TAXATION-II

Time allowed - 3 hours

Total Marks - 100

[N.B. - The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of the
quality of language and the manner in which the answers are presented. Different parts, if any, of the same question
must be answered in one place in order of sequence.]

Marks
1. (a) Section 30 has been amended to restrict the claim of deduction against income from business or
profession in the following cases: 4
(i) Perquisites
(ii) H. O. Expenses
(iii) Royalty, Technical know-how fees etc.
(iv) Incentive Bonus
State, with examples, how the above will be determined in computation of Total Income when net
profit is arrived at after charging such expenses.
(b) State with reasons whether the following expenses are fully or partly admissible as deduction while
computing income from business or profession: 5
(i) Stock-in trade was lost in fire, amounting to Tk. 12,000 and was debited to P/L Account.
(ii) Interest paid to bank Tk. 15,000 in connection with overdraft obtained for paying dividend.
(iii) Overseas travelling expenses Tk. 50,000. The amount of disclosed turnover and disclosed net
profit is Tk. 40,00,000 and Tk. 20,00,000 respectively.
(iv) Royalty paid Tk. 2,00,000. The amount of disclosed turnover and disclosed net profit is
Tk.40,00,000 and Tk. 20,00,000 respectively.
(v) Penalty paid for violating income tax law Tk. 25,000.
(c) Explain the following:
i) Penalty for concealment of income u/s 128 of ITO 1984. 3
ii) Penalty for incorrect or false audit report by a chartered accountant u/s 129A of ITO 1984. 3
(d) Explain when a Chartered Accountant acts as a `Principal’ and when as an `Agent’ to his tax client.
Which position is riskier? 4

2. (a) You are a Tax Advisor of ABC Ltd. Mr. Kabir, the Chief Financial Officer (CFO), of the company has
sought your advice for an effective and efficient business tax planning and techniques to provide the
assessee with maximum tax advantage. It has got 5(five) directors and 10(ten) salaried employees who
are individual assessees.
In response to the request of the CFO you are required to explain some effective business tax
planning techniques conducive to ABC Ltd.
(i) As an individual tax payer for its directors & employees. 5
(ii) As a business organization 5
(b) Comment on the following two scenarios: 8
Scenario-1:
A company wants to raise capital of Tk.20,00,000 for a project where earning before tax shall be 30%
of the capital employed. The company can raise debt fund @12%. Suggest which of the following 3
alternatives should it opt for.
(a) Tk.20,00,000 to be raised by equity capital.
(b) Tk.16,00,000 by equity and Tk.4,00,000 by loan.
(c) Tk.4,00,000 by equity capital and Tk.16,00,000 by loan.
Assume the company shall distribute the entire amount of profit as dividend while income is subject to
tax rate of 30%. Tax on dividend is 15% plus 3% additional tax on tax amount and 10% surcharge on tax.

Scenario-2:

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 What will be the option, if the earning before tax is 10% of capital employed.
(c) XYZ Ltd., a company registered in Honk Kong, is engaged in procuring garments from different parts of
the world and exporting to different retailers in Europe and USA. They want to set up an establishment
in Bangladesh in order to ensure timely shipments and quality of garments exported by different
factories of Bangladesh against letters of credit issued by the company’s bank in Hong Kong.
The company undertakes that the establishment can be set up in any form as follows:
(a) Liaison Office; or
(b) Branch Office; or
(c) Subsidiary Company
They need your advice on the income tax implications in the above three cases, so that they can take a
proper decision and plan accordingly. They also need your advice on the income tax implications for the
expatriate employees as may be appointed to work for their establishments in Bangladesh. Advise. 8

3. (a) Mr. X has constructed a 3-storied building with a loan of Tk.60 lakhs from Sonali Bank Ltd. The
construction was completed in November 2014. His loan account was debited by the bank with loan
interest as follows:
July 2012 to June 2013 Tk.6 lakhs
July 2013 to June 2014 Tk.10 lakhs
July 2014 to November 2014 Tk.6 lakhs
You are required to advise whether Mr. X will be entitled to any deductions for the above loan
interest amounts to arrive at his total income for the purpose of income tax. While giving your
advice, consider the rental income as in (b) below, if relevant. 3
(b) Mr. X is now negotiating with Mr. Y and Mr. Z for renting out the 1st and 2nd floors with effect from 1
January 2015 for a period of 4 years. He is also negotiating with ABC Ltd. to rent out two rooms with a
kitchen and a wash room for 3 years. The rent amounts have been agreed as follows:
(i) Ground floor (as above): Tk.20,000 p.m. with an advance of 6 months to be adjusted over a period
of the last 12 months of the rental period in equal amounts.
(ii) 1st floor: Tk.30,000 p.m. with an advance of 3 months to be adjusted over the last 3 months of the
rental period in equal amounts.
(iii) 2nd floor: Tk.25,000 p.m. with no advance, but with a security money of Tk.50,000 to be refunded
at the time of vacating the premises on the expiry of the rental period.
Mr. X wants all the rental payments, advances and security money to be paid in cash. Mr. Y, Mr. Z and
ABC Ltd. agree, provided it does not contradict with the provisions of the Income Tax Ordinance 1984
and the Income Tax Rules 1984 and does not deprive them of any income tax benefit which they would
have otherwise got.
You are required to give necessary advice with regard to above in the light of the Income Tax
Ordinance 1984 and Income Tax Rules 1984. 7

4. Calculate Mr. Adib Ahsan’s taxable Income and tax liability for the assessment year 2014-2015
considering the following, as may be relevant: 12
Income from Salary:
Basic salary Tk. 22,000 per month, Dearness allowance 10% of basic salary, Medical allowance Tk.
2,000p.m, Two festival bonuses each equal to one month’s basic salary and Annual performance bonus
equal to four months’ basic salary. Mr. Ahsan received free accommodation from his office which has
annual rental value of Tk. 120,000 and a full time car. Leave encashment during the year was Tk. 6,600. He
and his employer both contribute 10% of basic salary to a recognized provident fund.
Income from House Property:
Mr. Adib is the owner of a three storied house at Dhanmondi, Dhaka. He let out each floor at a monthly
rent of Tk. 10,000. Annual municipal value of the house is Tk. 300,000. Beside all the repair and
maintenance expenses, he paid municipal tax of Tk. 8,000, Insurance premium Tk. 20,000 and interest on
mortgage loan Tk. 3,000 for the house. The ground floor remained vacant for 2 months during the year.

Income from Business or Profession:

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 Profit from sole proprietorship business Tk. 155,000. In the previous year he incurred a loss of Tk. 40,000 in
the same business and carried forward Tk. 5,000 to set off this year. During the year he also earned profit
from partnership firm Tk. 120,000.
Income from other sources:
Dividend received Tk. 54,000 from a private limited company, Income from talk show Tk. 10,000 and
Interest received from bank savings account Tk. 2,700.
Income from FDRs in the name of his daughter and wife:
He has a daughter studying in a private university in Dhaka. She is dependent on her father. She has an FDR
amounting to Tk.10 lakhs, which is made up of her savings of pocket money, gifts she has received in her
birth days from the relatives and friends over the years and the accumulated interest on FDR. The FDR
account was opened in 2008, and the balance of Tk.10 lakhs as on 30/6/2014 includes interest of Tk.3 lakhs
(net of income tax) earned during the period from 2008 to 30 June 2013 and Tk.90,000 (net of 15% income
tax) interest earned during the income year 2013-2014.
Mrs. Ahsan has an FDR of Tk.20 lakhs. This is made up of her savings from the funds allocated for
household expenditure and interest earned upto 30 June 2014. Tk.1,80,000 was credited as interest
income (net of 15% income tax) during the income year 2013-2014.
Neither Mrs. Habib nor their daughter has any other income and has any Tax Identification Number (TIN).
Payments made during the year:
He paid Tk. 40,000 and Tk. 35,000 as insurance premium for his own and his spouse. He purchased share
from secondary market amounting to Tk. 7,200. He also purchased medical books for Tk. 15,000 during the
year. He donated Tk. 30,000 to Prime Minister’s Relief Fund, Tk. 20,000 to his relative and Tk. 35,000 to Aga
Khan Development Foundation.

5. TWS Ltd. has been in the business of manufacturing office furniture since 2002. For the year ended
December 31, 2013, its profit and loss account is as follows:
Notes Tk. ‘000 Tk. ‘000
Sales 4,800
Less: Cost of sales 1 2,600
Gross profit 2,200
Less: Operating expenditure:
Payroll costs 2 1,500
Directors’ remuneration 3 300
Freight and insurance 4 150
Finance charges 5 100
Donations 6 50
Utilities 7 75
Professional fees and subscriptions 8 85
Training and research 9 60
Entertainment 10 120
Foreign exchange loss 11 40
Provision for doubtful debts (trade) 12 30
2,510
( 310)
Add: Other income 13 400
Profit before taxation 90

Notes:
1. Cost of Sales Tk. ‘000
Included under cost of sales are
Depreciation of fixed assets 300
Provision for stock obsolescence 74
Damaged stocks written off 26

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2. Payroll Costs
Included under payroll costs are:
Provision for retirement benefits 80
Medical expenses of staff and family 46
Contribution to an overseas provident fund (unapproved) for an expatriate employee 16
3. Directors’ Remuneration
The directors’ remuneration comprises:
Directors’ salaries and fees 255
Leave passages 20
Entertainment allowances (utilized to entertain customers and dealers) 25
300
4. Freight and Insurance
Included under the above is an amount of Tk.3,000 paid to Safe Insurance
Ltd., a company incorporated in Bangladesh, for insuring imported goods.
5. Finance Charges
Included under the above is an interest subsidy of Tk.16,000 paid by
the company in relation to loans taken by the employees from a bank.
6. Donations
The above comprise:
Cash donations to approved institutions 30
Donations of 5 television sets to approved institutions 15
Advertisement in souvenirs 5
50
7. Utilities
Included in the above are deposits of Tk.3,000 for water and electricity in
connection with the expatriate employee’s house.
8. Professional Fees and Subscriptions
The above comprise:
Audit and tax fees 35
Registration of trade marks 20
Legal fees in obtaining a term loan 17
Legal fees on recovery of trade debts 13
85
9. Training and Research
Included under the above expenses are:
Routine product testing and quality control expenses 16
Payments to an approved research and development
company for the use of its services. 33
10. Entertainment
The above comprises:
Dinners and lunches provided to suppliers 54
Meals and refreshments provided to employees during promotional campaigns 6
Salesman entertainment allowances (utilized to entertain customers and dealers) 60
120
11. Foreign Exchange Loss
The above comprises:
Foreign exchange loss on settlement of trade debts 27
Foreign exchange loss on purchase of machinery 13
40
12. Provision for Doubtful Debts (trade)
The above provision comprises:
Specific provision for doubtful debts 8
General provision for doubtful debts 15
Bad debts written off 7
30

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 13. Other Income
This comprises income derived from Bangladesh as follows:
Tax exempt dividend 154
Interest income 86
Dividend income (gross) 160
400
14. Additional Information
(i) The balances of the following provision accounts are as shown below:
December 31
2013 2012
Tk. ‘000 Tk. ‘000
Provision for stock obsolescence 180 120
Provision for retirement benefits 302 254
Provision for doubtful debts (trade)
- Specific 32 25
- General 72 60
(ii) TWS Ltd. has unabsorbed tax losses and unabsorbed depreciation allowances brought forward
from the assessment year 2013-2014 of Tk.162,000 and Tk.103,000 respectively. The depreciation
allowances claim for the assessment year 2014-2015 is Tk.124,000.
Required:
Compute the total income and tax liability of TWS Ltd. for the assessment year 2014-2015. 18

6. (a) ABC Ltd. is a manufacturer of cosmetic items. It sells through a number of distributors across
Bangladesh. Currently it sells to distributors at Tk.80 per unit and fixes the MRP at Tk.100 per unit. The
declared price of distributors (i.e. selling price of distributors to retailers) is Tk.90 per unit. ABC Ltd.
withholds income tax @3% from distributors under section 53E(2) of the Income Tax Ordinance 1984.
It also collects VAT @ 15%. Similarly the distributors also collect VAT @ 15% from retailers.
Is there any scope for ABC Ltd. to minimize collection of income tax from distributors under the
income tax law by changing the price structure, without changing the current MRP and reducing the
government revenue collection from VAT? If yes, revise the price for distributors to a reasonable
level, and make comparison of withholding tax and VAT collection and deposit at each stage under
the existing and revised scenarios. ABC Ltd. has an incentive scheme under which its products may
be given free of cost down the distribution channel to compensate (up to a reasonable level)
financial loss, if any, due to change in price. No one should incur any loss due to price revision. 4
(b) MN Ltd. imports 15 IT equipment as a commercial importer. You are aware that the import of IT
equipment is exempted from VAT at import stage. The C&F agent of MN Ltd. says that import of IT
equipment is subject to collection of ATV at the time of import. MN Ltd. is subject to 4% trade VAT. If
the customs authority collects ATV @4% at the import stage, can MN Ltd. take credit of ATV as input
VAT paid and adjust against the total VAT credit in the VAT Current Account and VAT Return? The CFO
of MN Ltd. is confused, and sought your advice.
Give your opinion and advice. 4

7. (a) (i) When is zero tax imposed under VAT Act? (ii) What are the procedures to be adopted for disposal of
damaged or destroyed goods in accident under VAT Act? 4
(b) Sumon purchases 100 wall clocks (WC) @Tk.70 per unit and he sold all these WC to Nikhil at Tk.9,300
where he earns profit of Tk.2,000. After adding value of Tk.30 per unit Nikhil sells these WC in the
market. If VAT is same on all these clocks, calculate how much VAT Sumon has to pay and at what
price Nikhil sells these WC in the market. 3

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