Certificate in Accounting and Finance Stage Examinations

Rise February 19, 2022

School of 3 hours – 100 marks
Accountancy Additional reading time – 15 minutes

Tax Practices
MOCK PAPER
Question-1
Mr. Iqbal, is working as a Chief Engineer in a listed company Tameer Limited (TL). He derived
following emoluments during the tax year ended 30 June 20X4:
Rupees
Basic salary ( per month) 300,000
Cost of living allowance (per month) 50,000
Milk allowance (per month) 10,000
In addition to the above emoluments, Mr. Iqbal was also provided the following:
(i) Special bonus equal to one month‘s basic salary paid on 5 June 20X4.
(ii) A reimbursement of Rs. 36,000 in respect of driver‘s salary. Mr. Iqbal paid Rs. 60,000 to the
driver for four months.
(iii) A fully furnished accommodation in DHA, Karachi. The fair market value of the rent was
estimated to be Rs. 85,000 per month.
Following further information for the tax year 20X4:
(i) He earned capital gain income of Rs. 150,000.
(ii) He also received an income tax refund of Rs. 225,000 related to tax year 20X2. The amount
included Rs. 25,000 being compensation for delayed refund.
(iii) Annual rent of Rs. 800,000 from letting out a building to KK Enterprise (including Rs. 5,000 per
month for arranging two security guards for the building). Following expenses were incurred by
Mr. Iqbal in relation to the building: Repairs Rs. 200,000, Fire insurance premium Rs. 30,000,
Ground rent Rs. 10,000, Security guard salary Rs. 8,000 and Interest of Rs. 15,000 on a loan
obtained for building.
(iv) He inherited a plot of land from his father in July 20X3 whose FMV is Rs. 7 million. On October
1, 20X3 he entered into a contract of sale with Mr. Moin for Rs. 50.0 million. Mr. Moin paid a
deposit of Rs. 1.0 million and agreed to pay the balance within one month. On due date, Moin
defaulted in making the payment and Mr. Iqbal forfeited the deposit in accordance with the terms
of the contract.
(v) He earned Rs. 1,260,000 from business in China on which tax of Rs. 50,000 is paid outside.
(vi) Zakat paid under Zakat and Ushr Ordinance is Rs. 25,000.
(vii) On 1 July 20X3, Mr. Iqbal acquired a life insurance policy and paid a premium of Rs. 500,000.
He also contributed Rs. 1,600,000 to an approved pension fund.
(viii) On 1 May 20X2 Iqbal received 3,000 shares, by way of a gift from his father, in Lucky Inc., a
company registered on Toronto Stock Exchange. On 1 January 20X0 his father had bought these
shares at a price of CAD 20 per share (equivalent to PKR 1,300 per share). The market value of
each share at the time of transfer to Iqbal was CAD 28 (equivalent to PKR 2,100 per share). On
15 June 20X4 Iqbal sold all shares in Lucky Inc. to an investor for CAD 32 per share and paid a
brokerage commission of CAD 0.2 per share to the stock broker. He also paid income tax of CAD
1,500 to the tax authorities in Toronto. The exchange rate at the time of above transaction was
CAD 1 = PKR 90.
Required: Compute the income and tax payable by Mr. Iqbal for the tax year ended 30 June 20X4. (16)

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Question-2
King and Lamda (equal partners) are running a partnership firm in Pakistan since long named KL
Enterprise. Both Mr. King and Mr. Lamda are UK nationals. During current tax year King did not visited
Pakistan, however Lamda visited Pakistan twice for 10 days for taking business decisions. Following
information is extracted from KL‘s records for year ended 30 June 2016:
Rs.
Sales 90,000,000
Profit before taxation 45,385,000
Administrative and selling expenses include the following:
(i) Marketing expense of Rs. 90,000 in total paid to 10 persons equally in cash.
(ii) Legal expenses of Rs.1,000,000 in respect of a dispute over territorial rights.
(iii) Rs.3,000,000 paid in respect of an unsuccessful court case filed by customer.
(iv) Rs.2,600,000 contributed to a foreign pension fund maintained for employees.
(v) Rs.1,800,000 paid on 1.11.2015 to improve the features of production department software. Its
life is indefinite.
(vi) Rs.650,000 in respect of the cost of two ramps. The ramps were built for disabled persons.
(vii) Accounting depreciation and amortization amounts to Rs. 1,875,000.
(viii) Motor expenses as follows:
Total Cost of running Lamda‘s car. (It is used 70% for private journeys) 50,000
Cost of running another motor car used by the production manager 80,000
Parking fines paid to Government on production manager car 30,000
Financial charges include the following:
(i) Mark-up of Rs.1,200,000 paid on a loan obtained from bank for advancing concessional loans to
employees.
(ii) Mark-up of Rs.9,000,000 on short term loan obtained for working capital.
Other income includes the following:
(i) Gain on sale of 30,000 shares in Blue listed company. These are sold for Rs.120 per share in
March 2016. KL purchased these shares in May 2015 at a cost of Rs.35 per share.
(ii) Rs. 0 gain for sale of vehicles to employees. Rs.2,450,000 is received from employees. The FMV
and tax WDV of cars was Rs.5,250,000 and Rs.3,320,000 respectively. These are sold at
accounting WDV.
(iii) Gain on sale of shares in ML (Pvt.) company. On 1.7.12 KL acquired 200,000 shares at Rs.50 per
share. On 1.9.15 KL sold 100,000 shares at price of Rs.85 per share to a foreign investor. The
market value at that time was Rs.80 per share. On 1.2.16 KL sold remaining shares for Rs.75 per
share to a local investor. The market value at time of sale was Rs.78 per share. The gain recorded
in books is equal to actual sale proceeds less cost.
(iv) Bad debt recovery of Rs. 90,000 which was not previously allowed as deduction.
(v) Foreign source business income of Rs. 600,000.
Other information:
1. The assessed losses brought forward from tax years 2014 and 2015 were as follows:
2015 2014
-----Rupees-----
Business loss before depreciation 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
2. Tax paid on foreign income is Rs. 70,000.
3. Tax depreciation and amortization on assets capitalized for TY 2016 is 1,500,000.

Required: Calculate income and tax payable by KL for year ended June 30, 2016. (20)
Note: Show all relevant exemptions, exclusions and disallowance

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Question-3
Following information has been extracted from Zahid Lal‘s records for the year ended 30 June 2014:
Rs. in ‘000
Income from business 500
Capital gain 800
Income from other sources 100
ZL is engaged in the business of manufacturing chairs. Following further information is available from ZL‘s
records:
(i) The income from business includes income in respect of a loan of Rs. 85,000 received otherwise than
by a crossed cheque.
(ii) Business losses before depreciation brought forward from tax years 2012 and 2013 amounted to
Rs. 130,000 and Rs. 200,000 respectively.
(iii) The amount of tax depreciation adjusted during the year against income from business amounted to
Rs. 490,000. Unabsorbed tax depreciation brought forward from previous assessment years amounted
to Rs. 135,000.
(iv) Capital losses brought forward from tax years 2007 and 2008 amounted to Rs. 50,000 and Rs. 65,000
respectively.
(v) A loss from speculation business brought forward from tax year 2012 amounted to Rs. 100,000.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income of ZL for the tax year 2014
and the amount of loss, if any, to be carried forward to next tax year. (7)

Question-4
(a) Under the provisions of the Income Tax Ordinance, 2001 briefly describe the following:
(i) Mr. Amjad has received a show cause notice under section 122 and has filed an offer of
settlement. The oversight committee has decided the case and the taxpayer is satisfied
with the Committee decision.
Required: What action is now required at taxpayer‘s end? (4)
(ii) There is a dispute of ownership regarding a house owned by Mr. Kamran. The rental
income earned from renting out the house is Rs. 6,000,000 in TY 2012. The Civil court
decided on 15 May 2020 that it is the property of Kamran. Commissioner issued an
assessment order on 12 March 2021.
Required: Is Commissioner justified in issuing the notice after lapse of so much time? (2)
(iii) High Court has decided a question of law in favour of tax payer. The Commissioner has
some of the years pending in respect of same issue. Later on in April 2020 Supreme
Court decided the case against taxpayer.
Required: What is the power available to Commissioner in this regard relating to
pending years and by which date Commissioner can exercise this power? (2)
(iv) Commissioner has identified certain errors in the return of TY 2019 of Miss Rukhsana
and a show cause notice is issued to her on 15 May 2021.
Required: What is the date by which Commissioner should issue an amended assessment
order? (1)

(b) Explain the provisions of law relating to benefit available to non-residents if they provide loan to
a resident person and earn interest income thereon? (04)

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Question-5
Moin is involved in Supply of telecommunication equipment. His accounting year end is June 30, 2026.
His tax manager has computed the taxable income for tax year 2026, as under:
Note Rs. in ‘000’
Profit before tax as per Profit & Loss Account 100,000
Add:
Accounting depreciation 20,000
Accounting amortization (i) 6,000
Tax gain on disposal of fixed assets (ii) 5,000
31,000
Less:
Tax depreciation:
- initial (iii) 5,000
- normal 10,000
Accounting gain on disposal of fixed assets (ii) 7,000
(22,000)
Taxable income 109,000
Notes to the Computation:
(i) On June 29, 2026, he acquired rights for use of trade mark for a period of three years. For
accounting purposes, the cost is being amortized equally over the three-year period.
(ii) Tax gains on disposal of fixed assets include a tax gain of Rs 260,938 on the sale of a car. It was
acquired on December 31, 2024 at a cost of Rs 3,500,000. However, for the purpose of tax
depreciation, the value was restricted at Rs 2,500,000. As a policy, the car was sold to an
employee for Rs 1,800,000. Tax gain represents the difference between fair market value i.e.
Rs 2,400,000 and the tax written down value i.e. Rs 2,139,063.
(iii) During the year, the entity acquired second hand equipment at a cost of Rs 8,000,000. He is of the
view that since the equipment was not used by himself before so he is entitled to claim initial
allowance.
(iv) Entity disputes certain amounts invoiced by its suppliers. These were allowed as deduction in
relevant years on accrual basis. Year-wise breakup of such liabilities is as follows:
Year of supply 2022 2023 2024 2025
Amount in Rs in ‗000‘ 790 1,251 1,244 1,596
Required:
Give your comments on tax treatment in the computation of taxable income for TY 2026 with which you
concur or disagree. Note: Restrict your answer to comments. Revised computation is not required. (10)

Question-6
Queen Limited (QL), a registered importer, exporter and manufacturer, is primarily engaged in the
manufacture and export of a wide range of goods. Following activities were carried out by the company
during the year:
(i) 60,000 kg of chemical, sold at a price of Rs. 140 per kg. The value of chemical fixed by the
Federal Board of Revenue (FBR) was Rs. 135.
(ii) Import of 1,000 kg of un-manufactured goods from Brazil. The value assessed by the customs
authorities at import stage amounted to Rs. 880,000. The Federal excise duty paid on import is
Rs. 30,000.
(iii) Storage batteries purchased at a price of Rs. 650,000. QL paid the amount via online transfer of
money into supplier‘s business bank account. However, this account has not yet been declared by
the supplier to the Commissioner Inland Revenue.

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(iv) QL being exporter for sales tax purposes, filed an application for refund of Rs. 186,000 on
account of input tax paid on raw material exported to Iran. The refund is expected to be received
soon. QL is also required to pay a default surcharge of Rs. 25,000 to the income tax department
for late filing of monthly withholding tax statement.
(v) In July 2017 QL sold certain taxable goods worth Rs. 535,000 to an un-registered wholesaler at a
wholesale price of Rs. 50 per pack and collected further tax at the rate of 3% of the value of
supplies. In November 2017, the internal auditor pointed out that these goods had an actual sale
price of Rs. 65 per pack to which customer agreed also.
Required:
In the light of the provisions of Sales Tax Act, 1990 advise the management of the company as to the
chargeability/ adjustment of sales tax in each of the above situations. (10)

Question-7
Sahulaat Limited (SL) is engaged in various businesses across Pakistan. Following data has been extracted
from SL‘s records for the month of November 2019:
Rupees
Local purchases of raw-material:
from registered suppliers (including purchase of 100,000 for zero rate sale) 22,776,000
from un-registered suppliers 9,000,000
Supplies of goods:
local taxable supplies to registered persons 10,800,000
local taxable supplies to un-registered persons 4,000,000
local exempt supplies to registered persons 3,000,000
exports to Spain 11,000,000
1. Taxable supplies to un-registered persons include the following:
a. goods worth Rs.210,000 which were supplied to an individual manufacturer, Sarwat Kirmani,
whose annual turnover from taxable sales amounted to Rs. 1,000,000 and has number of
employees not exceeding 8.
b. foam worth Rs. 605,000 supplied to an unregistered manufacturer, other than a cottage
industry, for onward processing.
c. goods worth Rs. 728,000 supplied on four months‘ credit to an unregistered distributor in
Sialkot. The price is inclusive of mark-up at 4%.
d. the rest of the goods were supplied to end consumers.
2. Taxable supplies to registered persons include sale of electrical appliances worth Rs. 1,200,000 to a
large departmental store in Islamabad. SL received the full payment on 31 October 2019.
3. Following further information is also available: (not included in purchases and supplies mentioned
above)
a. Raw materials of Rs. 3,650,000 were purchased from an un-registered AOP for the
manufacture of gas appliances.
b. supply of stores worth Rs. 125,000 for consumption aboard a flight proceeding to Islamabad.
c. A payment of Rs. 11,700,000 (inclusive of sales tax), was made. This related to machine for
installation in the manufacturing unit.
d. Preservatives of Rs. 690,000 were purchased from a cottage industry for onward sale to the
producers of fruit juices.
e. Packing materials of Rs. 2,350,000 were purchased from registered distributors. The
distributor did not file his return under section 26 by the due date.
f. Advance payment of Rs. 300,000 was made to Sanai Enterprise, an un-registered distributor,
for the purchase of detergents.
g. We purchased a fiscal electronic cash register and office equipment from a corporate supplier
at a price of Rs. 735,000 and Rs. 495,000 respectively. Fiscal register is used for taxable local
as well as exempt sale.

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 h. Tiles measuring 625 square meters were purchased in November 2019 from a local
manufacturer at Rs. 665,000. Extra tax was charged by the manufacturer at the time of
purchase at 8% in addition to normal tax. One third of tiles were purchased for purpose of
sale and remaining for use in construction of factory building.
i. A credit note of Rs. 30,000 was issued by us for change in value of supply for goods sold in
January 2019.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate of
17%, except where it is implied otherwise.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount of
sales tax payable by or refundable to SL and input tax to be carried forward, if any, for the tax period
November 2019.
Note: Show all relevant exemptions, exclusions and disallowance. (15)

Question-8
a) Specify with reasons, whether the following independent acts may be considered as a tax evasion
or tax avoidance:
(i) In order to reduce his tax liability, Mr. Jaffer, a resident individual, paid a premium of Rs.
100,000 to the life insurance company on his policy.
(ii) Sakhi Limited (SL) paid 50% of Ahmad‘s salary i.e. Rs. 50,000 in cash whereas the
remaining 50% of his salary was credited to his bank account. SL claimed Rs. 50,000 as
admissible deduction in its return of income.
(iii) In order to reduce her tax liability, Mrs. Shamim who runs her own business, paid higher
salary to her self, keeping in view that lower slab rates are applicable on salary income as
compared to income from business. (3)
b) In the light of Code of Ethics for Chartered Accountants as applicable to tax services you are
required to explain whether tax calculations can be made by CA firm for an audit client assuming:
a) Audit client is not a public interest entity
b) Audit client is a public interest entity
(6)

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 EXTRACTS FROM THE INCOME TAX ORDINANCE, 2001
Rates of Tax for non-salaried Individuals and
Association of Persons
S. No Taxable Income Rate of Tax
1. Where taxable income does not exceed Rs. 0%
2. 400,000
Where taxable income exceeds Rs. 400,000 but 5% of the amount exceeding Rs.
does not exceed Rs. 600,000 400,000
3. Where taxable income exceeds Rs. 600,000 but Rs. 10,000 plus 10% of the amount
does not exceed Rs. 1,200,000 exceeding Rs. 600,000
4. Where taxable Income exceeds Rs. 1,200,000 but Rs. 70,000 plus 15% of the amount
does not exceed Rs. 2,400,000 exceeding Rs. 1,200,000
5 Where taxable Income exceeds Rs. 2,400,000 but Rs. 250,000 plus 20% of the amount
does not exceed Rs. 3,000,000 exceeding Rs. 2,400,000
6 Where taxable Income exceeds Rs. 3,000,000 but Rs. 370,000 plus 25% of the amount
does not exceed Rs. 4,000,000 exceeding Rs. 3,000,000
7. Where taxable Income exceeds Rs. 4,000,000 but Rs. 620,000 plus 30% of the amount
does not exceed Rs. 6,000,000 exceeding Rs. 4,000,000
Where taxable Income exceeds Rs. 6,000,000 Rs. 1,220,000 plus 35% of the
8.
amount exceeding Rs. 6,000,000

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(2) Where the income of an individual chargeable under the head ―‗salary‖ exceeds seventy-five
per cent of his taxable income, the rates of tax to be applied shall be as set out in the following
Table, namely:—

S. No Taxable Income Rate of Tax

(1) (2) (3)
1. Where taxable income does not exceed 0%
Rs. 600,000
2. 5% of the amount exceeding
Where taxable income exceeds
Rs. 600,000
Rs. 600,000 but does not exceed
Rs. 1,200,000
3. Where taxable income exceeds Rs. 30,000 plus 10% of the
Rs. 1,200,000 but does not exceed amount exceeding Rs. 1,200,000
Rs. 1,800,000
4. Where taxable income exceeds Rs. 90,000 plus 15% of the
Rs. 1,800,000 but does not exceed amount exceeding Rs. 1,800,000
Rs. 2,500,000
5. Where taxable income exceeds Rs. 195,000 plus 17.5% of the
Rs. 2,500,000 but does not exceed amount exceeding Rs. 2,500,000
Rs. 3,500,000
6. Where taxable income exceeds Rs. 370,000 plus 20% of the
Rs. 3,500,000 but does not exceed amount exceeding Rs. 3,500,000
Rs. 5,000,000
7. Where taxable income exceeds Rs. 670,000 plus 22.5% of the
Rs. 5,000,000 but does not exceed amount exceeding Rs. 5,000,000
Rs. 8,000,000
8. Where taxable income exceeds Rs. 1,345,000 plus 25% of the
Rs. 8,000,000 but does not exceed amount exceeding Rs. 8,000,000
Rs. 12,000,000
9. Where taxable income exceeds Rs. 2,345,000 plus 27.5% of the Amount
Rs. 12,000,000 but does not exceed exceeding Rs. 12,000,000
Rs.30,000,000
10. Where taxable income exceeds Rs. 7,295,000 plus 30% of the
Rs. 30,000,000 but does not exceed amount exceeding Rs. 30,000,000
Rs.50,000,000
11. Where taxable income exceeds Rs. 13,295,000 plus 32.5% of the amount
Rs. 50,000,000 but does not exceed exceeding Rs. 50,000,000
Rs.75,000,000
12. Where taxable income exceeds Rs. 21,420,000 plus 35% of the
Rs.75,000,000 amount exceeding Rs. 75,000,000

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 Rates of tax for disposal of immoveable property
(3A) Gain arising on disposal of an immovable property shall be computed in accordance with the formula:
S.No. Holding Period Gain
1. Where holding period of an immovable property does not exceed one year A
2. Where holding period of an immovable property exceeds one year but Ax¾
does not exceed two years
3. Where holding period of an immovable property exceeds two year but Ax½
does not exceed three years
4. Where holding period of an immovable property exceeds three year but Ax¼
does not exceed four years
5. Where holding period of an immovable property exceeds four years 0
Where A is the amount of gain on disposal of an immovable property.

The tax will be calculated on immovable property at the following rates:

S. No. Amount of gain Rate of tax
1. Where the gain does not exceed Rs. 5 million 3.5%
2. Where the gain exceeds Rs. 5 million but does not exceed Rs. 10 million 7.5%
3. Where the gain exceeds Rs. 10 million but does not exceed Rs. 15 million 10%
4. Where the gain exceeds Rs. 15 million 15%

Rates of tax for securities

TY 2022
Securities acquired Securities acquired
S. No. Period
before 01.07.2016 after 01.07.2016

1. Where holding period of a security is less than 12 months 15%

Where holding period of a security is 12 months or more
2. 12.5%
but less than 24 months 12.5%
Where holding period of a security is 24 months or more
3. 7.5%
but the security was acquired on or after 1.7.2013
4. Where the security was acquired before 1st July, 2013 0% 0%

Rates of tax depreciation

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

Initial allowance rate 25%

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CAF-02

CAF-02

MOCK

MARCH 2022

SUGGESTED
SOLUTION
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 CAF-02

Answer-1 Marks
Mr. Iqbal
Taxable Income and Tax thereon 0.50
TY 20X4
Income from salary (W-1) 6,276,000 0.25
Income from capital gain - PSI 150,000 0.25
Income from capital gain – FSI (W-3) 2,286,000 0.25
Income from property (W-2) 1,537,000 0.25
Income from other source
- Compensation for delayed refund [Sec.39(1)(cc)] 25,000 0.25
- Service in relation to building [Sec.39(1)(fa)] (5,000 x 12) – 8,000 52,000 0.25
Income from business – China 1,260,000 0.25
Total Income - NTR 11,586,000 0.25
Less: Zakat [Sec. 60] (25,000)
Taxable income – NTR 11,561,000 0.25
Tax liability on income falling under NTR (1,220,000 + 35% x 5,561,000) 3,166,350 0.5
Less: Foreign tax credit (lower of): [Sec.103] 1.25
 Actual foreign tax 50,000
 Pakistani tax ( 3,166,350 /11,561,000 x 1,260,000) = 345,091 (50,000)

Less: Foreign tax credit (lower of): [Sec.103] 1.25

 Actual foreign tax 1,500 x 90 = 135,000
 Pakistani tax ( 3,166,350 /11,561,000 x 2,286,000) = 626,094 (135,000)
2,981,350
Less: Tax credit on life insurance policy [Sec.62] (2,981,350/11,561,000) x 500,000 (128,940) 1.25
C is lower of:
 500,000 or
 20% of 11,561,000 or
 2,000,000
Less: Tax credit on approved pension fund [Sec.63] (2,981,350/11,561,000) x 1,600,000 (412,608) 1.25
C is lower of:
 1,600,000 or
 20% of 11,561,000 = 2,272,200
Tax payable to Government 2,439,802 0.25

(N-1) Amount paid by Iqbal to driver of Rs. 60,000 is his personal expense, so it is ignored. 0.5
(W-1)
Basic Salary [Sec.12(1)] (300,000x12) 3,600,000 0.25
Cost of living allowance [Sec.12(2)(c)] (50,000 x 12) 600,000 0.25
Milk allowance [Sec.12(2)(c)] (10,000 x 12) 120,000 0.25
Special bonus [Sec.12(2)(c)] 300,000 0.25
Reimbursement of driver salary [Sec.12(2)(d)] 36,000 0.25
Accommodation (higher of)
- 45% of basic salary [Sec.13(12)] (3,600,000 x 45%) 1,620,000 0.25
- Fair Market Rent (85,000 x 12) 1,020,000 1,620,000 0.75
Total 6,276,000
(W-2)
Property Income 1.5
Rentals (Adj. (iii)) [Sec.15(1)] 800,000 – (5,000 x 12) 740,000 0.5
Forfeited deposit (Adj. (iv)) [Sec.15(2)] 1,000,000 0.25
Rent chargeable to tax 1,740,000
Less: Admissible expenses

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CAF-02
- Repair allowance (1/5 x 740,000) (148,000) 0.25
- Fire insurance premium (30,000) 0.25
- Ground rent (10,000) 0.25
- Interest on loan (15,000) 0.25
1,537,000
(W-3) Income from capital gain-FSI
Considered received on disposal of shares (3,000 x 32 x 90) 8,640,000 0.50
Less: Cost of acquisition (3,000 x 2,100) (6,300,000) 0.50
Less: Brokerage commission (3,00 x 0.2 x 90) (54,000) 0.50
Income from capital gain 2,286,000

Answer-2
King and Lamda
Taxation of AOP (Resident)
Income and tax thereon
Income from business Pakistan source (W-1) 34,452
Income from capital gain [S.37(3)] [100,000 x (85 – 50) + 100,000 x (78-50)] x 75% 4,725 0.5
Income from capital gain – separate block (W-1) 2,550
Income from business – FSI 600 0.5
Total Income 42,327 0.5
Less: Income from capital gain – separate block (2,550)
Taxable income 39,777

Tax payable 1,220,000 + (39,777,000 – 6,000,000) x 35% 13,042 0.5

Less: Foreign tax credit on income from business:
Lower of: [S.103]
a) Pakistan average rate of tax (13,042/39,777 x 600) 197
b) Foreign income tax paid 70 (70) 1
12,972
Add: Tax on securities (2,550 x 15%) 383 0.5
Tax payable to Government 13,355 0.5

(W-1) Income from business Pakistan source Rs. (000)

Profit before tax 45,385 0.5
Add: Inadmissible expenses
Individual payment of advertisement of Rs. 9,000 (90,000/10) (allowed) [S. 20(1)] - 0.5
Legal expense (being wholly and exclusively for business is allowed) [S. 20(1)] - 0.5
Unsuccessful court case (being wholly and exclusively for business is allowed) - 0.5
Contribution to unapproved pension fund being foreign [S.21(e)] 2,600 0.5
Capital expenditure for improvement of software wrongly expensed [S.21(n)] 1,800 0.5
Capital expenditure for building ramps wrongly expensed [S.21(n)] 650 0.5
Accounting Depreciation and amortization [S.22(1)] 1,875 0.5
Car running expense for private use [S.21(h)] (50 x 70%) 35 0.5
Production manager car running costs (allowed) [S.20(1)] - 0.5
Parking fines paid [S.21(g)] 30 0.5
Mark up bank loan (allowed) [S.20(1)] - 0.5
Mark up short term loan (allowed) [S.20(1)] - 0.5
Tax Gain on disposal of vehicles at market value (5,250 - 3,320) 1,930 0.5

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CAF-02
[S.22(8)]
Tax bad debt recovery [S.29] (W-2) 0 0.25
8,920
Less: Gain on sale of securities 30,000 x (120 – 35) 2,550 0.5
Accounting gain on vehicle 0 0.25
Gain on disposal of shares in ML 100,000 x (85 – 50) + 100,000 x (75-50) [S.37] 6,000 0.5
Accounting Bad debt recovery [S.29] 90 0.5
Foreign source business income 600 0.5
(9,240)
Income from Business before depreciation and amortization – PSI 45,065 0.5
Less: b/f business loss before depreciation [S.57] ( 3,550 + 2,900) (6,450) 0.5
38,615
Less: un- absorbed depreciation and amortization b/f (2,550) 0.5
Less: un- absorbed depreciation and amortization c/y (W-3) (1,613)
34,452

(W-2) Tax bad debt recovery

Amount received 90 0.5
Less: Actual amount of bad debt 90 0.25
Less: Previously allowed as deduction (0) (90) 0.25
0
(W-3) Tax amortization, depreciation and initial allowance
Depreciation on ramp (building) [S.22] *650 x 10% 65 0.5
Amortization on improvement of intangible [S.24] **(1,800/25 x 243/366) 48 1
Tax amortization and depreciation on other assets 1,500 0.5
1,613
* 50% factor not applied because purchased before 1.7.20.
** In tax year 2016 in February there were 29 days [S.24(4)]

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Answer-3
Mr. Zahid Lal
Taxable income and Tax Thereon
Tax Year 2014
Rs in 000
Income from business (adjusted) (500 - 85) 415 1
Add: Tax Depreciation [S.57(4)] 490 0.5
Income from business before depreciation 905
Less: b/f Loss TY 2012 [S.57(1),(3)] (130) 0.5
Less: b/f Loss TY 2013 [S.57(1),(3)] (200) 0.5
575
Less: depreciation b/f (135)
Less: depreciation c/y (490) - 0.5

Capital Gain 800 0.5

Less: b/f loss 2008 [S.59] (65) 735 0.5

Income from other source (100 + 85) 185 1

Taxable income 920 0.5

c/f unabsorbed depreciation [S.57(4)] (575-135-490) 50 0.5

c/f speculation loss [S.58] 100 0.5
- 2007 capital loss is already dead [S.59] 0.5

Answer-4
a)
(i). Where the taxpayer is satisfied with the decision of Committee:
(a) the taxpayer shall deposit the tax (including penalty and default surcharge as per Committee
decision);
(b) Commissioner shall amend assessment according to Committee decision after tax payment (including
penalty and default surcharge) as per decision of the Committee;
(c) taxpayer shall waive right of appeal against such amended assessment; and
(d) no further proceedings shall be undertaken on issues decided by the Committee if the tax has been
deposited by the taxpayer. [S. 122A] [1 Mark for each point]
(ii). If there is a dispute in a Civil Court on ownership of a property whose income is chargeable, an assessment
order may be issued within 1 year of the end of the financial year in which Court decided the case.
The civil court has decided the case on 15 May 2020. It means that the Commissioner can issue the assessment
order by 30 June 2021. As the assessment order is issued 12 March 2021, the commissioner is justified in issuing
the assessment order as it is within the time limit i.e. 30 June 2021. [S. 125] [ 2 marks]
(iii).
(1) Where a question of law has been decided by High Court or the Appellate Tribunal, the Commissioner
may, follow this decision for same taxpayer for other years pending before him, even if Commissioner is going
in an appeal against the order.
(2) In case the decision is reversed (means that now it is decided against taxpayer), the Commissioner may
modify all the assessments. This modification is to be made within 1 year of receipt of appellate order. In this
case, the general limits for issuing assessment order will not apply. So modification can be made by April
2021. [S. 124A] [1 mark for each point]

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(iv). Amended assessment order can be issued within 120 days of issuance of show cause notice. So in this case
amended assessment order can be issued by 12 September 2021. However Commissioner may pass an
assessment order by taking further 90 days. [S. 122 (9)] [1 mark]
b)
Any profit (interest) received by a non-resident person on a security issued by a resident shall be exempt from tax
if:
(a) the persons are not associates;
(b) the security was widely issued by the resident person outside Pakistan for raising a loan outside Pakistan. The
loan is used in a business in Pakistan;
(c) the interest was paid outside Pakistan; and
(d) the security is approved by the Board. [1 mark for each point]
[S. 46]

Answer-5

(1) Amortization of Trade Mark [Sec. 24(5)]

Tax amortization is not recorded in tax computation.
Trade mark is an intangible and amortized over its useful life for tax purpose. If an
intangible is not available for use for the whole tax year then amortization deduction shall
1.5
be calculated proportionately based on number of days available for use divided by number
of days in the tax year.
Therefore, the company can claim amortization deduction for tax purpose for 2 days.
(2) Gain on disposal of car [Sec.77(1)], [Sec.22(13a)]
Sale proceed shall be taken at higher of Fair Market Value (FMV) or actual consideration
In case of Disposal of car to an employee FMV Rs.2,400,000 shall be taken instead of
actual sale proceed of Rs.1,800,000
However, if a car having original cost exceeding Rs. 2,500,000 is subsequently disposed of
3
then sale proceed shall be calculated as follows:
Proportionate sale proceed in this case would be Rs.1,714,286 (i.e. 2,500,000 / 3,500,000 x
2,400,000).
Tax gain/(loss) should be calculated by comparing the Rs. 1,714,286 with Rs. 2,139,063
(WDV).
(3) Initial allowance: [Sec. 23(5)]
According to section 23 any plant or machinery that has been used previously in Pakistan
is not an eligible depreciable asset for the purpose of initial allowance. Therefore, initial
allowance in this case cannot be claimed irrespective of the fact as to whether the 1.5
equipment is used in Pakistan by Moin or by any other person.
(4) Disputed liability [Sec.34(5)]
An expenditure allowed as deduction is required to be paid within a period of 3 years from
the end of the tax year in which it was allowed. Any unpaid liability against such expense
shall be taxable in the 4th year.
2
Therefore expenses charged in year 2022 shall be taxable in the tax year 2026 as it is the 4th
year of such liability.

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Answer-6
(i) Value of supply shall be the price fixed by the Board. However if supply is made higher than value fixed by
Board the value shall be the actual price. Therefore value of supply will be Rs.140 per kg. [Page 443 of
book]
(ii) In case of imported goods, value of supply shall be the value determined under Customs Act including
custom duty and excise duty charged on it. Thus in this case, value of goods imported from Brazil shall be
Rs. 910,000 (Rs. 880,000 + Rs. 30,000). [Page 443 of book]
(iii) Payment must be made from business bank account of buyer to business bank account of the supplier. Bank
account of both buyer and supplier should be declared to Board at the time of registration/through change of
particulars subsequently. As above condition is not fulfilled QL will not be entitled to claim input tax.
[Section 73]
(iv) If a registered person is liable to pay any tax, default surcharge or penalty under any law administered by
Board, the refund under Sales Tax Act shall be made after adjustment of that amount. Thus Rs. 25,000
default surcharge shall be adjusted against exports refund of Rs. 186,000. [Section 10]
(v) The supplier (seller) shall issue a debit Note (in duplicate) where for any valid reason the value of supply
mentioned in invoice issued has increased. Thus QL shall issue a debit to increase the value from Rs. 535,000
to Rs. 695,500 (535,000 / 50 x 65). [Rule 21]

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Answer-7
Sahulaat Limited
Sales tax payable/ (Refundable)
For the tax period November 2019
Rs in 000
Output tax (14,897  17%) [S.3(1)] 2,532 0.5
Less: Input tax (lower of) [S.8B(1)]
- Actual 2,007
- 90%  2,532 2,279 (2,007) 0.5
525
Less: Input tax on fixed assets [S.8b(1)] (980) 0.5
Sales tax refundable (455)
Add: 3% further tax on un-registered sale (1,305  3%) [S(3)(1A)] 39 0.5
Sales tax payable 39 0.5
Refundable against exports (1,499 + 647) [S.10(1)] 2,146 0.5

(W-1) Input Tax

Other than fixed assets

From registered suppliers [S.7(1)] [(22,776 – 100)  17%] 3,855 0.5
From unregistered suppliers of Rs. 9,000 [S.7(1)] - 0.5
Raw material purchased from unregistered AOP of Rs. 3,650 [S.7(1)] - 0.5
Purchase of preservatives from cottage industry of Rs. 690 [S.7(1)] - 0.5
Packing material purchased of Rs. 2,350 (distributor not filed return) [S.7(2)] - 0.5
Advance payment for third schedule goods to unregistered person of Rs. 300 [S.7(1)] - 0.5
Purchase of office equipment of Rs. 495 [S.8(1)(i)] - 0.5
Purchase of tiles (665/3) x 17% 38 0.5
3,893
Fixed assets
Payment for machine [ ] [S.7(1)] 1,700 0.5
1,700

(W-2) Apportionment of input tax [Rule 25]

Sales Input tax Input tax
(Other than fixed assets) (fixed assets)
Taxable 14,897 2,007 980 (876 + 104) 1
Zero rated 11,000 1,499 (1,482 + 17*) 647 0.5
Exempt 3,000 404 197 (176 + 21) 0.5
28,897 3,893 1,700
*100x17% = 17
(W-2.1) Electronic cash register (Specific input)
Purchase of electronic cash register (735  17%) [For local taxable and exempt] [S.7(1)] 125
(W-2.2) Apportionment of specific input tax
For taxable supplies [125 x 14,897 / (14,897 + 3,000)] 104 0.25
For local exempt supplies [125 x 3,000 / (14,897 + 3,000)] 21 0.25

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CAF-02
(W-3) Sales/Supplies
Unregistered
Taxable goods to un-registered customers (4,000 – 210 – 728 – 2,457[S.3(1)] 605 1
Goods supplied on credit [ ] [S.(2)(46)(iii)] 700 0.5
1,305
Registered
Taxable goods to registered customers (10,800 – 1,200) [S.3(1)] 9,600 1
Sales to cottage industry [S.3(1)] 210 0.5
Goods supplied to end consumer [S.3(1)] (4,000 – 210 – 605 – 728) 2,457 0.5
Sales to departmental store (not included in sale in previous month) 1,200 0.5
Supplies to flight proceeding to Islamabad [S.3(1)] 125 0.5
Credit note issued (not allowed as 180 days have passed) [Rule 22(4)] - 0.5
14,897

Answer-8
(a)
(i) Mr. Jaffer paid life insurance premium to reduce the tax liability by availing tax credit available
under Income Tax Ordinance, 2001. Thus, this is tax avoidance.
(ii) Sakhi Limited paid 50% of the salary to Mr. Ahmed in cash, so that only 50% of salary may be
disclosed to tax authorities and tax burden on Mr. Ahmed may be reduced which is against law.
This is tax evasion.
(iii) Mrs. Shamim will pay lower rate tax on Income from Salary and will claim deduction of salary
under the head Income from business which is not allowed. This is tax evasion.
(b)
Audit Clients that are not Public Interest Entities
Safeguards to address self-review threat when the audit client is not a public interest entity include:
 Using professionals who are not audit team members to perform the tax service.
 Having an appropriate reviewer who was not involved in:
o the service review
o the audit work or
o service performed.

Audit Clients that are Public Interest Entities

A firm (or a network firm) shall not prepare tax calculations of current and deferred tax liabilities (or assets) for an
audit client (public interest entity) for preparing accounting entries that are material to the financial statements on
which the firm will express an opinion.
If impact of accounting entries on financial statements is immaterial then above safeguards mentioned above will be
applied.

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