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Taxation Managment

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Taxation Management ­ FIN 623
VU
MODULE 8
LESSON 8.36
INCOME FROM BUSINESS & ITS COMPUTATION
Taxation of Resident Company
Exercise 1
M/S XYZ Ltd. filed tax return for tax year 2006, declaring taxable income as Rs.1,350,000/; during the
assessment and scrutiny of record by the tax authority it was observed that deduction of tax at source was
not made by the company, while making the following payments. Compute taxable income and tax thereon
for tax year 2006.
Salaries
Rs. 350,000
Payments made in execution of a contract for purchase of office appliances
Rs. 150,000
Professional fee paid to chartered accountant.
Rs. 100,000
Solution E-1
Tax payer: M/S XYZ Ltd.
Tax year: 2006
Residential status  Resident
NTN: 000111
Following amounts are added back since deductions are not allowed under provisions of section
21.
Salaries
Rs. 350,000
Payment in execution of contract
Rs. 150,000
Professional Fee
Rs. 100,000
Total amount to be Added Back
Rs. 600,000
Income from Business
Solution E-1
Taxable income declared
Rs. 1,350,000
Add back under section 21
Rs. 600,000
Taxable income after add back
Rs. 1,950,000
Computation of Tax
Tax already paid with return
Rs. 1,350,000 x 35% = Rs. 472,500
Tax payable on account of additions of Rs. 600,000/-
Rs. 600,000 x 35% = Rs. 210,000
Taxation of Companies
Minimum Tax on Resident Companies Sec. 113
Resident Company is subjected to minimum tax @ 0.50% of its turnover for a tax year, even in cases where
the company sustains loss.
Turnover under this section means:
the gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on
invoice or bills, derived from the sale of goods;
the gross fees for the rendering of services or giving benefits, including commissions;
the gross receipts from the executions of contracts; and
the company's share of the amounts stated above of any association of persons of which the
company is a member
Exercise-2
M/s XYZ (Pvt) Ltd. filed return for tax year 2007, declaring taxable income of Rs. 1,300,000 and paid entire
liability of tax. On scrutiny of record by tax authorities, it came to their notice that following amounts have
been paid by Cash. In the light of this information/data compute tax liability of said company for tax year-
2007.
Salary
Rs. 30,000
Office Rent
Rs. 120,000
Professional Fee
Rs. 80,000
Postages
Rs. 8,000
Freight paid
Rs. 9,000
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Taxation Management ­ FIN 623
VU
Electricity bill
Rs. 7,000
Telephone
Rs. 5,000
Penalty
Rs. 9,000
Solution of E-2
Add Back Inadmissible Deductions U/S 21
Salary paid by cash
Rs. 30,000
Rent of office paid by cash
Rs. 120,000
Professional fee paid by cash
Rs. 80,000
Total Additions
Rs. 230,000
Declared income
Rs. 1,300,000
Tax already paid
Rs. 455,000
(1,300,000 x 35%)
Additions made U/S 21
Rs.  230,000
Tax payable on additions
Rs. 230,000 x 35%=
Rs.
80,500
Note: Additions on account of rest of payments, although by cash not required to be added back as
provided in section 21(L)
Computation of Depreciation
Exercise 3
M/S A.K. Brothers is a partnership firm. In the books of accounts the following information/data has been
provided with respect to plant and machinery. Compute normal depreciation and initial allowance in the
light of the given information.
Book value of plant and machinery as on 01-07-2006
Rs. 1,800,000
Machinery disposed of during the year with book value.
Rs.  600,000
Additions of eligible depreciable asset during the year
Rs 1,000,000
Solution of E-3
Tax Payer: A.K. Brothers
Tax Year: 2007
Residential Status: Resident
NTN: 000111
Particulars
Book value
Depreciation
Opening W.D.V
1,800,000
----
Disposals
(600,000)
----
Balance W.D.V
1,200,000(X)
----
Additions during Year
1,000,000
Initial allowance
@ 50% on 1,000,000
500,000
Balance book value
(Y) 500,000
Total book value (X+Y)
1,700,000
Normal Depreciation@ 15%
255,000
Total Depreciation
755,000
On Speculation Business
Exercise ­ 4
M/s ABC Ltd. A manufacturing company has furnished the following accounting information for tax year
2007. Compute taxable income and tax thereon:
- Gross Income from normal business
Rs.2,500,000
- Expenditures on normal business
Rs. 1,000,000
- Gross income from speculation business
Rs. 600,000
- Expenditures on speculation business
Rs.300,000
- Loss carried forward on normal business
Rs. 200,000
- Loss Carried forward on speculation business
Rs. 900,000
- Advance Tax Paid
Rs. 200,000
Solution of E-4
Tax Payer: ABC Ltd.
Tax Year: 2007
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Taxation Management ­ FIN 623
VU
Residential Status: Resident
NTN: 000111
Computation of taxable income and tax thereon:
In Rs.
Particulars
Speculation Operations
Normal Business
Total
Gross Income
600,000
2,500,000
3,100,000
Expenditures
(300,000)
(1,000,000)
(1,300,000)
Net Income
300,000
1,500,000
1,800,000
C/F Loss
(900,000)
(200,000)
(1,100,000)
Taxable Income
(600,000)
1,300,000
---
Note-1
Taxable Income:
Normal business Rs.1,300,000
Tax payable= (1,300,000 x 35%) = Rs. 455,000
Note-1:
Loss of Rs. 600,000 from speculation business can not be set off against business income, it can be set off
against speculation business income, and hence this loss of Rs. 600,000 shall be carried forward to next year.
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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