The Professionals Academy of Commerce

First Term Exam April, 2011 (Autumn-2011)

Taxation (Solution)
C- All Sections
Answer Q.1 Mr. Raza , Tax Year 2011 , Computation of Taxable Income and Tax Liability Basic salary (280,000*9) Accommodation Utilities allowance (45,000*9) Medical allowance Cost of living allowance (25,000*9) Gratuity from Unrecognised Fund Pension upto 9 months from MNC Pension for last 3 months from MNC Pension for last 3 months Car transferred to him Shares acquired (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) (M-1) TOTAL 2,520,000 1,134,000 405,000 405,000 225,000 2,660,000 108,000 36,000 150,000 700,000 70,000 8,413,000 Property Income Total Taxable Income Less: property income separate block EXEMPT 252,000 75,000 108,000 150,000 585,000 TAXABLE 2,520,000 1,134,000 405,000 153,000 225,000 2,585,000 36,000 700,000 70,000 7,828,000 600,000 8,428,000 600,000 7,828,000 1,565,600 (M-1.5) 27,500 1,593,100 (1,000,000) 593,000

(N-1) (N-2) (N-3)

(N-4) (N-5)

(M-1)

Income tax @ 20% on Rs. 7,828,000/Add: tax on property income upto 400,000 = 12,500 15,00 tax on 200,000 @ 7.5%= 0 Taxable Income as computed above Tax deducted by the Employer Tax to be paid by Mr. Raza (N-1)

(M-1.5)

Accomodation provided to an employee, taxable higher of the following: 45% of basic salary (2,520,000 * 45%) 1,134,700 F.M.R (120,000 * 9) 1,080,000 Medical Allowance is exempt upto 10% of basic salary so, amount to be taxed: 45,000 * 9 - (2,520,000 * 10%) 153,000 Gratuity from Unrecognised Fund is Exempt upto lower of: 50% of amount 2,660,000 = 1,330,000 75,000 So, taxable amount is 2,660,000 75,000 = 2,585,000

(N-2) (N-3)

(N-4) (N-5)

F.M.V of car

700,000 140,000 (70,000) 70,000

F.M.V of shares (200 * 700) less: consideration paid (200 * 350) amount to be included in salary

Answer Q.2 Normal tax year is a period of twelve months ending on the 30th day of June and is denoted by the calendar year in which the said date falls. Where a persons income year is different from the normal tax year, or is allowed to use a twelve months period different from normal tax year, such income year or such period shall be that persons special tax year and shall be denoted by the calendar year relevant to normal tax year in which the closing date of the special tax year falls. Where the tax year of a person changes, the period between the end of the last tax year prior to change and the date on which the changed tax year commences shall be known as the transitional tax year. (each definition = 2 Marks)

1) Not adjustable advance shall be treated as rent chargeable to tax under the head Income from Property in the tax year in which it was received and the following nine tax years in equal proportion. (M-2) 2) Where an amount is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allocated to the tax year in which it is refunded or to any subsequent tax year. (M-2) 3) After first vacation, where the owner lets out the building or part thereof to another person and receives from the succeeding tenant any amount which is not adjustable against the rent payable by the succeeding tenant, the succeeding amount as reduced by such portion of the earlier amount as was charged to tax shall be treated as rent chargeable to tax under the head Income from Property (M-2) Answer Q.3 Company means: 1) 2) 3) 4) 5) 6) a company as defined in the Companies Ordinance, 1984; a body corporate formed by or under any law in force in Pakistan; a modaraba; a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; a trust; a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force; 7) a foreign association, whether incorporated or not, which the 2[Board] has, by general or special order, declared to be a company for the purposes of this Ordinance; 8) a Provincial Government; 9) a Local Government] in Pakistan; or 10) a Small Company. (M-0.5 each)

Association of persons includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons formed under a foreign law, but does not include a company. (M-2)

eligible depreciable asset means a depreciable asset other than (a) any road transport vehicle unless the vehicle is plying for hire; (b) any furniture, including fittings; (c) any plant or machinery 1[that has been used previously in Pakistan]; or (d) any plant or machinery in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the asset in the tax year in which the asset is acquired. (M-4) Answer Q.4 i). Any payment made to an employee is salary income and tax at source is to be deducted by the employer u/s 149 of the Income Tax Ordinance. As tax at source is not deducted, the payment of Rs. 20,000 shall be treated as inadmissible at time of computing taxable business income of employer. ii). Payment on account of household expenses does not pertain to business. Rs. 50,000 on this account shall be inadmissible.

iii). Where an asset is not fully used for the purpose of business only proportional part of its expenses (including
depreciation) can be charged to the business. Under the given case only 50% of the normal depreciation shall be charged to the business. This amount comes to Rs. 90,000 (i.e., 50% of depreciation which is Rs. 1.200,000 X 15%). Initial allowance shall not be admissible as the asset is not an eligible depreciable asset. iv). Computer software is an 'intangible'. It shall be amortized within a maximum period of ten years, if its useful life is more than 10 years. Where an intangible is not used for the whole of the tax year its amortization is computed on the basis of the number of days the asset is used during the tax year. Amount of amortization shall be Rs. 44,754 which is computed as below: (Rs. 900,000 / 10) x 182 days 366 days v). After receipt of compensation following amount shall be included in taxable business income in the year of receipt of compensation. Total amount received as compensation Less: Amount of loss not allowed Taxable in the year of receipt of compensation Rs. 400,000 (150,000) 250,000

vi). Professional tax of Rs. 100,000 paid to the Provincial Government is an admissible business expense as it is incurred for the sake of the business. (M-2.5 each)

Answer Q.5

Income from Property Rent Signing amount Income Tax 57,500 + (1,250,000 - 1,000,000) * 10% Note 1.

1,150,000 100,000 (M-2) 1,250,000 (M-2) 82,500

Expenses are not allowed under the head Income from Property .

(M-1)

Answer Q.6 Nature of income Tax Year 2010 Pakistan source income Foreign source income Taxable income Tax Year 2011 Pakistan source income Foreign source income Taxable income 17,250,000 3,000,000 Taxable Taxable (Note-2) 17,250,000 (M-1.5) 3,000,000 (M-1.5) 20,250,000 Amount in Rupees Taxable/ exempt Taxable amount 5,750,000 (M-1.5) (M-1.5) 5,750,000

5,750,000 12,000,000

Taxable Exempt (Note-1)

Note 1 Since he is non-resident for the tax year 2010, only his Pakistan source income is taxable. (M-1) Note-2 Since he is resident for the tax year 2011, both is Pakistan and foreign source income is taxable. (M-1) The End