Examples ..

Business Income
Tax Year 2021
Note: For computation of tax liability, use tax calculator available at www.softax.com.pk

Q 1:
M/s. XYZ Glass (Private) Limited is manufacturer of glass products and sells its products through various channels in
Islamabad Lahore and Faisalabad. Following is the profit and loss account of company for the year ended on June 30, 2021:

Rs '000' Rs '000'
Sundry expenses 2,500 Gross profit 256,031
Office salaries 35,400 Interest on bank deposit 400
Rent, rates & taxes 9,200 Recovered bad debts 500
Legal charges 2,500 (allowed in past)
Finance charges on lease assets 475 Dividend 700
Advertisement 6,400
Auditor's fee 7,000
Cost of issue of debentures 6,100
Loss on sale of furniture 2,300
Provident fund contribution 8,000
Bad Debts 4,500
Vehicle expenses 9,350
Fire insurance premium 8,100
Preliminary expense 1,100
Provision for taxes 12,070
Provision for bad debts 4,600
Liquidated damages 3,400
Depreciation 43,800
Net profit 90,836
257,631 257,631

Additional information :
The following information is available:
(i) Sundry expenses include donation of Rs 600,000 paid to an unrecognized charitable institution.
(ii) Office salaries include Rs 7,000,000 paid to one director.
(iii) Provident fund is recognized by the income Tax Department.
(iv) Vehicle expenses are not vouched and verifiable to the extent of Rs 1,980,000.
(v) Tax depreciation works out to Rs 33,550,000.
(vi) Lease rental for the year is Rs 1,850,000.

Required
Calculate the taxable income and tax liability of the company for the tax year 2021 from the above data.
Solution:
M/s. XYZ Glass (Private) Limited
COMPUTATION OF TAXABLE INCOME & TAX LIABILITY
FOR THE TAX YEAR 2021

INCOME FROM BUSINESS Rs Rs

Profit as per Accounts 90,836,000

Add:
Provision for taxes 12,070,000
Provision for bad debts 4,600,000
Unvouched vehicle expenses 1,980,000
Donation to unrecognized institution 600,000
Accounting depreciation 43,800,000
Finance charges on lease assets 475,000 63,525,000
154,361,000
Less :
Lease rental 1,850,000
Tax depreciation 33,550,000
Dividend 700,000 36,100,000
Taxable income under Normal Tax Regime (NTR) 118,261,000

COMPUTATION OF TAX LIABILITY

Alternate Corporate Tax u/s 113C (17% of accounting profit) A 15,442,120
Tax liability under NTR @ 29% B 34,295,690
Tax liability under FTR on Dividend Income (700,000 x 15% ) 105,000
Total tax liability (Higher of A or B and liability under FTR) 34,400,690

Less: Tax deducted on dividend 105,000

Balance tax payable 34,295,690

Assumption
1 It is assumed that tax on dividend income has been deducted at source , hence credit of the same has been claimed against
tax liability under FTR.
2
It is assumed that loss on sale of furniture and bad debts are in accordance with the provision of Income Tax Ordinance, 2001.

3 It is assumed that company is resident and minimum tax under section 113 is applicable.
However the same has not been computed in the absence of turnover and its comparison with tax under NTR has also not
been made.
Q 2:
Grow fast is engaged in the manufacturing and trading of FMCG products, its shares are listed on the stock markets of the

Rs.
Sales 56,500,000
Cost of sales 23,520,000
Gross profit 32,980,000
Add:
Dividend received 400,000
Less:
Director's salaries 7,700,000
Staff salaries 13,150,000
Contribution to employees provident fund (a) 800,000
Admin and selling expense 1,000,000
Depreciation (b) 600,000
Entertainment charges (c) 200,000
Insurance charges (d) 400,000
Fees (e) 3,000,000
Total expenses 26,850,000
Net Income 6,530,000

Notes
(i) Employee Fund Trust is revocable at the option of MD of the company and an application for approval has been filed with
relevant tax authority.
(ii) Accounting Depreciation includes Rs 200,000 for plant and machinary. Depreciation on all assets is charged on rates for
normal depreciation given in 3rd Schedule to the income tax ordinance 2001. Written down value of plant and machinery for
the purpose of calculation of tax depreciation is Rs 1,250,000 which includes addition during the year of new machinery of
the value of Rs. 550,000
(iii)
Entertainment expenses includes Rs. 100,000 reimbursed to the director of the company for which no support is available.

(iv) Insurance includes prepaid expenses amounting to Rs. 150,000.

(v) The company has paid fees to the tax consultant for defending taxpayer's appeal in Appellate Tribunal.

Required:
Compute the taxable income and the tax liability of the company, giving proper comments where any given information has
Solution:
Grow Fast Limited
COMPUTATION OF TAXABLE INCOME AND INCOME TAX
FOR THE YEAR 30th JUNE 2021

INCOME FROM BUSINESS Rs. Rs.

Profit before tax as per accounts 6,530,000

Add: (Inadmissible Deduction)
Contribution to employees provident fund 800,000
Accounting depreciation on plant and machinery 200,000
Entertainment expenses without supporting evidence 100,000
Prepaid insurance 150,000
1,250,000
Less: (Admissible deduction)
Tax depreciation on plant and machinery (N-1) 304,375
Dividend (taxable under the head income from other sources) 400,000
704,375
Income from other sources 7,075,625
Dividend income cover under FTR 400,000

Total taxable income 7,075,625

Computation of tax liability

Tax on Rs 7,075625 x 29% (A) 2,051,931
Alternate Corporate Tax u/s 113C (17% of accounting profit) (B) 1,110,100
Minimum tax u/s 113 (56,500,000 x 1.5%) (C) 847,500
Tax liability: Higher of (A) or (B) or (C) 2,051,931
Tax on gross dividend @ 15% 60,000
Tax liability: 2,111,931
Less: Tax deducted on gross dividend (N-2) 60,000
Balance tax payable 2,051,931

Normal Initial Total

N-1 Tax depreciation on plant and machinery: W.D.V depreciation allowance depreciation
15%
Rs Rs Rs Rs
Opening WDV 1,250,000
Less: Addition during the year 550,000
700,000 105,000 - 105,000

Addition during the year 550,000

Less: 25% initial allowance 137,500
412,500

Less: Initial allowance (550,000 x 25% ) 137,500 137,500

Normal depreciation on addition during the year 61,875 - 61,875

(550,000 -137,500) x 15%
166,875 137,500 304,375

N-2 In the absence of information it has been assumed that tax on dividend has duly been deducted and deposited.
N-3 As the legal fee for defending taxpayer's appeal in income tax Appellate Tribunal is admissible expense hence the same has no
effect on the taxable income.
Q 3:
Trading profit and loss account of M/s. Tariq Limited for the year ended on 30th June 2021 is as under:

Rs '000' Rs '000'
Sales 2,500,000
Less: Cost of Sales (1,600,000)
Gross profit 900,000
Less : expenses
Salaries and wages 178,000
Office rent 60,000
Telephone expenses 40,000
Travelling and conveyance 42,000
Forwarding 60,000
Entertainment 3,000
Miscellaneous 8,000
Office stationary 8,000
Depreciation 60,000
Income tax for the last year 55,000
Bad Debts 9,000
Doubtful Debts 6,000
Donations 1,000
Liquidated damages 500
Insurance 5,000
Provision for taxation 80,000
(615,500)
Net Profit 284,500

Notes and additional information

(i) A sum of Rs 800,000 written off last year and allowed by the income tax department has been recovered and credited to the
bad debt reserve.
(ii) Un-vouched and un-detailed expenses included in the entertainment amounted to Rs. 400,000
(iii) Depreciation allowed under income tax law is Rs. 66,000,000
(iv) Salaries and wages include payment of Rs. 275,000 without deducting tax at source
(v) Salary paid amounting to Rs. 250,000 in cash
(vi) Donations of Rs. 600,000 paid to approved institution under Clause (61), Part I, Second Schedule.
(vii) Donations of Rs. 400,000 paid to approved institution but not specified under Clause (61), Part I, Second Schedule.
(viii) Prepaid insurance Rs. 300,000

Required:
Compute the taxable income and tax liability of the Company for the tax year June 30, 2021
Solution:
M/S. TARIQ LIMITED
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY
Rs. Rs.
FOR THE YEAR ENDED 30th JUNE 2021 '000' ' 000'

Net Profit 284,500

Add: (Inadmissible Expenses)
Accounting depreciation 60,000
Income tax for the last year 55,000
Doubtful debts 6,000
Donation to approved institution credit shall be allowed 400
Donation to approved institution under Clause (61), Part I, Second Schedule 600
Provision for taxation 80,000
Bad debts recovered from allowed portion 800
(assume credited to liability otherwise the same shall be ignored for taxation purpose as already
included in given accounting profit)
Unvouched and un-detailed expense 400
Payment of salaries without tax deduction 275
Cash payment of salaries 250
Pre-paid insurance 300
Total additions 204,025
Total profit after addition 488,525
Less :
Tax depreciation (66,000)
Total income 422,525
Less: Donation to approved institution under Clause (61) (600)
Taxable Income 421,925

Computation of tax liability

Alternate Corporate Tax u/s 113C (17% of accounting profit) (A) 48,365
Tax on taxable income @ 29% (B) 122,358
Turnover tax u/s 113 @ 1.5% of Rs 25,00,000 (C) 37,500

Tax liability (higher of A, B or C) 122,358

Less:
Tax credit on donations. Tax credit shall allowed on lower of:
(i) 20% of taxable income i.e. Rs. 421,925 84,385
(ii) Actual 400
Hence tax credit is (122,538 / 421,925 x 400) (116)
Balance tax payable 122,242
Q 4:
Following is the profit and loss account of M/s. Salman (Private) Limited for the year ending 30th June 2021

Rs. Rs.
Sundry expenses 8,000 Gross profit 900,000
Office salaries 104,000 Casual income 2,000
Rent, rates and taxes 28,000 Premium on issue of debentures 40,000
Income tax 10,400 Recovered bad debts (allowed in past) 1,600
Legal charges 7,200 Dividend 8,000
Advertisement 20,000
Audit fee 24,000
Cost of issue of debentures 20,000
Loss on sale of furniture 8,000
Provident Fund contribution 28,000
Bad debts 16,000
Vehicle expense 32,000
Fire insurance premium 32,000
Communication 3,600
Provision for taxation 36,000
Provision for bad debts 16,000
Liquidation damages 12,000
Depreciation 160,000
Net Profit 386,400
951,600 951,600

Required:
Compute the net taxable income of the company for the tax year 2021 from the above data after keeping in view the
following notes:
(i) Sundry expense include Rs. 2,000 paid to an institution not recognized u/s 61.
(ii) Office salaries include Rs. 30,000 paid to one of the directors.
(iii) Provident Fund is recognized by the tax department.
(iv) Vehicle expenses are not vouched and verifiable to the extent of Rs. 6,000
(v) Actual depreciation works out to Rs. 140,000 only.
Solution
M/s. Salman (Private) Limited
COMPUTATION OF TAXABLE INCOME
FOR THE YEAR 2021
Rs. Rs.
Income from business
Profit as per accounts 386,400
Add: (Inadmissible expenses)
Income tax 10,400
Provision for taxes 36,000
Provision for bad debts 16,000
Unvouched vehicle expenses 6,000
Donation to unapproved institution 2,000
Accounting depreciation 160,000 230,400
616,800
Less:
Tax depreciation 140,000
Dividend (excluded to calculate income from business) 8,000 (148,000)
468,800

Income from other sources

Dividend income (Not to included in taxable income as fully covered under FTR )
Taxable income 468,800

Notes
(i) Cost of issue of debentures and recovery from already allowed bad debts have no impact on taxable income.
(ii) In the absence of sales no turnover tax has been computed.
 Q 5:
M/s. Tanveer Associates has four partners and sharing profit and loss equally.
The unadjusted loss of AOP stands at Rs. 2,000,000. One partner submits resignation and retires from business.

Required
1 State the set off and carry forward of losses of AOP
2 Compute the amount of loss to be carried forward by the firm

Solution
Statement of set off and carry forward losses of AOP's
An association of person being taxable independent of its member is entitled to set -off and carry forward its losses as other

Computation of the amount of loss to be carried forward by the firm Rs.

Total un-adjusted loss 2,000,000
Less: share of resigning partner (2,000,000/4) 500,000
Loss to be carried forward 1,500,000
Q 6:
Yusuf Hospital, an AOP furnishes following details of accounts year ended 30th June 2021:

Rs. Rs.
Salaries 1,500,000 Gross in-patient receipts 3,000,000
Hospital supplies 400,000 (before tax deduction)
Electricity 150,000 O.P.D collection 680,000
Communication 140,000 (before tax deduction)
Insurance 55,000
Water 35,000
Repair and maintenance 40,000
Depreciation on fixed assets
(excluding burnt out equipment) 175,000
Property taxes 45,000
Radiology lab expenses 95,000
Professional fee paid 60,000
Expenses on free clinic 120,000
Un-vouched payments 60,000
Penalties for violations 65,000
Net profit 740,000
3,680,000 3,680,000

Additional information
(i) Depreciation includes Rs. 15,000 on a car completely is personal use of partner.
(ii) Salaries include drawings of Rs. 80,000 made by each of the partners.
(iii) A philanthropist donated Rs. 1.5 million through cheque for construction of ward.
(iv) Taxes withheld by clients are Rs. 150,000.
(v) A close friend extended an interest free loan of Rs. 100,000 to hospital during the year.
(vi) A foreign patient gave cash gift of Rs 200,000 but is not accounted so for.
(vii) A surgical equipment costing Rs. 300,000 was burnt out, dacoits looted Rs. 50,000 from safe locker.
(viii) Both these items are fully insured and the claim has been fully admitted by the insurance company.
(ix) The hospital has added 10 renowned companies to the panel with expected increase of Rs. 2,000,000 in future revenue.

Required
Work out hospital's total income and tax liability.
Solution
YUSUF HOSPITAL
CALCULATION OF TAXABLE INCOME AND TAX LIABILITY
TAX LIABILITY FOR THE TAX YEAR 2021

Income from business Rs.

Net profit before tax 740,000
Add: (Inadmissible Expense)
Depreciation on personal car 15,000
Partner's drawing 160,000
Cash gift not accounted for as deemed income u/s 39 200,000
Un supported payments 60,000
Penalties for non-observance of good environment regulations 65,000
500,000
Taxable Income 1,240,000

Computation of tax liability

Normal Income Tax on Rs. 1,240,000 76,000
Calculated through the slab rates provided in Division I, Part I, First schedule.

Less: proportionate tax on receipts covered u/s 153

76,000 / 3,680,000 x 1,500,000 (30,978)
Assumed 10% is deducted on amount of Rs. 1,500,000
Balance tax payable 45,022

Notes
(i) It is assumed that tax and accounting depreciations are same.
(ii) Interest on loan and donation has not been accounted for as the same is liability for the hospital to construct Special Cancer
Ward and return the loan to friend.
(iii) Assumed both were being received through cross cheques otherwise the same shall be treated as income u/s 39.
(iv) As loss incurred by burning of surgical equipment and by theft was fully insured, hence no gain or loss has been considered
for the purpose of computation of taxable income.
(v) There is no impact of revenue to be increased in future due to new clients induction.
(vi) Sale of scrap has not been shown as income from other sources as it is already included in net profit.
(vii) No turnover tax has been computed as the turnover of AOP is less than Rs. 10 millions.