Chapter 11 - Income From Business-Updated

Chapter 11- Income from Business
Errors Rectified:
Page 97 line 25/26: the lines to be replaced as follows:
In case of person following Cash basis of Accounting, the cost of production shall be determined
using Prime Costing (or Marginal Costing or Variable Costing) Method or Absorption Costing
Method.
Notes:
The rates of tax taken on this chapter are as applicable for IY 2072/73. Please note the same.
Question 1- Page 84
Provision of the Act (Sec. 22 (6))
In case of change in basis of accounting, the taxpayer shall make necessary adjustments in income
calculation in the Income Year when the basis of accounting is changed in such a way that no amount
included, deducted, to be included or to be deducted in calculating the persons income of the Income
Year is omitted or repeated.
Based on the above provisions:
a. As per accrual basis of accounting, the amount shall be included in Income in the Income Year
20X1/X2. However, as the person followed cash basis of accounting in that Income Year and the
amount was not received in cash, the amount was not included in Income. As such, the amount shall
be included in income as per Sec. 22 (6) in IY 20X2/X3 (No omission/no repeat)
b. As per accrual basis of accounting, the amount shall be included in Income in the Income Year
amount was received in cash, the amount was included in Income. As such, the amount shall not be
included in income as per Sec. 22 (6) in IY 20X2/X3 (No omission/no repeat)
c. As per accrual basis of accounting, the amount of house rent for Shrawan 20X2 till Poush 20X2 shall
be deductible in the Income Year 20X2/X3. However, as the person followed cash basis of
accounting in that Income Year and the amount was paid in cash, the amount was deducted while
deriving the Income from business. As such, the amount shall not be deducted in income as per Sec.
22 (6) in IY 20X2/X3 (No omission/no repeat)
Question 2- Page 84
Provision of the Act (Sec. 22 (6))
In case of change in basis of accounting, the taxpayer shall make necessary adjustments in income
calculation in the Income Year when the basis of accounting is changed in such a way that no amount
included, deducted, to be included or to be deducted in calculating the persons income of the Income
Year is omitted or repeated.
Based on the above provisions:
a. As per accrual basis of accounting, the amount shall be included in Income in the Income Year
amount was not received in cash, the amount was not included in Income. As such, the amount shall
be included in income as per Sec. 22 (6) in IY 20X2/X3 (No omission/no repeat)
b. As per accrual basis of accounting, the amount shall be included in Income in the Income Year
amount was received in cash, the amount was included in Income. As such, the amount shall not be
included in income as per Sec. 22 (6) in IY 20X2/X3 (No omission/no repeat)
c. As per accrual basis of accounting, the amount of house rent for Shrawan 20X2 till Poush 20X2 shall
be deductible in the Income Year 20X2/X3. However, as the person followed cash basis of
accounting in that Income Year and the amount was paid in cash, the amount was deducted while
deriving the Income from business. As such, the amount shall not be deducted in income as per Sec.
22 (6) in IY 20X2/X3 (No omission/no repeat)
Question 1- Page 88
The question is not clear, whether the company is claiming the amount added by the employer as
contribution of employers towards Retirement Fund account of employee or the deducted amount was
contribution of employees in unapproved retirement fund.
In the first case, as the amount is employee expenses of the company; the amount is deductible u/s 13 of
the Act as it satisfies all the three conditions prescribed by Sec. 13 of the Act.
In the second case, as the contribution is the expenditure of employee and hence, it does not satisfy a
criteria of to be incurred by the person, the amount is not deductible.
Question 1- Page 91
Please refer to point no. 3 of Page 90 (Sec. 21-1 (gha))
Question 2- Page 91
Please note that Sec. 21 specifies of the payments not only expenditures. Hence, any payment above
Rs. 50,000 at a time when the turnover of the person exceeds Rs. 20 Lakhs during the Income Year is
not deductible except in the six exceptions mentioned in Sec. 21 (2) of the Act.
In the given case, as the payment exceeds Rs. 50,000; in case if the turnover exceeds Rs. 2 Million: the
amount is not deductible for tax purpose.
Question 3- Page 91
Refer Page 89 of the book
Question 4- Page 91
In your answer, write down the six exceptions from page 90 of the book.
Conclusion:
As the payment is made to farmer, the amount is deductible for tax purpose even when the produces are
primarily processed. However, if the payment is for readymade items; the amount would not be
deductible.
Question 1- Page 95
Copy all provisions of Sec. 14 of the Act.
Question 2- Page 95
As per Sec. 14 (2), in case a resident entity controlled by exempt organization pays interest to the
Controlling entity, the maximum amount of interest that can be claimed as expenses shall be limited to
the sum of following:
a. Interest Income derived by the person during the Income Year, and
b. 50% of Adjusted taxable income derived for the person excluding interest income and interest
expenses.
In the given question, Fewa P. Ltd. is a resident entity controlled by exempt organization as 80% of its
shares are held by nonresidents, where it would be resident entity controlled by exempt organization
even when 25% of its shares were held by nonresident persons. As it paid interest to its foreign investors
Sec. 14 (2) is applicable.
The calculation of adjusted taxable income is done as prescribed by Income Tax Manual 2066 (Updated
2068):
Sales Income
5,000,000
Less: Deductions
Cost of Sales (assuming calculated as per Sec. 15)
2,000,000
Admin Expenses (assuming as per Sec. 13)
1,100,000
Pollution Control Expenses
300,000
Adjusted Taxable Income (assuming there are no other expenses)
1,600,000
Therefore, eligible expenses u/s 14 (2): Lower of following
a. Actual Interest paid to foreign investors
b. Sum of following:
Interest Income
Add: 50% of ATI Calculated above
1,400,000
875,000
75,000
800,000
Eligible Expenses u/s 14 (2)

Eligible Interest Expenses u/s 14 (1)- assuming paid for loan used for business
Total Eligible Expenses u/s 14
875,000
100,000
975,000
Ineligible expenses
525,000
Treatment of Ineligible Expenses:

As per Sec. 14 (3), the excess of actual interest paid to controlling person over the interest claimable u/s
14 (2) can be carried forward to be claimed in following Income Year(s), and is deemed to be paid for
loans utilized in the following Income Year(s).
In the given case, the excess of Rs. 575,000 is carried forward to be claimed in following Income Year(s)
and the same amount is deemed to be paid as interest for the loans utilized in following Income Year(s).
Question 3- Page 95
expenses.
In the given question, Ram Trading P. Ltd. is a resident entity controlled by exempt organization as it is
wholly owned by nonresident Mr. Thapar, where it would be resident entity controlled by exempt
organization even when 25% of its shares were held by nonresident persons. As it paid interest to its
foreign investors Sec. 14 (2) is applicable.
2068):
Sales Income
500,000
Less: Deductions
300,000
Depreciation (assuming the deduction as per Sec. 19)
100,000
100,000
Interest Income
40,000
70,000
20,000
50,000

40,000
60,000
100,000
Ineligible expenses
Question 4- Page 95
expenses.
2068):
Sales Income
750,000
Less: Deductions
Cost of Sales (assuming calculated as per Sec. 15)
500,000
120,000
Depreciation (assuming as per Sec. 19)

20,000
110,000

Interest Income
75,000
60,000
5,000
55,000

60,000
60,000
Ineligible expenses
15,000
Treatment of Ineligible Expenses:

As per Sec. 14 (3), the excess of actual interest paid to controlling person over the interest claimable u/s
14 (2) can be carried forward to be claimed in following Income Year(s), and is deemed to be paid for
loans utilized in the following Income Year(s).
In the given case, the excess of Rs.15,000 is carried forward to be claimed in following Income Year(s)
and the same amount is deemed to be paid as interest for the loans utilized in following Income Year(s).
Question 1- Page 98
Please refer to valuation of closing stock portion of the book. Note the following:
Cost or Market value, whichever is lower

FIFO or weighted average cost formula
Use of Prime Costing or Absorption Costing Method
Question 2- Page 98
Calculation of Value of Closing Stock for Income Tax Purpose- using absorption costing method and
assuming FIFO Cost Formula
Quantity
Amount
2250
2,500,000
1,500,000
1,200,000
800,000
250,000
6,250,000
120,000
52.08
117,187.50
Calculation of Cost of Production

Consumption of raw materials
Wages
Power
Stores consumed (assuming direct cost)
Repairs & maintenance building (ignored as cannot be included)
Machinery (ignored as depreciation is separately calculated)
Furniture (ignored as depreciation is separately calculated)
Computers (ignored as depreciation is separately calculated)
Other Factory Overheads
Administrative Overhead (ignored, as deductible u/s 13)
Interest on Bank Loan (ignored, as deductible u/s 14)
Total cost of production
Units produced
Per unit cost
Cost of Closing Stock
(2250*52.08)
Market Value (not given and expected to be higher)
Therefore, value of closing stock is Rs. 117,187.50
Question 1- Page 101

Calculation of Allowable Repair & Improvement Expenses u/s 16 for IY 20X1/X2
Particulars
A. Depreciable Basis
B. 7% of A
C. Actual Repair & Improvement
Expenses
D. Allowable u/s 16 (B or C,
whichever is lower)
E. Excess (C-D)
Pool A
100,000,000
7,000,000
2,000,000
Pool B
800,000
56,000
100,000
Pool C
16,000,000
1,120,000
1,600,000
2,000,000
56,000
1,120,000
44,000
480,000
Pool D
-
Total
116,800,000
3,700,000
3,176,000
524,000
a) As calculated above, since its not the case of overhauling of aircraft as per the Standard of Civil
Aviation Authority of Nepal or repair and improvement expenditure of assets lost in earthquake, the
deductible repair and improvement expenditure is Rs. 3,176,000; and not 3,700,000.
b) The excess of repair and improvement expenditure over deductible amount as per Sec. 16 is
capitalized in respective pool while deriving at Opening Depreciation Base for next year. In the given
question, excess of Rs. 44,000 of Pool B and Rs. 480,000 of Pool C during IY 20X1/X2 is considered
for computing Opening Depreciation Base of Pool B and Pool C respectively for IY 20X2/X3.

a. Calculation of Depreciation Allowance
S.N.
Particulars
I
Opening Depreciation Base
II
Absorbed additions
Up to Poush (100% of Cost)
From Magh to Chaitra (2/3 of
Cost)
From Baisakh to Ashad (1/3 of
Cost)
III
Disposal Proceeds
IV
Depreciable Basis (I + II - III)
V
Rate of Depreciation
VI
Depreciation Amount (IV X V)
Pool A
3,000,000
-
Pool B
500,000
300,000
300,000
Pool C
1,500,000
333,333
Pool D
700,000
-
333,333
3,000,000
5%
150,000
50,000
750,000
25%
187,500
175,000
1,658,333
20%
331,667
Total
5,700,000
633,333
300,000
333,333
700,000
15%
105,000
225,000
6,108,333
774,167
b. Had it been the special industry (assuming XYZ & Co., an entity), the rate of depreciation for Pool AD would be accelerated. The depreciation calculation would be as follows:
S.N.
Particulars
Pool A
Pool B
Pool C
Pool D
Total
I
3,000,000 500,000 1,500,000
700,000 5,700,000
II
Absorbed additions
- 300,000
333,333
633,333
- 300,000
300,000
Cost)
333,333
333,333
Cost)
III
Disposal Proceeds
50,000
175,000
225,000
IV
3,000,000 750,000 1,658,333
700,000 6,108,333
V
6.67% 33.33%
26.67%
20%
VI
200,100 249,975
442,278
140,000 1,032,353

S.N.
I
II
Particulars
Pool A
250,000
Absorbed additions
27,500
22,500
Cost)
Cost)
5,000
III
Disposal Proceeds
275,000
IV
2,500
V
25%
VI
625
Since the opening depreciation base for next year is higher than Rs. 2,000 (1875+10,000- unabsorbed
additions); the depreciation for the year is Rs. 625.
As per Sec. 119 (1), depreciation is allowable when all the following conditions are satisfied:
a. Ownership of Asset: The asset shall be owned by the person who is claiming such depreciation.
b. Use of Asset during the Income Year: The asset shall be used during the Income Year.
c. Use of Asset for Income Generation: The asset shall be used to generate income from business, i.e.
the pool shall be used to generate income from business.
d. Nature/Type of Asset: The asset shall be a depreciable asset.
Since the depreciable asset is owned by Ms. Saloni and used in business for income generation during
the Income Year, the depreciation on such asset is allowable for tax purpose.
Condition 1:
Particulars
Pool B
85,000
Absorbed additions
From Magh to Chaitra (2/3 of Cost)
From Baisakh to Ashad (1/3 of Cost)
III
Disposal Proceeds
100,000
IV
(15,000)
V
25%
VI
In this case, since the disposal proceeds exceed sum of opening depreciation base and absorbed
additions, there shall be gain on disposal of depreciable asset and the amount is charged to income as
per Sec. 7 (2) (d) of the Act.
S.N.
I
II
Condition 2:
S.N.
I
II
III
IV
V
VI
Particulars
Absorbed additions
From Baisakh to Ashad (1/3 of Cost)
Disposal Proceeds
Pool B
85,000
30,000
55,000
25%
13,750

Please refer to Page 109 (specific cases of depreciation) of the book.
The readers shall note requirement of the Act to treat different assets of Pool E in different block and
calculate allowable depreciation separately for each block of asset. Similarly, it should also be noted that
the method of depreciation is Straight Line and rate shall be determined using useful life of asset. The
useful life shall be rounded off to nearest half year.
In this solution, round off to nearest half year is computed using mathematical logic.
Particulars
Cost of Asset
Life of asset
Life rounded off to nearest half year
Absorbed Additions
Pool E1 AS
Depreciation (Absorbed
Additions * rate- for first year)
Cost * Rate- for subsequent
years
Pool E2 IMS
5 Million
10 years 5 months
10.5 years
100/10.5%
5 Million
(as is purchased in
Shrawan)
Rs. 476,190
3.15 Million
10 years 6 months
10.5 years
100/10.5%
1.05 Million
(as is purchased in Baisakh 20X2)
100,000

Note: Furniture is in Pool B and ATM & Generator are in Pool D, and considered accordingly while
working for additions of assets.
A. Calculation of Depreciation for Pool A to Pool D:
S.N.
I
II
III
IV
V
VI
Particulars
Absorbed additions
Cost)
Disposal Proceeds
Pool A
120,000,000
-
3,500,000
116,500,000
5%
5,825,000
Pool B
5,550,000
1,966,667
500,000
800,000
666,667
200,000
7,316,667
25%
1,829,167
Pool C
12,000,000
-
12,000,000
20%
2,400,000
Pool D
13,500,000
4,200,000
2,000,000
1,333,333
Total
151,050,000
6,166,667
2,500,000
2,133,333
866,667
1,533,333
3,700,000
153,516,667
17,700,000
15%
2,655,000
12,709,167
B. Calculation of Depreciation for Pool E

1. The depreciation of Opening Depreciation of Pool E1 is to be amortized for last installments,
which means- the depreciation is Rs. 1,236,000
2. There are two additions of Leasehold improvements in the question, both from Magh to Chaitra.
Though leasehold improvements are of permanent nature and falls under Pool A as per Schedule
2 of the Act, however Income Tax Manual has allowed an alternative treatment of leasehold
improvement by allowing amortizing the improvements over useful life including it in Pool E. As
Income Tax Authority is compelled to act as per its circulars and directives, and the matter is
beneficial to taxpayer, the solution is prepared by considering the alternative treatment allowed by
Income Tax Manual.
Particulars
Pool E2 Leasehold
Pool E2 Leasehold
improvement useful life 60
improvement useful life 120
months
months
Cost
3,600,000
6,000,000
Absorbed Additions (2/3rd of
2,400,000
4,000,000
Cost)
100/5%
100/10%
Depreciation
480,000
400,000
3. Total Depreciation of Pool E= Depreciation of Pool E1+ Depreciation of Pool E2+ Depreciation of
Pool E3= 2,116,000
C. Calculation of Total Depreciation for the Year
Total Depreciation for the year = 14,825,167
D. Calculation of Eligible Repair and Improvement expenses
Particulars
Pool A
Pool B
Pool C
Pool D
Total
S.N.
I Depreciable Basis
116,500,000 7,316,667 12,000,000 17,700,000 153,516,667
II 7% of I
8,155,000
512,167
840,000
1,239,000
10,746,167
III Actual Repair & Improvement Exp
500,000
550,000
600,000
1,650,000
IV Allowable R & I u/s 16
500,000
550,000
600,000
1,650,000
V Excess (III- IV)
Since the leasehold building is not owned, the repair of such building cannot be claimed as per Sec.
16 of the Act. However, it is a contractual obligation and is paid for the business purpose; thus, the
amount is allowable u/s 13 of the Act. Hence, the repair and maintenance expense of leasehold
building of Rs. 500,000 is allowable u/s 13.
Calculation of Opening Depreciation base of replaced asset:
Particulars
Year 20X0/X1- Absorbed Additions
Depreciation for Year 20X0/X1
Depreciation Base for 20X1/X2
Opening Depreciation Base for 20X6/X7
Amount
133,333,333 (400,000,000X1/3)
26,666,667 (133,333,333 X 20%)
373,333,333 (400,000,000-26,666,667)
74,666,667
298,666,667
59,733,333
238,933,333
47,786,667
191,146,667
38,229,333
152,917,333
30,583,467
122,333,867
Calculation of Depreciation u/s 19 and Schedule 2 of the Act:

(in Millions)
S.
N.
I
II
Particulars
Pool A

Absorbed additions
Up to Poush (100% of
Cost)
From Magh to Chaitra (2/3
of Cost)
From Baisakh to Ashad
16,750.00
6.67
Pool B
Pool C
425.00
10.00
333.00
-
Pool D
Replaced
Other
Assets
Assets
122.33 14,627.67
333.33
32,258.00
350.00
-
10.00
6.67
Total
333.33
343.33
6.67
III
IV
V
VI
(1/3 of Cost)
Disposal Proceeds
Depreciable Basis (I + II III)
Depreciation Amount (IV
X V)
2.00
2.00
16,756.67
6.67%
435.00
33.33%
331.00
26.67%
122.33
100.00%
14,961.00
20.00%
32,606.00
1,117.67
144.99
88.28
122.33
2,992.20
4,465.47

Statement of Assessable Income from Business of M/s B&B Cement P. Ltd:
Particulars
Amounts to be included u/s 7 of the Act:
Sales
Interest Income- assumed directly related to business objective of the
person
Bad debts recovered
Total Inclusions in Income (A)
Allowable Deductions
Interest Expenses
Cost of Trading Stock
Repair & Improvement Expenses
Pollution Control Cost
Research & Development Cost
Depreciation as per Income Tax Act
Salary
Rent
Vehicle Running Expenses
Insurance
Other Expenses
Total Deductions (B)
Assessable Income from Business (A-B)
Sec.
Ref.
Refer
W.N.
Amounts
7.2
7.2
35,660,000
15,000
25
1.1
35,675,000
14
15
16
17
18
19
13
13
13
13
13
2
3
4
5
5
6
7
7
7
7/8
7/9
2,900,000
24,540,000
695,295
2,500,000
1,520,000
275,000
143,000
1,825,000
34,398,295
1,276,705
Statement of Total Assessable Income & Taxable Income

Particulars
Assessable Income from Business
Assessable Income from Investment
Assessable Income from Windfall Gain
Total Assessable Income
Less: Allowable Deductions from Total Assessable Income
to arrive at Taxable Income
A. Contribution to PM Relief Fund & National
Reconstruction Fund of GON
B. Expenditure u/s 12A
C. Donation u/s 12 (3)
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
10
10
12B
12A
11
11
11
11
Amount
1,276,705
1,276,705
1,276,705
Statement of Tax Liability:

The corporate tax rate for Special Industry is 20%, in absence of information supporting applicability of
other concessions u/s 11 of the Act.
Tax Liability= taxable income * Corporate Tax rate = 1,276,705 * 20%= Rs. 255,341
Working Notes:
1. As the IRD has applied Transfer Pricing Rules (Sec. 33) to determine the Arms Length Transaction,
the contention of IRD seems correct. It is assumed that the company has accepted the IRDs verdict
and thus, the sales amount is adjusted to include Arms Length pricing to its sister concern. The
readjusted sale is Rs. 35,660,000
1.1. Since bad debts expenses at the time of booking in books were not allowed as deduction, the
recovery of bad debt is also not included in income.
2. B&B Cement P. Ltd. is a resident entity controlled by Exempt Organization and falls within the
purview of Sec. 14 (2) as 31% of its interest is held by a nonresident person, which is 25% or more of
the total interest of the company. In this case, the eligible interest expenses are sum of interest to
controlling person to the extent of limit by Sec. 14 (2) and other eligible interest expenses.
It is assumed that rest of the interest expenses of Rs. 2,270,000 is incurred on loan utilized for
business purpose and obtained from an unrelated party, which is totally deductible.
Calculation of Eligible Interest Expenses u/s 14 (2)
Lower of Following:
A. Interest paid to Controlling Entity
630,000
B. Sum of Following
2,095,853
a. Interest Income
15,000
b. 50% of ATI calculated without including interest income
2,080,853
& interest expenses (refer calculation below)
C. Eligible (Lower of A or B)
630,000
D. Total Eligible
2,900,000
Calculation of ATI for Sec. 14 (2) & 50% of ATI- based on interpretation of Income Tax Manual
Particulars
Amount
Notes
Inclusions:
Sales
35,660,000 As included in Assessable Income Calculation
Interest Income
- Cannot be included as per Sec. 14 (2)
Recovery of Bad Debt
- As included in Assessable Income Calculation
Total Inclusions (A)
35,660,000
Deductions
Interest Expenses
- Cannot be deductible u/s 14 (2)
- As included in Assessable Income Calculation
- Total incurred during the year as per Income Tax
Manual
- Total incurred during the year as per Income Tax
Manual
Depreciation
695,295 As included in Assessable Income Calculation
Other Expenses (general
deductions)
Total Deductible expenses (B)
31,498,295
ATI (A B)
4,161,705
50% of ATI
2,080,853
3. In absence of further information, the cost of trading stock is assumed to be equal to the Cost of
Goods sold as appeared in the question.
4. In absence of information, it is assumed that there are no repair and improvement expenses.
5. In absence of information, it is assumed that expenditure for Pollution Control & Research &
Development has not been incurred.
6. Calculation of Depreciation
Since the company has accepted the Assessment Order issued by IRD u/s 102 of the Act, the
company is deemed to accept the charge of increasing the asset by purchasing a fraudulent VAT
invoice. As such, the depreciation for the year shall be based on the restated opening balance:
Impact of Fraudulent Invoice in Opening Balance
As the capitalization of the assets was made on Shrawan of 20X1, the depreciation on such assets
was charged for the whole year.
Particulars
Pool A
Pool B
Pool C
A. Depreciation not deductible
10,000
20,000
30,000
B. Depreciation Rate
5%
25%
20%
Since accelerated rate was not used last year
C. Underlying base of the Asset (A/B)
200,000
80,000
150,000
D. Impact on Opening Balance
190,000
60,000
120,000
Restated Opening WDV of Assets
Particulars
A. Opening Balance (Given)
B. Impact of Fraudulent bill in Opening Balance
C. Restated Opening Balance (A B)
Pool A
300,000
(190,000)
110,000
Pool B
1,600,000
(60,000)
1,540,000
Pool C
400,000
(120,000)
280,000
Pool D
500,000
500,000
Since there are no additions or disposal of assets, the depreciation base is equal to the Restated
Opening Balances, and the depreciation is calculated accordingly.
Particulars
Pool A
Pool B
Pool C
Pool D
A. Restated Opening Balance (Dep. Base)
110,000 1,540,000
280,000
500,000
B. Depreciation Rate
6.67%
33.33%
26.67%
20%
As the company uses accelerated rate
C. Depreciation
7,337
513,282
74,676
100,000
The total of above = Rs. 695,295
Since the company has not used the accelerated rate until last previous year, there may be chance of
decreasing the depreciation base by the tax authority; as in practice the accelerated rate is made
mandatory, though the Act uses the word the tax payer may instead of the taxpayer shall for such
benefits. As the tax reassessment of this company is final and the tax officer has not raised any issue
concerning that, it is assumed that there is no chance of reduction on the Opening Depreciation Base.
6.1. Since it is Cement Industry, means a production based industry specified in Sec. 3 (a) of Industrial
Enterprises Act, 2049. This implies it is a special industry which is eligible for accelerated
depreciation, i.e. 1/3rd accelerated rate on normal depreciation rate.
7. It is assumed that these expenses satisfy all the conditions laid down by Sec. 13 of the Act, i.e.
incurred by the cement industry to generate income from business during the Income Year.
8. Since it is a company as per the definition of Income Tax Act, as per Sec. 22 it must follow accrual
basis of accounting, which means prepaid expenses are not allowed in this year. Thus, total
insurance expenses claimable is Rs. 143,000 (paid less prepaid)
9. It is assumed that the director is a non executive director. Since, the company has made payment for
personal expenses of director amounting to Rs. 100,000; as per Sec. 53, the payment tantamount to
distribution of profit and dividend tax is applicable as per Sec. 54.
Similarly as per Sec. 21 (1) (e), distribution of profit is not deductible for tax purpose, it means the
other expenses of Rs. 100,000 is not deductible, i.e. Rs. 1,825,000 is only deductible
Commission to marketing agent is normal business expenditure, and deductible u/s 13. There is no
any provision in Income Tax Act to disallow any expenditure merely on the basis of failure to withhold
tax. Failure to withhold tax on any payment attracts fees and interests under Chapter 22 of the Act,
but the expenditures are allowed for tax purpose.
10. In absence of information, it is assumed that there are no other incomes.
11. In absence of information, it is assumed that there is no contribution to PM Relief Fund, or National
Reconstruction Fund of GON or Expenditure u/s 12A or donations u/s 12.

Statement of Assessable Income from Business of M/s Gorkhali Cement P. Ltd:
Particulars
Sales
Other Income Interest Income directly related to the business objective
of the person
Interest Expenses
Administrative Expenses
Selling & Distribution Expenses
Sec.
Ref.
Refer
W.N.
7.2
7.2
Amounts
31,000,000
588,235
31,588,235
14
15
16
17
18
19
13
13
2
3
4
5
5
6
7
7
2,000,000
17,146,000
400,000
9,068,000
2,000,000
600,000
31,214,000
374,235

Particulars
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
8
8
12B
12A
9
9
9
10
Amount
374,235
374,235
374,235

The corporate tax rate for Special Industry is 20%, in absence of information supporting applicability of
other concessions u/s 11 of the Act.
Tax Liability= taxable income * Corporate Tax rate = 374,235 * 20%= Rs. 74,847
Working Notes:
1. Interest income received by an entity is subject to 15% withholding tax, which means Rs. 500,000 is
85% of the actual interest income. Grossing up the same, the interest income is 588,235.
2. It is assumed that the construction of factory building is completed, and used during the year
20X1/X2, implying that the interest for the year is deductible u/s 14 (1).
3. Calculation of Cost of Trading Stock:
Factors to be considered:
Cost of Trading Stock is sum of Value of Opening Stock and the cost of production of the year
less Value of Closing Stock.
Closing Stock is valued at Cost or Market value, whichever is lower.
Cost of Production is determined by using absorption costing method, as it is company following
Accrual basis of accounting; under which the components of cost are direct material, direct labor,
other direct expenses and factory overhead. Factory overhead does not include repair and
improvement expenses and depreciation of depreciable asset.
Opening Stock
700,000
Less: Repair & Improvement of Depreciable asset included
(14,000)
(Assumed that Repair is of depreciable asset- 2% of valuation)
Restated Opening Balance as per Income tax law
686,000
Add: Cost of Production
Cost of clinker and other raw materials
18,000,000
Salary & wages for Factory (assumed Wages)
1,200,000
Repair & Maintenance (assumed of Depreciable asset)
Other Overhead expenses (assumed factory overhead)
200,000
19,400,000
Less: Value of Closing Stock as per Income Tax
Accounting Value of Closing Stock
3,000,000
Less: Repair & Improvement included in it- 2% of valuation
(60,000)
(assumed R&I be of Depreciable Asset & not for trading stock)
Restated Value of Closing Stock as per Income Tax Act
(2,940,000)
17,146,000
4. It is assumed that the repair and improvement expenses included in the cost of production are the
only repair and improvement expenses, which means the repair is of Plant & Machinery, i.e. Pool D
Asset.
A. Depreciation Base of Pool D
30,000,000
B. 7% of Above
2,100,000
C. Actual Expenses
400,000
D. Eligible (Lower of B or C)
400,000
The repair expenses included in Closing Stock is also part of Rs. 400,000.
5. In absence of information, it is assumed that expenditure for Pollution Control & Research &
Development has not been incurred.
Particulars
Pool A
Pool B
Pool D
Total
Not given
Absorbed Additions
40,000,000
Not Given
Disposal Proceeds
Not given
Depreciation Base
40,000,000 1,200,000 (given)
30,000,000
(given)
Depreciation Rate (Note 6.1)
6.67%
33.33%
20%
Depreciation
2,668,000
400,000
6,000,000
9,068,000
6.1. Since it is Cement Industry, means a production based industry specified in Sec. 3 (a) of Industrial
Enterprises Act, 2049. This implies it is a special industry which is eligible for accelerated
depreciation, i.e. 1/3rd accelerated rate on normal depreciation rate.
7. It is assumed that these expenses satisfy all the conditions laid down by Sec. 13 of the Act, i.e.
incurred by the cement industry to generate income from business during the Income Year.
Reconstruction Fund of GON or Expenditure u/s 12A or donations u/s 12.

Statement of Assessable Income from Business of M/s ABC P. Ltd:
Particulars
Sales
Miscellaneous Income
Interest Expenses
(Raw Materials Consumed+ Decrease in Finished Goods Stock)
Sec.
Ref.
Refer
W.N.
Amounts
7.2
7.2
9,050,000
100,000
9,150,000
14
15
2
3
200,000
5,500,000
16
17
18
19
13
4
5
5
6
7
50,000
258,333
1,210,000
7,218,333
1,931,667

Particulars
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
8
8
12B
12A
9
9
9
10

The corporate tax rate for XYZ Co. Ltd. is assumed to be 25%.
Tax Liability= taxable income * Corporate Tax rate = 1,835,084 * 25%= Rs. 458,771
Amount
1,931,667
1,931,667
96,583
1,835,084
Working Notes:
1. Amount received in connection to acceptance of restriction related to business also form part of
business income.
2. In absence of information, it is assumed that the company is not a resident entity controlled by
exempt organization as clarified by Sec. 14, and the interest expenditure is deductible u/s 14 of the
Act.
It is assumed that Managing Directors Office was put to use during year, which qualifies the claim of
interest expenses for tax purpose. Since, the renovation of managing directors room serves proper
business purpose, the interest expenditure is deductible.
3. In absence of further information, it is assumed that the Cost of Sales in the question and cost of
trading stock calculated as per Sec. 15 of the Act are same.
4. Calculation of Eligible Repair & Improvement Expenses:
A. Depreciation Base (given in Question)
850,000
B. 7% of A above
59,500
C. Actual Repair & Improvement Expenses
50,000
D. Eligible u/s 16 (Lower of B or C)
50,000
5. In absence of information, it is assumed that there is no Pollution Control Cost & Repair and
Improvement Cost.
6. Calculation of Adjusted Depreciation as per Sec. 19 & Schedule 2 of Act:
Depreciation in Question
275,000
Less: Depreciation for Equipment used since 15th Baisakh
(25,000)
Add: Eligible Depreciation of Equipment as per ITA
8,333
(one-third of 25% of 100,000)
Total Eligible Depreciation
258,333
6.1. Office Equipments fall under Pool B of Depreciable Asset; and the entity is not entitled to accelerated
depreciation. As such, the rate of Depreciation is 25% and since its added in the Pool in Baisakh,
one-third of the cost is absorbed additions.
7. It is assumed that the administrative expenses are incurred by ABC P. Ltd. for the purpose of
generating income from business during the Income year; which satisfies all the conditions laid down
by Sec. 13 of the Act.
Eligible Administrative Expenses u/s 13
Expenses Given in Question
1,360,000
Less: Repair & Improvement Expense included in it
(50,000)
Less: Donation included in it
(100,000)
Eligible Administrative Expenses
1,210,000
Reconstruction Fund of GON or Expenditure u/s 12A or notified donations u/s 12 (3).
10. Eligible Donation Expenditure- Donation to Exempt Organization
Minimum of Following:
a. Actual Donation
100,000
b. 5% of ATI
96,583
(ATI = Total Assessable Income Contribution u/s 12B Expenditure u/s 12A)
i.e. 5% of 1,931,667
c. Maximum
100,000
Therefore, eligible = Rs. 96,583

The solution in this problem to calculate Assessable Income from Business is done on Add back basis
as detailed information as to the expenditures are not provided. Inland Revenue Authority has not
developed any such form to present the assessable income through indirect method, as such.
Books of KBC Bank Ltd
Calculation of Assessable Income from Business
Particulars
Net Profit Before Tax
Add:
Loan Loss Provision in the books
Provision for Investment Loss
Fine paid to SEBON
Amount
(Rs.)
100,000,000
15,000,000
1,000,000
100,000
Payment for Software

Amortization of Pre-operating exp
1,000,000
500,000
Sponsorship for sporting event

Donation to Cancer Relief Society
Less:
Loan Loss Provision u/s 59
Depreciation of Software
500,000
200,000
10,000,000
111,111
108,188,889
Notes
Loan loss provision are allowed u/s 59 and

treated separately (refer W. N. 1 for calculation of
LLP for accounting purpose)
Investment losses, at the time of disposal of
investments, are allowed but not the provisions
against possible investment losses.
Fine paid against non compliance of any statute
of any country is not deductible for tax purpose
u/s 21 (1) (b) of the Act.
It is separately claimed as per Sec. 19 of the Act
Preoperating expenses are deductible u/s 13 in
the first year of operation; as such, the
amortizations are not deductible for tax purpose.
Is separately claimed u/s 12A
Is separately claimed u/s 12
W.N. 5
W. N. 6

Particulars
E. Contribution to PM Relief Fund & National
F. Expenditure u/s 12A
G. Donation u/s 12 (3)
H. Donation u/s 12 (1) & 12 (2)
Taxable Income
Since it is a bank, the applicable corporate tax rate is 30%.
Section
Reference
Refer
W. N.
7
7
12B
12A
8
9
8
10
Amount
91,811,111
108,188,889
500,000
100,000
107,588,889
Tax Liability= taxable income * Corporate Tax rate = 107,588,889 * 30% = Rs. 32,276,667
Calculation of Fees & Interest u/s 117, 118 & 119 of the Act:
It is assumed that the tax return is filed on time, and final corporate tax liability was deposited on due
date. It is further assumed that estimated tax return was also filed on due date. Hence, fees u/s 117 and
interest u/s 119 is not applicable. Hence, we need to check the applicability of Sec. 118:
Check whether interest u/s 118 is applicable.

Particulars
Amount to be deposited
Up to Poush end
Amounts actually
deposited
12,000,000
Remarks
90% of 40% of actual Tax liability =

No Interest
11,619,600
Up to Chaitra end
90% of 70% of Actual tax Liability =
21,000,000
No Interest
20,334,300
Up to Ashad end
90% of 100% of Actual tax Liability=
30,000,000
No Interest
29,049,000
Since amount actually deposited is greater than the amount to be deposited, there is no application of
interest u/s 118 of the Act.
Working Notes:
1. Loan Loss provision charged to Profit & Loss
Closing Total LLP
75,000,000
Less: Opening balance of Total LLP
50,000,000
Total LLP charged to Income Statement (net of write backs)
25,000,000
2. Since Staff gratuity has been paid to retirement fund, as per the interpretation in Example 8.4.3 of
Income Tax Manual 2066 (Updated 2068), gratuity provision deposited in the approved retirement
fund on the basis of the exact name of the employees without any recourse of such investment to the
employer are eligible to be deducted for tax purpose. As such, no treatment has been made to staff
gratuity paid to Approved Retirement Fund.
3. The repair of office building taken on lease is deductible u/s 13 of the Act. As such, no treatment of
such expenditure is done while calculating assessable income from business.
4. Staff welfare expenses as part of reimbursement of personal tour expenses are deductible u/s 13 of
the Act so far the expenses are included while calculating income of the person getting such
reimbursement; since Definition of Personal & Domestic Nature Expenses exclude any such
expenses when it is included in assessable income. (Refer Page 89 of the book for further reference)
5. Calculation of Eligible Loan Loss Provision u/s 59
As per Sec. 59 (1Ka), Loan loss provision is eligible to the extent of 5% of Gross Loan Outstanding as
on Year end date. The calculation is given below:
A. Gross Loan Outstanding
1,200,000,000
B. 5% of Above
60,000,000
C. Total Loan Loss Provision till year end of Income Year
75,000,000
D. Eligible Expenses (Lower of B Or C Above)
60,000,000
E. Claim up to Previous Year
50,000,000
F. Claim for the Year (D E)
10,000,000
The question has not provided the information as to the total loan loss provision claim up to previous
Income year. Since 5% Total Loan (Rs. 50,000,000) is less than total Loan loss Provision (Rs.
60,000,000) in the immediately preceding Income Year, it is assumed that Loan loss provision to the
extent of 5% of Loan Outstanding up to previous income year has been claimed.
The above calculations are based on the interpretation of Income Tax Manual 2066 (Updated 2068).
Multiple interpretations prevail.
6. Calculation of Depreciation of Software u/s 19 & Schedule 2 of the Act
Absorbed Additions of Software (1/3rd of Cost)
333,333
Depreciation Rate (100/3%)
Depreciation
111,111
9. Eligible Expenditure u/s 12A
As per Sec. 12A, in case a company with prior approval from IRD incurs expenditure for the purpose
of conservation and promotion of cultural heritage and public infrastructures related to sports, the
minimum of following three is eligible for deduction to arrive at taxable income:
a. Actual Expenditure
500,000
b. 10% of Assessable Income
10,818,889
c. Maximum
1,000,000
Therefore, eligible= 500,000
If we consider this amount as business promotion expenses rather expenditure for promotion of
cultural, religious or ancient heritages or development of physical public amenities related to sports,
the expenditure is deductible u/s 13 of the Act.
10. Eligible Donation Expenditure u/s 12
a. Actual Donation
b. 5% of ATI
i.e 5% of 10,318,889
c. Maximum
200,000
515,945
100,000

Statement of Assessable Income from Business of M/s ABC P. Ltd:
Particulars
Sec.
Ref.

Sales
Other Income
Interest Expenses
Refer
W.N.
7.2
7.2
Amounts
8,000,000
50,000
8,050,000
14
15
1
2
300,000
5,000,000
16
17
18
19
13
3
4
4
5
6
600,000
350,000
50,000
500,000
6,800,000
1,250,000

Particulars
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
7
7
12B
12A
8
8
8
9
Amount
1,250,000
1,250,000
62,500
1,187,500

The corporate tax rate for ABC P. Ltd. is assumed to be 25%.
Tax Liability= taxable income * Corporate Tax rate = 1,187,500*25%= Rs. 296,875
Working Notes:
Act.
2. In absence of further information, it is assumed that the Cost of Sales in the question and cost of
trading stock calculated as per Sec. 15 of the Act are same.
3. In absence of information, it is assumed that there are no repair expenses.

4. Calculation of Pollution Control Cost & Research and Development Cost:
The calculation below is based on the interpretation of the definition of Adjusted taxable income by
Income Tax Manual 2066 (Updated 2068) issued by IRD:
ATI for
ATI for R
Particulars
Notes
PCC
&D
Sales
8,000,000 8,000,000
Other Income
50,000
50,000
Total Inclusions
8,050,000 8,050,000
Less: Deductions
Interest Expenses
Total eligible u/s 14 (1) without applying
300,000
300,000
limit of Sec. 14 (2)
As eligible for assessable income from
5,000,000 5,000,000
business
Repair & Improvement
Expenses
business
Not deductible while calculating ATI for
1,500,000
PCC and deductible at full to calculate ATI
for R&D
Research & Development
Deductible at full while calculating ATI for
1,000,000
Cost
PCC and not deductible to calculate ATI for
R&D
Depreciation
50,000
50,000
business
500,000
500,000
business
Donation
Not deductible while computing Adjusted
Taxable Income
6,850,000 7,350,000
Adjusted Taxable Income (A-B)
1,200,000
700,000
Eligible Pollution Control Cost:
Pollution Control Cost is eligible to the extent of minimum of following two:
a. Actual Incurred for the year
1,500,000
b. 50% of ATI from all businesses
600,000
Implying that Rs. 600,000 is eligible and the rest of Rs. 900,000 will be considered while determining
Opening Depreciation Base of next year for Pool D Depreciable Asset.
Eligible Research & Development Cost:
Research & Development Cost is eligible to the extent of minimum of following two:
a. Actual Incurred for the year
b. 50% of ATI from all businesses
1,000,000
350,000
Implying that Rs. 350,000 is eligible and the rest of Rs. 650,000 will be considered while determining
Opening Depreciation Base of next year for Pool D Depreciable Asset.
5. It is assumed that the depreciation in question is calculated as per Sec. 19 and Schedule 2 of Income
Tax Act, 2058.
6. It is assumed that the administrative expenses are incurred by ABC P. Ltd. for the purpose of
generating income from business during the Income year; which satisfies all the conditions laid down
by Sec. 13 of the Act.

9. Eligible Donation Expenditure
a. Actual Donation
100,000
b. 5% of ATI
62,500
c. Maximum
100,000

The tax liability of M/s Buddhishree & Co. is Rs. 200,000 for the year, out of which Rs. 120,000 as TDS
has been deducted and deposited by Anubav & Co. (agent) against rental payments to Buddhishree & Co
(withholdee) as per Sec. 88 of the Act (10% of Rs. 1,200,000).
As per Sec. 93, the amount so withheld and deposited by agent is eligible to be claimed as advance tax
when such tax is not final withholding as per Sec. 92. While going through the list of final withholding
taxes u/s 92 of the Act; the rental income of a firm cannot be a final withholding payment. Thus, the
withholding tax withheld and deposited by the agent is eligible to be claimed as advance tax.
As such:
a. M/s Buddhishree & Co. is required to deposit additional Rs. 80,000 as tax after claiming Rs. 120,000
as advance tax.
b. Yes. If the tax liability was just Rs. 100,000; the advance tax claimable by the firm would be greater
than the total liability, which means no additional cash to be paid against such liability.
c. The implication would be such that the firm cannot claim such withholding tax as advance in the
returns in any income years other than the year when the related incomes are included in tax
assessments. As such, the ability of the firm to claim such amounts as advance tax would cease. The
only recourse would be applying for refund u/s 113 of the Act.

Statement of Assessable Income from Business
Particulars
Sec.
Ref.

Sales
Office Furniture Sales
Recovery of Bad Debt
Dividend Income
Interest Expenses
Office Expenses
Refer
W.N.
7.2
25
7.3/92
14
15
16
17
18
19
13
1
2
3
5
6
Amounts
500,000
500,000
350,000
45,250
16,000
411,250
88,750
Statement of Assessable Income from Employment

Particulars
Gross Salary Received (Net + TDS)
Employers Contribution to ARF
Compensation received from employer
Investment insurance paid by employer on his behalf
Emergency Medical Treatment by Employer
Reimbursement of Tour Expenses during official visit to Hong Kong
Retirement payments
Assessable Income from Employment
Sec.
Ref.
8.2
8.2
8.2
8.2
8.3
8.3
Refer
W. N.
8
9
10
11
Amount
494,000
100,000
70,000
10,000
674,000
Statement of Assessable Income from Investment

Sec.
Ref.
9.2
9.3
Particulars
Gain on Disposal of Securities
Interest from Personal Deposit in Natural Bank
Refer
W. N.
12
Amount
100,000
100,000
Statement of Total Assessable Income, Taxable Income & Balance Taxable Income
Particulars
Assessable Income from Employment
Section
Reference
Refer
W. N.
Amount
88,750
674,000
100,000

A. Contribution to Approved Retirement Fund
B. Contribution u/s 12 B
In absence of information, it is assumed there is not
any such contribution
C. Notified Donation u/s 12 (3)
In absence of information, it is assumed there is no any
such donation
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Less: Allowable Reductions from Taxable Income as per
Schedule 1 (1) of the Act
Balance Taxable Income
13
862,750
14
250,000
-
15
16
48,488
921,262
921,262
Analysis of Income for application of varying tax Rate:

Balance Taxable Income
921,262
Less: Gain on Disposal of Securities
100,000
Remaining amount of Balance taxable income where normal rate of tax is applicable
821,262
Maximum 10% tax is applicable on Gain on Disposal of Non Business Chargeable Asset, which
means gain on disposal of securities is taxable at maximum rate of 10%, where the rate is 5% when
the securities are listed in recognized stock exchange. As the question is silent about the listing status
of securities, we have assumed the securities are listed.
Statement of Tax Liability
Particulars
1st
Rs. 250,000
Next Rs. 100,000
Next Rs. 471,262
(821,262-350,000)
Balance Rs. 100,000
Tax Liability before Tax Credits
Less: Tax Credits
Tax Liability after Tax Credits
Rate
Refer
W. N.
Amount
1%
15%
25%
2,500
15,000
117,816
5%
5,000
140,316
140,316
12
Working Notes:
1. Sale of Office Furniture is considered while determining the depreciation pool of Pool B, and ignored
for inclusion.
2. Recovery of bad debts is included in income only if the relevant bad debt expenses were allowed at
the time of writing off of debts. Since the related bad debt expense was not allowed for deduction at
the time of write off, it is not included in income.
3. Dividend received from resident company is final withholding and final withholding income is not
included in income as per Sec. 7 (3) of the Act. As NIC Asia Bank Ltd. is a resident company, the
receipt of dividend is a final withholding payment.
4. Cost of Trading Stock:
Value of Opening Stock
80,000
Add: Purchases
390,000
Less: Closing Stock Value

Particulars
A. Opening Depreciation Base
(120,000)
350,000
Pool B
145,000
(Furniture & Computer)
B. Absorbed Additions
7,000
Pool C
80,000
(Motorcycle)
-
Total
(100% cost of Printer)
C. Disposal Proceeds
35,000
80,000
20%
16,000
45,250
(Spare table)
D. Depreciation Base (A+B-C)

E. Depreciation Rate
F. Depreciation
117,000
25%
29,250
6. The gift to one of its customer is personal expenses and not deductible for tax purpose. As such
deductible office expense is Rs. 16,000. It is assumed that other office expense satisfies all the
conditions laid down by Sec. 13 of the Act.
7. Personal drawings are capital repayments and are neither expenses, nor income. Thus, ignored.
8. It is assumed that the insurance premium is deposited by employer after deducting proceeds from the
employees income. In case we assume, the premium to be added in addition to the salary paid, the
amount should be included in income.
9. Any discharge or reimbursement of cost incurred by an individual is included in income
10. Any discharge or reimbursement of cost incurred by an individual is included in income, however, if it
serves the proper business purpose of employer; it is not included in income as per Sec. 8 (3). Since
the reimbursement is for official purpose, it serves the proper business purpose of employer.
11. Treatment of Retirement Payments:
The retirement benefits accrued up to the date of implementation of Income Tax Act, 2058, i.e. 18th
Chaitra 2058 is exempted from income tax, which means encashment of un-availed leave up to 18th
Chaitra 2058 of Rs. 50,000; gratuity accrued up to the same date of Rs. 400,000 and payment from
approved retirement fund out of contribution up to the same date of Rs. 400,000 is not taxable.
11.1. Encashment of Un-availed Leave:
Un-availed leave encashed for such leave accrued after 18th Chaitra 2058 is subject to 15% final
withholding payments as per Sec. 88 and 92 of the Act. It means Rs. 170,000 is taxable at 15%
final withholding.
11.2. Payment of Gratuity and Provident Fund from Approved Retirement Fund:
As per Sec. 65, Sec. 88 and Sec. 92; retirement payments from approved retirement fund or GON
is subject to 5% tax on gain calculated as per Sec. 65 on final withholding basis.
The tax is calculated as follows:
A. Actual Payments (gratuity plus Provident Fund)
1,300,000
B. Higher of following TWO:
650,000
a. 50% of (A) Above
650,000
b. To the extent
500,000
C. Gain (A B)
650,000
D. Tax @ 5%
32,500
12. It is assumed that the interest is not received in connection to business, which implies that it is not a
final withholding payment. As per Sec. 9 (3), final withholding payments do not form part of
assessable income.
13. In absence of information, it is assumed that there is no income from windfall gain. Had there been
income from Windfall Gain, it would be final withholding payment.
14. Contribution to Approved Retirement Fund:
15.
16.
17.
18.
The minimum of following three amounts is eligible for deduction from Total Assessable Income to
arrive at Taxable Income:
A. Actual Contribution across all Approved Retirement Funds
250,000
(Employers Contribution + His own Contribution)
B. 1/3rd of Total Assessable Income
406,583
(1/3rd of 1,219,750)
C. Maximum
300,000
The minimum amount is actual contribution, which is deductible.
Gift/donation to Exempt Organization
In case a person makes donation or gives gift to any exempt organization, the minimum of following
three amounts is deductible for tax purpose. A political party registered with Election Commission is
an Exempt Organization. We have assumed that the political party in question is registered with
Election commission:
Eligible Donation:
A. Actual Donation
50,000
B. 5% of ATI
48,488
(5% of {Total Assessable Income- Eligible Contribution to ARF- Contribution u/s 12B)
C. Maximum
100,000
D. Eligible (Minimum of A or B or C)
48,488
In absence of information, it is assumed that there is no any reductions availed from taxable income
as per Sec. 1 of Schedule 1 of the Act.
Since his spouse is also an earning member, it is not prudent to select Couple for tax Assessment.
Thus, it is assumed the assessment to be Individual not Couple.
In absence of information, there are no tax credits.

a. As per Sec. 14 (1), interest expenses incurred for the generation of income from business during any
income year is eligible for deduction under the following conditions:
1. In case the interest is accrued/paid on loan which has been utilized for the purpose of
creation/purchase of assets, the asset shall be utilized at least for a point of time during the
Income Year, or
2. In other cases, the loan shall be utilized for business purpose.
Income Tax Manual issued by IRD interpreted the provision to claim the interest expenses of the
entire Income Year, when the asset is used for at least a point of time during the Income Year, which
means if an asset is used for a day during the Income Year, the interest incurred against loan for
financing of such assets is deductible for the entire Income Year.
Based on the above facts, the practice of M/s Simple Innovations P. Ltd. to capitalize the interest
incurred till 10th Baisakh is not as per the provisions of the Act, and the tax officers contention is
correct.
b. The question is not clear about the nature of repair and improvement expenses. The treatment of
repair and improvement expenses as per Income Tax Act is as follows:
1. Incurred for business asset- becomes part of business asset
2. Incurred for NBCA- treated as part of outgoings for NBCA
3. Incurred for Trading Stock- treated as part of cost of trading stock
4. Incurred for depreciable asset- claimed as per Sec. 16
In this case, its been assumed that the repair and improvement expenses in question are incurred for
factory assets, which are depreciable asset; in which case these cannot be part of trading stock.
The tax officers contention is correct in this regard.

Statement of Assessable Income from Business:
Particulars
Sales
Miscellaneous Income
Dividend Income
Interest Expenses
Other Expenses
Repair Expenses of Hired Vehicles
Government Penalties
Sec.
Ref.
Refer
W.N.
7.2
7.2
7.3/92
1
1.1
14
15
16
17
18
19
13
13
21
2
3
4
5
5
6
7
8
9
Amounts
25,000,000
5,000
25,005,000
300,000
13,300,000
700,000
280,000
1,400,000
50,000
16,030,000
8,975,000

Particulars
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
10
10
12B
12A
11
11
11
12
Amount
8,975,000
8,975,000
100,000
8,875,000

The corporate tax rate is 25% (as stated in question).
Tax Liability= taxable income * Corporate Tax rate = 8,875,000 * 25%= Rs. 2,218,750
Working Notes:
1. It is assumed that other income is also part of business income.
1.1. Dividend income is deemed to be received from resident company, which implies that it is final
withholding payments and thus, exempted from inclusion in income u/s 7 (3).
Act.
It is assumed that interest is incurred for loan utilized for business.
3. Calculation of Cost of Trading Stock:
Factors to be considered:
Cost of Trading Stock is sum of Value of Opening Stock and the cost of production of the year
less Value of Closing Stock.
Closing Stock is valued at Cost or Market value, whichever is lower.
Cost of Production is determined by using absorption costing method, as it is company following
Accrual basis of accounting; under which the components of cost are direct material, direct labor,
other direct expenses and factory overhead. Factory overhead does not include repair and
improvement expenses and depreciation of depreciable asset.
Non Refundable duties form part of cost of trading stock as per NAS.
Opening Stock
Add: Cost of Production
Raw Material
Freight
Custom Duty
Repair & Maintenance (assumed of Depreciable Asset)
Less: Value of Closing Stock
1,500,000
11,000,000
900,000
1,500,000
-
13,400,000
(1,600,000)
13,300,000
4. Calculation of Eligible Repair & Improvement Expenses:

It is assumed that repair included in Cost of Stock is within 7% of Depreciation Base of Pool D, in
absence of further information. As such, Rs. 700,000 is allowed as deduction u/s 16.
5. In absence of information, it is assumed that there is no Pollution Control Cost & Repair and
Improvement Cost.
6. Calculation of Depreciation as per Sec. 19 & Schedule 2 of Act:
Since, the information of Plant & Machinery is not given; the depreciation effect of plant & machinery
cannot be calculated. The question is not complete in this regard, in which case the reader may
assume the repair cost to be of trading stock.
In absence of detailed information, depreciation is computed for vehicles only assuming that
accumulated depreciation up to Previous Year was as per Income Tax Act, and not just the
accounting depreciation.
1,000,000
Add: Absorbed Additions (100%- as added before Poush)
500,000
Less: Disposal Proceeds
(100,000)
Depreciation Base
1,400,000
Depreciation Rate
20%
Depreciation
280,000
7. It is assumed that the Other Expenses are incurred by ABC P. Ltd. for the purpose of generating
income from business during the Income year; which satisfies all the conditions laid down by Sec. 13
of the Act.
Eligible Other Expenses u/s 13
Expenses Given in Question
2,000,000
8.
9.
10.
11.
12.
Less: Personal Nature telephone Expenses

(100,000)
(assuming the amount is not included in individuals income)
Less: Personal nature travel expenses
(500,000)
(assuming the amount is not included in individuals income)
Eligible Other Expenses
1,400,000
Alternate Solutions:
If it has been assumed that the personal nature expenses were included in the concerned individuals
income, the amount would have been deductible; as it would be beyond the scope of definition of
Domestic & Personal Nature Expenses.
Repair Expenses of hired vehicles are business expenses incurred during the income year by the
person, and hence allowed for deduction as per Sec. 13.
The substance of such expenses is that these expenses are part of hire charges to the owner of
vehicle, as hire charges of operating lease of asset are deductible u/s 13 of the Act, these
expenditures are also deductible under the same provision.
As per Sec. 21 (1) (b), penalties paid as a result of non compliance with any statute of any country
are not deductible for tax purpose. It is assumed that the penalties to government are paid due to the
infringement of law of land.
In absence of information, it is assumed that there are no other incomes.
In absence of information, it is assumed that there is no contribution to PM Relief Fund, or National
Eligible Donation Expenditure- Donation to Exempt Organization
It is assumed that the donation is provided to an exempt organization.
a. Actual Donation
200,000
b. 5% of ATI
448,750
i.e. 5% of 1,931,667
c. Maximum
100,000
13. Deferred Tax Liabilities are not current tax liabilities and are calculated for accounting purpose for any
taxable or deductible temporary differences.

a. Computation of Eligible Pollution Control Cost
As per Sec. 17, the pollution control cost incurred for the operation of business of any person is
eligible during the Income Year to the extent of Minimum of following two:
i.
Actual Pollution Control Cost
ii.
50% of Adjusted Taxable Income from all businesses
The following adjusted taxable income from all businesses for the purpose of Sec. 17 is calculated
on the basis of interpretation through an example in Income Tax Manual 2066 (Updated 2068):
Particulars
Sales
Dividend Received net of Tax
Scrap Sales
Consulting Income
Interest Expenses
Salary & Wages
Administrative Overhead
Donation
Adjusted Taxable Income for Sec. 17 (A-B)
50% of Above
Therefore, eligible = lower of Rs. 690,000 or 499,000 = 499,000
Sec.
Ref.
7.2
7.3
7.2
7.2
Refer
W.N.
Amounts
12,300,000
140,000
450,000
12,890,000
14
15
3,020,000
4,510,000
16
17
18
19
13
13
3
4
5
230,000
1,300,000
432,000
1,800,000
600,000
11,892,000
998,000
499,000
6
6
7
b. Computation of Eligible Research & Development Cost

As per Sec. 18, the Research & Development cost incurred for the operation of business of any
person is eligible during the Income Year to the extent of Minimum of following two:
i.
Actual Research & Development Cost
ii.
50% of Adjusted Taxable Income from all businesses
The following adjusted taxable income from all businesses for the purpose of Sec. 18 is calculated
on the basis of interpretation through an example in Income Tax Manual 2066 (Updated 2068):
Particulars
Sales
Scrap Sales
Consulting Income
Sec.
Ref.
7.2
7.3
7.2
7.2
Refer
W.N.
Amounts
12,300,000
140,000
450,000
12,890,000
Interest Expenses
Salary & Wages
Donation
Adjusted Taxable Income for Sec. 18 (A-B)
50% of Above
Therefore, eligible = lower of Rs. 1,300,000 or 804,000 = 804,000
c.
14
15
3,020,000
4,510,000
16
17
18
19
13
13
3
4
5
230,000
690,000
432,000
1,800,000
600,000
11,282,000
1,608,000
804,000
6
6
7
Computation of Eligible Interest Expenses

It is assumed that JICA and DFID are associated persons. As such, 60% of the interest of M/s Solar
Power P. Ltd. is held by an associated person of an exempt entity, implying the company to qualify as
Resident Entity controlled by Exempt Organization and thereby, the provisions of Sec. 14 (2) are
applicable while claiming deduction of interest paid to JICA by the company.
As per Sec. 14 (2), interest paid to a controlling person by resident entity controlled by exempt
organization shall be deductible to the extent of minimum of the following:
i.
Actual interest paid to the controlling entity, or
ii.
Sum of following:
a. Interest Income, and
b. 50% of ATI calculated without including interest income and interest expenses
Calculation of ATI, and maximum limit for Sec. 14 (2)
Particulars
Sec.
Ref.
Refer
W.N.
Amounts

Sales
7.2
12,300,000
7.3
1
Scrap Sales
7.2
140,000
Consulting Income
7.2
450,000
12,890,000
Interest Expenses
14
2
15
4,510,000
16
3
230,000
17
4
690,000
18
5
1,300,000
19
432,000
Salary & Wages
13
6
1,800,000
13
6
600,000
Donation
7
9,562,000
Adjusted Taxable Income for Sec. 14 (2) (A-B)
3,328,000
50% of Above
1,664,000
Therefore, eligible interest expenses u/s 14 (2) = Lower of Rs. 2,950,000 or Rs. 1,664,000 =
1,664,000
Total Eligible Interest Expenses = Eligible exp u/s 14 (1) + Eligible Exp u/s 14 (2) =
70,000+1,664,000= 1,734,000
d. Computation of Corporate Tax Liability
Statement of Assessable Income from Business
Particulars
Sec.
Ref.

Sales
Scrap Sales
Consulting Income
Interest Expenses
(As per Solution [C] above)
[as per solution (a) above]
[as per solution (b) above]
Salary & Wages
Assessable Income from Business (A B)
7.2
7.3
7.2
7.2
Refer
W.N.
Amounts
12,300,000
140,000
450,000
12,890,000
14
1,734,000
15
4,510,000
16
17
18
19
13
13
230,000
499,000
8,04,000
6
6
432,000
1,800,000
600,000
9,805,000
3,085,000

Particulars
Less: Allowable Deductions from Total Assessable
Income to arrive at Taxable Income
D. Donation u/s 12 (1) & 12 (2)
Taxable Income
Section
Reference
Refer
W. N.
8
8
12B
12A
9
9
9
10
Amount
3,085,000
3,085,000
100,000
2,985,000

It is a production based industry, means, special industry u/s 11; implying the Corporate Tax rate to
be 20%.
Tax Liability= taxable income * Corporate Tax rate = 2985000*20%= Rs. 597,000
Working Notes:
1. Dividend is assumed to be received from a resident company. As per Sec. 92, dividend received from
resident company is final withholding payments. As per Sec. 7 (3), final withholding payments do not
form part of income.
2. As per the Interpretation by Income Tax Manual, the total interest expenses eligible as per Sec. 14 (1)
regardless of ceiling mentioned in Sec. 14 (2) should be included while calculating adjusted taxable
income for the purpose of Sec. 17 and 18, and ignored for the purpose of Sec. 14 (2).
3. It is assumed that the repair of plants is within 7% of Depreciation Base of Pool D. In absence of
detailed information, gross up of depreciation does not seem feasible.
4. Pollution Control Cost is ignored for the purpose of calculation of ATI for the purpose of Sec. 17, and
considered at actual to calculate ATI for the purpose of Sec. 14 (2) and 18.
5. Research & Development Cost is ignored for the purpose of calculation of ATI for the purpose of Sec.
18, and considered at actual to calculate ATI for the purpose of Sec. 14 (2) and 17.
6. It is believed that all conditions as per Sec. 13 are satisfied by the expenses.
7. Donation cannot be deducted while computing Adjusted Taxable Income as per the definition.
10. Eligible Donation Expenditure
a. Actual Donation
310,000
b. 5% of ATI
154,250
c. Maximum
100,000

Chapter 11 - Income From Business-Updated

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 11 - Income From Business-Updated

Uploaded by

Copyright:

Available Formats

Chapter 11- Income from Business