Question # 1

ZJ Limited (ZJL) is an unlisted public company engaged in the business of manufacturing,

supply and export of pharmaceutical products. Following information has been extracted from
ZJL’s un-audited financial statements for the year ended 30 September 2017.
Rs. in ‘000
Sales-net 218,500
Cost of sales (157,580)
Gross profit 60,920
Administrative and selling expenses (39,000)
Financial charges (4,700)
Other income 29,280
Profit before taxation 46,500

Additional information:
Sales includes:
(i) Sale of polio vaccines of Rs. 30,000,000 to Red Cross mission in Somalia. The
entire amount was realized during the year.
(ii) Discounted sale of Rs. 3,600,000 to one of the NGO’s operating welfare hospitals in
KPK province. A discount of 25% was allowed to the NGO on their purchases.
Cost of sales includes:
(i) Cost of opening and closing stock-in-trade of Rs. 25,690,000 and 29,200,000
respectively comprising of raw and packing materials, work-in-process and
finished goods. ZJL computes the cost of stock-in-trade using marginal cost
method. The values of opening and closing stock-in-trade under absorption cost
method were Rs. 28,460,000 and Rs. 32,350,000 respectively.
(ii) Accounting depreciation of Rs. 2,210,000.
Administrative and selling expenses include:
(i) Withholding tax of Rs. 600,000 i.e. 20% of purchase price, paid in August 2017
(borne by ZJL) on the plot of land handed over to the winner of a lucky draw
which was organized under a sales promotion scheme. ZJL acquired this plot in
January 2016 at a cost of Rs. 3,000,000. The market value of the plot at the time
of lucky draw was Rs. 10,000,000.
(ii) Rs. 1,800,000 paid to improve the embodied features of production software.
(iii) Rs. 650,000 in respect of the cost of two ramps. The ramps were built to provide
access to persons with disabilities.
(iv) Accounting depreciation of Rs. 1,980,000.
Other income includes:
(i) Rs. 2,450,000 received from employees against sale of five vehicles. The market
value and tax written down value of these vehicles at the time of sale was Rs.
5,250,000 and Rs. 3,320,000 respectively. As per company’s policy the vehicles
are sold at their book values.
(ii) Net profit of Rs. 20,000,000 from ZJL’s associates. ZJL records its earnings from
associates using equity method of accounting.
(iii) Gain on sale of securities in Mali Limited (ML), a listed company, amounting to
Rs. 6,000,000. On 1 July 2014 ZJL acquired 200,000 shares in ML at Rs. 50 per
share constituting 55% interest in ML. On 1 August 2017 ZJL sold 100,000 shares
in ML at a negotiated price of Rs. 85 per share to a foreign investor. The market
value of these shares at the time of sale was Rs. 80 per share. On 15 September
2017 ZJL sold the remaining 100,000 shares in ML at a negotiated price of Rs. 75
per share to a local investor. The market value of the shares at the time of sale was
Rs. 78 per share. The gain was computed at the average of the negotiated prices.
ZJL reported the above transactions to the relevant Stock Exchange through its
broker and was also in compliance with all the requirements of the SECP.
Other information: (not reflected in the above financial results)
(i) On 30 June 2017 ZJL received Rs. 1,250,000 as share of income from AOP. The
gross turnover of the AOP was Rs. 30,000,000. ZJL holds 35% interest in the
AOP.
Further information:
(i) ZJL has filed the option to opt out of the final tax regime.
(ii) Total tax depreciation amounts to Rs. 4,300,000.
(iii) Tax paid u/s 147 was Rs. 1,000,000, tax deducted on import of packing materials
u/s 148 was Rs. 1,200,000, tax deducted by distributors u/s 153 was Rs.
1,050,000 and tax deducted on realization of export proceeds u/s 154 was Rs.
300,000.
(iv) The assessed losses brought forward from tax years 2016 and 2017 were as follows:
2017 2016
------- Rupees -------
Business loss 2,900,000 3,550,00
Unabsorbed tax depreciation 2,550,000 -
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the taxable income, net tax payable by or refundable to ZJL for tax year 2018
and amount of tax to be carried forward along with the amount of default surcharge, if
any.
Note:
• Your computation should commence with the profit before tax figure of
Rs. 46,500K.
• Ignore WWF and WPPF.
• Show all relevant exemptions, exclusions and disallowances.
Question # 2
Rahat and Musa are partners in RM Associates (RMA), a firm engaged in the business of
providing consultancy and book keeping services to clients in Pakistan as well as abroad. Rahat
and Musa share profits and losses in the ratio of 4:5 respectively. Following is an extract from
RMA’s profit and loss account for the year ended 30 June 2018:

Particulars “Rupees”
Net Revenue 36,500,000
Less:
Salaries (19,780,000)
Rent (1,250,000)
Depreciation/amortization (accounting) (1,680,000)
Software expense (650,000)
Interest expense (135,000)
Other expenses (1,655,000)
Total expenses (25,150,000)
Income before tax for the year 11,350,000
Additional information:
(i). Net revenue includes the following:
• Retainership fee of Rs. 19,710,000 from corporate clients. Withholding tax at the rate
of 7% of the gross receipt was deducted and the amount is included in other expenses.
• An amount of Rs. 6,210,000 received under an agreement from a Doha based company,
Isra Middle East, for providing technical services in Doha. The amount was brought into
Pakistan in foreign exchange in compliance with the regulations of the State Bank. No tax
was deducted from the receipt either in Doha or in Pakistan by the bank.
• Rs. 10,580,000 on account of on-line accounting services provided to various clients in
Iran and Afghanistan. The amount was received in foreign exchange through normal
banking channel. Withholding tax at the rate of 1% of the gross receipts was deducted
by the collecting bank and the amount is included in other expenses.
(ii). Salaries include Rs. 290,000 and Rs. 355,000 respectively paid to Rahat and Musa per
month.
(iii). The rent was paid in respect of office premises to Lalazar Limited. RMA did not deduct
withholding tax from the payment.
(iv). Software expense represents purchase of a software on 1 January 2018.
(v). Interest expense was in relation to a vehicle obtained on finance lease. Lease rentals paid
during the year amounted to Rs. 800,000. The lease term of the vehicle ended on 1 June 2018,
on which date RMA acquired the vehicle at a residual value of Rs. 950,000. The market value
of the vehicle at the date of its transfer to RMA was estimated at Rs. 1,150,000.
(vi). The tax written down values of RMA’s assets on 1 July 2017 were as follows:

Assets Rupees
Furniture and fixtures 1,700,000
Computers and laptops 840,000
Accounting software (remaining life of 5 5,000,000
years)
74
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and net
tax liability of RMA for the tax year 2018.
Question # 3

Khawar Associates (KA) is engaged in the business of supplying stationery items to both the
individuals and corporate customers. Following is an extract from the summarized income
statement for the year ended 30 June 2018.

Particulars Rupees
Sales 2,348,000
Cost of sales (1,230,000)
Operating expenses (470,000)
Profit before tax 648,000

(i). The above sales include the following:

• An amount of Rs. 573,000 (net of tax) received from Mr. Iqbal. Mr. Iqbal is registered
for sales tax purposes. The rate of withholding tax is 4.5% of the gross receipts.
• Goods worth Rs. 825,000 sold to SP Limited (SPL). SPL deducted tax of Rs. 37,125
from the payment against this sale.
• The rest of the sales were made to individual customers having turnover of less than
fifty million rupees.

(ii). Cost of sales includes Rs. 20,000 paid to SPL as a penalty for late delivery of goods.

(iii). Operating expenses include the following:

• Salaries of Rs. 50,000 paid to part time sales staff working exclusively on SPL’s
assignment. The rest of the expenses were common to all the customers.
• A donation of Rs. 60,000 to an educational institution established by the Provincial
Government.
• Zakat of Rs. 10,000 under the Zakat and Ushr Ordinance, 1980.

(iv). KA also received a dividend of Rs. 36,000 (net of tax) from a private company.

Required:

Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
KA’s taxable income and tax liability for tax year 2018.