Income from property
Less: Income from property
Taxable income excluding Income from property
Add: Share of profit from AOP for rate purpose
Taxable income for rate purpose
Tax liability (non-salaried case)
Income tax on 14,942.5 x 25%
Income tax on 3,735,625 / 14,942,500 x 850,000
Tax on property income (156,300-150,000) x 5%
Total tax liability

147,000
9,300
156,300
1,006,300
156,300
850,000
14,092,500
14,942,500

3,735,625
212,500
315
212,815

Notes:
1
Amount of sales tax of Rs 79.2 million included in the sales figure shall be
excluded to determine taxable profit, since the same is not an income of the
business.
2

Any taxes paid on purchases including any advance taxes paid are not
admissible expenses of the business. Rs 63 million paid on purchases and rs 2.3
million paid as advance tax on utility bills are added back to compute taxable
profit of BE.

An asset is treated as disposed off from the business if the same is put to
personal use. In this case the proceeds on disposal is taken as the fair market
value which is Rs 1.5 million. Since no entry has been passed in the accounts
for the disposal, therefore taxable gain of 0.5 million is added to the accounting
profit to determine taxable profit.

Where bonus shares received, are subsequently disposed off the taxable
amount shall be computed as under:
? the face value of bonus shares shall be treated as dividend;
? the difference between consideration received and dividend is taxable as
capital gain.
Therefore 10,000 shares received by Mr Axe as bonus shares, their face value
@ Rs 10 each shall be treated as dividend under FTR, whereas difference
between sale proceeds @ Rs 135 per share and dividend @Rs 10 per share is
taxable as capital gain. Since the shares are of unlisted public company held for
more than 12 months therefore the gain of Rs 125 per share is exempt upto
25%.

Asset received under inheritance, if subsequently disposed off, cost of the asset
for the purpose of determining gain on disposal is treated as the fair market
value on the date of inheritance therefore cost of painting A and B is Rs
1,700,000 and 100,000 respectively. Loss arising on the disposal of painting A
is unadjustable (specific category of assets on which loss on disposal is not

allowed) whereas gain on disposal of painting B of Rs 900,000 is taxable upto

75% since the holding period of the asset is more than 12 months.

Solution Q No 2
(i)

An individual is resident for Pakistan tax purpose if his stay in a tax year is
183 days or more. Physical stay of Mr. Mahiwal in Pakistan in the tax year
20X2 is 92 days (1st July to 30th September) and therefore he is a nonresident person in the tax year 20X2.

(ii)

A day in Pakistan solely by reason of being in transit does not count as a day
present in Pakistan. Physical stay in Pakistan of Mr. Rana in the tax year 20X2
excluding a day in transit is 182 days (1st July to 29th Dec) and therefore he
is a non-resident person in the tax year 20X2.

(iii)

A government employee posted abroad in the tax year is resident irrespective

of his physical stay in Pakistan. Therefore, Mr. Baber is a resident person in
the tax year 20X2 for Pakistan tax purpose.

(iv) Physical stay of Mr. Francis in Pakistan in the tax year ended 31.12.20x1
(special tax year granted by the Commissioner) is 154 days i.e. 31st July to
31st December and therefore he is a non-resident for Pakistan tax purpose.

Solution Q No 6:
a) Legal representative means any person who in law represents the estate of the
deceased person and includes any person who intermeddles with the estate of
the deceased and to whom the estate of the deceased devolves where the
deceased person sues or is sued.
b) Income earned by Mr YMN prior to his death shall be subject to tax in the same
manner if Mr YMN had not died and the tax liability shall be the first charge on
the estate of Mr YMN. Mr ABK in the representative character shall be liable for:
? Any tax that the Mr YMN would have become liable for if he had not
died: and
? Any tax payable in respect of the income of the estate of Mr YMN
However, the liability of Mr ABK in representative character shall be limited to the
extent to which the estate of Mr YMN is capable of meeting the tax liability.
c) Tax assessment proceeding pending against Mr YMN at the time of his death shall
be treated as taken from inception against Mr ABK (legal representative) and
may be continued against Mr ABK from the stage at which it stood on the date of
Mr YMNs death.
Moreover, any proceeding which could have been taken against Mr YMN if he had
survived may be taken against Mr ABK in representative character.

Solution Q No 9
Kamyab Engineering Ltd. (KEL)
Computation of sales tax liability
For the tax period November 2010
Note: Import value and value of supply of commercial imports are identified and therefore tax
paid on import stage is not a residual input tax and shall not be apportioned.
Residual Input Tax:
17% of Rs.70.7 million
Add: Sales tax on utility bills
60,000 + 21,000 + 26,000
Sales tax on uniforms - inadmissible
Less: Input tax on purchases o/s for more
than 180 days 200,000 x 17%

12,019,000
107,000
-12,126,000
34,000
12,092,000

Apportionment of input tax:

Taxable local supplies
Exports
Exempt supplies

Turnover
64,000,000
13,000,000
11,000,000
88,000,000

Sales tax liability:

Output tax 17% of Rs.64 million
Less: Input tax against taxable local supplies
(input tax not more than 90% of output tax)
Output tax on supply of commercial imports
(12,500,000 mark up 40,000) x 17%
Less: Input tax on commercial imports
10,000,000 x 17%
Payable
Refundable against exports

Input tax
8,794,182
1,786,318
1,511,500
12,092,000
10,880,000
8,794,182
2,085,818
2,118,200
1,700,000

418,200
2,504,018
1,786,318

Al-Hamd Academy
ICAP Module C
TEST

Taxation
Faculty: KP
Time allowed: 3 Hours

August 2011
Max Marks: 75

Question 1: Mr. Paratha provided the following information for his accounting year ended
30.6.2011:
(1) On 1.6.2011, Paratha sold 5,000 shares in XYZ (Private) Ltd for Rs.100,000. The shares had
become his property on 1.7.2010 on the distribution of assets on the liquidation of PPP Ltd in
which company he was a shareholder.
(2) On 1.6.2011, Paratha transferred 10,000 shares in Z (Private) Ltd to his wife Puri under an
agreement to live apart. Puri is an employee of the Government of Pakistan and was posted to
Bangladesh during the tax year 2011. In the tax year 2011 Puri was present in Pakistan for 30
days when she was on leave from her foreign posting.
10,000 shares in Z (Private) Ltd were purchased by Paratha in the tax year 2008 for Rs.120,000.
The fair market value of 10,000 shares on 1.6.2011, based on a valuation done by the auditors of
Z (Private) Ltd, was Rs.200,000.
Paratha is of the view that:
(i) Rs.100,000 representing the sale consideration of 5,000 shares in XYZ (Private) Ltd is his
income taxable under the head Capital gains since he had not paid anything to acquire the
shares and the shares were not held for more than one year since their acquisition.
(ii) The shares transferred to his wife Puri under an agreement to live apart would be treated
as a disposal of a capital asset and Rs.80,000 representing the difference between FMV
and the cost of shares would be taxable capital gains.
Required: State, giving reasons, whether or not you are in agreement with each of the two
views expressed by Mr. Paratha. If you are not in agreement with any of his views, explain the
correct treatment to be adopted for the determination of the income, if any, chargeable under
the correct head(s) of income for the tax year 2011.
(15 marks)
Question 2: Explain the residency test of an individual for tax purpose and how it can be
established where a person has frequent visits outside Pakistan.
(10 Marks)

Question 3: Explain the provisions in respect of employee share scheme along with disposal of
shares and option to acquire shares under employee share scheme.
(10 Marks)
Question 4: The following information is provided by Mr Qureshi:
(1) Qureshi, a citizen of Pakistan, retired from the services of XYZ Ltd (XYZ) on 29.6.2010. On
retirement, Qureshi was eligible to receive the following from XYZ:
(i)

A monthly pension of Rs.20,000 payable from 1.7.2010.

(ii)
(iii)

Rs.100,000 in lieu of unavailed privileged leave.

Rs.350,000 as a gratuity from an approved gratuity scheme.

The pension is deposited at the end of each month into Qureshis bank account. The
amounts for the leave pay (leave encashment) and gratuity were paid by XYZ to Qureshi on
5.7.2010. No taxes were deducted by XYZ from the above payments.
(2) Qureshi commenced employment with Superior Steel Ltd (SSL) on 1.7.2010 as the factory
accountant. In accordance with the terms of his employment the following remuneration and
benefits were received by Qureshi for the year ended 30.6.2011:
(i) A basic monthly salary of Rs.200,000.
(ii) Monthly allowances of Rs.20,000 as house rent allowance, Rs.30,000 as utility allowance
and Rs.30,000 as medical allowance.
(iii) A company maintained motor car for his business and private use.
(iv) Reimbursement of all medical treatment for Qureshi and his wife
(v) Two months notice in writing on either side in case of cessation of employment.
(3) As a policy matter of SSL, which is applicable to all employees, the basic salary for the month
is deposited into each employees bank account on the first working day of the following month.
The monthly allowances are to be collected by the employees from the cashier on the last
working day of each month.
(4a) In order to provide the benefit of a car to Qureshi, a new Toyota Saloon was taken on lease
by SSL on 1.8.2010 from an approved leasing company, for an annual lease rental of Rs.400,000
payable for four years. If the car had been purchased outright by SSL, the cash price would have
been Rs.1,200,000.
(4b) For the year ended 30.6.2011, SSL paid Rs.210,000 as hospitalisation charges for the
treatment of Qureshis wife. NTN of the medical practitioner is available along with employers
attestation.
(4c) SSL made a one time payment of Rs.500,000 to Qureshi on his agreement to give six
months notice of cessation of employment instead of the two months notice agreed to in the
original terms of employment.
(4d) During the last days of June 2011, Qureshi was on vacation. On resuming his duties on
7.7.2011, he collected his monthly allowances from the cashier for the month of June 2011.
(4e) Tax deducted at source by SSL from Qureshis salary income for the relevant tax year was
Rs.767,000.
(5a) On 1.7.2010, Qureshi rented an apartment owned by SSL, located in a building adjoining the
SSLs factory premises. The apartment had recently been vacated by a tenant. The tenant, who
had no connection with SSL, had paid a monthly rent of Rs.15,000 (considered as Fair Market
Rent). Qureshi is paying Rs.10,000 per month to SSL as rent for the use of the apartment.
(5b) Due to the constantly fluctuating power supply, SSL agreed to supply electricity to the
apartment rented by Qureshi from the factory generator. The electricity units consumed during
the year ended 30.6.2011 as per the meter installed in the apartment, if purchased from an
independent power company, would have cost Rs.123,800.
(6) Qureshi is the owner of a piece of land in Sadar.
On 1.9.2010, Qureshi entered into a contract with Mr Govind for the sale of the land for
Rs.20,000,000. Under the terms of the sale contract, Govind paid Rs.300,000 as a deposit and

the balance of Rs.19,700,000 was payable at the latest by 1.10.2010, failing which the deposit
would stand forfeited.
Govind failed to pay the balance amount of Rs.19,700,000 and the deposit of Rs.300,000 was
forfeited. On 1.10.2010, Qureshi rented the land to Govind on a monthly rental of Rs.250,000.
Govind paid the rent in advance up to 30.6.2011. On 1.10.2010 Govind also paid Qureshi a
refundable deposit of Rs.3,000,000 which was not adjustable against the rent payable.
(7) After seeking permission from SSL, Qureshi commenced his own part-time business, under
the name of Taxhelp, of preparing returns of income of salaried individuals for the year ended
30.6.2010 which were to be furnished to the tax authorities by 30.9.2010. The permission
granted by SSL was on the understanding that on working days Qureshi could devote his time to
the business only after 7 pm and that his business should not interfere with his official duties as
the factory accountant.
Qureshi closed the first accounts of Taxhelp for the period ended 30.6.2011. The summarised
income and expenditure account for that period is as follows:
Rs.
Receipts
Fees received (net of tax @ 6%) from Rose Pakistan Ltd (RPL)
for preparing the tax returns of all the employees
of RPL category 1
282,000
Fees received from other individuals category 2
100,000
382,000
Expenditures
Salaries to employees working exclusively on the RPL assignment
Expenditure common to both categories 1 and 2
Salaries to part-time employees
Stationery, computer hire and conveyance of staff
Surplus of receipts over expenditure

(155,600)
64,000
24,432

(88,432)
137,968

(8) Other information submitted by Qureshi:

(i) On 13.6.2011, Qureshi donated Rs.150,000 through banking channel to an educational
institution established in Karachi by the Federal Government.
(ii) Qureshi received a dividend of Rs.45,000 (net of tax) from a private company on 10.1.2011.
(iii) Qureshi paid Rs.15,000 as zakat under the Zakat and Ushr Ordinance during the year.
Required:
(a) Compute the taxable income of Mr Qureshi for the tax year 2011 giving clear explanations for
the inclusion in or exclusion from the computation of taxable income of each of the items listed
above.
(Marks 25)
(b) Calculate the tax payable by Mr Qureshi for the tax year 2011.

(Marks 5)

Tax rates along with marginal relief rates are as under:

Category 2 (salaried case i.e. where taxable salary exceeds 50% of taxable income)

1
2
3

TAXABLE INCOME
Up to Rs.300,000
300,001 350,000
350,001 400,000

RATE
Nil
0.75%
1.50%

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

400,001 450,000
450,001 550,000
550,001 650,000
650,001 750,000
750,001 900,000
900,001 1,050,000
1,050,001 1,200,000
1,200,001 1,450,000
1,450,001 1,700,000
1,700,001 1,950,000
1,950,001 2,250,000
2,250,001 2,850,000
2,850,001 3,550,000
3,550,001 4,550,000
Over Rs.4,550,000

2.50%
3.50%
4.50%
6.00%
7.50%
9.00%
10.00%
11.00%
12.50%
14.00%
15.00%
16.00%
17.50%
18.50%
20.00%

Marginal relief in case of salaried taxpayers

Where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the
table, the income tax payable shall be the tax payable on the maximum of that slab plus an
amount equal to
(i)

20% of the amount by which the total income exceeds the said limit where the total
income does not exceed Rs.550,000.

(ii) 30% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.1,050,000.
(iii) 40% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.2,250,000.
(iv) 50% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.4,550,000.
(v) 60% of the amount by which the total income exceeds in each slab but the total
income exceeds Rs.4,550,000.
Tax rates on income from property where the owner is an individual:
S. No.

Gross amount of rent

Rate of tax

(1)

Where the gross amount of rent does not

exceed Rs.150,000

Nil

(2)

Where the gross amount of rent exceeds

Rs.150,000 but does not exceed Rs.400,000

5% of the gross amount

exceeding Rs.150,000

(3)

Where the gross amount of rent exceeds

Rs.400,000 but does not exceed
Rs.1,000,000

Rs.12,500 plus 7.5% of

the gross amount
exceeding Rs.400,000

(4)

Where the gross amount of rent exceeds

Rs.1,000,000

Rs.57,500 plus 10% of

the gross amount
exceeding Rs.1,000,000

- The end -

Al-Hamd Academy
Answers to the test Taxation Module C August 2011
Answer to Q.1
(i)
Sale of 5,000 shares
Where a capital asset becomes the property of a person, inter alia, on the distribution of
assets on the liquidation of a company, the FMV of the assets on the date of its
acquisition is treated as the cost of asset.
In the circumstances, Parathas view that the sale consideration is taxable as capital gain
is not correct. The capital gain or loss on the sale of shares would be the difference
between the consideration received and the cost of assets which in this case would be
the FMV of shares on the date of acquisition.
(ii)

Mr. Parathas view is not correct. Under the non-recognition rules, no gain or loss arises
on the disposal of an asset, inter alia, under an agreement between spouses to live a
part provided the recipient is a resident for Pakistan tax purposes at the time of the
acquisition.
When puri acquired 10,000 shares she was a resident for Pakistan tax purposes since
during that year she was an employee of the Federal Government of Pakistan posted
abroad.
Accordingly, under the non-recognition rules, this transaction is not taxable.

Answer to Q.2:
An individual is a resident for Pakistan tax purpose when he is physically present in Pakistan
during the relevant tax year for 183 days or more. A government employee posted abroad in the
tax year is resident irrespective of his physical stay in Pakistan.
Where an individual has frequent visits outside Pakistan, Rule 14 explains the procedure to count
days for tax residency purpose as under:
o

Part of a day that an individual is present in Pakistan counts as a whole day including:
A day of arrival in Pakistan
A day of departure from Pakistan
A public holiday
A day of leave
A day that the individuals activity in Pakistan is interrupted because of a strike, lockout or delay in receipt of supplies
? A holiday spent in Pakistan before, during or after any activity in Pakistan
?
?
?
?
?

A day in Pakistan solely by reason of being in transit does not count as a day present in
Pakistan

Answer to Q.3
a)

Right or option to acquire shares

Right or option made available to an employee to acquire shares is taxable only where the
employee disposes of the same in which case gain is taxable in the year of disposal under
the head salary as consideration received less cost of right or option.

b)

c)

Issue of shares
Shares may be issued to employees without any restriction on transfer or it may be with
restriction on transfer. Taxability of an amount under the head salary is as under:
Issue without any restriction
Taxable in the year of issue of shares

Issue with restriction on transfer

Taxable in the year in which the employee
has a free right to transfer the shares or he
disposes off the shares whichever is earlier

Taxable at FMV at the date of issue of

shares less any consideration given by the
employee for shares / option or right

Taxable at FMV at the time the employee

has a free right to transfer or he disposes
off the shares whichever is earlier less any
consideration given by the employee for
shares / option or right

Gain on shares subsequently disposed off falls under the head capital gain and for this
purpose cost of shares shall be the total of consideration given by the employee for shares
/ option or right and the amount taxed under the head salary in this respect.

Answer to Q.4

(a)
Mr Qureshi
Tax year 2011
Computation of taxable income
Rs.
Salary
From XYZ Private Ltd
Pension Rs.240,000 exempt from tax
Payment in lieu of unavailed leave
Gratuity

(Note 1A)
(Note 1B)
(Note 1C)

100,000
150,000

From Superior Steel Ltd

Basic salary Rs.200,000 x 11 months
Allowances
Housing Rs.20,000 x 12 months
Utilities Rs.30,000 x 12 months
Medical Rs.30,000 x 12 months
Benefit of company maintained car
Benefit of free hospitalisation Rs.210,000 exempt from tax
Consideration for a change in the terms of employment
Concessional rent for use of companys apartment
Free electricity

(Note 2)
(Note 3)
(Note 3A)
(Note 3A)
(Note 3B)
(Note 4)
(No te 5)
(Note 6)
(Note 7)
(Note 8)

2,200,000

Income from property

Income from business
Total income
Less: Zakat paid
Taxable income
Less: Property income: separate block of income
Taxable income (taxable at normal slab rates)

(Note 9)
(Note 10)

240,000
360,000
360,000
55,000

500,000
60,000
123,800
4,148,800
2,550,000
137,968
6,836,768
15,000
6,821,768
2,550,000
4,271,768

Items not included in the computation of income and tax payable

(1) Sadar land: 10% of unadjustable advance received by an owner of a building is treated as
chargeable rent. However, this provision is applicable in the case of an owner of land and
therefore Rs.3,000,000 received from Govind is not included in chargeable rent.
(2) Dividend: Dividend income is taxed @ 10% under FTR. Rs.5,000, being the tax deducted at
source (10% of Rs.50,000), is the final tax.
(b) Computation of tax payable
Rs.
Tax on Rs.4,271,768 at 18.5%
Tax under marginal relief formula
17.5% on Rs.3,550,000
50% on Rs.721,768
Whichever is lower
Tax on property income
Tax on Rs.1,000,000
Tax on Rs.1,550,000 @ 10%
Tax credit on donation 1,002,777 / 6,821,768 x 150,000
Tax deducted from salary income
Tax payable

790,277
621,250
360,884
982,134
790,277
57,500
155,000

212,500
1,002,777
22,049
980,726
767,000
213,727

Notes
(1A) Pension is exempt since Qureshi is a citizen of Pakistan, pension is received from his former
employer XYZ and he does not continue to work for XYZ or any of its associate.
(1B) Leave encashment of Rs.100,000 is taxable even if it is received from the past employer.
(1C) Gratuity from XYZ is taxable in the tax year 2011. However, gratuity from approved scheme
is exempt up to Rs.200,000. Taxable amount of gratuity is 350,000 200,000 = Rs.150,000.
(2) The basic salary of June 2011 was credited in Qureshis bank account in July 2011. As salary
is taxed on receipt basis, basic salary for 11 months is taxable in the tax year 2011.
(3) As per SSLs policy, Qureshi should have collected the allowances for housing, utilities and
medical on the last working day of June 2011. The allowances were made available to Qureshi in
June 2011 and are therefore treated as having been received by him in June 2011 despite the
fact that the allowances were actually collected by him on 7 July 2011.
(3A) The allowances for housing and utilities are fully taxable.
(3B) Medical allowance up to 10% of basic salary is exempt if free medical or reimbursement is
not provided for in the terms of employment. Therefore, the medical allowance is fully taxable.
(4) Taxable benefit of a car used for both purposes is 5% of the FMV of vehicle at the
commencement of the lease. Rs.1,200,000 being the cash price of the vehicle on 1.8.2010 is the
FMV of the vehicle. Taxable benefit is Rs.1,200,000 x 5% = 60,000 x 11/12 = Rs.55,000.
(5) Hospitalisation is exempt as this benefit is in accordance with the terms of employment.

(6) Rs.500,000 received on his agreement to give 6 months notice period against the period of 2
months in the original terms of employment is taxable.
(7) Any concession in rent is a taxable perquisite. The previous tenant who had recently vacated
the apartment was paying a monthly rent of Rs.15,000 is considered as the FMV of apartment.
The difference of Rs.5,000 a month is a benefit of employment.
(8) Since the electricity was supplied free of cost to Qureshi Rs.123,800 is a benefit of
employment chargeable to tax as salary.
(9) Income from property.
Consideration for the use of land at Rs.250,000 per month for 9 months
Forfeited deposit paid under a contract for the sale of land
Rent chargeable to tax

Rupees
2,250,000
300,000
2,550,000

(10) Income from service income is taxable under normal tax structure. However, normal tax
liability should not be less than 6% of service income as the same is minimum tax. In the case of
Mr. Qureshi tax liability is more than 6% of gross service revenue and therefore provision of
minimum tax is not applicable.

Al-Hamd Academy
ICAP Module C
Final TEST

Taxation
Faculty: KP
Time allowed: 3 Hours

February 2012
Max Marks: 100

Question 1: List down the persons who are required to file return of income and what are the
dates for filing of return of income.
(10 marks)
Question 2: Bengali Babu (Private) Ltd (BBPL) was incorporated on 1.7.2010 and closed its first
accounts on 30.6.2011. BBPL commenced its commercial production on 1.9.2010 as a
manufacturer. Prior to the commencement of commercial production, BBPL had incurred the
following expenditures in July and August 2010:
Rs.
Preparation of a feasibility report
8,000,000
Construction of prototypes
5,000,000
Trial production activities
2,000,000
15,000,000
BBPLs return of income for the tax year 2011 was furnished to the Commissioner in the proper
form and within the due date of filing. The aforesaid three items of expenditure were not claimed
as deductible expenditure on the reasoning that they were incurred prior to commencement of
commercial production and the expenditure was in the nature of capital expenditure. The taxable
income declared was Rs.1,975,000 and tax thereon was paid along with the return of income. It
was pointed out subsequent to filing of return that the tax treatment accorded to the three items
of expenditure totaling Rs.15,000,000 was not correct.
Required:
(i) State, explaining the relevant provision of the law, why the tax treatment accorded to the
three items of expenditure in the return of income for the tax year 2011 was incorrect.
(6 marks)
(ii) State what action BBPL should take to rectify the mistake.

(4 marks)

Question 3: Jamal and Jamali Associates (JJA), a registered partnership firm is in the business
of manufacturing consumer products. The assessment of JJA for the tax year 2011 (accounting
year ended 30.6.2011) was selected for audit under section 177 of the Income Tax Ordinance.
(1) On completion of the audit, the Commissioner informed JJA that he intends to amend the
assessment to:
(i)

Disallow Rs.1,530,000 out of travelling expenses, being the travel and hotel expenses for
JJAs technical managers visit to Japan.

(ii)

Disallow Rs.400,000 being the contribution paid by JJA to the unrecognized Employees
Provident Fund.

(iii)

Disallow Rs.75,600 expended on the annual Eid-Milan party for JJAs employees and their
families.

(iv)

Disallow Rs.500,000 being damages paid to JJAs sole distributor.

(v)

Disallow the donation of Rs.1,000,000 paid to a hospital.

(vi)

Disallow the Rs.1,200,000 salary paid to Mr. Jamal.

The Commissioner has required JJA to furnish explanations as to why he should not amend the
assessment on the lines indicated.
(2) The following information on the issues raised by the Commissioner is provided to you:
(i) Travelling expenses
The travel to Japan was entirely for business purposes. It was necessary for the firms
technical manager to travel to Japan for the purpose of selecting a second-hand mixing
machine, so as to ensure that the machine was compatible with the firms requirements.
(3 marks)
(ii) Contribution to the unrecognized provident fund.
JJA, in its accounting system, has ensured that when any payment is made from the fund
to an employee, tax would be deducted at source from the amount of the payment, if the
amount is chargeable to tax as the salary income of the employee.
(3 marks)
(iii) Eid-Milan party
The expenditure on the party was motivated by the purpose of maintaining cordial relations
between the employees and the management.
(3 marks)
(iv) Damages paid to the sole distributor
Due to the failure to deliver supplies within the time stipulated in the contract, JJA had to
pay damages to their sole distributor. The failure to deliver the supplies in time was due to
the negligence of the dispatch department of the firm and not due to the violation of any
law.
(3 marks)
(v) Donation
The donation was to a hospital which was established in Pakistan by the Federal
Government.
(3 marks)
(vi) Salary paid to Mr Jamal
Mr Jamal is a partner in the firm of JJA. He is also the Chief Executive Officer (CEO) of the
firm devoting his full time to managing the affairs of the firm. His salary was approved by
the partners.
(3 marks)
Mr Jamal, as CEO of JJA, wants you to explain the relevant statutory tax provisions on the issues
raised by the Commissioner.
Required: State giving reasons whether or not in each case, the amendment proposed by the
Commissioner is or is not in accordance with the provisions of the tax statute.
Question 4:
Mr. Z provided the following information relevant to his accounting year ended 30.6.2012:
(1) Until 31.10.2011, Z was an employee of AOPL. On 31.10.2011, Z opted for early retirement
scheme of AOPL. On retirement, Z, in addition to his monthly remuneration, received:
Rs.7,000,000 as golden handshake payment under AOPLs voluntary retirement scheme.
Rs.9,000,000 accumulated balance from AOPLs recognized Employees Provident Fund.
A bonus equal to two months basic salary.

(2) Zs terms of employment with AOPL provided for the following:

(i) A basic salary of Rs.500,000 per month
(ii) Monthly allowances of:
10% of basic salary for utilities
Rs.75,000 for medical [No entitlement for free medical benefit or reimbursement]
(iii) A company maintained car, having cost of Rs.3,000,000, for office and private use. Z to
pay AOPL Rs.10,000 per month for the private use of the car. In accordance with AOPLs
policy, Z purchased the car on 31.10.2011 at Rs.600,000. Another employee of AOPL had
then offered to purchase the car at that date for Rs.900,000.
(3) The monthly salary and cash allowances of all employees of AOPL are deposited into each
employees bank account on the first working day of the following month.
(4) On 1.11.2011, Z commenced business of supply of locally purchased items to various
companies. Z closed his business on 31.3.2012. Zs profit for the period is as follows:
Rs.
Sales (net of tax deducted @ 3.5%)
1,664,625
Less: Expenses
1,586,500
Profit
78,125
(5) On 1.4.2012, Z left for Saudi Arabia for employment for a period of two years at salary of
US$ 20,000 (Rs.1,600,000) per month. No tax has been paid or deducted at source in Saudi
Arabia on the salary income of Z. For the tax year 2012, Z is resident for Pakistan tax since
his stay in Pakistan was more than 182 days. Following his departure, Z returned to Pakistan
for the first time on 5.7.2012 for a short stay of one week.
(6) On retirement from AOPL on 31.10.2011, Z was due Rs.6,000,000 from unapproved gratuity
scheme of AOPL. The gratuity was paid on 30.4.2012 to Z at his request in Saudi Arabia in
US dollars.
(7) Other information:
(i) On 8.6.2011, Z had acquired 5,000 shares in CD Pakistan Ltd for Rs.500,000 and had
been allowed a tax credit thereon of Rs.50,000 in the tax year 2011. On 11.6.2012, Z
sold these 5,000 shares in CD Pakistan Ltd for Rs.500,000.
(ii) Tax Rs.16,700 collected by a bank on cash withdrawal by Z in the tax year 2012.
(iii) Z elected to tax the amount of the golden handshake at the average rate of tax for the
preceding three years which is 12%.
(iv) Tax deducted at source from Zs salary by AOPL for the tax year 2012 is Rs.2,800,000.
Required:
(a) Compute the taxable income of Mr. Z, giving necessary explanations.

(20 marks)

(b) Calculate the taxable payable by or refundable to Mr Z

(2 marks)

Question 5
Choose the correct answer:

(40 Marks)

1. Perquisites include:
(i)
(ii)
(iii)
(iv)

Bonus
Overtime
Extra amount to enter into employment contract
Benefit of company maintained car

2. Employment under the Income Tax Ordinance includes:

(i)
(ii)
(iii)
(iv)

Directorship or an office of management in a company

A position entitling the holder to a fixed or ascertainable remuneration
Holding or acting in a public office
All of the above

3. Mr. Z joined a private company as a financial controller on 1.2. 2011 at a monthly salary
of Rs.300,000. His salary is paid in the first week of the next month. However, he took
salary of June and July 2011 in advance in the last week of June and he wants to tax his
salary on accrual basis as he is an employee of a private company. His salary for the tax
year 2011 would be taxed for:
(i)
(ii)
(iii)
(iv)

4 months
5 months
6 months
at the option of Mr. Z to be exercised with the return of income

4. Option granted under employee share scheme is a:

(i)
(ii)
(iii)
(iv)
(v)

capital asset and taxable under the head capital gain

personal asset and therefore not taxable
business asset and taxable under the head income from business
capital asset but taxable under the head salary
None of the above

5. Share of profit received by a company from a joint venture i.e. AOP is:
(i)
(ii)
(iii)
(iv)

included in the companys taxable income only for rate purpose

Exempt in the hands of the company as the AOP has already paid tax
Taxable in the hands of the company in the normal manner
Taxable subject to a tax credit

6. A company lets out building along with plant and machinery. Its income is chargeable as:
(i)
(ii)
(iii)
(iv)

Income from property

Income from business
Income from other sources
Taxable as a separate block of income

7. Co-owners of immovable property:

(i)
(ii)
(iii)

can never be assessed as an AOP

are always assessed as an AOP
can be assessed as an AOP in some cases

8. Deduction of tax at source from payment on account of rent is mandatory for:

(i)
(ii)
(iii)
(iv)

Every tenant
Companies
companies and AOP constituted under law
None of the above

9. Capital gain is computed as a difference between:

(i)
(ii)
(iii)
(iv)

consideration received of a capital asset and its cost

fair market value (FMV) of a capital asset and its cost
FMV as determined by the Commissioner or consideration received of a capital
asset whichever is higher and its cost
FMV of a capital asset as declared by the taxpayer and its cost

10. Rental income earned by a person engaged in the business of letting out shops in a large
shopping plaza is taxed as:
(i)
(ii)
(iii)
(iv)

Income from business

Income from property
Income from other sources
Capital gain being a capital asset

11. Dr. Awan purchased a building for his clinic few years ago and claimed tax depreciation
on such building. He disposed off his building during the current year. The profit on sale
of the said building is taxed as:
(i)
(ii)
(iii)
(iv)

Exempt from tax being a capital receipt

capital gain being a capital asset
Business income
income from other sources

12. Mr. Zulfiqar is full time engaged in purchase and sale of shares of listed companies by
holding such shares on short term as well as on long term basis. His gain on sales of
such shares is:
(i)
(ii)
(iii)
(iv)

Taxable as business income

Taxable as income from other sources
Taxable as capital gain
Exempt from tax if holding period is more than one year

13. Admissible business expenses are those:

(i)
(ii)
(iii)
(iv)

As list down in the income tax laws

As reported in the annual accounts and audited by a firm of Chartered
Accountants
As admitted by the Commissioner
disallowed by the Commissioner but relief is given by the Appellate Tribunal

14. Which of the following is not admissible expense under business income:
(i)
(ii)
(iii)
(iv)

Litigation expense to defend an existing title of a business asset

Litigation expense for the purpose of amalgamation
legal expense for making agreement for the supply of goods in future
None of the above is the correct answer

15. Unpaid trading liability concept is applicable on:

(i)
(ii)
(iii)
(iv)

An expense outstanding in the 3rd year after its accrual

An expense outstanding in the 4th year after its accrual
Outstanding principal amount of loan taken for trading purpose
Interest payable on the above loan but not paid till the 4th year after its accrual

16. Business loss (excluding loss due to depreciation) suffered by an AOP in a tax year:
(i)
(ii)
(iii)
(iv)

can be set-off by the members of AOP

can be carried forward by the AOP for future period without any time limit
can be carried forward by its members
None of the above

17. Speculation losses:

(i)
(ii)
(iii)
(iv)

are adjusted against income from other sources

can be c/f up to 6 years against income from any source of income in future
are first adjusted against other speculation gain and then against business income
(other than speculation business) of the same tax year
None of the above

18. A carried forward loss under the head income from business can be set-off against:
(i)
(ii)
(iii)
(iv)

Income from other sources

Income from any head of income
Capital gain
None of the above

19. Return of income shall be furnished by a company having year end 31st March (special
tax year), on any of the following date:
(i)
(ii)
(iii)
(iv)

30th day of September

31st day of December
31st day of March next year
None of the above

20. Extension in filing of return can, on the application by the taxpayer, be granted up to any
duration applied for by the:
(i)
(ii)
(iii)
(iv)

Commissioner with the approval of the Chief Commissioner

Commissioner with the approval of the FBR
Chief Commissioner with the approval of FBR
Commissioner without any approval under exceptional circumstances

21. First appeal against the Commissioners order is to be filed within any of the following
days from the date of service of the said order:
(i)
(ii)
(iii)
(iv)

30 days
60 days
90 days
any time period allowed by the appellate authority applied for by the taxpayer

22. Notice for discontinuation of business shall be submitted to the Commissioner within ___
days of such discontinuation:
(i)
(ii)
(iii)
(iv)

30
15
60
any time on or before the due date for filing of return

23. Quarterly advance income tax is payable by an individual taxpayer whose last assessed
income exceeds Rs.:
(i)
(ii)
(iii)
(iv)

200,000
500,000
1,000,000
None of the above

24. Withholding tax on account of purchase of raw material is required to be deposited into
Government treasury within:
(i)
(ii)
(iii)
(iv)

7 days of the delivery of goods

7 days of the receipt of suppliers invoice
7 days of payment to the supplier
a period at the discretion of the taxpayer for which he is required to obtain
permission from the Commissioner

25. Dividend income includes:

(i)
(ii)
(iii)
(iv)

A reward for achieving a particular target

A payment / reward against any investment made including any securities issued
under National Savings Schemes
an advance / loan to a shareholder by a public unlisted company which does not
qualify as a public company under the Income Tax Ordinance
Amount repaid by a company to its shareholders on reduction of capital to the
extent of accumulated profits

Tax rates along with marginal relief rates are as under:

Category 2 (salaried case i.e. where taxable salary exceeds 50% of taxable income)

1
2
3
4
5
6
7
8
9
10
11
12
13

TAXABLE INCOME
Up to Rs.350,000
350,001 400,000
400,001 450,000
450,001 550,000
550,001 650,000
650,001 750,000
750,001 900,000
900,001 1,050,000
1,050,001 1,200,000
1,200,001 1,450,000
1,450,001 1,700,000
1,700,001 1,950,000
1,950,001 2,250,000

RATE
Nil
1.50%
2.50%
3.50%
4.50%
6.00%
7.50%
9.00%
10.00%
11.00%
12.50%
14.00%
15.00%

14
15
16
17

2,250,001 2,850,000
2,850,001 3,550,000
3,550,001 4,550,000
Over Rs.4,550,000

16.00%
17.50%
18.50%
20.00%

Marginal relief in case of salaried taxpayers

Where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the
table, the income tax payable shall be the tax payable on the maximum of that slab plus an
amount equal to
(i)

20% of the amount by which the total income exceeds the said limit where the total
income does not exceed Rs.550,000.

(ii) 30% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.1,050,000.
(iii) 40% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.2,250,000.
(iv) 50% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.4,550,000.
(v) 60% of the amount by which the total income exceeds in each slab but the total
income exceeds Rs.4,550,000.
- The end -

Al-Hamd Academy
Answers to the test Taxation Module C August 2011
Answer to Q.1
The following persons are required to file return of income:
a) Every company including an approved non-profit organization and an approved welfare
institution;
b) A person other than a company whose taxable income exceeds basic exemption which is
Rs.350,000. However, an individual whose business income exceeds Rs.300,000 but does
not exceed Rs.350,000 is also required to file return of income;
c)

Who has been charged to tax for any of the two immediately preceding tax years;

d) Who claims a loss carried forward;

e) A person who owns immovable property of 250 square yards or more or a flat in urban
areas other than property owned by a non-resident person, widow, orphan below 25
years of age and disabled person;
f)

A person who owns immovable property of 500 square yards or more in a rating area;

g) A person who owns a flat of 2,000 square feet or more in a rating area;
h) A person who owns a vehicle of 1,000 cc or more;
i)

A person who has obtained National Tax Number; or

j)

A person who holds commercial or industrial connection of electricity where the annual
bills exceed Rs.1 million.

Due date for filing:

i. 31st August
1. Annual statement of tax deduction from salary
2. Return of income through e-portal in the case of salaried individual
3. Statement for FTR u/s 115(4) by an individual or AOP
ii. 30th September
a) Return of income by an individual or AOP (other than return of income through e-portal
in the case of salaried individual)
b) Return of income and statement for FTR u/s 115(4) by a company having year end
between 1st July to 31st December.
iii. 31st December
Return of income and statement for FTR u/s 115(4) by a company having year end between
1st January to 30th June.
Answer to Q.2:
(i) As the three items of expenditure were incurred prior to the commencement of commercial
production, such expenditure is classified as pre-commencement expenditure which has been
defined to mean any expenditure incurred before the commencement of commercial production
wholly and exclusively to derive taxable income and specifically includes the cost of feasibility
studies, construction of prototypes and trial production activities.
Pre-commencement expenditure is amortized on a straight line basis over 5 years in equal
proportion [20% per year]. In the circumstances the treatment accorded to the three items of
expenditure is not correct.

(ii) BBPL is entitled to a deduction for amortization for the three items @ 20%. To claim this
amortization deduction, BBPL would have to file a revised return of income.

Answer to Q.3
(1) The following issues raised by the Commissioner are not in accordance with the provisions of
the tax statute:
(i) Contribution to the unrecognised provident fund:
A contribution to a recognised provident fund is an allowable deduction. A contribution made to
an unrecognised provident fund is also deductible provided the employer has made effective
arrangements to ensure that tax would be deducted from any payments made by the fund to the
employees.
As JJA has made the aforesaid effective arrangements, the contribution of Rs.400,000 made to
the fund is a deductible expenditure.
(ii) Eid-Milan party:
The expenditure of Rs.75,600 is in the nature of an amenity provided to the employees to
maintain cordial and friendly relations with employees which is an integral part of the business.
Expenditure incurred in order to indirectly facilitate the carrying on of the business is expenditure
incurred wholly and exclusively for business purpose and is a deductible expenditure.
(iii) Damages paid:
Rs.500,000 paid to the sole distributor as damages due to the failure to deliver supplies within
the time stipulated in the contract, is an expense connected and incidental to the business. The
fact that the delay in delivery of goods was due to the negligence of JJAs dispatch department is
not relevant. The expenditure incurred is wholly and exclusively for business purpose and is a
deductible expenditure.
(2) The following issues raised by the Commissioner are in accordance with the provisions of the
tax statute:
(i) Travelling expenses:
The expenditure of Rs.1,530,000 incurred solely to secure the purchase of machine, is capital
expenditure and is not deductible. Rs.1,530,000 should be added to the cost of the machine for
tax purposes.
(ii) Donation:
The donation of Rs.1,000,000 paid to a hospital run by the Federal Government is not a
deductible expenditure. JJA is however entitled to a tax credit.
(iii) Salary paid to Mr Jamal:
Any salary paid by an AOP to its members is not a deductible expenditure. Mr Jamal is a member
of the AOP and therefore, the salary paid to him is not a deductible expenditure.

10

Answer to Q.4
Mr Zaki
Tax year 2012
(a) Computation of taxable income
Salary from AOPL
Basic salary for five months
Utility allowance for five months
Medical allowance for five months
325,000
Less: 10% of basic salary
250,000
Bonus
Benefit of company maintained car
5% of Rs.3 million for 4 months
50,000
Less: payment by Mr. Z Rs.10,000 per month
40,000
Benefit on purchase of motor car 900,000 600,000
Golden handshake payment
Gratuity
AOPLs Employees Provident Fund exempt
Salary from Saudi Arabia
Foreign-source salary exempt
Taxable income
Less: Golden handshake payment to be taxed separately
Taxable income excluding separate block of income

2,500,000
250,000
125,000
1,000,000

10,000
300,000
7,000,000
6,000,000

17,185,000
7,000,000
10,185,000

(b)
Computation of tax payable
Tax on balance of Rs.10,185,000 at 20%
Tax on Rs.7,000,000 (golden handshake) at 12%
Add: surrender of tax credit on shares allowed in the tax year 2011
Advance tax collected by bank on cash withdrawals
Tax deducted at source by AOPL from salary income
Tax payable

16,700
2,800,000

2,037,000
840,000
2,877,000
50,000
2,927,000
2,816,700
110,300

Notes:
(1) Salary and cash allowances of each month are transferred to each employees bank account
on the first working day of the following month. Therefore, the basic salary and allowances
have been calculated for five months (June 2011 to October 2011).
(2) Rs.6,000,000 from unapproved gratuity: Amount received from unapproved gratuity scheme
is exempt up to 50% of the gross amount or Rs.75,000 whichever is lower.
However, since the gratuity was received by Z outside Pakistan, the above exemption is not
available and the entire amount is taxable.
(3) If a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax
year, any foreign source salary income earned by a resident person is exempt. Z left Pakistan
for Saudi Arabia on 1.4.2012 and remained abroad till the end of the tax year 2012 and
therefore salary earned in Saudi Arabia is exempt in Pakistan.
(4) The net profit of Rs.78,125 on the sale of locally purchased items is not taxable under any
head of income since the tax deducted Rs.60,375 (35% of gross sales of Rs.1,725,000) is
the final tax on the income arising from the sale of such items.
(5) As the shares of CD Pakistan Ltd were disposed off within a period of 36 months, the tax
credit of Rs.50,000 allowed in the tax year 2011 is required to be surrendered.

11

Answer to Q.5
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

(iv)
(iv)
(iii) Note for students: Option to tax salary on accrual basis can be exercised by the
Commissioner in this case and not the taxpayer.
(iv)
(iv)
(iii)
(iii)
(ii)
(iii)
(ii)
(iii)
(iii) and (iv)
(iii) and (iv)
(iv)
(ii) and (iv)
(iv)
(iv)
(iv)
(ii)
(iv)
(i) and (iv)
(ii)
(ii)
(iii)
(iv)

12

Al-Hamd Academy
ICAP Module C
TEST

Taxation
Faculty: KP
Time allowed: 3 Hours

August 2012
Max Marks: 75

Question 1:
Explain the correct tax treatment in each of the following situations:
(i) In 2001, Mr. Hammad inherited from his father a rare sculpture of Alexander which had a
fair market value of Rs.2,000,000 on the date of inheritance. In March 2012, the
sculpture was sold by him at Rs.750,000.
(ii) In December 2011, Mr. Harun entered into an agreement for sale of his residential plot
to Mr. Bux, who paid an advance of Rs.500,000. According to the agreement, Mr. Bux
was required to pay the balance by 28.2.2012. However, instead of paying the balance
amount, he terminated the sale agreement. Mr. Harun forfeited the advance of
Rs.500,000 in accordance with the terms of the agreement.
(iii) In September 2011, Mr. Saleem sold his personal car, Toyota Starlet, to one of his
friends at a price of Rs.350,000 whereas the fair market value of the car was Rs.500,000.
The car was purchased by him in the year 2008 at a cost of Rs.425,000.
(iv) Mr. Zarrar was working as a Chief Financial Officer in Dawai Pakistan (Pvt) Ltd, which is a
wholly owned subsidiary of Dawai AG, Germany. According to the Companys policy, Mr.
Zarrar was sent on secondment to Germany on 1.1.2012 for a period of five years.
During this period, half of his salary will be credited to his bank account in Pakistan,
whereas the remaining portion will be received by him in Germany.
(v) Mr. Jafar provided consultancy services to Sultan Ltd. In consideration for his services, he
received a net amount of Rs.470,000 after tax deduction of Rs.30,000.
(Marks 15)
Question 2:
Explain the term long term contract and the method of computing the income from long term
contract, under the Income Tax Ordinance, 2001.
(Marks 10)
Question 3:
Discuss the procedure required to be followed by a resident company if it intends to make
payments to a non-resident individual without deduction of tax.
(Marks 5)
Question 4:
Mr. Arif is working as a Senior Executive in PQ Pakistan Ltd. The details of his income / receipts
during the tax year 2012 are as follows:
(i)

He received basic salary of Rs.100,000 per month.

(ii)

He was provided with furnished accommodation for which PQ Pakistan Ltd paid a rent of
Rs.30,000 per month.

(iii)

A company owned car was provided to him which was used partly for official and partly for
private purposes. The car was purchased at a cost of Rs.500,000 but had a fair market
value of Rs.550,000.

(iv)

Medical allowance of Rs.150,000 was paid to him during the year. The actual medical
expenses incurred by him amounted to Rs.45,000.

(v)

He earned an income of Rs.45,000 on the sale of jewellery but incurred a loss of Rs.28,000
on sale of an antique.

(vi)

An apartment owned by him was rented on 1.7.2011 at a monthly rent of Rs.20,000. He

received a non-adjustable security deposit of Rs.200,000, which was partly used to repay
the non-adjustable security deposit received from the previous tenant in July 2010,
amounting to Rs.140,000.

(vii)

He incurred the following expenses on the apartment:

? Repairs Rs.8,000
? Share of rent to House Building Finance Corporation Rs.15,000

(viii) Gross dividend of Rs.12,000 was received from a listed company.

(ix)

Provident fund was deducted @ 12% of his basic salary. An equal amount was contributed
by the company.

(x)

He withdrew cash from the bank on which the bank deducted tax of Rs.500.

(xi)

Tax deducted by the company amounted to Rs.180,000.

(xii)

An amount of Rs.30,000 was donated by him to an approved charitable organization.

Compute his taxable income and total tax payable.

(Marks 25)

Question 5:
The following results of AB (Pvt) Ltd have been produced for calculation of taxable income and
tax liability:
Expenditure

Income

Salaries
Income Tax
Bad debts written off
Charity (unapproved)
Law charges
Rent, rates & taxes
Preliminary Expenses
Reserve for doubtful debts
Bonus to employees
Pension to Ex-Manager
Depreciation
Dividend Equalisation Reserve
Net Profit
Rs.

Rs.
18,000
3,860
9,100
950
12,000
2,340
1,800
8,700
5,000
2,100
14,678
2,500
24,819
105,847

Gross Profit
Premium on issue of shares
Other taxable receipts
Income from speculative transactions
Liability of interest waived by the
creditor
Profit on sale of furniture
Bad debts recovered
(allowed in the past)

Rs.

Rs.
98,000
2,250
940
2,740
567
800
550

105,847

You are required to compute taxable income after taking into consideration the following notes:
(a) Allowable tax depreciation amounts to Rs.8,600
(b) Law charges include Rs.6,000 paid as compromise amount for suit against one of the
directors.
(c) Sufficient verification is on record and the entire expenses are allowable.
(d) Tax WDV of furniture was Rs.10,000 which was sold for Rs.10,900.
(e) The company has fulfilled all the requirements of a small company.
(Marks 20)

Tax rates along with marginal relief rates are as under:

Category 2 (salaried case i.e. where taxable salary exceeds 50% of taxable income)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1.2

TAXABLE INCOME
Up to Rs.350,000
350,001 400,000
400,001 450,000
450,001 550,000
550,001 650,000
650,001 750,000
750,001 900,000
900,001 1,050,000
1,050,001 1,200,000
1,200,001 1,450,000
1,450,001 1,700,000
1,700,001 1,950,000
1,950,001 2,250,000
2,250,001 2,850,000
2,850,001 3,550,000
3,550,001 4,550,000
Over Rs.4,550,000

RATE
Nil
1.50%
2.50%
3.50%
4.50%
6.00%
7.50%
9.00%
10.00%
11.00%
12.50%
14.00%
15.00%
16.00%
17.50%
18.50%
20.00%

Marginal relief in case of salaried taxpayers

Where the total income of a taxpayer marginally exceeds the maximum limit of a slab in
the table, the income tax payable shall be the tax payable on the maximum of that slab
plus an amount equal to
(i)

20% of the amount by which the total income exceeds the said limit where the total
income does not exceed Rs.550,000.

(ii) 30% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.1,050,000.
(iii) 40% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.2,250,000.
(iv) 50% of the amount by which the total income exceeds in each slab but total income
does not exceed Rs.4,550,000.
(v) 60% of the amount by which the total income exceeds in each slab but the total
income exceeds Rs.4,550,000.

Tax rates on income from property where the owner is an individual:

S. No.

Gross amount of rent

Rate of tax

(1)

Where the gross amount of rent does not

exceed Rs.150,000

Nil

(2)

Where the gross amount of rent exceeds

Rs.150,000 but does not exceed Rs.400,000

5% of the gross amount

exceeding Rs.150,000

(3)

Where the gross amount of rent exceeds

Rs.400,000 but does not exceed
Rs.1,000,000

Rs.12,500 plus 7.5% of

the gross amount
exceeding Rs.400,000

(4)

Where the gross amount of rent exceeds

Rs.1,000,000

Rs.57,500 plus 10% of

the gross amount
exceeding Rs.1,000,000

- The end -

Al-Hamd Academy
Answers to the test - Taxation Module C

August 2012

Answer to Q.1:
(i) Fair market value on the date of inheritance is a deemed cost for the recipient. There are
certain capital assets including sculpture on the disposal of which gain is taxable subject
to holding period but loss, if any, shall not be recognized. Therefore, loss on disposal of
sculpture is not recognised.
(ii) Forfeited deposit under a contract for sale of immovable property is included in the
definition of rent under the head income from property which is taxable as separate
block of income. This amount is therefore taxable under the head income from property
and separate tax would be worked out as under:
Income tax on Rs.400,000
Income tax on Rs.100,000 @ 7.5%
Total tax on property income

12,500
7,500
20,000

(iii) Car held for personal use is not a capital asset and therefore its disposal does not fall
within the ambit of capital gain. Sale of a personal car is a capital receipt which is not
taxable under any head of income.
(iv) Salary shall be Pakistan source income where the salary is received from any
employment exercised in Pakistan, wherever paid. As the services are performed outside
Pakistan, salary in this case shall be foreign source salary.
Foreign source salary shall be exempt if a citizen of Pakistan leaves Pakistan during a tax
year and remains abroad during that tax year section 51(2). Therefore, foreign source
salary in this case would not be taxable in Pakistan.
(v) Service Income earned by a person where the service is provided to a tax deducting
agency:
This income is taxable under normal tax structure at normal slab rates. However, tax
deduction at source @ 6% shall be minimum tax on such income. It means that normal
tax liability on service income shall not be less than 6% of gross revenue.

Answer to Q.2:

Income from any long-term contract shall be computed on the basis of % of completion method.
% of completion in a tax year shall be determined as under:
Cost of contract incurred before the end of the tax year
_
Total estimated contract cost at the commencement of contract
Long-term contract means a contract which is not completed within the tax year in which work is
commenced other than a contract estimated to be completed within 6 months of the
commencement of work.

Answer to Q.3:
Where a person intends to make a payment to a non-resident without tax deduction on any
ground e.g. payment to the non-resident is not taxable in Pakistan, he shall furnish a notice to
the Commissioner before making payment setting out:

o name and address of the non-resident; and

o nature and amount of the payment
The Commissioner shall within 30 days pass an order accepting or rejecting the application.

Answer to Q.4:

Mr. Arif
Tax Year 2012
Computation of taxable income and tax liability
Rs.

SALARY
Basic salary 100,000 x 12
Accommodation 45% of basic salary
Company car 5% of Rs.500,000
Medical allowance
Less: 10% of basic salary
Provident Fund (assumed to be recognized)
Companys contribution 12% of basic salary
Less: Exempt up to Rs.100,000 or 10% of basic salary + DA
(Whichever is lower)

1,200,000
540,000
25,000
150,000
120,000

30,000

144,000
100,000

44,000
1,839,000

Income from property

Rent 12 x 20000
Un-adjustable advance
Less: Amount already taxed in the year 2011
10% of the balance advance
Chargeable rent
CAPITAL GAIN
Gain on sale of jewellery (holding period assumed to be within 1 year)
Loss on sale of antique not recognized
Taxable income
Less: Property income (separate block of income)
Income taxable at normal slab rates

240,000
200,000
14,000
186,000
18,600
258,600
45,000
-2,142,600
258,600
1,884,000

(28,000)

Notes:
Company car: 5% of the cost of car to the employer (and not the FMV) is taxable where the car
is being used for office and private purposes. However, if an employer has taken a car on lease
then FMV of the car at the inception of the lease shall be considered for this purpose.
Medical allowance: Medical allowance is exempt up to 10% of basic salary and for this
purpose actual medical expense incurred by the employee shall not be considered.
Antique: Antique is a capital asset. However, there is a specific category of capital assets
including antique on which capital gain, if any, is taxable but capital loss is not recognized.
Therefore, capital loss on disposal of antique is not considered in the computation of income.
Dividend income: Gross dividend income is taxable under Final Tax Regime and tax deducted
at source @ 10% of gross dividend is the full and final tax on such income and therefore,
dividend income is not included in normal taxable income.
Share of rent to HBFC: Share of rent to HBFC is not deductible from property income.
However, rebate is allowed on share of rent to HBFC at average rate of tax.

Tax liability (salaried case):

Working as per slab rates:
Tax as per slab No.12 @ 14% of Rs.1,884,000
Working as per Marginal Relief:
Tax as per slab No.11 @ 12.5% of Rs.1,700,000
Tax on Rs.184,000 @ 40%

Rs.
263,760

212,500
73,600
286,100

Income tax liability: whichever is lower of the above

Income tax on property income 5% of Rs.258,600 150,000
Less: Rebate on donation
269,190 / 2,142,600 x 30,000
Rebate on share of rent to HBFC
269,190 / 2,142,600 x 15,000
Total tax payable
Less: Tax deducted by the employer
Tax on cash withdrawal from the bank
Tax payable with return of income

263,760
5,430
269,190
3,769
1,885
180,000
500

5,654
263,536
180,500
83,036

Answer to Q.5:
AB Pvt Ltd

Computation of Taxable Income

Accounting Net Profit
Add:
Income tax charged to P&L a/c
Charity
Dividend equalization reserve
Law charges (related to personal case of a director)
Preliminary expenses
Reserve for doubtful debts
Accounting depreciation
Tax gain on disposal of furniture
Less:
Premium on issue of shares
Accounting profit on sale of furniture
Tax depreciation
Taxable Income
Income tax @ 25% being small company

Rs.
24,819
3,860
950
2,500
6,000
1,800
8,700
14,678
900

2,250
800
8,600

39,388
64,207

11,650
52,557
13,139