17 Spring 2018 - BT SA

SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 1 of 9
BUSINESS TAXATION [G5] – GRADUATION LEVEL

Marks
Question No. 2
(a) (i) Change in method of accounting for income chargeable to tax under the head ‘Income from
Business’: 02
A person may apply in writing for a change in the person’s method of accounting to the
Commissioner.
The Commissioner may, by notice in writing, approve such an application but only if
satisfied that the change is necessary to clearly reflect the person’s income chargeable to
tax under the head “Income from Business”.
If a person’s method of accounting has changed, the person shall make adjustments to
items of income, deduction, or credit, or to any other items affected by the change so that
no item is omitted and no item is taken into account more than once.
(ii) Provision for bad debts: 02

The firm cannot claim deductions on account of bad debts unless the following conditions
are satisfied:
 the amount of debt was previously included in the person’s income from business
chargeable to tax;
 the debt or part of the debt is written off in the accounts of the person in the tax year;
 there are reasonable grounds for believing that the debt is irrecoverable.
(iii) Initial depreciation allowance on a three-year old plant, which has been imported from
Japan. The remaining useful life of the plant is 8 years. 02
The firm can claim the initial allowance against the imported used plant as:
 it is used in Pakistan for the first time in a tax year
 it is used by the firm for the purposes of its business
 it falls in the definition of eligible depreciable asset
(b) Employee Share Scheme: 08

Employee share scheme means any agreement or arrangement under which a company may
issue shares in the company to:
(a) an employee of the company or an employee of an associated company; or
(b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an
employee of the company or an employee of an associated company.
(i) Option Granted to an Employee:
The value of a right or option to acquire shares under an employee share scheme granted
to an employee shall not be chargeable to tax.
Where, in a tax year, an employee is issued with shares under an employee share scheme
including as a result of the exercise of an option or right to acquire the shares, the amount
chargeable to tax to the employee under the head Salary for that year shall include the fair
market value of the shares determined at the date of issue, as reduced by any
consideration given by the employee for the shares including any amount given as
consideration for the grant of a right or option to acquire the shares.
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Marks
(ii) Disposal of the Option to Acquire Shares under the Employee Share Scheme:
Where, in a tax year, an employee disposes of a right or option to acquire shares under an
employee share scheme, the amount chargeable to tax to the employee under the head
Salary for that year shall include the amount of any gain made on the disposal computed in
accordance with the following formula, namely:
A–B
Where,
A is the consideration received for the disposal of the right or option; and
B is the employee‘s cost in respect of the right or option.
(iii) Shares issued to an Employee under the Option that are Subject to Restriction on Transfer:
Where shares issued to an employee under an employee share scheme are subject to a
restriction on the transfer of the shares:
(a) no amount shall be chargeable to tax to the employee under the head Salary until the
earlier of:
(i) the time the employee has a free right to transfer the shares; or
(ii) the time the employee disposes of the shares; and
(b) the amount chargeable to tax to the employee shall be the fair market value of the
shares at the time the employee has a free right to transfer the shares or disposes of
the shares, as the case may be, as reduced by any consideration given by the
employee for the shares including any amount given as consideration for the grant of a
right or option to acquire the shares.
(c) Diamond Enterprises

Computation of Taxable Income and Tax Payable
for the tax year 2018
Rupees
Speculation Trading
Business Business Total
(Barley) (Rice)
Sales ratio 44.65% 55.35% – 01
Gross sales (30,096 x 575) 17,305,200 22,572,000 39,877,200 1.5
Less: Discount – (1,122,000) (1,122,000) 0.25
Net sales 17,305,200 21,450,000 38,755,200 0.5
Gross profit {17,305,200 – (26,070 x 575)} 2,314,950 4,965,840 7,280,790 1.5
Less: Expenses:
– Research (990,000) (990,000) 0.25
– Future contract (41,250) (41,250) 0.25
Less: Administrative, selling and distribution
[(4,125,000 – 74,250) x 44.65%, x 55.35%] (1,808,765) (2,241,985) (4,050,750) 1.5
464,935 1,733,855 2,198,790 01
B/f losses (495,000) (907,500) 0.5
Taxable income/ (loss) (30,065) 826,355 01
Marks
Taxable Income / (Loss)
Speculation Business (30,065) C/F 0.25
Trading Business 826,355 0.25
Capital Loss (412,500) C/F 0.25
Question No. 3
(a) (i) Composition of the Appellate Tribunal: 04
The Appellate Tribunal consists of a chairperson and members. The members of the
tribunal are of two types i.e. judicial members and accountant members, who are appointed
by the Federal Government.
Accountant Members
A person may be appointed as an accountant member of an appellate tribunal if:
a) he is an officer of Inland Revenue Service equivalent to the rank of Regional
Commissioner;
b) a Commissioner Inland Revenue or Commissioner Inland Revenue (Appeals) having at
least three years experience as Commissioner or Collector; or
c) a person who has, for a period of not less than ten years, practiced professionally as a
Chartered Accountant within the meaning of the Chartered Accountants Ordinance,
1961.
d) a person who has, for a period of not less than ten years, practiced professionally as a
Cost and Management Accountant within the meaning of Cost and Management
Accountants Act,1966.
(ii) The powers and functions of the Appellate Tribunal are exercised through benches, which
are constituted by the Chairperson from members of the Tribunal. 02
A Bench of the Tribunal usually comprises of not less than two members of the Appellate
Tribunal, with equal number of judicial and accountant members.
In case of different numbers of accountant and judicial members, the number of members of
one class should not exceed the number of members of the other class by more than one.
Furthermore, chairperson of the Tribunal has the authority to constitute even single-member
benches. However, a single-member bench may only dispose of case involving amount of
tax or penalty not exceeding Rs. 1 million.
(iii) If there is difference in opinion among the members of a Bench on any point, the point is
decided according to the opinion of the majority. In case the number of members of the
Bench is even, and the members of a Bench are equally divided on a point, they are
required to state the point on which there is difference. 02
The case, then, is referred by the Chairperson for hearing on the point of difference by one
or more other members of the Appellate Tribunal, who were not part of the Bench original
disposing of the case.
Marks
After hearing by the new members is completed on the point of dispute, the point is decided
according to the opinion of the majority of the members who first heard the case and those
to whom the case was referred to later.
Situation may occur wherein a case is being heard by the full bench of the tribunal, and the
tribunal is equally divided on some issues. In this case, the Federal Government may
appoint an additional member in the Tribunal for the purpose of deciding the case.
(b) Foreign loss is a loss which arises when the total deductible expenditure exceeds the total foreign
source income for a tax year chargeable to tax under a head of income. 04
Rules relating to set off and carry forward of foreign losses are as follows:
 Foreign loss shall be carried forward to the following tax year and set off against the foreign
source income chargeable to tax under that head in that year, and so on.
 No foreign loss shall be carried forward to more than six tax years immediately succeeding
the tax year for which the loss was computed.
 Where a taxpayer has a foreign loss carried forward for more than one tax year, the loss for
the earliest year shall be set off first.
(c) (i) The cost of personal computer shall be its fair market value on July 1, 2017, the date on
which Mr. Aoun started using it for business purposes plus cost incurred by him on its up-
gradation. 02
(ii) In determining the cost of production machinery, the actual amount spent by Mr. Mirza shall
be reduced by the amount of subsidy received by him on acquisition of such machinery,
unless such amount of subsidy is chargeable to tax. 03
Since Mr. Mirza has purchased the machinery with a loan repayable in euro and before full
and final repayment of the loan, if there is an increase or decrease in the loan liability, in
terms of rupee, due to exchange rate fluctuation, the amount by which the liability is
increased or reduced shall be added to or reduced from the cost of the asset, as the case
may be.
However, difference if any, on account of foreign currency fluctuation, shall be taken into
account in the year of occurrence for the purposes of depreciation.
(iii) The cost of new machine purchased by Mr. Rehan in exchange for an old machine shall be
the sum of the following amounts: 03
 the total cash given for the new machine;
 the fair market value of the old machine as determined at the time the asset is acquired;
 any incidental expenditure incurred in acquiring new machine and disposing of the old
exchanged machine. Such as freight given in this case; and
 any expenditure incurred to alter or improve the new machine. For instance purchase of
cooling equipment given in this case.
Marks
Question No. 4
AB Associates
Computation of Taxable Income and Tax Liability
Rupees
Net Profit 739,750 0.25
Add:
Depreciation 495,000 0.25
Salary to partner Mr. Alam 220,000 0.25
Commission to partner Mr. Badr 27,500 0.25
Depreciation on owned assets 55,000 0.25
Depreciation on assets subject to finance lease 41,250 0.25
Financial charges on leased assets 6,875 0.25
Provision for doubtful debts 27,500 0.25
Loss on disposal of fixed assets 35,750 0.25
Residential telephone bills of partner Mr. Alam 13,750 0.25
Liabilities for more than 3 years
-Liability against purchases 220,000 0.25
-Interest on the bank loan 110,000 0.25
Tax gain on disposal of P&M (247,500-220,000) 27,500 1,280,125 01
Less:
Tax depreciation (528,013) 0.25
Tax loss on furniture (20,625 - 27,500) (6,875) 0.50
Lease rentals (49,500) 0.25
Bad debts recovered (90,750) (675,138) 0.75
Taxable Income / (Loss) 1,344,737 0.50
Tax liability [32,000+(1,344,737 - 750,000) x15%] 121,211 0.50
Divisible income 1,223,526 0.50
Share of Profit of AOP:

Rupees
Mr. Alam Mr. Badr Total
Ratio 3 2 5
Salary 220,000 - 220,000 0.25
Commission - 27,500 27,500 0.25
Residential telephone bills 13,750 - 13,750 0.5
Balance (3:2) 577,366 384,910 962,276 1.5
811,116 412,410 1,223,526 1.5
Marks
Depreciation:
Rupees
Additions
Total for
Opening WDV on Net of Initial
Net WDV Additions normal Normal Total
WDV Disposal Initial Allowance
Depreciation
Allowance
Plant and
machinery 687,500 220,000 467,500 110,000 82,500 550,000 27,500 82,500 110,000 2.0
Vehicle 1,100,000 - 1,100,000 1,475,000 1,475,000 2,575,000 - 386,250 386,250 1.0
Furniture 220,000 27,500 192,500 19,250 19,250 211,750 - 31,763 31,763 1.5
528,013
Mr. Alam
Rupees
Chargeable Rent 660,000 0.25
Less: Deductions
- Property related expenses –
- Repairs expense – – 0.25
Income From Property 660,000
Share of AOP 811,116 0.25
Taxable Income for rate purpose [Share of AOP not considered as
separate block of income] 660,000
Tax Liability (20,000+(660,000-600,000) x10%) 26,000 0.5
Mr. Zaheer
Rupees
Basic Salary (165,000 x 12) 1,980,000 0.5
Bonus 270,500 0.25
Medical Allowance (74,250 x 12) 891,000 0.5
Less: Exempt upto 10% of basic salary (198,000) 693,000 1.0
Overtime (13,750 x 12) 165,000 0.5
Utility allowance (49,500 x 12) 594,000 0.5
Accommodation
45% of basic salary 891,000 0.5
Salary B 4,593,500 0.5
Tax Liability (597,000+(4,593,500-4,000,000) x 27.5%) A 760,213 0.5
Less: Tax Credit
On Investment in shares or life insurance policy:
A÷BxC
C= Lower of;
Amount of investment 450,000 0.25
20% of taxable income 918,700 0.5
Rs. 1,500,000 1,500,000 450,000 (74,474) 1.0
Tax Payable 685,739 0.5
Marks
Question No. 5
Mr. Saif
Computation of Sales Tax Payable/ (Refundable)
for the tax period June 2018
Rupees
Note
Output tax N-2 56,610,000 0.5
Less: Input tax
Lower of
- Actual, or N-3 46,663,035 0.5
- 90% of output 50,949,000 (46,663,035) 0.5
Sales tax liability 9,946,965 0.25
Less: Input tax on fixed asset (8,400,00) 0.25
Add: Further tax
- Unregistered suppliers (2%) 200,000 0.5
Sales Tax Payable 1,746,965 0.5
Sales Tax Refundable on zero rated supplies N-3 10,243,359 0.5
Notes:
N-1: Computation of Input tax:
Rupees
Amounts Tax Rate Input Tax
Input tax on other than fixed assets:
Taxable goods from registered persons 296,000,000 17% 50,320,000 0.5
Taxable goods from unregistered suppliers 92,500,000 - - 0.25
Input tax not claimed in May 2018 5,055,000 5,055,000 0.5
Purchases from suspended person 20,000,000 17% (3,400,000) 0.5
CREST discrepancy 11,700,000 17% (1,989,000) 0.5
Wires and fittings 22,590,000 17% (3,840,300) 0.5
46,145,700 0.5
Input tax on fixed assets:
Machine 70,000,000 17% 11,900,000 0.5
Input tax on commercial imports:
Commercial imports 82,880,000 17% 14,089,600 0.5
72,135,300 0.5
Marks
N-2: Computation of Output Tax:
Rupees
Tax
Amounts Output Tax
Rate
Taxable supplies – manufactured goods 212,000,000 17% 36,040,000 Taxable supplies 0.5
Taxable supplies – manufactured goods to
cottage industry 10,000,000 17% 1,700,000 Taxable supplies 0.5
Local sales of exempt manufactured goods 37,000,000 – – Exempt supplies 0.25
Zero-rated
55,500,000 0% –
Export sales – manufactured goods supplies 0.25
37,740,000 0.25
Taxable supplies – commercial imports 111,000,000 17% 18,870,000 0.5
N-3: Apportionment of Input Tax:
Rupees
Input Tax on other Input Tax on
Supplies
than Fixed Assets Fixed Assets
46,145,700 11,900,000 0.5
Taxable supplies 222,000,000 32,573,435 8,400,000 Adjustable 0.5
Zero-rated supplies 55,500,000 8,143,359 2,100,000 Refund 0.5
Exempt supplies 37,000,000 5,428,906 1,400,000 Lapsed 0.5
314,500,000
Question No. 6
(a) Liability for Registration under the Sales Tax Laws:
Person Liable
Category Reason
Name or Not
(i) Mr. Yousuf No – Agent not required to be registered 1.0
(ii) Mr. Ahsan Yes Manufacturer Manufacturer as doesn’t fall under cottage industry
and retailer due to taxable turnover exceeding Rs.10 million,
while retailer as supplying to general consumers. 1.0
(iii) Mr. Hashim Yes Retailer Supplying clothes to general consumers 1.0
(iv) Mr. Ashbal No – Not liable under the Sales Tax Act, 1990, however,
being service provider could be liable under the
Provincial Sales Tax. 1.0
(v) Mr. Shehzad Yes Wholesaler As, besides buying and selling his tax under income
tax is being withheld which meets the criteria of
being a wholesaler. 1.0
Marks
(b) (i) If the entire amount of tax due as indicated in the return is not paid, it shall be recovered
along with default surcharge by stopping removal of any goods from the business premises
and through attachment of his business bank account without giving him a show cause
notice. A penalty may be imposed after giving a show cause notice. 02
(ii) A return can be revised subject to following conditions: 03

If there is any omission or wrong statement
The approval for revision is sought from Commissioner Inland Revenue
The return is revised within 120 days from date of filing of return.
Yes, it would have been to the advantage of Ms. Zohra, if the return was revised before
receipt of audit notice as no penalty in this regard would have been charged. Whereas, only
the amount short paid and default surcharge would be paid.
THE END

17 Spring 2018 - BT SA

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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 1 of 9

BUSINESS TAXATION [G5] – GRADUATION LEVEL

(ii) Provision for bad debts: 02

(b) Employee Share Scheme: 08

(c) Diamond Enterprises

Share of Profit of AOP:

N-3: Apportionment of Input Tax:

(ii) A return can be revised subject to following conditions: 03

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