Lecture 37 Income from Business

Exercise 4 on Speculation Business M/S ABC Ltd. a manufacturing company has furnished the following accounting information for tax year Compute taxable income and tax thereon: - Gross Income from normal business, Rs.2,500,000 - Expenditures on normal business Rs. 1,000,000

Income from Business Exercise – 4 on Speculation Business - 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

Income from Business Solution of E-4 Tax Payer : ABC Ltd. Tax Year – 2007 Particulars Speculation Normal Total Operations Business Gross inc. 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, N-1

Income from Business Solution of E-4 Contd… 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 normal business income, it can be set off against speculation business income, hence this loss of Rs. 600,000 shall be carried forward to next year.

Income from Business Exercise 5 Taxation of Companies 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 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 Medicines purchased Rs. 1,000,000 - Ambulances- running expenses Rs. 300,000 - Depreciation on ambulances Rs. 40,000

Income from Business Exercise-5 Contd… - 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

Income from Business Exercise-5 Contd… - 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 Rs. 1,000,000 shown as expense in revenue account. - Withholding tax deductions Rs. 525,000 - Loss carried forward from tax year 2005 Rs.1,200,000

Income from Business Solution of E-5 Tax Payer: M/S XYZ Ltd.Tax Year: 2006 Resident CompanyNTN: Revenue Account as Submitted by Co. EXPENDITURESRECEIPTS Medicines1,000,000 Ambulances300,000 Depreciation (Ambulances)40,000

Income from Business Solution of E-5 Contd. EXPENDITURESRECEIPTS Dep. – Others60,000From Salaries thru bank300,000Corporations Unsupported Pamt12,0006,000,000 Dep. On personal Other Receipts Car40,0002,000,000 Legal Fee by cash60,000Gain on Sale of X-Ray machine1,000,000Vehicles Net Profit5,388,000200,000 Total8,200,0008,200,000

Income from Business Solution of E-5 Contd. Net Profit as computed by Co.5,388,000 Less set off of c/f losses(1,200,000) Taxable Income4,188,000 Tax Payable 4,188,000x35%1,465,800 Less withholding Tax deductions525,000 Balance Tax Payable940,800 Tax Paid with Return940,800 Tax Payable/RefundableNIL

Solution of E-5 Contd.  Additions by Taxation Officer on account of inadmissible expenses: - Unsupported payments 12,000 - Depreciation claimed 40,000 on personal car of Director - Payment of legal fee by cash 60,000 - Purchase of X-Ray machine ( to be capitalized, balance sheet item as such not to be shown in Revenue a/c)1,000,000 Income from Business

Solution of E-5 Contd.Rs -Total additions 1,112,000 - Tax payable on account of add backs 389,200 (1,112,000 * 35%= ) The company shall have to pay tax amounting Rs 389,200. Income from Business

Exercise-6—Sole Proprietorship 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 inwardsRs.30,000 Closing stockRs.800,000

Income from Business Exercise-6 electric bill of office paidRs 18,000 Telephone bill paidRs 20,000 Rent of officeRs 120,000 Stationary for officeRs 4000 postages Rs 3000 Salaries to staffRs 200,000 Advertisement expensesRs 10,000 Advance tax paidRs 60,000

Tax Payer: Mr. A.Tax Year: 2007 Sole proprietorship NTN: Solution Exercise 6: Trading Account in Rs. Opening balance 800,000 Sale 2,000,000 Purchases 1,000,000 Closing Carriage inward 30,000 Stock 800,000 Gross profit 970,000 Total 2,800,000 2,800,000 Income from Business

Solution Exercise 6: Contd… Profit and loss Account Electricity 18,000Gross profit b/d 970,000 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 Income from Business

Solution Exercise 6:Contd.. Tax payable 595,000 * 12.50%= 74,375 Advance tax paid Rs 60,000 Tax payable Rs 14,375 Tax paid with return Rs 14,375 Tax payable / refundable Nil Income from Business

Exercise 7: Taxation of Association of persons 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.  Income from Business

Exercise 7: Taxation of Association of persons (Contd)…  Mr. Z has also earned income amounting Rs 200,000 from other sources. Income from Business

Solution Exercise 7 : Tax Payer: M/S. XYZTax Year: 2007 Partnership Firm NTN:  Net profit ( taxable income ) = Rs 900,000  Tax liability of firm ( 900,000* 17.50%*) = Rs 157,500 *Tax rate at serial # 12 for income range Rs 800,000 to 1,000,000 is applied Income from Business

Solution Exercise 7 :Contd…  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. ZRs 300,000 each Income from Business

Solution Exercise 7 :Contd…  Computation of tax liability of Mr. Z  income from other sources Rs200,000  share of profit of Mr. Z from firm M/S XYZ brothers (Add for rate purposes only) Rs 300,000  Taxable income Rs 500,000  Tax payable ( 500,000 * 10%) Rs 50,000  Subtract tax liability due to addition of Rs 300,000 for rate purposes (50,000/ 500,000* 300,000=30,000) Rs 30,000 Income from Business

Solution Exercise 7 :Contd…  Tax payable by Mr. Z Rs 20,000 (50,000-30,000=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 * 4% = 8,000 instead of Rs 20,000 Income from Business