Chapter 4 (b): Definitions

ICAP PAST PAPER QUESTIONS

Question-1
Rose Company Ltd. has a paid up capital of Rs.5,000,000 consisting 500,000 shares of Rs.10 each. On
30.6.2001 the company’s balance sheet shows accumulated profits of Rs.1,500,000. The company has to be
liquidated. The official liquidator realized Rs.6,500,000 and distribution among the shareholders was made at
the rate of Rs.13 per share. Shewani Group owns 200,000 shares in the company.
How much of the amount received by Shewani Group is dividend? Please explain your answer.
(4)
(Q.1 (b)September 2002)
Question-2
Define the following with reference to the Income Tax Ordinance, 2001?
(a) Fee for technical services (3)
(b) Non-profit organization (3)
(c) Income (3)
(d) Taxpayer (2)
(Q.1September 2004)
Question-3
Identify the situations in which two companies shall be considered to be associates within the meaning of the
Income Tax Ordinance 2001. (6)
(Q.5 (a) September 2007)
Question-4
Certain types of payments by a private company to their shareholders can be treated as "dividend" under the
Income Tax Ordinance, 2001. State the conditions necessary for the application of this rule and the exceptions
to it. (5)
(Q.4 (b) March 2008)
Question-5
State the circumstances when two companies shall be considered as associates, under the Income Tax
Ordinance, 2001.
(4)
(Q.5 (b) September 2008)
Question-6
A company engaged in manufacturing activities has decided to provide loan to one of its shareholders.
Explain the tax implication on the company as well as the shareholder if the Company:
(i) is registered under the Companies Act, 2017 as a private limited company.
(ii) is an unlisted public company. (6)
(Q.2 (a) September 2009)
Question-7
Tamba Pakistan (Pvt.) Limited is engaged in the manufacture of pharmaceutical products. Its board of
directors has approved a 3-year loan to one of its major shareholders.
Required:
Explain the tax implications of the above transaction on the company as well as the shareholder.
(4)
(Q.5 (a) March 2012)
Question-8
Under the Income Tax Ordinance 2001, where a person is reasonably expected to act in accordance with the
intentions of another person, both persons are considered as associates.
Required:
(i) Explain the term “person” in the above context. (3)
(ii) State the circumstances in which a company and its shareholder shall be considered as associates.
(4)
(Q.6 (b) March 2012)
Question-9
Differentiate between ‘Public company’ and ‘Private company’ within the meaning of Income Tax Ordinance,
2001. (5)
(Q.5 (a) September 2013)

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Chapter 4 (b): Definitions

Question-10
Under the provisions of Income Tax Ordinance, 2001:
Explain the term ‘Associates’. State the circumstances under which a shareholder in a company and the
company may be regarded as associates.
(5)
(Q.2 (b) March 2014)

Question-11
Certain payments made by a private limited company to its shareholders can be treated as ‘dividend’. Explain
the above in the context of Income Tax Ordinance, 2001. Also identify the exceptions to this rule.
(7)
(Q.7 March 2014)
Question-12
Briefly discuss the provisions of Income Tax Ordinance, 2001 in respect of the following situation:
ABC (Private) Limited has decided to provide a loan of Rs. 5 million to one of its shareholders, for the
purchase of a house.
(4)
(Q.2 (b) September 2014)
Question-13
Under the provisions of the Income Tax Ordinance, 2001 describe the following:
(i) meaning of the term ‘Associates’. (2)
(ii) circumstances in which a member of an association of persons and the association may be regarded
as associates. (2)
(iii) situation in which members of an association of persons may not be regarded as associates. (2)
(Q.3 (b) September 2016)

Question-14
On 25 August 20X8, the Officer of Inland Revenue has issued a notice to Rahat Foods (Private) Limited (RFPL)
to deposit withholding income tax of Rs. 1,950,000 in respect of loan amounting to Rs. 13,000,000 given to
Nadeem Ahmad, a shareholder of RFPL, by treating the amount of loan as dividend. The notice was served to
the company on 30 August 20X8.

According to RFPL’s records, the loan was given to Nadeem Ahmad on 25 May 20X7 when accumulated profit
of the company was Rs. 12,000,000.

In the light of the provisions of the Income Tax Ordinance, 2001 explain whether you agree with the notice
issued to RFPL by the Officer of Inland Revenue. (03)
(Q.4 (a) September 2018)
Question-15
(a) Briefly discuss the difference between a public company and a private company, within the meaning
of Income Tax Ordinance, 2001. (04)
(b) Certain types of payments by a private company to its shareholders can be treated as `dividend'
under the Income Tax Ordinance, 2001. State the conditions necessary for the application of this rule
and the exceptions to such rule.
(05)
(Q.5 March 2019)
Question-16
Explain Industrial Undertaking as specified in the Income Tax Ordinance, 2001.
(5)
(Q.4 (b) September 2011)

Question-17
Dr. Jamal is planning to establish a hospital as a non-profit organization.

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Chapter 4 (b): Definitions

Required:
Discuss the conditions that should be complied with by Dr. Jamal, under the Income Tax Ordinance, 2001.(03)
(Q.1(b) March 2021)
Question-18
Following information pertains to three unlisted companies:
Paid up Total Annual
Company Shareholders
capital reserves turnover
Rs. in million
60% shares are held by a
A Limited 30 80 150
foreign company
40% shares are held by the
B Limited 80 (35) 220 Provincial and Federal
governments
100% shares are held by a
C Limited 40 5 500
local group

Required:
Under the provisions of the Income Tax Ordinance, 2001 briefly discuss whether each of the above companies
can be classified as small, public or private. Also state the additional information, if any, which may be
required for determining the classification of these companies. (07)
(Q.4 (c) March 2022)

ICAP PAST PAPER SOLUTIONS

Note: Few of the questions are not answered below.
Answer-1
Any distribution made to the shareholders of a company on its liquidation, to the extent to which the
distribution is from the accumulated profits of the company whether capitalised or not is treated as dividend.
Therefore Rs. 3 x 200,000 = 600,000 will be treated as dividend in the hands of Shewani Group. Rs. 3 is
calculated as (1,500,000/500,000)

Answer-3
S. 85(3) (f)

Answer-4
The payment made (from accumulated profits) by a private company as defined in the Companies Act, 2017
of any amount (whether it is a part of the assets of the company or trust, or otherwise)
 by way of advance or loan to a shareholder
 for the individual benefit of a shareholder
shall be treated as dividend under the Income Tax Ordinance, 2001.

Exception
Following payments will not be considered as dividend:
(i) any advance/loan by a company involved in lending business;
(ii) any dividend paid by a company which is set off against amount previously paid by it and treated as a
dividend.

Answer-6
i. If the company is private limited company.
Tax implications on shareholders
The term dividend includes any payment by a private limited company by way of loan to its
shareholder for the individual benefit of shareholder to the extent of accumulated profits.
Accordingly, amount received by the shareholder shall be construed as dividend in the hands of the
shareholder and taxable under the provisions of the ITO-2001.

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Chapter 4 (b): Definitions

Tax implications on private limited company

Being a private company, it is responsible to deduct withholding tax on the payment of dividend at
the rates specified in the First Schedule.
ii. If the company is an unlisted public company, the payment made to the shareholders will not be
construed as dividend. So no tax implication on the company or the shareholder.

Answer-7
Implications from point of view of shareholder
The payment made by a private company as defined in the Companies Act, 2017 of any amount by way of
advance or loan to a shareholder shall be considered as dividend.
Therefore the amount received by shareholder will be treated as dividend income in his hands.
Implications from point of view of company
Every person paying a dividend shall deduct tax from the gross amount of the dividend paid at the rate of
15% of gross amount of dividend. Therefore company is required to deduct tax @ 15% of gross amount of
dividend.

Answer-8
i) Refer Chapter-4
ii) S. 85(3)(e)
Answer-9
Refer definitions.
Answer-10
Two persons shall be associates where the relationship between the two is such that one is expected to act in
accordance with the intentions of the other, or both are expected to act in accordance with the intentions of a
third person.
And S. 85(3) (e)

Answer-11
The payment by a private company as defined in the Companies Act, 2017 or trust by way of advance or loan
to a shareholder or for the individual benefit of a shareholder shall be considered as dividend. The payment
should be from accumulated profits.

Following payments will not be considered as dividend:

(i) any advance/loan by a company involved in lending business;
(ii) any dividend paid by a company which is set off against amount previously paid by it and treated as a
dividend.

Answer-12
The payment by a private company as defined in the Companies Act, 2017 or trust by way of advance or loan
to a shareholder or for the individual benefit of a shareholder. The payment should be from accumulated
profits.
Therefore it is considered as dividend in the hands of shareholder and company is required to deduct tax at
the rate of 15% on the gross amount of dividend.

Answer-13
i. Associates
Two persons shall be associates where the relationship between the two is such that:
 One is expected to act in accordance with the intentions of the other, or
 Both are expected to act in accordance with the intentions of a third person.
ii. A member of an AOP and the AOP, where the member,
 either alone or

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Chapter 4 (b): Definitions

 together with an associate or associates under another application of this section controls 50% or
more of the rights to income or capital of the association
iii. Members of an AOP shall not be associates where Commissioner is satisfied that no one is expected to act
in accordance with the intentions of the other.

Answer-14
“Dividend” includes the payment by a private company as defined in the Companies Act, 2017 or trust:
 by way of advance or loan to a shareholder or
 for the individual benefit of a shareholder,
The payment should be from accumulated profits.

Considering the above definition of dividend, the tax officer is correct to the extent of treating the loan
payment as dividend. However, he made error in treating the entire amount of Rs.13 million as dividend
because the amount of accumulated profit was Rs.12 million on that date. Therefore, only Rs.12 million can be
treated as dividend.

Answer-15
a) S. 2 (45), (47)
b) Dividend includes the payment by a private company as defined in the Companies Act, 2017 or trust:
 by way of advance or loan to a shareholder or
 for the individual benefit of a shareholder,
The payment should be from accumulated profits.
Following payments will not be considered as dividend:
(i) any advance/loan by a company involved in lending business;
(ii) any dividend paid by a company which is set off against amount previously paid by it and
treated as a dividend.

Answer-16
Refer the chapter above.

Answer-17
An individual cannot form a non-profit organization. However Dr. Jamal can run his clinic as a non-profit
organization:
(a) established for charitable purpose
(b) formed under a law as a non-profit organization;
(c) approved by the Commissioner for specified period, on an appeal in prescribed form, accompanied
by the prescribed documents and
(d) the person do not derive any benefit from the assets.

Answer-18
A Limited:
A Limited cannot be classified as small company. Though its turnover is less than Rs. 250 million but it’s share
capital and reserves are Rs. 110 million (30 +80) which is more than threshold of Rs. 50 million.
A Limited can be classified as private company. 60% of shares of A Limited are held by foreign company. If
foreign company is 100% owned by foreign government, then A Limited would be classified as public
company. As the ownership structure of foreign company is not known, we cannot classify it as public
company.

B Limited:
B Company can be classified as small company. Its turnover is less than Rs. 250 million and it’s share capital
and reserves are Rs. 45 million (80 - 35) which is less than threshold of Rs. 50 million. Additional information

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Chapter 4 (b): Definitions

regarding number of employees and constitution of company should have been given to reach a conclusive
decision.
B Limited can be classified as private company because neither the Provincial Government and nor the
Federal Government solely own 50% or more of the shareholding of company B.

C Limited:
C Limited cannot be classified as small company. Though its share capital and reserves are less than Rs. 50
million but its turnover is greater than Rs. 250 million.
C Limited can be classified as private company as 100% shareholding of the company is with local group
(non-government) and the Provincial, Federal or Foreign Government does not own 50% or more of the
shareholding of company C.
OTHER QUESTIONS
Questions Treatment
a) A person has employed 17 persons for the manufacturing of room
carpets. Explain under two independent scenarios whether he will
be considered as industrial undertaking or not. [Sec.2(29C)(a)(i)(ii))
 He uses human energy.  Not an industrial undertaking
 He uses electrical energy.  It is an industrial Undertaking
b) Company XYZ a listed company has 70% shareholding in both of Following are associates:
two companies:  ABC and XYZ [S. 85(3)(e)]
 ABC Private limited company  DEF and XYZ [S. 85(3)(e)]
 DEF Private limited company  ABC and DEF [S. 85(3)(f)]
What is the status of all of the above three companies under the
law?
c) What would be your answer if the company XYZ in above example No change in answer
is a private company?

Sajjad Ahmed Malik