Certificate in Accounting and Finance Stage Examination

11 June 2022
3 hours – 100 Marks
Additional Reading Time – 15 Minutes

Teacher: Sir Farrukh Amjad

Tax Practices – Test 8 - Mid Term

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
(iii) Start new question on new page
(iv) Write page number on top of your answer scripts.

Q.1 (a) “Taxes are primary revenue yielding tools of the Government of modern ages”. Write any
four exceptions to this rule. (04)
(b)
Shami is a resident in Pakistan. During the tax year 2021, the only income accrued to and
received by Shami was Rs. 2,000,000 on account of a gratuity received from his employer,
Diamond Pesticides Ltd (‘DPL’). Shami has never received any other gratuity from any other
employer during his whole working life. He is not sure whether the gratuity fund of DPL was
approved or not.
Required:
What will be the tax liability of Shami assuming that the gratuity fund of Diamond Pesticides
Ltd was:
(i) Approved by the Commissioner Inland Revenue (‘CIR’) under the Sixth Schedule to
the Income Tax Ordinance, 2001 (‘Ordinance’). (02)
(ii) Approved by the Federal Board of Revenue (‘FBR’) for the purposes of the relevant
clause in the Second Schedule to the Ordinance. (03)
(iii) Neither approved by the CIR nor the FBR. (04)

Q.2 Briefly discuss the residential status of the following persons for the tax year 2021 under the
Income Tax Ordinance, 2001

▪ Mr. Shah Mehmood Qureshi has been working as an ambassador of Pakistan in Qatar.
On 1/11/2020 he was posted to Pakistan Embassy in Canada for three years.

▪ Extreme Commerce a leading ecommerce service provider in Pakistan providing

services in Pakistan, UAE and Malaysia. Up to 31st August 2020, the management and
control of its affairs was partly situated in Pakistan. However with effect from 1st
September 2020 the entire management and control of the affairs of the partnership was
shifted to Malaysia

▪ Mr. Donald trump was sent to Pakistan on a special assignment by his USA based
company on 1st March 2020. He left Pakistan on 9th September 2020. He visited Pakistan
for a period of 15 days during the last 4 tax years.

▪ Daniyal Trading LLC was incorporated as a limited liability company in Turkey. The
management and control of its affairs are situated wholly in Pakistan. (08)
Q.3 Mr. Darpok, a Pakistani citizen, returned to Pakistan on 30.6.2019 after residing for six years in
Norway. On 1.7.2019 he joined a private hospital KKUH and received the following
emoluments:

Rs.
Basic salary (per month) 500,000
Medical allowance (per month) 60,000
Leave fare assistance 240,000

On 1.1.2020 Mr. Darpok resigned from the hospital and joined Dil (Private) Ltd (DPL), a
company engaged in health care and production of dental products. Mr. Darpok received Rs.3,
000,000 from DPL as consideration for joining the company. DPL agreed to pay following
emoluments to Mr. Darpok for the tax year 2020:

Rs.
Basic salary (per month) 800,000
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000

On 1.1.2020 DPL provided him with refrigerator, cooking range and washing machine for his
use at home. The book value for these appliances was Rs.200,000 and these were returnable to
the company after four years. 15% depreciation was charged by DPL on these appliances.

On 31.3.2020 he was given an option to purchase 2,000 shares of DPL at Rs.50 per share. The
break up value of the company on that date was Rs.150 per share. Mr. Darpok did not exercise
this option till 30.6.2020.

On 1.4.2020 he received a loan of Rs.5,000,000 from DPL for the purchase of a house. The
profit on loan was payable @ 8% per annum. The prescribed bench mark rate is 10% per
annum.

Other information relevant to Mr. Darpok for the tax year 2020 is as under:

1. On 30.4.2020 he received salary arrears of Rs.900,000 from his ex-employer in

Norway.
2. On 15.6.2020 he received insurance claim of Rs.600,000 against theft of a
painting which was stolen on 31.5.2020. The painting was purchased by him on
1.1.2019 for Rs.350,000. He had paid insurance premium of Rs.24,000 and also
paid lawyer’s fee of Rs.50,000 who represented him in the settlement
proceedings.
3. On 15.7.2019 Mr. Darpok received 20,000 shares in AB (Private) Ltd (ABL), a
company incorporated under the Companies Act, 2017 as a dividend in specie.
On 30.6.2020 he sold 15,000 shares in ABL for Rs.425,000. The fair market
value of these shares, on the date of issue, was estimated at Rs.25 per share.

Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax
payable for the tax year 2020. Give brief reasons for the treatment of items in (ii) and (iii) above.
(20)

Q.4 Under the provisions of the Income tax ordinance,2001 and Rules made thereunder, discuss the
tax implications/ treatment in each of the following independent cases:

a) On 30th November 2020 Jamila, (non-filer) gifted a Rs. 100,000 through crossed cheque
and a gold necklace to her daughter Bhindi, who was visiting Pakistan on three months’
vacation after a period of five years. Jamila had bought necklace in 2017 for Rs. 325,000
 Bhindi sold the necklace on the same date at a jewelry shop for Rs. 475,000 (04)
b) Zinda-lash Limited wrote off a debt amounting to Rs. 600,000 in September 2016 after
making all possible efforts for the recovery of the debt. ZL was allowed a deduction of
Rs. 410,000 in tax year 2017. In tax year 2020 the case which was filed in the court, for
the recovery of the debt was decided in ZL’s favor. Now, ZL is expecting to recover any
of the following two amounts against the debt:
i. Recovers Rs. 240,000
ii. Recovers Rss. 160,000
(04)

c) On 1st September 2020 Snack Video Pvt Limited engaged in the business of spreading
positivity through its content. After a successful launch the management decided to give
a party to Dumdar Sitaray, but the management is confused how to claim the expenses
incurred on this party. Give the guidance to claim the entertainment expenditure.
(05)

d) On 1st September 2016 Mega Pvt. Limited engaged in the business of manufacturing
plastic bottles, had obtained a machinery on finance lease. For the year ended 30th
September 2019 MPL charged interest of Rs. 228,000 to the profit and loss account of
such finance lease. Total lease rental paid during the year amounted to Rs, 475,000. At
the end of the lease term which expired on 31st August 2019, the machinery was
transferred to MPL at a residual value of Rs. 764,000. The market value of the
machinery on the date of its transfer amounted to Rs. 868,000
(03)

Q.5 On 31st December 2021 Mr. Korona resigned from his employment with Vaccine Limited. In
January 2021 he received the following amounts in final settlement:
• Rs. 600,000 as unapproved gratuity
• Rs. 8,510,000 due to voluntary retirement
• Rs. 1,300,000 and Rs. 1,700,000 as salary arrears relating to tax year 2019 and 2020
respectively,
Mr. Korona had received a monthly salary of Rs. 500,000 from July 2021 to December 2021.
His taxable income and tax liability during the preceding four tax year were as under:
Tax year 2018 2019 2020 2021
Total Taxable Income 2,800,000 3,200,000 3,800,000 4,800,000
Total Tax paid 359,500 404,500 300,000 630,000
Required:
As a tax consultant advise Mr.Korona about the amount of income tax payable by him for the
tax year 2022 under the Income Tax Ordinance, 2001. (07)

Q.6 a) Discuss which assets are not considered as capital assets for the purpose of determining
the Income under the Head of Capital Gains. (03)
b) What do you understand by term “Security” and “Derivative products” as provided in
the I.T.O 2001 and rules made thereunder? (03)

Q.7 Miss Muteeba (Korean National) owns a five story residential complex in Dil Garden Housing
Society Lahore. She provides the details of that residential complex for the tax year 2021:
1) She rented the two floor of the building to her sister and her brother at a monthly rent of
Rs. 55,000 and Rs. 67,000 respectively. Whereas the FMV of these floors are Rs. 53,000
and Rs. 73,500 respectively.
2) She put a third floor of the building on sale, for which she received Rs. 700,000 as a
security deposit on 31st May 2021. The remaining payment will be made by 15th July
2021, but the party failed to pay the remaining amount so she confiscate the deposit.
3) She kept 4th Floor for her personal residence.
4) And 5th floor is used as a Storehouse for her boutique inventory. For which she is
charging Rs. 30,000 per month to her business. Meanwhile the FMV of that floor is
 equal to the rent charged.
5) In addition to the above property she borrowed Rs. 5 million from her friend Farrukh,
and out of these 5 million she paid 3.75 million to acquire a plot in Gwadar industrial
zone. And invest remaining amount in her business.
6) She rented the plot to her younger brother Azan on 1st November 2020 at the price of
Rs. 135,000 per month. She hired independent valuer for the annual valuation of her
plot for which she paid Rs. 13,000 and the valuer determined the annual value is Rs.
1,733,328.
7) She incurred repair charges on her building amounting to Rs. 450,000
8) She Pays Rs. 13,000 per month to a property dealer to collect the rent on the behalf of
her.
9) She received a loan in cash from Farrukh.

Required: Calculate the Income Chargeable to Tax and Income tax Payable (Also guide her
which option will be suitable for her) (12)

Q.8 (a) Pakistan Goods Limited (‘PGL’) currently uses a normal tax year of 12 months ending on 30
June each year. However, it has applied in writing to the Commissioner Inland Revenue for a
change of its normal tax year to a special tax year ending on 31 December each year.
Required:
(i) State on what basis Pakistan Goods Limited can be allowed a change to a special tax
year by the Commissioner Inland Revenue.
(ii) State whether it is mandatory for the Commissioner to give a personal hearing to the
applicant before passing an order either accepting or rejecting the request.
(iii) State whether the Commissioner can impose any conditions when allowing a change
in the tax year.
(iv) State from what date the order of change in the tax year will take effect.
(v) State whether permission, once granted, can be withdrawn by the Commissioner.
(05)

(b) Mr. Asad is currently involve in the business of Import and Export of Cutting Tools. He
involved in the following transactions during the whole month of March 2020:
(i) Exports amount to Rs. 25,000,000 was contracted in March 2020. The amount of
Rs.5,000,000 was received as an advance in March 2020 and the remaining amount will
be received in the month in which the consignment will be received (May 2020) by 3 rd
party. Mr. Asad has paid the Tax on advance and as well as on the remaining amount as
a receivable but he is in confusion about his taxability in May 2020 when he will
actually receive the remaining balance.
(ii) Mr. Asad was entered into a contract of Importing the Manufacturing Plant of Cutting
Disc-672 of Rs. 33,000,000 with a Malaysian party. He had to purchase a special
machinery for Rs. 6,250,000 to put the Plant in Specific place and also had to hire the
Specialists (@ Rs. 1,650,000) to install the plant. Depreciation rate of Machinery is 15%.
He claimed the above expenditures on payable basis and also want to claim the same
expenditures on paid basis.

He has no knowledge of Taxation Rules in Pakistan and therefore wants you to advise him
about his taxability. As a Tax Consultant advise him about his taxability for the Month of May.
(05)

(c) Aleena has been an employee of Mansha Ltd (ML), a public listed company since 1 July
2016. In the tax year 2021 her monthly salary was Rs. 400,000, but to date she has been paid her
salary for 11 months only, as her salary for June 2021 has not yet been paid. ML has also paid
income tax of Rs. 600,000 on the salary paid to Aleena in the tax year 2021.
On 1 July 2020, ML gave Aleena a loan of Rs. 8,000,000 at a profit of 2% per annum. She
utilized this loan to acquire a new house. At the time of the acquisition of the house, Rs.
100,000 was collected as income tax by the house registering authority.
Required:
(i) State, giving reasons, whether the salary receivable by Aleena for the month of June
2021 is or is not taxable in the tax year 2021. (03)
(ii) State the permissible limit for the deduction allowed for the profit paid on a debt
obtained for the acquisition of a house and whether or not it is possible for any excess to
be carried forward to a subsequent tax year. (03)

(The End)