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Taxation Managment

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Taxation Management ­ FIN 623
VU
MODULE 8
LESSON 8.37
INCOME FROM BUSINESS & ITS COMPUTATION
Taxation of Companies
Exercise-5
M/S XYZ is a limited company, running a chain of hospitals. The company filed tax return along with
relevant accounts/ documents for tax year 2006. This return has been selected for total audit. As a taxation
officer, work out taxable income and tax liability of the said company for tax year 2006.
Medicines purchased Rs. 1,000,000
Ambulances- running expenses.
Rs. 300,000
Depreciation on ambulances
Rs. 40,000
Depreciation on other assets
Rs. 60,000
Salaries paid through bank accounts of employees
Rs. 300,000
Unsupported payment for purchase of stationery
Rs. 12,000
Depreciation on account of car owned by director and in his personal use Rs. 40,000
Payment of legal fee by cash
Rs. 60,000
Received payments from corporations on the panel of the hospitals
Rs. 6,000,000
Other receipts
Rs. 2,000,000
Gain on sale of a vehicle
Rs. 200,000
Purchase of X-Ray machine for shown as expense in revenue account
Rs. 1,000,000
Withholding tax deductions
Rs. 525,000
Loss carried forward from tax year 2005
Rs. 1,200,000
Solution of E-5
Tax Payer: M/S XYZ Ltd.
Tax Year: 2006
Resident Company
NTN: 000111
Revenue Account as Submitted by Co.
RECEIPTS
EXPENDITURES
Particulars
Amount in Rs.  Particulars
Amount in Rs.
Medicines
1,000,000
From Corporations
6,000,000
Ambulances
300,000
Other Receipts
2,000,000
Depreciation (Ambulances)
40,000
Gain on Sale of Vehicles
200,000
Depreciation Others
60,000
Salaries thru bank
300,000
Unsupported PAMT
12,000
Depreciation on personal car
40,000
Legal Fee by cash
60,000
X-Ray machine
1,000,000
Net Profit
5,388,000
8,200,000
8,200,000
Computation of Tax Payable:
Net Profit as computed by Co.
5,388,000
Less set off of c/f losses
(1,200,000)
Taxable Income
4,188,000
Tax Payable 4,188,000x35%
1,465,800
Less withholding Tax deductions
525,000
Balance Tax Payable
940,800
Tax Paid with Return
940,800
Tax Payable/Refundable
NIL
Additions by Taxation Officer on account of inadmissible expenses:
Unsupported payments
12,000
Depreciation claimed on personal car of Director
40,000
Payment of legal fee by cash
60,000
Purchase of X-Ray machine ( to be capitalized, balance sheet item as such  1,000,000
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Taxation Management ­ FIN 623
VU
not to be shown in Revenue a/c)
Total additions
1,112,000
Tax payable on account of add backs (1,112,000 x 35%= 389,200)
389,200
The company shall have to pay tax amounting Rs 389,200.
Sole Proprietorship
Exercise-6
Mr. A is running business as sole proprietor. From the following information/data relevant to tax year
2007, compute taxable income and tax thereon.
Opening Stock
Rs.800,000
Purchases
Rs.1,000,000
Sales
Rs.2,000,000
Carriage inwards
Rs.30,000
Closing stock
Rs.800,000
Electric bill of office paid
Rs 18,000
Telephone bill paid
Rs 20,000
Rent of office
Rs 120,000
Stationary for office
Rs 4000
Postages
Rs 3000
Salaries to staff
Rs 200,000
Advertisement expenses
Rs 10,000
Advance tax paid
Rs 60,000
Solution Exercise 6:
Tax Payer: Mr. A
.
Tax Year: 2007
Sole proprietorship
NTN: 000111
Trading and Profit & Loss Account
In Rs
Opening balance
800,000 Sale
2,000,000
Purchases
1,000,000 Closing Stock
800,000
Carriage inward
30,000
Gross profit
970,000
Total
2,800,000
2,800,000
Electricity
18,000
Telephone
20,000
Office rent
120,000
Stationary
4,000
Postages
3,000
Salaries
200,000
Advertising
10,000
Net profit
595,000
Total
970,000
970,000
Tax payable 595,000 x 12.50%=
Rs. 74,375
Advance tax paid
Rs 60,000
Tax payable
Rs 14,375
Tax paid with return
Rs 14,375
Tax payable / refundable
Nil
Taxation of Association of persons
Exercise 7:
From the following information/ data for tax year 2007 regarding M/S XYZ brothers, a partnership firm,
compute taxable income and tax liability of the firm as well as individual members.
This firm comprises of three partners Mr. X, Mr. Y and Mr. Z, each partner has equal share in profits.
Net profit of M/S XYZ brothers for tax year 2007 is worked out as Rs 900,000.
Mr. Z has also earned income amounting Rs 200,000 from other sources.
Solution Exercise 7:
Tax Payer: M/S. XYZ
Tax Year: 2007
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Taxation Management ­ FIN 623
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Partnership Firm
NTN: 000111
Net profit (Taxable Income) =
Rs 900,000
Tax liability of firm
(900,000 x 17.50 %*) =
Rs 157,500
*Tax rate at serial # 12 for income range Rs 800,000 to 1,000,000 is applied.
Note: Tax liability is the obligation of firm and not of the partners. However, if partner has income from
any other source, his share of income from partnership is added to taxable income only for rate purposes.
Share of profit of each member Mr. X, Mr. Y, Mr. Z
Rs 300,000 each
Computation of tax liability of Mr. Z:
o Income from other sources
Rs200,000
o Share of profit of Mr. Z from firm M/S XYZ brothers
(Add for rate purposes only)
Rs 300,000
o Taxable income
Rs 500,000
o Tax payable (500,000 x 10%)
Rs 50,000
o Subtract tax liability due to addition of Rs 300,000 for rate purposes
(50,000/ 500,000 x 300,000=30,000)
Rs 30,000
Tax payable by Mr. Z
Rs 20,000
If Rs 300,000 would have not been added for rate purposes, Mr. Z would have paid tax at the rate of 4 %
that is 200,000 x 4% = 8,000 instead of Rs 20,000.
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Table of Contents:
  1. AN OVERVIEW OF TAXATION
  2. What is Fiscal Policy, Canons of Taxation
  3. Type of Taxes, Taxation Management
  4. BASIC FEATURES OF INCOME TAX
  5. STATUTORY DEFINITIONS
  6. IMPORTANT DEFINITIONS
  7. DETERMINATION OF LEGAL STATUS OF A PERSON
  8. HEADS OF INCOME
  9. Rules to Prevent Double Derivation of Income and Double Deductions
  10. Agricultural Income
  11. Computation of Income, partly Agricultural,
  12. Foreign Government Officials
  13. Exemptions and Tax Concessions
  14. RESIDENTIAL STATUS & TAXATION 1
  15. RESIDENTIAL STATUS & TAXATION 2
  16. Important Points Regarding Income
  17. Geographical Source of Income
  18. Taxation of Foreign-Source Income of Residents
  19. Exercises on Determination of Income 1
  20. Exercises on Determination of Income 2
  21. SALARY AND ITS COMPUTATION
  22. Definition of Salary
  23. Significant points regarding Salary
  24. Tax credits on Charitable Donations
  25. Investment in Shares
  26. SALARY AND ITS COMPUTATION EXERCISES 1
  27. SALARY AND ITS COMPUTATION EXERCISES 2
  28. SALARY AND ITS COMPUTATION EXERCISES 3
  29. Tax treatment of Gratuity
  30. Gratuity Exercise
  31. PROVIDENT FUND
  32. Exemptions on Business income, Treatment of Speculation Business
  33. Deductions Allowed & Not Allowed
  34. Deductions: Special Provisions, Depreciation
  35. Methods of Accounting
  36. Taxation of Resident Company
  37. Taxation of Companies: Exercises
  38. Computation of Capital Gain
  39. Disposals Not Chargeable To Tax
  40. TAX RETURNS & ASSESSMENT OF INCOME UNIVERSAL SELF ASSESSMENT SCHEME
  41. Normal Assessment, USAS, Provisional Assessment, Best Judgment Assessment
  42. ADVANCE TAX COLLECTION & RECOVERY OF TAX PENALTIES & PROSECUTION
  43. What is Value Added Tax (VAT)?
  44. SALES TAX
  45. SALES TAX RETURNS