Fundamentals Level Skills Module

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Tax rates and allowances are on pages 23.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
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Taxation
(Pakistan)
Tuesday 3 December 2013
The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest rupee.
2. All apportionments should be made to the nearest month except where the exact number of days is given in the
question.
3. All workings should be shown.
TAX RATES AND ALLOWANCES
The following tax rates and allowances for the tax year 2013 are to be used in answering all questions on this
paper.
A. Tax rates for salaried individuals where salary income exceeds 50% of taxable income
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 5% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 17,500 plus 10% of the amount exceeding Rs. 750,000
Rs. 1,500,001 Rs. 2,000,000 Rs. 95,000 plus 15% of the amount exceeding Rs. 1,500,000
Rs. 2,000,001 Rs. 2,500,000 Rs. 175,000 plus 175% of the amount exceeding Rs. 2,000,000
Rs. 2,500,001 and above Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000
B. Tax rates for associations of persons and non-salaried individuals to whom the rates given in A are not applicable
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 10% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 35,000 plus 15% of the amount exceeding Rs. 750,000
Rs. 1,500,001 Rs. 2,500,000 Rs. 147,500 plus 20% of the amount exceeding Rs. 1,500,000
Rs. 2,500,001 and above Rs. 347,500 plus 25% of the amount exceeding Rs. 2,500,000
C. Tax rates for companies
Small company 25% of taxable income
Public company/private company 35% of taxable income
D. Tax rates on capital gains on the disposal of securities
Where the holding period of a security is
less than six months 10%
more than six months but less than 12 months 8%
12 months or more 0%
E. Tax rates on capital gains on the disposal of immovable properties
Where the holding period of immovable property is
up to one year 10%
more than one year but not more than two years 5%
2
F. Tax rates for income from property
(i) For individuals and associations of persons
Up to Rs. 150,000 0%
Rs. 150,001 to Rs. 400,000 5% of the gross amount exceeding Rs. 150,000
Rs. 400,001 to Rs. 1,000,000 Rs. 12,500 plus 75% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 57,500 plus 10% of the gross amount exceeding
Rs. 1,000,000
(ii) For companies
Up to Rs. 400,000 5% of the gross amount
Rs. 400,001 to Rs. 1,000,000 Rs. 20,000 plus 75% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 65,000 plus 10% of the gross amount exceeding
Rs. 1,000,000
G. Other tax rates
On dividends received from a company 10%
H. Rates of deduction/collection of tax at source
Sale of goods (general rate) 35%
Sale of immovable property 05%
Services (other than transport) 6%
Contracts 6%
Commission or brokerage 10%
Profit on debt 10%
Import of goods (general rate) 5%
I. Depreciation rates
Buildings (all types) 10%
Furniture and fittings 15%
Plant and machinery (not otherwise specified) 15% of the tax written down value
Motor vehicles (all types) 15%
Computer hardware 30%
}
J. Initial allowance
Eligible depreciable assets other than buildings 50% of cost
Eligible buildings 25% of cost
K. Pre-commencement expenditure
Amortisation rate for pre-commencement expenditure 20%
L. Benchmark rate
Interest free loans to employees 10% per annum
3 [P.T.O.
This is a blank page.
Question 1 begins on page 5.
4
ALL FIVE questions are compulsory and MUST be attempted
1 For the purpose of this question, you should assume that todays date is 15 July 2013.
Faisal Industries Limited (FIL) is an unlisted company incorporated under the Companies Ordinance, 1984. The
company has 1,000 employees. The goods manufactured by FIL are exempt from sales tax. The company prepares
its financial statements to 30 June each year.
The following are the audited financial results for the year ended 30 June 2013:
Note Rs.
Sales 1 110,000,000
Cost of sales 2 (62,000,000)

Gross profit 48,000,000

Administrative expenses 3 (15,000,000)

Distribution and selling costs 4 (13,000,000)
Other operating expenses 5 (10,000,000)
Other operating income 6 5,000,000

(33,000,000)

Profit/(loss) from operations 15,000,000

Finance cost 7 (4,000,000)

Net profit 11,000,000

Unless stated otherwise, FIL paid for all the expenditure through crossed cheques and tax was deducted and deposited
by FIL as required under the law.
Notes
Note 1
Sales include goods, having a fair market value of Rs. 700,000, which were sold for Rs. 500,000 to an associate of
FIL.
Note 2
Cost of sales
Rs.
Stock consumed (i) 52,000,000
Freight inwards (ii) 1,000,000
Depreciation 2,000,000
Other (iii) 7,000,000

62,000,000

Sub-notes to note 2:
(i) Stock consumed has been computed as follows:
Rs.
Opening stock 18,000,000
Purchases 66,000,000
Closing stock (a) (32,000,000)

52,000,000

(a) The net realisable value of the closing stock is Rs. 40,000,000 against its cost of Rs. 35,000,000.
5 [P.T.O.
(ii) The freight inwards was all paid in cash.
(iii) This includes an amount of Rs. 1,500,000 paid to a French company as consideration for a non-exclusive,
non-transferable right for the production of an item for a period of 15 years. Production of the item started on
1 July 2012.
Note 3
Administrative expenses include the following:
Salaries of four employees for six months at Rs. 20,000 per employee per month paid in cash;
Rs. 600,000 paid as wages to a personal servant of a director of the company;
Rs. 500,000 paid for the valuation of the assets of another company which FIL intended to acquire;
Rs. 100,000 depreciation allowance on fixed assets acquired under a finance lease;
Rs. 1,000,000 paid as rent for an office for two years from 1 July 2012;
Rs. 45,000 paid as a penalty imposed by the Commissioner for late filing of the annual return of income for the
tax year 2012; and
Rs. 50,000 donated to a political party which is a staunch supporter of lower taxation for the corporate sector.
Note 4
Distribution and selling costs include the following:
Rs. 500,000 paid to an employee as a reward for achieving his high sales target. As this was a one-off payment,
no tax was withheld by FIL from the reward.
Rs. 700,000 spent on a visitors room for the customers of the company as detailed below:
Rs.
Extension of the visitors room 325,000
Installation of new air conditioners 275,000
Decoration items with a useful life of one year 100,000

700,000

Note 5
Other operating expenses include the following:
Rs. 110,000 written off as irrecoverable during the year ended 30 June 2013. The amount had been given to
one of FILs clients as a loan a year earlier.
Rs. 50,000 paid as motor vehicle tax on the companys vehicles.
Rs. 150,000 given as a scholarship to Mr Shafique, a citizen of Pakistan, for his technical training in connection
with a scheme approved by the Federal Board of Revenue under the relevant provision of the law. Shafique is
not an employee of FIL.
Note 6
Other operating income includes a gain of Rs. 200,000 accrued on the sale of some antique furniture.
Note 7
The finance cost includes:
Rs. 50,000 as a provision for bad debts computed at 1% of the trade debtors outstanding on 30 June 2013.
Rs. 700,000 [Rs. 600,000 as the principal cost and Rs. 100,000 as finance charges] paid to an approved
modaraba in respect of plant and machinery taken on a finance lease on 1 January 2013.
6
Note 8
Other information
(i) Schedule of own fixed assets as per tax record
Assets Tax written down Addition at cost
value as on 1 July 2012 during the year
Rs. Rs.
Freehold land 10,000,000
Building on freehold land 5,000,000 1,000,000
Plant, machinery and equipment 12,000,000 200,000 [see note (a)]
Computers 1,825,000 1,000,000 [see note (b)]
Furniture and fittings 6,000,000 [see note (c)]
Motor vehicles 7,000,000 2,400,000 [see note (d)]
Sub-notes to note 8(i):
(a) A machine having a residual value of Rs. 50,000 was transferred from the category of assets taken on
finance lease to own fixed assets on the maturity of the finance lease term. The transfer was made at the
book value of Rs. 200,000.
(b) Includes a new computer purchased for Rs. 300,000 on 20 June 2013 for which installation could not be
made until 15 July 2013.
(c) Within furniture and fittings, antique furniture having a tax written down value (TWDV) of Rs. 300,000 on
1 July 2012 was sold for Rs. 800,000 on 30 June 2013 [refer to note 6].
(d) Represents the cost of an office car.
(e) Plant and machinery of Rs. 2,500,000 taken on a finance lease on 1 January 2013 is not included in the
above schedule of fixed assets [refer to note 7].
(ii) Tax paid by or collected from FIL during the year ended 30 June 2013 was:
Rs.
Income tax deducted from payments received for the supply of goods 45,000
Income tax paid along with electricity bills 800,000
Advance tax paid in cash in four equal instalments on the due dates 4,000,000
(iii) Goodluck Ltd, a public listed company, failed to deduct tax of Rs. 50,000 from payments it made to FIL on
account of a supply of goods made by FIL.
Required:
(a) Compute the taxable income of Faisal Industries Ltd (FIL) for the tax year 2013, giving clear explanations
for the inclusion or exclusion of each of the items listed in the notes.
Note: The reasons/explanations for the items not listed in the computation of taxable income should be shown
separately. Specific marks are allocated for this part of the requirement. (26 marks)
(b) Calculate the tax payable by/refundable to FIL for the tax year 2013 on the basis of taxable income computed
in part (a).
Note: Ignore workers welfare fund and the minimum tax provisions. (2 marks)
(c) (i) State, giving reasons, whether the Commissioner of Inland Revenue (CIR) can recover the tax of
Rs. 50,000 from Goodluck Ltd which it failed to deduct from FIL, after FIL has filed its return of income
and paid the tax due on the declared income. (1 mark)
(ii) State from which company the CIR will recover the default surcharge on account of the non-deduction
of tax referred to in (i) above, together with the period of default.
Note: No calculations are required in this part of the question. (1 mark)
(30 marks)
7 [P.T.O.
2 For the purpose of this question, you should assume that todays date is 15 July 2013.
Dr Ali, aged 48, a citizen of Pakistan, returned to Pakistan on 1 May 2012 after spending ten years in Dubai. He
started his medical practice in Karachi on 1 July 2012. He has adopted accrual based accounting for computing his
taxable income on a regular basis and has calculated his net income for the year ended 30 June 2013 as follows:
Receipts
Note Rs. Rs.
Fees for treatment of patients at the clinic 2,500,000
Fees for treatment of patients at their homes 900,000

3,400,000
Expenses
Rent of clinic 1 120,000
Salaries paid to staff 2 650,000
Purchase of car 1,200,000
Car running expenses 3 180,000
Utility bills paid in cash 75,000
Advance income tax 25,000
Communication expenses 4 80,000
Medicines used 5 850,000
Fees paid to the Pakistan Medical Association (PMA) 6 90,000
Fine paid for violation of Electricity Rules, 1937 50,000

(3,320,000)

Net profit 80,000

All the payments were made through crossed cheques drawn on a scheduled bank unless stated otherwise, but no
tax has been deducted from any of the payments made.
Notes:
Note 1
Of the rent of Rs. 120,000, an amount of Rs. 60,000 was paid in cash in accordance with the terms of the rental
agreement. The expense was otherwise fully verifiable.
Note 2
Salaries paid comprised:
Rs. 575,000 to a nurse; and
Rs. 75,000 to an office boy as advance salary for six months starting from 1 January 2013.
Note 3
It is estimated that one-third of the usage of the car was for personal reasons without any business connection.
Note 4
Communication expenses comprised:
Rs. 40,000 incurred for the purchase of a second-hand mobile phone set, this payment was made in cash; and
Rs. 40,000 paid as mobile phone call bills, inclusive of advance income tax at Rs. 4,000.
It is fairly estimated that half of the calls were made for non-business reasons.
Note 5
Medicines used include the cost of expired medicines of Rs. 50,000, which were destroyed on 30 June 2013.
Note 6
The fees were paid on 1 July 2012 and were for a period of five years.
8
Note 7
Other information:
(i) Dr Ali has received Rs. 250,000 as his 50% share of profit from an association of persons (AOP) in Pakistan.
The AOP is engaged in the business of the import and sale of surgical goods without any value addition. Tax of
Rs. 50,000 deducted at the import stage constituted the AOPs final tax liability.
(ii) During the tax year 2013, Dr Ali also received Rs. 450,000 as salary pertaining to the previous tax year 2012
from his ex-employer in Dubai.
(iii) Dr Alis bank statement shows that a gross amount of Rs. 100,000 was credited to his account on 30 June
2013. The bank deducted Rs. 5,000 as Zakat along with income tax at the specified rate.
(iv) Dr Ali is the owner of two acres of agricultural land situated in the province of Sindh. During the tax year 2013,
he received Rs. 40,000 as rent for this land from his tenant whereas a fair market rent of such land would have
been Rs. 60,000.
(v) Rs. 5,000 was collected as income tax along with the electricity bills paid by Dr Ali.
Required:
(a) Compute Dr Alis taxable income, the income assessable under the final tax regime and his total tax payable
for the tax year 2013. Give reasons for the treatment of any items excluded from the taxable income or for
which no expense/deduction is allowed. (20 marks)
(b) State the type of mistakes found in an assessment order which can be rectified by the Commissioner under
the Income Tax Ordinance, 2001 and the situation(s) in which a taxpayer must be given an opportunity of
being heard by the Commissioner before he can make a rectification order. (2 marks)
(c) State the time limit in which an appeal can be filed before the Commissioner (Appeals) against a rectification
order and the maximum period for which the Commissioner (Appeals) can stay the recovery of a tax demand
contested in the appeal. (3 marks)
(25 marks)
9 [P.T.O.
3 For the purpose of this question, you should assume that todays date is 15 July 2013.
Mr Ilyas, aged 50 and resident in Pakistan, disposed of the following assets during the year ended 30 June 2013:
Immovable assets
(1) 5 July 2012: Sold his house in Lahore for Rs. 30,000,000. He had bought the house on 5 December 2011 for
Rs. 20,000,000, incurring the following expenses:
stamp duty at 2% of the purchase price;
capital value tax at 2% of the purchase price;
brokers fee at 2% of the purchase price; and
corporation tax at 1% of the purchase price.
During his ownership of the house, Ilyas incurred the following expenses:
Rs. 300,000 on the modification of the drawing room to give it a modern look; and
Rs. 25,000 as property tax.
Further payments made at the time of the sale of the house were:
brokers fee at 2% of the sale price;
income tax at 05% of the sale price at the time of the transfer of the house to the buyer.
(2) 30 September 2012: The government of Punjab compulsorily acquired his land under the Land Acquisition Act,
1894 and paid him Rs. 30,000,000. He had purchased the land for Rs. 25,000,000 on 1 January 2011. On
7 October 2012, he invested the whole amount of the consideration received in a ten-year fixed term deposit
account with the National Bank of Pakistan. The profit on the deposit will become due to Ilyas at the time of
maturity of the term.
(3) 1 January 2013: Ilyas entered into a contract for the sale of his house in Islamabad with Mr Sohail for a
consideration of Rs. 50,000,000. Sohail paid Rs. 5,000,000 at the time of the contract for sale. However, he
failed to pay the balance of the amount by 30 April 2013 and Ilyas forfeited the Rs. 5,000,000 in accordance
with the terms of the contract. Subsequently, the house was sold for Rs. 49,000,000 to Mr Mumtaz on 30 June
2013. Ilyas had inherited the house on 25 June 2010, on which date the fair market value of the house was
estimated at Rs. 39,000,000.
Movable assets
(1) 15 July 2012: Sold 2,500 shares in Pakistan Petroleum Ltd, a company listed on the Karachi Stock Exchange,
for Rs. 500,000. He had purchased these shares on 15 September 2011 for Rs. 350,000. No tax was withheld
at source on this transaction.
(2) 30 August 2012: Gifted a painting, having a market value of Rs. 1,000,000, to his brother, a citizen of Germany,
and who had lived in Germany for the last ten years. In 2012 the brother visited Pakistan for a period of
180 days, flying back to Germany again on 30 August 2012. Ilyas had bought the painting for Rs. 500,000 on
1 January 1990.
(3) 15 September 2012: Gifted jewellery, having a fair market value of Rs. 1,500,000, to his sister who is an
employee of the Federal Government and has been posted in Saudi Arabia since 1 June 2010. Ilyas had bought
this jewellery on 1 September 2011 for Rs. 500,000.
(4) 14 December 2012: Sold 10,000 shares in Interwood (Pvt) Ltd for Rs. 300,000. He had acquired these shares
as follows:
5,000 shares were purchased at Rs. 18 per share on 5 February 2010.
5,000 bonus shares were allotted to him on 1 July 2010 when the fair market value was Rs. 22 per share.
Incidental charges relating to the purchase and sale of these shares of Rs. 10,000 were paid in cash.
(5) 15 February 2013: Discarded a machine which he had imported from China for Rs. 1,000,000 on 1 January
2013 to start the business. However, the machine was badly damaged during the shipment, rendering it unfit
for use. The shipping company paid him Rs. 850,000 as damages. The scrap value of the machine on the date
it was discarded was estimated to be Rs. 200,000. The documentation charges incurred in connection with the
claim for damages were Rs. 25,000.
10
(6) 15 April 2013: Sold 50,000 shares in Delta (Pvt) Ltd for Rs. 450,000. The shares were originally purchased
for Rs. 550,000 on 15 May 2009. On 30 June 2012, Ilyas had made a provision for diminution in the value
of the shares of Rs. 125,000.
Other information:
(i) Unless stated otherwise, Ilyas paid all the amounts through crossed cheques and tax was deducted and deposited
as required under the law.
(ii) Ilyas has a brought forward capital loss of Rs. 700,000 from the tax year 2011 which had arisen on account of
a sale of shares in Pakistan Petroleum Ltd.
(iii) Advance tax of Rs. 25,000 has been deducted on his cash withdrawals from the bank during the tax year 2013.
(iv) Advance tax of Rs. 50,000 has been paid by Ilyas on the basis of his tax liability for the tax year 2012.
Required:
Compute the tax payable by Mr Ilyas for the tax year 2013 on the taxable income arising from the above
transactions. Give brief reasons for your treatment of each item.
(20 marks)
11 [P.T.O.
4 (a) Mr Muddasir has had an appeal pending before the Appellate Tribunal for a long time. He is thinking about
seeking relief through the alternative dispute resolution (ADR) mechanism provided in the law and seeks your
opinion on some aspects relating to the ADR mechanism.
Required:
Advise Mr Muddasir on the following:
(i) In which two situations a taxpayer CANNOT apply to the Federal Board of Revenue (the Board) for the
appointment of a committee for the resolution of a dispute under the alternative dispute resolution (ADR)
mechanism. (2 marks)
(ii) The persons eligible to be appointed by the Board as members of the resolution committee. (2 marks)
(iii) Whether, if he is not satisfied with the final orders of the Board, he can continue to pursue his remedy
before the Appellate Tribunal. (1 mark)
(b) In the case of each of the following, state the last date of filing of the return of income as provided under
s.118 of the Income Tax Ordinance, 2001:
(i) Bryonia Laboratories (Pvt) Ltd, a manufacturer of medicines, for the tax year ended on 31 March 2012.
(ii) Silk Bank Ltd, a banking company, for the tax year ended on 31 December 2012.
(iii) Ms Mehwish, a salaried person, filing her return through the e-portal for the tax year ended on 30 June
2013.
(iv) Mr Osmani, a property dealer, for the tax year ended on 28 February 2013.
Note: Ignore any extensions given by the Board or the government in any of the above categories of cases.
Note: The total marks will be split equally between each part. (4 marks)
(c) State the grounds on which an individual taxpayer can apply for an extension of time for furnishing his/her
return of income; by when such an application must be made and how many days extension the
Commissioner can grant in normal circumstances. (3 marks)
(d) Mr Adeel purchased a luxury car having a market value of Rs. 3,000,000 on 1 January 2013. The
Commissioner of Inland Revenue (the CIR) served a notice on Adeel requiring him to file his return for the tax
year 2013 but Adeel failed to comply with the terms of the notice.
Required:
Given the circumstances:
(i) State the type of assessment order which the Commissioner of Inland Revenue (CIR) will issue and the
basis on which that assessment order will be framed.
(ii) State after how many days from serving the assessment order in (i) on Adeel, the CIR can take coercive
measures to recover tax from him.
(iii) State the steps Adeel will need to take for the assessment order served on him to be abated without
filing an appeal.
Note: The total marks will be split equally between each part. (3 marks)
(15 marks)
12
5 (a) List the persons who are required to be registered for sales tax under the Sales Tax Act, 1990. (7 marks)
(b) Ms Mehr filed her sales tax return for April 2013 on 15 May 2013. She has now discovered that, due to an error,
taxable supplies of Rs. 500,000 had not been declared in the original return. Although no notice of audit has
yet been received from the Commissioner Inland Revenue, Ms Mehr wishes to revise the return immediately and
pay the due amount of tax.
Required:
(i) State whether Ms Mehr can revise the return without seeking the permission of the Commissioner of
Inland Revenue (CIR).
(ii) State whether Ms Mehr will be liable to pay the full amount of default surcharge or if there is any
concession in this regard.
(iii) State whether the CIR can recover any penalty from Ms Mehr for this default, and if so, of how much.
Note: No computations are required.
Note: The total marks will be split equally between each part. (3 marks)
(10 marks)
End of Question Paper
13
Answers
Fundamentals Level Skills Module, Paper F6 (PKN) December 2013 Answers
Taxation (Pakistan) and Marking Scheme
Notes:
1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Candidates were
not expected to produce answers with this extensive detail, which would not be possible in a three hour exam.
2. All references to legislation shown in square brackets are for information only and do not form part of the answer expected from
candidates.
Marks
1 Faisal Industries Limited (FIL)
(a) Taxable income for the tax year 2013 (accounting year ended 30 June 2013)
Note Rs. Rs.
Income from business
Net profit as per income statement 11,000,000 05
Add:
Adjustment in the sales value of goods sold to an associate (1) 200,000 10
Adjustment in the value of closing stock (2) 3,000,000 10
Accounting deprecation in the cost of sales (3) 2,000,000 05
Payment made to a French company (4) 1,500,000 05
Salaries paid in cash (5) 480,000 10
Wages of a personal servant of a director (6) 600,000 10
Expenses relating to the acquisition of another company (7) 500,000 10
Depreciation on fixed assets taken under a finance lease (3) 100,000 05
Rent paid in advance (8) 500,000 05
Penalty imposed for late filing of return (9) 45,000 10
Donation to a political party (10) 50,000 05
Payment of reward without tax deduction (11) 500,000 10
Capital expenditure on the visitors room (12) 600,000 10
Loan written off (13) 110,000 10
Taxable profit on the sale of furniture (14) 500,000 05
Provision for bad debts (15) 50,000 10

10,735,000
Less:
Amortisation of intangible (4) 150,000 15
Accounting profit on the sale of furniture (14) 200,000 05
Initial allowance (16) 737,500 15
Tax depreciation (16) 5,353,125 40

(6,440,625)

Income from business/taxable income 15,294,375

Items not included in the computation of taxable income

(i) Freight inwards paid in cash Rs. 1,000,000
Freight charges are not rendered inadmissible merely on the basis that they have been paid in cash.
[2nd proviso to s.21(l)] 10
(ii) Decoration items Rs. 100,000
Since the useful life of the decoration items was estimated to be one year only, it is admissible as
revenue expenditure. [s.20(2)] 10
(iii) Motor vehicle tax Rs. 50,000
Motor vehicle tax is for the purposes of business and revenue in nature. Further, it does not fall in the
list of inadmissible deductions. [s.20(1) read with s.21(a)] 10
(iv) Scholarship granted to a Pakistani citizen Rs. 150,000
Since the scholarship has been granted to a Pakistani citizen for his technical training under a scheme
approved by the Federal Board of Revenue, the expenditure is admissible. The beneficiary of the
scholarship does not need to be an employee of the taxpayer. [s.27(c)] 10
17
Marks
(v) Lease rentals paid to an approved modaraba Rs. 700,000
A lease rental comprises the principal amount and finance charges. Since the plant and machinery were
taken on a finance lease from an approved modaraba, the lease rentals paid are fully admissible.
[s.28(1)(b)] 10

26

Notes
Note 1
The price charged to the associate was below the market value of the goods by Rs. 200,000. The sales are,
therefore, enhanced by this amount to reflect the correct value as if it were an arms length transaction. [ss.68
and 108]
Note 2
The closing value of stock-in-trade for a tax year can be the lower of cost [Rs. 35,000,000] or net realisable
value [Rs. 40,000,000] of the stock-in-trade on hand at the end of the year. It cannot be lower than both
of these values. The amount of Rs. 3,000,000 is, therefore, added back to income to make the value of the
closing stock equal to cost. [s.35(4)]
Note 3
Accounting depreciation is not a deductible charge. Tax depreciation and initial allowance are deductible at
the rates prescribed in the Third Schedule and subject to the conditions mentioned in the relevant provisions
[ss.22 and 23] of the Ordinance.
Note 4
The non-exclusive, non-transferable right for the production of an item is defined as an intangible in the
Income Tax Ordinance, 2001. The full cost of an intangible is not allowed as a deduction in any single tax
year. It is to be amortised over the useful life of the intangible. An intangible asset with a normal useful life
of more than ten years shall be treated as if it had a normal useful life of ten years. [s.24(4)(a)] The amount
to be amortised is computed below:
Cost of the intangible Rs. 1,500,000
Actual useful life 15 years
Deemed to have useful life 10 years
Amortised cost chargeable this year 1,500,000/10 = Rs. 150,000
[s.24(3) and (11)]
Note 5
Since the monthly salary of each employee is above the maximum amount which can be paid in cash [i.e.
Rs. 15,000 per month], the amount is disallowed in full at Rs. 480,000 (20,000 x 6 x 4). [s.21(m)]
Note 6
Wages of Rs. 600,000 paid to a personal servant of a director of FIL are not for the purposes of business
carried on by FIL. It is, therefore, not allowed as an expense. [s.20(1) and s.21(h)]
Note 7
Expenses incurred at Rs. 500,000 relate to the acquisition of another company. The expense, therefore,
being capital in nature, is disallowed. [s.21(n)]
Note 8
Since half the amount of the rent paid relates to the next tax year, it is disallowed at Rs. 500,000. [s.34(1)
and (3)]
Note 9
A penalty of Rs. 45,000 paid for the late filing of a return of income is an inadmissible expense on either of
the following two grounds:
(a) A penalty for the late filing of a return of income is included in tax as defined in the Income Tax
Ordinance, 2001 (the Ordinance). Tax is an inadmissible deduction under the law. [s.21(a)]
(b) It was imposed for violation of the provisions of the Ordinance, hence not admissible. [s.21(g)]
Note 10
Donation of Rs. 50,000 made to a political party is not an allowable expense because it was not for the
purposes of business. The fiscal ideology of a political party is irrelevant in determining the admissibility of
an expense. Further, a donation paid to a political party does not qualify for any tax credit. [s.20(1) and s.61]
18
Marks
Note 11
Any amount paid in connection with employment falls in the definition of salary. Since no tax was deducted
from the taxable salary of the employee, it became an inadmissible expense. [s.21(c)]
Note 12
Expenditure of Rs. 325,000 for an extension of the visitors room and Rs.275,000 for the installation of new
air conditioners are capital expenditure and not allowable as a deduction. However, tax depreciation and
initial allowance will be admissible as per law. [s.21(n)]
Note 13
Since FIL is not a financial institution carrying on a business of lending money, the amount of the loan written
off as a bad debt is not allowable as a deduction. For non-financial institutions, only those amounts which
first had been offered for tax are eligible for deduction as bad debts, when they are written off as irrecoverable.
[s.29(1)(a)]
Note 14
An accounting loss or profit resulting from the disposal of an asset is tax neutral. Therefore, to nullify its effect,
the amount of the accounting profit of Rs. 200,000 is reduced from the total income and the excess of the
sale proceeds over the tax written down value of the furniture is added back at Rs. 500,000. [s.22(8)(a)]
Note 15
Provision for bad debts at Rs. 50,000 has been made on an estimated basis and does not satisfy the
conditions of:
written off in the accounts; and
existence of reasonable grounds for believing that the debt is irrecoverable.
The provision is, therefore, added back to the total income of the taxpayer. [s.29(1)(b) and (c)]
Note 16
Initial allowance and tax depreciation:
Asset TWDV on Addition/ Initial TWDV Rate of Depreciation
1 July 2012 (deletion) allowance for depreciation
during the depreciation
year
(1) (2) (3) (4) 5 = (2 + 3) (6) (7)
(4)
Rs. Rs. Rs. Rs.
Freehold land 10,000,000
Building on
freehold land 5,000,000 1,000,000 250,000 5,750,000 10% 575,000
(see (a))
325,000 325,000 10% 32,500
(see (b))
Plant, machinery
and equipment 12,000,000 50,000 12,050,000 15% 1,807,500
(see (c))
275,000 137,500 137,500 15% 20,625
(see (d))
Computers 1,825,000 700,000 350,000 2,175,000 30% 652,500
(see (e))
Furniture and fittings 6,000,000 (300,000) 5,700,000 15% 855,000
Motor vehicles 7,000,000 2,400,000 9,400,000 15% 1,410,000

Total 737,500 5,353,125

[s.22 and 23 read with 3rd Sch]
Sub-notes to note 16
(a) The rate of initial allowance on new buildings used for business during the tax year is 25%.
(b) The addition represents an extension of an existing room for visitors. Hence no initial allowance is
admissible. However, depreciation is admissible on such an addition.
(c) The machine already in use by the taxpayer under the finance lease was transferred at its residual value
[Rs. 50,000] at the maturity of the finance lease term. Tax depreciation is allowable at 15% of the
residual value and not on the book value of Rs. 200,000. [s.22 read with ss.76 and 77(4)]
19
Marks
(d) The amount represents new air conditioners installed and used during the tax year and eligible for
depreciation and initial allowance at 50% of the cost. [s.23]
(e) Although computers of Rs. 1,000,000 were purchased during the year, a computer costing
Rs. 300,000 was not put to use during the year ended 30 June 2013, hence is not entitled to any
capital allowance.
(b) Tax liability for the tax year 2013
Rs. Rs.
Taxable income for the tax year 2013 (from (a)) 15,294,375

Since the company does not fall within the definition of small company,
tax is charged at 35% 5,353,031 05
Less: Tax already paid
Tax deducted on payments received for the supply of goods
[Proviso to s.153(3)] 45,000 05
Tax collected along with electricity bills [ss.168 and 235] 800,000 05
Advance tax paid in cash [s.147] 4,000,000 05

(4,845,000)

Tax payable with return [s.137] 508,031

20

(c) (i) The Commissioner of Inland Revenue (CIR) cannot recover the principal amount of tax from the
withholding agent, if in the meanwhile it has been paid by the person from whom it was originally
deductible. Hence, the CIR cannot recover the amount in question from Goodluck Ltd. 10

(ii) The CIR can only recover the amount of default surcharge from Goodluck Ltd and not from FIL. The
period of default starts from the date the deducted tax amount was payable to the date it was paid
by FIL. 10

30

20
Marks
2 (a) Dr Ali
Taxable income and tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Note Rs. Rs.
Income under normal law
Net income as per income statement 80,000 05
Add:
Rent of the clinic (1) 60,000 10
Salary paid to nurse (2) 575,000 10
Purchase of car (3) 1,200,000 05
Expenses relating to personal use car (4) 60,000 10
Advance income tax paid (5) 25,000 05
Communication expenses (6) 62,000 15
Pre-paid fees to PMA (7) 72,000 10
Fine for violation of electricity rules (8) 50,000 10

2,104,000
Less:
Depreciation on car (3) 120,000 10
Depreciation on cell phone (6(i)) 3,000 10

(123,000)

Income from business 2,061,000

Tax on taxable income under the normal law

Tax on income from business
On first Rs. 1,500,000 147,500
On remainder of Rs. 561,000 at 20% 112,200 259,700 05

Tax on income under the final tax regime (FTR)

Tax on profit on debt (9) 9,500 15

Total tax payable 269,200

Less: Tax paid or deducted/collected by withholding agents

Tax deducted on profit for debt (9) 9,500 05
Tax collected with electricity bills [s.235] 5,000 05
Tax collected with mobile phone bills [s.236] 4,000 05
Advance tax paid by Ali [s.147] 25,000 05

(43,500)

Tax payable with return [s.137] 225,700

Explanation of items not included in the computation of taxable income

(i) Salary paid to office boy Rs. 75,000
If the monthly salary of an employee does not exceed Rs. 15,000, its payment in cash does not render
it inadmissible. Since the monthly salary of the office boy was Rs. 12,500 (75,000/6), the full amount
is admissible. [s.21(m)] 10
(ii) Utility bills paid in cash Rs. 75,000
When otherwise admissible, the utility bills do not become inadmissible on account of being paid in
cash. [para (b)(i) of proviso to s.21(l)] 10
(iii) Destruction of expired medicines Rs. 50,000
Destruction of expired medicines is incidental to the medical practice and allowable as a deduction.
[s.20 and general principles of taxation] 10
(iv) Share from association of persons (AOP) Rs. 250,000
Where income from an AOP is assessable under the normal law, the share of profit from such an AOP
is added to the income of the individual member when determining the rate of tax to be applied to his
other taxable income. However, where the income from the AOP is taxable under the final tax regime
(FTR), the share of profit is neither liable to be further taxed nor added when determining the rate of
tax for other taxable income. Since the total income of the AOP is covered under the FTR, it does not
need to be further added to the income of Ali. [s.169(2)(a)] 10
21
Marks
(v) Income from ex-employer in Dubai Rs. 450,000
Dr Ali was not resident in Pakistan in any of the four tax years preceding the tax year 2013. Therefore,
his foreign-source income during the tax years 2013 and 2014 will be exempt from tax in Pakistan.
[s.51(1)] 10
(vi) Agricultural income Rs. 40,000
Rent received from land which is situated in Pakistan and is used for agricultural purposes is treated as
agricultural income and exempt from income tax under the Ordinance. [s.41(1) and (2)(a)] In such a
situation there is no need to determine the fair market rent of the land. 10

20

Notes
Note 1
Rent paid in cash Rs. 60,000
Where any expenditure under a single head of account exceeds Rs. 50,000 and the individual payment is
more than Rs. 10,000, to be admissible as a deduction, it has to be paid through the prescribed modes like
a crossed pay order, crossed bank draft, etc. Verifiability of the expense does not mitigate the inadmissibility
of the expense, therefore it is disallowed. [s.21(l)]
Note 2
Dr Ali, being an employer, was required to deduct income tax from the taxable salaries paid to his employees.
Since the salary of the nurse was above Rs. 400,000, his failure to deduct tax at source and deposit it in
the government treasury renders the whole salary of Rs. 575,000 paid to the nurse as inadmissible.
[s.21(m)]
Note 3
The car is a capital asset and any costs incurred in acquiring a capital asset are not admissible. [s.21(n)].
However, depreciation on the car is admissible at 15% of the value of car. Since one-third of the usage of
the car was not for the purposes of business, the admissible tax depreciation is restricted accordingly as
below:
Rs.
Value of the car 1,200,000
Tax depreciation at 15% [s.22 read with Part I of the 3rd Sch] 180,000
Admissible depreciation restricted to 2/3rd (180,000 x 2/3) [s.22(3)] 120,000
Further, no initial allowance is admissible on a car. [s.22(5)(a)]
Note 4
One-third usage of the car was for non-business purposes, therefore, Rs. 60,000, being one-third of total
expenses, are added back as inadmissible. [s.21(h)]
Note 5
Income tax paid is an inadmissible expense under the relevant provision [s.21(a)] of the Ordinance. However,
it is included when computing the tax payable/refundable with the return.
Note 6
(i) Communication expenses include inadmissible capital expenditure of Rs. 40,000 incurred on the
purchase of a mobile phone. The expenditure is inadmissible as a straight deduction [s.21(n)];
however, it is eligible for depreciation as computed below:
Rs.
Value of the mobile phone 40,000
Tax depreciation at 15% [s.22 read with Part I of the 3rd Sch] 6,000
Since only half the usage was for the purposes of business, the amount of allowable depreciation is
reduced by 50% to Rs. 3,000.
Further, no initial allowance is admissible on a used mobile phone. [s.22(1)]
(ii) The total mobile phone calls bill at Rs. 40,000 includes advance income tax collected at source which
is not admissible as a deduction. [s.21(a)] However, it is adjustable against the tax liability of the
taxpayer.
Since half of the calls were made for non-business purposes, half the bill is to be disallowed on a
pro-rata basis. [s.20(1)]
22
Marks
The inadmissible amount is, consequently, computed as below:
Rs.
Total mobile phone bill 40,000
Less: Inadmissible advance income tax (4,000)

(a) 36,000
Less: Expenditure relating to non-business use (36,000 x 1/2) (18,000)

Admissible expenditure (b) 18,000

Inadmissible phone call expenditure (a) (b) 18,000

Inadmissible advanced income tax 4,000

22,000
Total inadmissible communication expenses at (i) and (ii) [40,000 + 22,000] 62,000
Note 7
Rs. 90,000 paid to the Pakistan Medical Association (PMA) was for five years. Since only Rs. 18,000
relates to the tax year 2013, the balance amount of Rs. 72,000 is added back to the total income. [s.34(1)]
However, the disallowed amount will be available for deduction in the next four tax years in accordance with
the law.
Note 8
A fine paid for the violation of the Electricity Rules, 1937 is an inadmissible deduction under the law.
[s.21(g)]
Note 9
Profit on debt
Tax deducted on the profit on debt is the final discharge of the tax liability. [s.151(3)]
Tax is deductible on the gross amount of the profit on debt as reduced by the amount of Zakat deducted at
source/paid under the Zakat and Ushr Ordinance, 1980. [s.151(1)]
Rs.
Gross profit credited to the account 100,000
Less: Zakat deducted (5,000)

Income liable to tax deduction 95,000

Tax at 10% 9,500

(b) Rectifiable mistakes
Any mistake, whether of the law or of fact, which is apparent from the record and which does not require
further investigation/inquiry can be rectified by the Commissioner. 10
A rectification order which has the effect of increasing an assessment, reducing a refund or otherwise being
adverse to the taxpayer can only be passed after giving the taxpayer a reasonable opportunity of being heard. 10

20

(c) An appeal can be filed within 30 days of the service of the demand notice based on the rectification order
or where no demand notice is served, the date on which the rectification order is served. 15
The Commissioner (Appeals) can stay the recovery of the tax demanded in appeal for a maximum period of
30 days, in aggregate, after affording an opportunity of being heard before the Commissioner against whose
order the appeal has been filed by the taxpayer. 15

30

25

23
Marks
3 Mr Ilyas
Tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Transaction Note Capital gain/(loss) Tax
Rs. Rs.
Capital gains and tax on the disposal of immovable properties
taxable as a separate block
On the sale of a house in Lahore (1) 7,700,000 770,000 35
On the compulsory acquisition of land (2) 5,000,000 250,000 20
On the sale of a house in Islamabad (3) 10,000,000 0 10
Capital gains on securities taxable as a separate block
On the sale of shares in Pakistan Petroleum Ltd (4) 150,000 12,000 15
Income under the head Capital gains assessable to tax along
with other heads of income
On the gift of a painting (5) 375,000 10
On the sale of shares in Interwood (Pvt) Ltd (6) 150,000 20
On the disposal of an imported machine (7) 25,000 20

550,000

Less:
Capital loss on the disposal of shares in Delta (Pvt) Ltd (8) (100,000) 15
Capital loss brought forward from the tax year 2011 on
account of disposal of shares in Pakistan Petroleum Ltd (9) 0 10

(100,000)

Taxable income 450,000

Tax at 10% of the amount exceeding

Rs. 400,000 (450,000 400,000) x 10% 5,000 05
[Para (1) of Div I, Pt I of the 1st Sch]
Tax payable under the fixed tax regime
Tax under the head Income from property (3) 457,500 15
[s.15 read with Div VI of Pt I of the 1st Sch]

Total tax 1,494,500

Less: tax already paid
on the sale proceeds of house in Lahore at 05% of total
proceeds Rs. 30,000,000 (30,000,000 x 05%) [s.236C] 150,000 05
on cash withdrawals from bank [s.231A] 25,000 05
advance tax paid [s.147] 50,000 05

(225,000)

Tax payable with return 1,269,500

Items not included in the computation of capital gain

Ilyas gifted the jewellery to his sister who, although she had been in Saudi Arabia for the last two years on account
of being an employee of the Federal Government posted abroad, is treated as resident in Pakistan. [s.82(c)] A gift
to a resident person is not a taxable event. [s.79(1)(c)] 10

20

Notes:
Note 1
Sale of house in Lahore
Through an amendment in the Finance Act, 2012, a gain on the disposal of an immovable property held not
beyond two years has been made chargeable to tax according to the rates prescribed for such capital gains in the
First Schedule to the Income Tax Ordinance, 2001. The capital gain on the disposal of the house in Lahore is
computed as:
24
Marks
Rs. Rs.
Consideration received 30,000,000
Less:
Cost of acquisition
Purchase price [s.76(2)(a)] 20,000,000
Stamp duty (20,000,000 x 2%) [s.76(2)(b)] 400,000
Capital value tax (20,000,000 x 2%) [s.76(2)(b)] 400,000
Brokers fee on the purchase of the house (20,000,000 x 2%) [s.76(2)(b)] 400,000
Corporation tax (20,000,000 x 1%) [s.76(2)(b)] 200,000
Modification of the drawing room [s.76(2)(c)] 300,000
Brokerage to real estate agent on the sale of the property
(30,000,000 x 2%) [s.76(2)(b)] 600,000

(22,300,000)

Capital gain 7,700,000

Tax at 10% as the holding period of the house was less than one year
(7,700,000 x 10%) [Div VIII of Pt I of 1st Sch] 770,000

The property tax paid at Rs. 25,000 did not form part of the cost nor did it increase the value of the house, hence
it is not deducted from the consideration received.
Note 2
Land acquired by the Government of Punjab under the Land Acquisition Act, 1894
In the case of an asset compulsorily acquired under any law where the consideration received by the person for
the disposal of the asset is reinvested by the recipient in an asset of a similar kind within one year of the disposal,
no capital gain is to be recognised. [s.79(1)(d)] In the given case, the amount of consideration received was not
reinvested in an asset of the same kind, hence the capital gain is taxable as computed below:
Rs.
Consideration received on the disposal on 30 September 2012 30,000,000
Less:
Cost of the land on 1 January 2011 (25,000,000)

Capital gain 5,000,000

Tax at 5% as the holding period of the land was more than one year but less than two years
(5,000,000 x 5%) [Div VIII of Pt I of 1st Sch] 250,000

Note: The profit on the fixed term account did not accrue during the tax year 2013, hence, no taxation during
the year.
Note 3
Sale of house in Islamabad
(i) Transaction with Mr Sohail
The amount of Rs. 5,000,000 forfeited by Ilyas in accordance with the terms of the contract for the sale of
his house to Sohail is to be treated as rent received [s.15(2)] and taxed as below as a separate block of
income:
Rs.
Rent received 5,000,000
Tax payable on Rs. 5,000,000
[Rs. 57,500 plus 10% of the gross amount exceeding Rs. 1,000,000]
(57,500+ 10% x (5,000,000 1,000,000)) 457,500

[s.15 read with Div VI of Pt I of the 1st Sch]

(ii) Transaction with Mr Mumtaz
Rs.
Consideration received for the sale of the house on 30 June 2013 49,000,000
Market value on 25 June 2010, the date of inheritance by Ilyas [s.37(4A)(b)] (39,000,000)

Capital gain 10,000,000

Since the disposal was made after holding the house for more than two years, no gain is taxable under the
law. [s.37(1A)]
25
Marks
Note 4
Sale of shares in Pakistan Petroleum Ltd
Since the company is listed on the Karachi Stock Exchange, it is to be treated as a public limited company. Shares
of a public company are included in the definition of a security. Any gain or loss on the disposal of a security is
treated as a separate block of income. [s.37A] The capital gain is computed as:
Rs.
Consideration received on the sale of 2,500 shares on 15 July 2012 500,000
Purchase price on 15 September 2011 (350,000)

Capital gain 150,000

Tax at 8% of the capital gain as the holding period is more than six months but less than
12 months (150,000 x 8%) [Div VII of Pt I of 1st Sch] 12,000

Note 5
Gift of painting
Gift of a capital asset, chargeable to tax, to a non-resident is a taxable event. Since his brother did not stay in
Pakistan for 183 days during the tax year 2013, he remained a non-resident and the gift of the painting to him
does not fall in the non-recognition clause and so is taxable. [s.79(2) read with s.82(a)]
The capital gain is computed as:
Rs.
Fair market value of the painting to be treated as consideration received on 30 August 2012 1,000,000
Cost of the painting purchased on 1 January 1990 (500,000)

Capital gain 500,000

Since the disposal of the painting was made after holding it for more than a year, only 75% of the capital gain is
taxable at Rs. 375,000. [s.37(3)]
Note 6
Sale of shares in Interwood (Pvt) Ltd
Rs. Rs.
Consideration received on the sale of 10,000 shares on 14 December 2012 300,000
Less:
Purchase price of 5,000 shares at Rs. 18 per share on 5 February 2010
(5,000 x 18) 90,000
Allotment of 5,000 bonus shares on 1 July 2010 0
(Fair market value is not relevant in this case)
Incidental charges [s.76(2)(b)] 10,000

(100,000)

Capital gain 200,000

Since the disposal of the shares was made after holding them for more than a year, only 75% of the capital gain
is taxable at Rs. 150,000. [s.37(3)]
Note 7
Disposal of machine
Since Ilyas was not entitled to claim depreciation on this machine, the machine falls within the definition of a
capital asset. [s.37(5)(b)] Discarding an asset is also treated as a disposal of the asset. [s.75(3A)] The capital
gain is determined as:
Rs. Rs.
Consideration received 15 February 2013
Damages from the shipping company 850,000
Scrap value of the machine 200,000

1,050,000
Cost of the machine on 1 January 2013
Purchase price of the machine 1,000,000
Documentation charges incurred 25,000

(1,025,000)

Capital gain 25,000

26
Marks
Since the disposal was made within one year of acquiring the asset, the full amount of capital gain is taxable.
[s.37 (3)]
Note 8
Sale of shares in Delta (Pvt) Ltd
Rs.
Consideration received on 15 April 2013 for the sale of shares 450,000
Purchase price on 15 May 2009 (550,000)

Capital loss (100,000)

The provision for diminution in the value of shares made on 30 June 2012 is to be ignored as the same, being
a notional loss, was not deductible in the tax year 2012. A capital loss on the sale of shares of a private limited
company can be set off, subject to certain exceptions, against the capital gains arising from the disposal of other
assets. [s.38(1)]
Note 9
The capital loss on the sale of shares in Pakistan Petroleum Ltd, being a loss suffered from the sale of securities
during a tax year, is not eligible to be carried forward to the subsequent tax year. [s.37A(5)]
4 (a) Mr Muddasir
Subject to the fulfilment of certain conditions, a taxpayer whose case is pending before an appellate authority
can avail of the alternative dispute resolution (ADR) mechanism provided in the law for the resolution of their
tax disputes. The points raised in the question are answered as follows:
(i) There are two exceptions where a taxpayer cannot apply to the Federal Board of Revenue (the Board)
for the appointment of a committee for the resolution of their dispute. These are where:
either the prosecution proceedings have already been initiated against the taxpayer; or
the dispute involves interpretation of a question of law having effect on identical other cases. 20

(ii) The committee shall consist of an officer of the Inland Revenue and two other persons from a panel.
The panel comprises chartered or cost accountants, advocates, income tax practitioners and reputable
taxpayers. 20

(iii) Yes, if Muddasir is not satisfied with the orders of the Board, he may continue to pursue his remedy
before the Appellate Tribunal as if no order had been made by the Board. [s.134A] 10

(b) The last date for the filing of returns of income by taxpayers is determined with reference to the date on which
their tax year ends, and the category of persons to which they fall. In the given situations, the last dates
for filing of the returns are as below:
(i) Bryonia Laboratories (Pvt) Ltd
For the tax year ended 31 March 2012, the last date for filing of the return of income in the case of
a company is 31 December 2012. [s.118(2)(a)] 10
(ii) Silk Bank Ltd
For the tax year ended 31 December 2012, the last date for filing of the return of income in the case
of a company is 30 September 2013. [s.118(2)(b)] 10
(iii) Ms Mehwish
For the tax year ended 30 June 2013, the last date for e-filing of the return of income in the case of a
salaried person is 31 August 2013. [s.118(3)(a)] 10
(iv) Mr Osmani
For the tax year ended 28 February 2013, the last date for filing of the return of income in the case of
a person is 30 September 2013. [s.118(3)(b)] 10

40

(c) Application for an extension of time to file a return of income

A person who is required to file a return of income may, by the due date for the furnishing of that return,
apply for an extension of time to file the return. Valid reasons for seeking an extension are:
27
Marks
(i) absence of the person from Pakistan;
(ii) sickness or other misadventure; or
(iii) any other reasonable cause. 20
In normal circumstances, an extension of time for furnishing a return shall not exceed 15 days from the due
date of furnishing of the return. [s.119(2) and (3)] 10

30

(d) Mr Adeel
Since Adeel has not complied with the notice served on him for the filing of the return of income, the
Commissioner of Inland Revenue (CIR) can frame an assessment in the manner provided in the Ordinance,
without waiting for the filing of the return by Adeel. Under the given circumstances in the question, different
aspects relating to such assessment of income are explained as follows:
(i) In the given circumstances, the CIR may issue a provisional assessment order by framing an
assessment based on any available information or material and to the best of his judgement. 10
(ii) The provisional assessment order will become a final assessment order after the expiry of 60 days from
the date of service of the provisional assessment order. Once the assessment order becomes a final
assessment order, the CIR can take coercive measures to recover the amount of tax assessed against
Mr Adeel in accordance with the provisions of the Ordinance. 10
(iii) For the provisional assessment order served on him to be abated without the filing of an appeal, Adeel
should, within 60 days of the service of the provisional assessment order, file his return of income for
the tax year 2013 along with other relevant documents/information, namely:
a wealth statement;
a wealth reconciliation statement; and
an explanation of the source of the funds used for the acquisition of the car. [s.122C and 116(2A)] 10

30

15

5 (a) Persons required to be registered for sales tax

The following persons, who are making taxable supplies in Pakistan in the course or furtherance of any
taxable activity carried on by them, are required to be registered for sales tax under the Sales Tax Act, 1990:
(i) a manufacturer, not being a cottage industry; 10
(ii) a retailer whose value of supplies, in any period during the last 12 months exceeds Rs. 5 million; 15
(iii) an importer; 10
(iv) a wholesaler (including dealer) and distributor; 10
(v) a person required, under any other Federal law or Provincial law, to be registered for the purpose of any
duty or tax collected or paid as if it were a levy of sales tax to be collected under the Act; and 15
(vi) a commercial exporter, who intends to obtain a sales tax refund against his zero-rated supplies. 10

[s.14 of the Sales Tax Act, 1990 read with rule 4 of the Sales Tax Rules, 2006] 7

(b) Ms Mehr
In the given circumstances, Ms Mehr can revise her sales tax return, on her own, without waiting for any
notice of audit from the Commissioner of Inland Revenue (CIR).
The points raised in the question are answered as follows:
(i) Ms Mehr can revise her return to declare the correct amount of taxable supplies made without seeking
any permission from the CIR and pay the shortfall of tax. 10
(ii) Ms Mehr will be liable to pay the full amount of the default surcharge on the amount of the tax shortfall
caused by the non-declaration of taxable supplies of Rs. 500,000 in the original return. 10
(iii) No. If both the tax due and the full amount of the default surcharge are paid by Ms Mehr along with
her revised return, the CIR cannot recover any penalty from her on account of the shortfall of tax paid
with the original return. 10

[First proviso to s.26(4)] 30

10

28