Very Short Questions and Answers

1. Give a brief definition of business as defined in the Income Tax Act, 2058.

The Act has defined business as an industry, a trade, a profession or the like isolated transaction with a business character and includes a past, present or prospective business.

2. List out two incomes excluded from the business.

Two incomes excluded from business are:

  • Amounts exempted from income tax under section 10
  • Final withholding payments
3. Give any two distinctions between business and profession.

Two distinctions between business and professions are listed below.

  • Business includes an activity relating to purchase and sale of goods with an objective of earning profit whereas profession involves the rendering of specialized services for a fee.
  • Business needs huge amount of capital as compared to profession.
4. Briefly state the provision related to pollution control cost.

Actual pollution control cost or 50 percent of adjusted taxable income from all business conducted by the person whichever is lower is allowed for deduction. The portion of such cost not allowed as a deduction is capitalized at the beginning of the next income year

Short Questions and Answers

1. What do you mean. by donation to tax-exempt organizations? State the provision mentioned under section 12 of Income Tax Act, 2058.

Donation given to an approved tax-exempt organization is allowed as follows:

www.spastakhabar.com
5% of adjusted taxable income (after deducting contribution to approved retirement fund)

or Actual donation paid

or Maximum limit (Whichever is the lowest)

 

XXX

XXX

Rs. 100,000

 

However, the GoN may prescribe, by publishing a notice in Nepal Gazette, to allow full or partial deduction of the expenses incurred for special purposes at the time of assessing income.

Donation given by a company for the work of protection and promotion and ancient, cultural, and religious heritage and building of public physical infrastructure for the development and promotion of sports activities in Nepal given by pre-approval of IRD is allowed as follows:

10% of total assessable income

or Actual donation paid

or Maximum limit (Whichever is the lowest)

 

XXX

XXX

Rs. 10,00,000

 

Donation given by a person to the Prime Minister Relief Fund and Reconstruction Fund established by the Government of Nepal (GoN) is fully allowed for deduction while computing taxable income.

2. Mention the provision of depreciation in Income Tax Act, 2058.

Depreciation is the depletion in the value of depreciable assets used in the business or investment by wear and tear, obsolescence, or the passing of time. Depreciation is allowed for a deduction on used depreciable assets owned by the person. For depreciation purpose, the depreciable assets have been classified into five blocks. The block-wise details and rate of depreciation are given in the following table:

Block

 

Details of assets

 

Depreciation

 

A

B

C

D

E

Building, Structures, and similar works of permanent nature

Computers, data processing equipments, furniture, fixtures and office equipments

Automobiles, bus and mini bus

Construction and earth moving equipments, unabsorbed pollution control cost and R&D cost and any tangible assets not included in above blocks (e.g. plant and machinery)

Intangible assets (patent, copy rights, trade marks, software etc. which are not included in Block ‘D’ assets)

 

5%

25%

20%

15%

 

 

Cost +Life

rounded down to the nearest half

Blocks A, B, C and D are the blocks of tangible assets whereas Block E is the block of intangible asset. For Blocks A, B, C and D, the diminishing balance method (i.e. written down method) is used while computing depreciation. But for Block E, the straight line method is used.

The block-wise depreciation basis and depreciation are calculated as under:

Opening depreciation basis

Add: Addition during the year (time-wise)

 

Less: Disposal during the year

Depreciation basis

XXX

XXX

XXX

XXX

XXX

Depreciation of a block = Depreciation basis of a block x Depreciation rate applicable to that block.

Addition during the year in any Block is divided into two parts: absorbed and unabsorbed portion. Such division is based on the later of the time the asset is first owned/used or the cost is incurred. The table is given herewith to clarify the position:

Time

 

Absorbed Portion

 

Unabsorbed Portion

 

Shrawan first to Poush end

Magh first to Chaitra end

Baishak first to Ashadh end

 

3/3.

2/3

1/3

Nil

1/3

2/3

 

During the income year, only the absorbed portion of the addition is considered for calculating depreciation basis. The addition of assets falling under block A, B, C and D is included in respective blocks whereas in case of Block ‘E”, each asset is shown in separate block.

If the depreciation basis after deducting depreciation during an income year is less than Rs. 2,000, the whole amount is allowed as depreciation expenses during the income year. Gain (loss) on disposal of block of depreciable assets is treated as normal gain (loss) of business or investment.

In addition to normal depreciation, the following entities are allowed one-third additional depreciation of the rate prescribed on the assets falling under Blocks A, B, C, and D:

  • an entity engaged in building public infrastructure to transfer to the Government of Nepal and any other entity engaged in power generation, transmission, or distribution of electricity.
  • an entity wholly engaged in operating a special industry under section 11.
  • an entity wholly engaged in the operating road, bridge, tunnel, ropeway, or sky bridge constructed by the entity.
  • an entity wholly engaged in operating trolleybuses or trams.
  • cooperative registered under Cooperatives Act, 2048 except involved in tax-exempt transactions.

Likewise, a person generating energy power for own business purpose may claim to deduct 50% of the capitalized amount of the assets used to generate such power as depreciation allowance in the same year. Similarly, the person who uses fiscal printer and cash machine to issue invoices may claim to deduct in a lump sum the whole amount incurred for such machines as depreciation allowance in the same year.

3. How the term ‘business’ has been defined in the Act? List any five incomes that are included in the business heading?

Generally, business is a commercial activity undertaken with a profit motive. Income Tax Act, 2058 has defined business as an industry, a trade, a profession, or the like isolated transaction with a business character and includes a past, present or prospective business. By contrast to employment, business is an earning activity typically consisting of not only the provision of labor but of the combined provision of labor and capital.

The five incomes included in business heading are as follows:

  • Service fees including commission, meeting management or technical service fees.
  • Amounts derived from the disposal of trading stock.
  • Net gains from the disposal of business assets or liabilities of the business.
  • Amounts treated as derived in respect of excess depreciation on the disposal of the person’s depreciable assets of the business.
  • Gifts received by the person in respect of the business.
4. A trading company supplied the following information:

Beginning inventory of Merchandise Rs. 250,000

Purchase during the year Rs. 12,00,000

Custom duty paid Rs. 100,000

Closing stock at the end period of Rs. 120,000

Required: Cost of trading stock

SOLUTION

Calculation of cost of trading stock

Particulars

 

Amount

 

Beginning inventory of merchandise

Add: Purchase during the year Custom duty paid

Custom duty paid

Less: Closing stock

 

Cost of trading stock (CTS)

 

250,000

12,00,000

100,000

(120,000)

 

14,30,000
5. Mr. Karna a sole trader involved in business activity in remote area ‘B’ has taxable income Rs. 1,800,000 before exemption. He has insured his life with annual premium of Rs. 21,000.

Required: Tax liability

SOLUTION

Statement of taxable income of Mr. Karna, a sole trader, for the relevant (previous) income year.

Particulars

 

Rs.

 

Taxable income before exemption

Less: a. Life insurance premium

(Maximum Rs. 20,000 or Actual Rs. 21,000; lower)

b. Remote area exemption (‘B’)

 

Remaining taxable income

18,00,000

 

20,000

40,000

 

17,40,000

 

Calculation of tax liability:

1st Rs.350,000

Next Rs. 100,000 @ 15%

Balance Rs.12,90,000 @25%

Total tax liability

 

Nil

Rs. 15,000

Rs. 322,500

Rs. 337 500

 

6. Following are the receipts and payments account of Dr. Dixit a medical practitioner for the previous year:
Dr.                              Receipts and Payments A/C                                                         cr.

 

Receipts

 

Rs.

 

Payments Rs.

 

To Consultation fees

To Visiting fees

To Royalty from natural resources

To Income from minor surgery

To Loan from bank

To Birthday gifts

To Dividends

To Pension from previous

employer

 

 

100,000

50,000

 

150,000

 

75,000

50,000

25,000

95,000

 

143,000

 

By Staff salary

By Office expenses

By Car expenses

By Office rent

By Purchase office furniture

By Domestic expenses

By Advance income tax

By Repairs

By Donation

By Balance c/d

 

70,000

45,000

15,000

60,000

65,000

10,000

5,000

2,000

7,000

409,000

 

  688,000

 

  688,000

 

Additional information:

  • Office furniture was purchased on 1st Baishakh of the previous year.
  • Repair expenses were related to the office furniture purchased previously.
  • The cost of furniture includes Rs. 5,000 interest on the bank loan.

Required:

(a) Net (assessable) income from profession.

(b) Statement of total taxable income.

SOLUTION 

Calculation of assessable income from a profession, investment, and employment of Dr. Dixit for the previous year.

Calculation of allowable repairs of furniture: Allowable repairs = 7% of depreciation basis or actual (lower)

= 7% of Rs. 20,000 or Rs. 2,000 = Rs. 1,400

It is assumed that a loan from the bank was used for professional purposes.

7. The following are the receipts and payments accounts of an accountant for the previous year.

SOLUTION:

Woking notes:

Consultation fees, accounting fees, and interest related to the profession are assumed to be gross.

 Interest on fixed deposits is subject to final withholding income.

iii. Income from the agriculture of an individual is tax exempted.

8. Mr. Bhuwan is a film actor submitted the following receipts and payments account for the previous year:

Additional information:

  • The car was purchased on 15th Falgun of previous year. Charge depreciation as per rules.
  •  His wife is also a professional actress and she earned Rs.400,000 during the year.
  • Compensation receivable from a producer Rs.200,000 is yet to be receivable. However, he has spent Rs.10,000 for collecting this amount.

Required:

a) Assessable income from profession

b) Statement of total income

SOLUTION

Computation of assessable income from the profession of Mr. Bhuwan, a film actor, for the previous year

Working notes:

An individual can keep, for tax purposes accounts on a cash or an accrual basis. Here, a cash basis has been considered. Hence, advance receipts has been included in income and receivables have not been included in income.

The income of Mr. Bhuwan’s wife has been assumed to be assessed separately treating her as a single individual.

Interest on bank a/c and rent from home (net) are final withholding incomes for an individual.

9. OR The Receipts and Payment Account of a medical practitioner is given below:

Additional information:

  • Provided depreciation on trademarks and surgical equipment as per rule. Both assets were purchased on Bhadra of the previous year.
  • 1/3rd of domestic expenses include general expenses incurred for professional purposes.
  • Commission received Rs. 10,000 from clients was not shown in books of account.
  • Life insurance premium of Rs. 15,000 on his own life was charged in staff salary.
  • Traveling expenses include Rs. 2,000 paid for an educational tour for his son. f. Miscellaneous income includes Rs. 5,000 income from agriculture Agro-expenses were borne by himself.

Required:

(a) Net (assessable) income from Profession

(b) Net (assessable) income from investment

(c) Statement of Taxable income (total income)

(d) Tax liability

SOLUTION

(a) Calculation of assessable income from profession and practitioner for the previous year

 b) Calculation of donation:

5% of adjusted taxable income

i.e. 5% of Rs. (344,529+ 20,000) =  Rs. 18,226

 Or, Actual= Rs. 10,000

Or, Maximum= Rs. 100,000 (Lowest)

Hence, Rs. 10,000 is fully allowed for reduction.

Leave a Reply

Your email address will not be published. Required fields are marked *