LUMS

ACCOUNTING & FINANCE (ACCT 370) Practice Solution

I Compute taxable income and tax liability in the case of Mr. X, a 65 years old
gentleman, for tax year 2017. He was appointed in a private company after
retiring from government service.
Basic salary 600,000
Employer provided accom.(Annual rent=200,000)
Utilities allowance 50,000
Medical reimbursement under terms of employment 100,000
Conveyance allowance 50,000
Employer paid premium for Life Ins. Policy taken out by X 40,000
Please note:
Rs. 300,000 pension received from government.
Mr. X donated 50,000 under clause (61) Part I of the Second Schedule.
Rs. 15,000 tax was deducted from his salary by the Company.
His other incomes are as under:
Rent from house in Model Town 800,000
Rs. 1,000,000 from leasing out a small industrial plant. The written down value of
the plant and machinery as on 30.06.2016 was Rs. 3 million.
He tried his hand at a business and incurred loss of Rs. 300,000.

U/s 15 Rent from house is a separate block of income on which tax amounts to
40,000

U/s 12
Item Exempt Taxable
Basic salary 600,000
Accommodation (Rent less than 45% hence) 270,000
Utilities allowance 50,000
Medical reimbursement 100,000
Conveyance allowance 50,000
Premium for Life Ins. Policy taken out by X 40,000
Pension 300,000
Total salary 1,010,000

U/s 39
Lease of industrial plant 1,000,000
Less depreciation 450,000
Total 550,000
Set off of business loss 300,000
Total Income 1,260,000
Less donation under clause (61) 50,000
Taxable income 1,210,000

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Salary income is more than 50% of taxable income hence para (1A) applied

Up to 750,000 14,500
10% of 1,210,000 750,000 46,000

Tax 60,500
Less tax credit for insurance premium 40,000 x 60,500 2,000
1,210,000
Tax computed 58,500
Less deducted on salary 15,000
Tax payable 43,500
Plus tax on rental income 40,000

No benefit of seniority allowance can be given as taxable income is more than Rs.
1,000,000.

II(a) From the details of profit & loss account of M/S XY, an AOP comprising two
members X and Y (sharing profit/loss in the ratio of 30:70), compute taxable
income and tax thereon for tax year 2017. X is a full time researcher in a
government-run institute. Net profit of Rs. 1,500,000 was arrived at by their
accountant taking the following expenses:

*Salaries to staff (not subject to tax) 300,000

Utilities 200,000
Interest on capital to Y 300,000
Rent of business premises 200,000
Advertisement 50,000
Token money for purchasing new office 150,000
Entertainment (as per rules) 60,000
Depreciation on furniture 50,000 (as per accounting rules)

*Paid through crossed cheques as required by law.

WDV of furniture as on 01.07.15 is 500,000.
(a)
Depreciation on furniture

WDV for tax year 2016 500,000

Less 15% u/s 22 75,000 425,000

WDV for tax year 2017 425,000

Less 15% u/s 22 63,750 361,250
Unclaimed depreciation is 63,750 minus 50,000 = 13,750 (to be reduced from profit)

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Net Profit as computed by accountant 1,500,000
Add-backs of inadmissible expenses
Interest to Y 300,000
Token money 150,000 1,950,000
Less difference in depreciation 13,750

Total income of AOP 1,936,250

Tax up to 1,500,000 144,500

Tax @20% on 436,250 87,250 231,750

(b) Calculate individual taxable income and income tax of each member, as per net
income given below:

Salary income Income from other source

X 800,000
Y 600,000

Total income of AOP 1,936,250

Less interest to Y 300,000
Divisible income 1,636,250

Share of X @ 30% 490,875

Share of Y @ 70% 1,145,375 + 300,000 = 1,445,375

AOP share Salary Other source Total

X 490,875 800,000 1,290,875
Y 1,445,375 600,000 2,045,375

Tax of X on total income using para (1A) 68,588

Tax on salary quantum 800,000 x 68,588
1,290,875
42,506
Less 40% on account of being researcher 17,002
Tax liability of X 25,504

Tax of Y on total income using para (1) 235,425

Tax on other source 600,000 x 235,425
2,045,375
Tax liability of Y 69,060

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III Calculate income and tax thereon for tax year 2017 in the case of XYZ (Pvt) Ltd.
Co, manufacturing educational toys for children. It has also rented out 40% of its
head office premises to other companies. Its income details are mentioned below.

Sale of toys 20,000,000

Direct expenses 3,000,000
Indirect expenses 2,000,000
Premium fire insurance for whole building 400,000

Depreciation
WDV as on 01.07.16.
Plant & Machinery 10,555,000
Office Building 9,000,000
Furniture 500,000
Vehicles 1,000,000

Rent from different tenants 3,000,000

Non-adjustable advance from the present tenants 1,000,000

It paid:
Property tax of rented out portion 400,000

Donation
300,000 u/s 61 to a government-run hospital.
Rs. 800,000 under clause (61)

Depreciation
WDV on 01.07.16. Rate of dep. Amount of dep
Plant & Machinery 10,555,000 15% 1,583,250
Office Building 60% 540,000 10% 54,000
Furniture 500,000 15% 75,000
Vehicles 1,000,000 15% 150,000
Total 1,862,250

Income from Business

Sale of toys 20,000,000
Less
Direct expenses 3,000,000
Indirect expenses 2,000,000
60% of premium 240,000
Depreciation 1,862,250
Net Income 1,289,750

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Income from property
Rent from tenants 3,000,000
One tenth non-adjustable advance 100,000 3,100,000

Less
One-fifth 620,000
Property tax 400,000
Premium 160,000
Net income 1,920,000

Income u/s 18 1,862,250

Income u/s 15 1,920,000
Total income 3,782,250
Less donation u/c (61) up to
20% of 3,782,250 = 756,450
Taxable income 3,025,800

Tax @ 31% 937,998

Less tax credit u/s 61 937,998 x 300,000

3,025,800
93,000

Tax payable by the company 844,998