BBA/BBM, TU

Prof. Kamal Deep Dhakal  Ishwari P Bhattarai  Girija P Koirala  Romakant Bhattarai
Contents

2. Taxation of Income in Nepal ...................................... 1

3. Quantification, Allocation and Characterization

of Amounts ................................................................. 4

4. Exempt Amounts, Concessions, Tax Rates and

Withholding Payments .............................................. 6

5. Valuation of Stock and Depreciation ........................10

6. Income from Business .............................................. 17

7. Set-off and Carry Forward of Losses ....................... 44

8. Income from Employment....................................... 49

9. Income from Investment ..........................................73

10. Total Assessable Income, Taxable Income, Tax

Liability and Tax Payable..........................................81

12. Value Added Tax (VAT) ........................................... 84

 Taxation of Income in Nepal
Q Practical Problems
SOLUTION - 1
Revenue Capital
Sale of window frame Rs.40,000 Loan from bank Rs.100,000
Sale of readymade furniture 200,000 Disposal of non business land 500,000
Compensation from insurance co. 50,000 Total 600,000
Total 290,000

SOLUTION - 2
Accounts payable for 2077/78 ($15000 × Rs.102) Rs.1,530,000
Amount paid for accounts payable in 2078/79 ($ 15000 × Rs.108) Rs.1,620,000
Net amount of exchange loss to be included Rs.90,000

SOLUTION - 3
a. Income to be included: (cash basis accounting)
Debtor collection of last year Rs.200,000
Expense to be included:
Advance office rent paid Rs.200,000
b. If Mr. Rohit kept accounts on accrual basis;
Income or expenses to be included for 2078/79 Nil
Note: Under cash basis accounting, income and expenses should be recognized at the time of
cash received. However, under accrual basis system, income and expenses should be recorded
only at the time of earned and expended.

SOLUTION - 4
Length of stay in Nepal:
Income year 2077/78 (Ashadh) = 10 days
Income year 2078/79 (1st Shrawan - 23 Poush) = 5 × 30 + 23 = 173 days
Total stay in consecutive period of 365 days = 183 days
Mr. Bush stayed in Nepal for 183 days in consecutive period of 365 days, so his residential
status is resident.

SOLUTION - 5
According to Income Tax Act 2058, permanent employee of Nepal government posted abroad is
a resident person for tax purpose. Therefore, the residential status of Dr. Thapa is resident.

SOLUTION - 6
As per Income Tax Act 2058, the person whose normal place of abode is in Nepal is resident.
Mr. Amogh's normal place of abode is in Nepal, so his residential status is resident.
2 Solution Manual to Taxation and Auditing

SOLUTION - 7
Length of stay in Nepal:
1st Falgun to end of Ashadh: 5 × 30 = 150 days,
Mr. Ronald stayed in Nepal for 150 days in a consecutive period of 365 days, which is less than
183 days. So his residential status is non-resident.

SOLUTION - 8
a. Dr. Thapa is a government servant posted abroad. So, he is a resident of Nepal.
b. Statement of taxable income
Particulars Amount Amount
Salary (65,000 × 12) 780,000
Dashain Kharcha (One Month) 65,000
Contribution to P.F. by government @ 10% 78,000
Foreign allowance $ 3500 × Rs. 90 315,000
Assessable income from employment 1,238,000
Less: Allowable reduction:
Contribution to P.F. 1/3 of 1,238,000 412,667
Or Actual (20% of 780,000) 156,000
Or Maximum (whichever is lower) 300,000 (156,000)
Taxable income before exemption 1,082,000
Less: Foreign allowance exemption (75% of 315,000) 236,250
Taxable income remained after exemption 845,750
c. Computation of tax liability
First Rs. 500,000 (single) @ 1% 5,000
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 145,750 @ 20% 29,150
Total tax liability 54,150
Less: Advance tax paid Nil
Tax payable 54,150

SOLUTION - 9
a. Residential status of Mr. Shankar:
Mr. Shankar Parajuli is a government employee posted abroad. So, his residential status is
resident.
b. Statement of taxable income
Particulars Amount Amount
Salary Rs. (26,000 × 12) 312,000
Dashain Kharcha 26,000
P.F. Contributed by government 31,200
Foreign allowance:
Dearness allowance $ 1,000 × 90 × 9 month 810,000
Outstation allowance $ 500 × 90 × 9 month 405,000 1,215,000
Assessable income from employment 1,584,200
Less: allowable reduction:
* Contribution to P.F.
1/3 of 1,584,200 528,067
or Actual (20% of 312,000) 62,400
or Maximum limit 300,000 (62,400)
Taxable income before exemption 1,521,800
Less: Foreign allowance exemption (75% of 1,215,000) 911,250
Taxable income 610,550
 Chapter 2 • Taxation of Income in Nepal 3

Computation of tax liability

Particulars Amount (Rs.)
First Rs. 500,000 (basic exemption – single) @1% 5,000
Balance Rs. 110,550 @ 10% 11,055
Total Tax payable 16,055

SOLUTION - 10
a. Residential status of Mrs. Janaki:
Mrs. Janaki is an employee of Nepal government posted abroad. So, her residential status is
resident.
b. Statement of total taxable income
Particulars Amount Amount
Salary (18,000 × 5) 90,000
(24,000 × 7) 168,000 258,000
Dashain Kharcha (one month) 18,000
P.F. contributed by government @ 10% 25,800
Dearness allowance (2000 × 5) 10,000
Foreign allowance ($ 3000 × 7 × Rs. 100) 2,100,000
Assessable income from employment 2,411,800
Less: Allowable reduction:
Contribution to Retirement Fund
1/3 of 2,411,800 803,933
or Actual 20% of 258,000 51,600
or Maximum limit (Whichever is lower) 300,000 (51,600)
Taxable income before exemption 2,360,200
Less: Foreign allowance exemption (75% of 2,100,000) 1,575,000
Taxable income 785,200
Computation of tax liability
Particulars Amount (Rs.)
First Rs. 500,000 (basic exemption – single) 1% 5,000
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 85,200 @ 20% 17,040
Total Tax liability 42,040
Less: Tax rebate @ 10% (4,204)
Tax payable 37,836
Q
Quantification, Allocation and
Characterization of Amounts
Q Practical Problems
PP - 1
Quantity of petrol free of cost 25 litre
Market price of petrol per litre = Rs. 160
Quantified benefit = 25 × 160 = Rs. 4,000

PP - 2
Calculation of assessable income
Salary income Rs.500,000
Allowance 100,000
Accommodation facility (2% of 500,000) 10,000
2,500
Car facility (0.5% of 500,000)
Assessable income 612,500

PP - 3
Characterized interest benefit = 10 –2 = 8% of loan amount. Ms. Sushma require to include 8%
interest on loan provided office into employment office.
8
∴ Total interest subsidy = 1,000,000 × 100 = 80,000

PP - 4
Monthly salary of house keeper paid by office Rs.6,000 p.m.
Deduction from his salary Rs.2,000 p.m.
Characterized benefit of house keeper facility = 6,000 – 2,000 = Rs.4,000 p.m.
Total amount to be included = 4,000 × 12 = Rs.48,000.

PP - 5
Total income earned Rs.400,000
Less: Expense incurred 120,000
Net income earned 280,000
Share of income of X and Y: X = Error!= Rs.56,000
Y = Error!= Rs.224,000

PP - 6
Total salary = 45,000 × 12 = Rs. 540,000
Car facility 0.5% of salary
Amount of car facility to be included = 540,000 @ 0.5% = Rs.2,700
 Chapter 3 • Quantification, Allocation and ... 5

Note: Vehicle facility received by others (other than the employee) is required to include 1% of
market value of vehicle in income.

PP - 7
Contract period = 3 months
Market value of car = Rs.1,800,000
Amount of car facility to be included = Error!× Error! = Rs.4,500
Note: Vehicle facility received by other (other than the employee) is required to be included in
income = 1% of market value of vehicle.

PP - 8
Salary per month = Error! = Rs.25,000
Total salary for 12 month = 25,000 × 12 = Rs.300,000
Amount of car facility = (0.5% of 300,000) = Rs.1,500
Amount of accommodation facility = (2% of 300,000) = Rs.6,000

PP - 9
Accommodation facility
Total rent of flat for the year = 25,000 × 12 = Rs.300,000
Accommodation facility = (25% of 300,000) = Rs.75,000
Amount of vehicle facility
Market value of vehicle = Rs.2,000,000
Vehicle facility to be included = Error!= Rs.20,000
Note: Accommodation facility received by others (other than the employees) is required to
include 25% of prevailing market rent in income.

PP - 10
Characterized benefit to be included in income:
Total salary of cook and guard paid by office (6,000 + 8,000) × 12 Rs.168,000
Less: Deduction from his salary by office (6,000 × 12) (72,000)
Net amount to be included in income 96,000

PP - 11
Rate of interest benefit = 10 – 5 = 5%
Amount of interest benefit = Error!× Error! = Rs.20,000

PP - 12
Calculation of amount required to be included in income
Package remuneration Rs. 150,000

( 1 3
Car facility 30‚00‚000 × 100 × 12 ) Rs. 7,500

Total 157,500

Q
Tax Exemptions, Concessions
and Tax Rates
Q Practical Problems
SOLUTION - 1
Computation of tax liability of Mrs. Sharma
First Rs.600,000 (Statutory exemption- couple) @ 1% Rs.6,000
Next Rs.200,000 @ 10% 20,000
Next Rs.300,000 @ 20% 60,000
Balance 900,000 @ 30% 270,000
Balance 2,000,000 @ 36% 720,000
Total tax liability 1,076,000
Less: Rebate for women 10% 107,600
Tax payable 968,400

SOLUTION - 2
Computation of taxable income
Taxable income before exemption Rs.2,500,000
Less: Remote area - A (50,000)
Taxable income 2,450,000
Computation of tax liability
First Rs.500,000 (Statutory exemption- single) Nil
Next Rs.200,000 @ 10% Rs. 20,000
Next Rs. 300,000 @ 15% 45,000
Next Rs. 1,000,000 @ 15% 150,000
Balance Rs.450,000 @ 18% 81,000
Total tax liability 296,000
Note: Individual having export income for the year is taxed @ 15% in place of 20% and 30% or
allowed 25% tax rebate on the slable of 20% and 50% tax rebate on the slab of 30%. Additional
tax 20% is imposed on the tax liability exceeding income Rs. 2,000,000

SOLUTION - 3
Applicable tax for highly undeveloped (remote) area = 10% of 20 = 2%
Applicable tax for providing employment to 2,000 Nepalese citizens = 70% of 20 = 14%
(whichever is lower)
Hence, tax liability = 2% of 6,000,000 = 120,000
Note: Industry getting two or more concession at a time is allowed only one facility as per the
selection made by such entity.
 Chapter 4 • Tax Exemptions, Concessions, Tax Rates and Loss Set Off 7

SOLUTION - 4
Industry located in SEZ situated in mountainous district is exempt tax for 1st 10 years and then
taxed at 50% of normal rate their after.
Tax liability for year 10 = Nil
Tax liability for year 11 = 7,500,000 @ 10% = Rs.750,000

SOLUTION - 5
Taxable income including capital gain Rs.850,000
Less: Gain on non business chargeable assets (capital gain) (60,000)
Taxable income (excluding capital gain) 790,000

Computation of tax liability

First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 90,000 @ 20% 18,000
Capital gain tax Rs. 60,000 @ 10% 6,000
Total tax liability 44,000

SOLUTION - 6
Tax liability of Rohit:
10 buses @ Rs.8,000 per bus = Rs.80,000
20 taxi @ Rs.4,000 per taxi = Rs.80,000
Total taxable income 160,000
Note: The holder of public transporter (natural person) is taxed flat amount of tax per year as
per the types of vehicles and their CC. Therefore, total income from public transport is not
required to be included in income.

SOLUTION - 7
Total retirement payment = Rs.900,000
50% of Rs.900,000 = Rs.450,000
or Flat amount = Rs.500,000
(Whichever is higher is tax free)
Taxable amount = Rs.900,000 – 500,000 = Rs.400,000
Tax payable = 400,000 @ 5% = Rs.20,000 (final TDS)

SOLUTION - 8
Computation of tax liability
First Rs.500,000 (single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Balance Rs.150,000 @ 20% 30,000
Total tax liability 55,000
Less: Tax rebate @ 10% (5,500)
Tax payable 49,500
∴ Amount of tax rebate = Rs. 5,500

SOLUTION - 9
Statement of Taxable Income
Taxable income before exemption 1,400,000
Less: Remote area class – A (50,000)
Less: Health insurance premium:
Actual premium paid 25,000
Or Maximum limit 20,000 (20,000)
(Whichever is lower)
Less: Life insurance premium: 45,000
Actual premium paid 40,000 (40,000)
8 Solution Manual to Taxation and Auditing

Or Maximum limit
Taxable income 1,290,000
Computation of Tax Liability
First Rs. 500,000 (single) @ 1% Rs. 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 290,000 @ 30% 87,000
Total tax liability 172,000
Less: Rebate for women @ 10% 17,200
Total tax payable 154,800

SOLUTION - 10
Statement of Taxable Income
Taxable income before exemption Rs. 1,500,000
Less: Remote area class – B (40,000)
Less: House insurance premium
Actual premium paid 10,000
Or Maximum limit 5,000 (5,000)
(Whichever is lower)
Taxable income Rs. 1,455,000
Computation of Tax Liability
First Rs. 600,000 (couple) Nil
Next Rs. 200,000 @ 10% Rs. 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 355,000 @ 30% 106,500
Total tax payable Rs. 186,500

SOLUTION - 11
Computation of Tax Liability
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% Rs. 20,000
Balance Rs. 300,000 @ 20% 60,000
Capital gain Rs. 400,000 @ 5% 20,000
Total tax payable Rs. 100,000

SOLUTION - 12
Capital gain of a company is taxed at normal tax rate of the entity
Tax liability = Rs. 2,200,000 @ 25% = Rs. 550,000

SOLUTION - 13
Statement of Taxable Income
Taxable income before exemption Rs. 1,200,000
Less: Exemption for pension:
25% of 500,000 (single) 125,000
or, Pension income 300,000 (125,000)
(Whichever is lower)
Taxable income 1,075,000
Computation of Tax Liability
First Rs. 500,000 (single) @ 1% Rs. 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 75,000 @ 30% 22,500
Total tax liability 107,500
 Chapter 4 • Tax Exemptions, Concessions, Tax Rates and Loss Set Off 9

SOLUTION - 14
Statement of Taxable Income
Taxable income before exemption Rs. 1,800,000
Less: Foreign allowance exemption (75% of Rs. 800,000) 600,000
Taxable income 1,200,000
Computation of Tax Liability
First Rs. 500,000 (single) @ 1% Rs. 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 200,000 @ 30% 60,000
Total tax liability 145,000
Less: Rebate for women @ 10% 14,500
Total tax payable 130,500
Q
 Valuation of Stock and
Depreciation
Q Practical Problems
SOLUTION - 1
Calculation of cost of trading stock
Particulars Rs.
Beginning inventory 250,000
Add: Purchase 1,200,000
Custom duty 100,000
Less: Closing stock (120,000)
Cost of trading stock 1,430,000

SOLUTION - 2
Calculation of cost of trading stock
Particulars Rs.
Opening stock (110,000/110 × 100) 100,000
Add: Direct material 1,200,000
Direct labour 1,000,000
Manufacturi9ng expenses 200,000
Less: Closing stock (220,000/110 × 100) (200,000)
Cost of trading stock 2,300,000

SOLUTION - 3
Calculation of cost of trading stock
Particulars Rs.
Beginning inventory of finished goods 200,000
Add: Direct material (Opening + Purchase – Closing) (120,000 + 1,500,000 – 150,000) 1,470,000
Direct labour 500,000
Royalty on production 300,000
Less: Closing stock of finished goods (250,000)
Cost of trading stock 2,220,000
 Chapter 5 • Valuation of Stock and Depreciation 11

SOLUTION - 4
Calculation of cost of trading stock
Particulars Rs.
Opening stock 250,000
Add: Purchase 1,000,000
Custom and excise duty 10,000
Less: Closing stock (190,000)
Cost of trading stock 1,160,000

SOLUTION - 5
a. Calculation of depreciation base amount and allowable depreciation for the year
Particulars Block-B (Rs.)
Beginning depreciation base amount 1,100,000
Add: Addition during the year:
Ashwin (Rs.300,000 × 3/3) 300,000
Falgun (Rs.240,000 × 2/3) 160,000
Jestha (Rs.150,000 × 1/3) 50,000
Less: Disposal during the year (120,000)
Depreciation base amount 1,490,000
Allowable depreciation @ 25% 372,500
b. Closing WDV at the end (Depreciation basis – Allowable depreciation = Rs. 1,117,500
Calculation of opening WDV for the next year
Particulars Block-B (Rs.)
Closing WDV at the end/ balance after depreciation 1,117,500
Add: Unabsorbed additions:
Falgun (Rs. 240,000 × 1/3) 80,000
Jestha (Rs. 150,000 × 2/3) 100,000
Opening WDV for the next year 1,297,500

SOLUTION - 6
a. Calculation of depreciation base amount and allowable depreciation for the year
Particulars Block-C (Rs.) Block-D (Rs.)
Beginning depreciation base amount 300,000 480,000
Add: Addition during the year:
Magh (Rs.50,000 × 2/3) – 33,333
Less: Disposal during the year 125,000 –
Depreciation base amount 175,000 513,333
Rate of depreciation 20% 15%
Allowable depreciation 35,000 77,000
12 Solution Manual to Taxation and Auditing

b. Calculation of opening WDV for next year

Particulars Rs.
Balance after depreciation 140,000 436,333
Add: Unabsorbed additions – 16,667
Opening WDV for next year 140,000 453,000

SOLUTION - 7
Calculation of allowable depreciation (block-D)
Particulars Individual Entity
Opening WDV 1,500,000 1,500,000
Add: Addition during the year:
Chaitra (Rs.300,000 × 2/3) 200,000 200,000
Less: Disposal during the year) (200,000) (200,000)
Depreciation base amount 1,500,000 1,500,000
Normal depreciation @ 15% 225,000 225,000
Add: Additional depreciation (1/3 of 225,000) – 75,000
Total allowable depreciation 225,000 300,000
Calculation of allowable repair and capitalized repair:
7% of 1,500,000 Rs.105,000
or Actual repair cost (whichever is lower) Rs.125,000
∴ Capitalized repair (125,000 –105,000) Rs.20,000
Calculation of Opening WDV for the next year (block-D)
Particulars Individual Entity
Balance after depreciation 1,275,000 1,200,000
Add: Unabsorbed additions 100,000 100,000
Capitalized repair 20,000 20,000
Opening WDV for next year 1,395,000 1,320,000
Note: Entity running special industry is allowable additional depreciation 1/3 of total allowable
depreciation. However, individual running same industry is not allowed such facility.

SOLUTION - 8
a. Calculation of depreciation base amount and allowable depreciation for the year
Particulars Block-B (Rs.)
Opening WDV 2,500
Add/Less: Addition/Disposal Nil
Depreciation base amount 2,500
Allowable depreciation @ 25% 625
Balance after depreciation 1,875
Total allowable depreciation (625 + 1,875) 2,500
Closing WDV at the end Nil
Note: If the balance after depreciation is less than Rs.2,000, then the whole amount should be
included into allowable depreciation.
 Chapter 5 • Valuation of Stock and Depreciation 13

SOLUTION - 9
Calculation of depreciation base amount for the year
Particulars Blocks
A B C D E
Opening WDV for the year 3,000,000 400,000 1,500,000 1,200,000 –
Add: Addition during the year – – – – 200,000
Less: Disposal during the year – (40,000) (240,000) (120,000) –
Depreciation base amount 3,000,000 360,000 1,260,000 1,080,000 200,000
Rate of depreciation 5% 25% 20% 15% 3.5 year
Allowable depreciation 150,000 90,000 252,000 162,000 57,143
Closing WDV 2,850,000 270,000 1,008,000 918,000 142,857

SOLUTION - 10
Calculation of depreciation base amount for the year
Blocks
Particulars
A B C D E
Opening WDV for the year 6,000,000 700,000 2,500,000 2,000,000 –
Add: Addition during the year
1st Magh (Rs.1,500,000×2/3) – – 1,000,000 – 500,000
1st Marga (Rs.800,000×3/3) – – – 800,000 –
Less: Disposal during the year – – – – –
Depreciation base amount 6,000,000 700,000 3,500,000 2,800,000 500,000
Rate of depreciation 5% 25% 20% 15% 30%
Allowable depreciation 300,000 175,000 700,000 420,000 16,667
Add: Additional depreciation (1/3) 100,000 58,333 233,333 140,000 –
Total depreciation 400,000 233,333 933,333 560,000 16,667
Note: Entity running special industry is allowed additional depreciation 1/3 of normal
depreciation. However, this facility is not allowed to block-E.

SOLUTION - 11
Calculation of depreciation base amount and allowable depreciation for the year and
closing WDV
Particulars Block-C (Rs.)
Opening depreciation basis amount 150,000
Add: Addition during the year:
Bhadra (Rs.500,000 × 3/3) 500,000
Falgun (Rs.600,000 × 2/3) 400,000
Less: Disposal during the year (125,000)
Depreciation base amount 925,000
Allowable depreciation @ 20% 185,000
Closing WDV = (925,000 – 185,000) 740,000

SOLUTION - 12
Particulars Block-B Block-D
Opening WDV 600,000 300,000
Add: Addition during the year:
Poush (Rs.100,000 × 3/3) – 100,000
Chaitra (Rs.300,000 × 2/3) 200,000 –
Less: Disposal during the year) (250,000) (398,000)
Depreciation base amount 550,000 2,000
14 Solution Manual to Taxation and Auditing

Rate of depreciation 25% 15%

Allowable depreciation 137,500 300
Balance after depreciation 412,500 1,700
Total allowable depreciation (300+1,700: Block D) 137,500 2,000
Calculation of opening WDV for next year
Particulars Block-C (Rs.)
Balance after depreciation (550,000 – 137,500) 412,500
Add: Unabsorbed additions
Chaitra: (300,000 × 1/3) 100,000
Opening WDV (next year) 512,500
Note: When the balance after depreciation is less than Rs. 2,000 than the total value should be
included into allowable depreciation.

SOLUTION - 13
a. Calculation of depreciation base amount and allowable depreciation for the year
Particulars Block-D (Rs.)
Opening WDV 1,800,000
Add: Addition during the year:
Magh (Rs.600,000 × 2/3) 400,000
Jestha (Rs.900,000 × 1/3) 300,000
Less: Disposal during the year (300,000)
Depreciation base amount 2,200,000
Allowable depreciation @ 15% 330,000
Closing WDV (2,200,000 – 330,000) 1,870,000

SOLUTION - 14
a. Calculation of depreciation basis value and allowable depreciation for the year.
Particulars Block-B (Rs.)
Opening WDV before previous capitalized value 1,170,000
Add: Previous year capitalized repair 30,000
Opening WDV after adjustment 1,200,000
Add: Absorbed addition for the year:
2 400,000
Falgun (Rs. 600,000 × 3 )
1 100,000
Baisakh (Rs. 300,000 × 3 )
Less: Disposal during the year (20,000)
Depreciation basis value 1,680,000
Normal rate of depreciation 25%
Normal amount of depreciation 420,000
1 140,000
Add: additional depreciation (3 of 420,000)
Total allowable depreciation 560,000
Closing WDV for the year 1,120,000
Allowable repair and capitalized value
7% of 1,680,000 117,600
or Actual repair (whichever is lower) 90,000
Capitalized value (Actual cost is less than 7% value) Nil
 Chapter 5 • Valuation of Stock and Depreciation 15

b. Calculation of opening WDV for the next year.

Particulars Block - B
Closing WDV for the year 1,120,000
Add: Unabsorbed additions :
1 200,000
Falgun (Rs. 600,000 × 3 )
2 200,000
Baisak (Rs. 300,000 × 3 )
Add: Capitalized value of repair Nil
Opening WDV for the next year 1,520,000
1
Note: Entity running special industry is allowed additional depreciation 3 of normal depreciation.

SOLUTION - 15
a. Calculation of depreciation basis value and allowable depreciation for the year.
Particulars Block-D (Rs.)
Opening depreciation basis value 2,000,000
Add: Absorbed addition:
2 600,000
Chaitra (Rs. 900,000 × 3 )
Less: Disposal of during the year Nil
Depreciation basis value 2,600,000
Normal rate of depreciation 15%
Normal amount of depreciation 390,000
Add: Additional depreciation (1/3 of 390,000) 130,000
Total allowable depreciation 520,000
Closing WDV for the year 2,080,000

Calculation of capitalized value of PCC

Gross income business 1,800,000
Less: TD before PCC and R & D (1,200,000)
Unrecovered business loss (100,000)
Adjusted taxable income for PCC and R & D 500,000
Allowable PCC
50 % of 500,000 Rs.250,000
or Actual PCC Rs. 300,000
(Whichever is lower)
∴ Capitalized PCC = 300,000 − 250,000 = Rs. 50,000
Calculation of allowable repair and capitalized value:
7% of 2,600,000 Rs. 182,000
or Actual value Rs. 200,000
(Whichever is lower)
∴ Capitalized value of repair Rs. 18,000.
b. Calculation of opening WDV for the next year
Particulars Block - D
Closing WDV for the year 2,080,000
Add: Unabsorbed addition:
1
Chaitra (Rs. 900,000 × 3 ) 300,000
3
Ashadh (Rs. 300,000 × 3 (unused part) 300,000
Add: Capitalized value of PCC 50,000
16 Solution Manual to Taxation and Auditing

Add: capitalized value of repair 18,000

Opening WD for the next year 2,748,000
Note:
1
i. Entity running special industry is allowed additional depreciation 3 of normal depreciation.
ii. Assets purchased but not used in business in the income year is not allowed to be included for
depreciation. it is assumed that the assets will be used from the beginning of 1st Shrawan of next
year.
iii. Unallowable PCC and R & D due to limit is required to be capitalized in block − D assets at the
beginning of next year.
SOLUTION - 16
Depreciation base value = 1,000,000 + (23 × 900,000) = Rs. 1,600,000
Allowable depreciation = Rs.320,000

Rate of depreciation =
( 320,000
16‚00,000
× 100
) = 20%

∴ Block of assets = C, because the depreciation rate 20% is belongs to Block-C.

SOLUTION - 17
Depreciation base value = (500,000 – 80,000) = 420,000
Allowable depreciation = (25% of 420,000) = Rs. 105,000
Gain loss on sale to be included in income = Nil

SOLUTION - 18
Allowable depreciation = (12,00,000 × 100
20
) = Rs.240,000
Closing WDV = 1,200,000 –240,000 = Rs.960,000
Note: Industrial company is allowed additional depreciation 1/3 of normal depreciation.
Therefore rate of Block-D assets for special industry becomes:
Normal rate 15%
Add: Additional depreciation 5%
Total rate 20%

SOLUTION - 19
Calculation of total depreciation (block-E)
Particulars Rs.
1st Assets = (400,000/4) 100,000
2nd Assets = (100,000/2.5) 40,000
Total 140,000

SOLUTION - 20
Allowable depreciation = 2,500 @ 25% = Rs.625
Balance after depreciation = Rs.1,875
Total depreciation = (625 + 1,875) = Rs.2,500
Closing WDV = Nil
Q
 Income from Business
Q Practical Problems
SOLUTION -1
Computation of assessable income Business/Profession of Mr. Avinash for the income
year 2079/80
Particulars Rs. Rs.
Admissible income

( )
100 400,000
Audit fees Rs.340 ,000 × 85
200,000
Consultation fees
100,000
Accounting assistance fees
Assessable income from profession 700,000
Note: Meeting fees (up to Rs. 20,000 per meeting), lottery win and interest from bank deposit
are final withholding income under Section 92. Audit fees is subject to advance TDS 15%, so it
should be included in income.

SOLUTION - 2
Amount to be included in business
Particulars Rs.
Gain on disposal of business land (Rs.1,000,000 – 800,000) Rs.200,000
Gain on disposal of business liability (Rs.200,000 – 180,000) 20,000
Total income to be included 220,000

SOLUTION - 3
Amount to be included in business
Particulars Rs.
Disposal value of pool of computer 300,000
Less: Base value of pool dissolved 250,000
Net gain from disposal of depreciable assets to be included 50,000
Note: As per the IT Act 2058, only gain on disposals of total block of assets is required to be
included into income. Therefore, gain on disposals of a motorcycle is not included into income.

SOLUTION - 4
Adjusted taxable income for interest
Particulars Rs.
Gross income excluding interest income 2,000,000
Less: Total deduction before interest 1,600,000
Adjusted taxable income 400,000
Allowable interest paid to controlling entity
50% of 400,000 200,000
18 Solution Manual to Taxation and Auditing

Add: Interest income 400,000

Total interest allowable 600,000
Or, Actual interest paid (whichever is lower) 800,000
∴ Allowable interest Rs.600,000

SOLUTION - 5
Allowable amount of repair cost
Particulars Rs.
7% of 1,200,000 84,000
or Actual repair cost (whichever is lower) 90,000
∴ Allowable repair cost Rs.84,000

SOLUTION - 6
Adjusted taxable income and allowable PCC and R & D cost
Particulars Rs.
Gross income from business 1,800,000
Less: Total deduction before PCC and R & D (1,200,000)
Business loss (50,000)
Adjusted taxable income from business 550,000
Allowable PCC:
50% of 550,000 Rs.275,000
or, Actual PCC (whichever is lower 200,000
∴ Allowable amount of PCC Rs.200,000
Allowable R & D cost:
50% of 550,000 Rs.275,000
or, Actual R & D cost (whichever is lower) 300,000
∴ Allowable R & D cost Rs.275,000

SOLUTION - 7
Calculation of adjusted taxable income
Particulars Rs. Rs.
Gross income from business 3,000,000
Less: Total deduction before PCC and R&D (2,200,000)
Less: Business loss (120,000)
Adjusted taxable income for PCC and R&D 680,000
Less: Allowable PCC
50% of 680,000 340,000
or Actual (whichever is lower) 300,000 (300,000)
Assessable income from business 380,000
Assessable income from investment (200,000 – 50,000) 150,000
Total assessable income 530,000

Allowable donation to Public school

ATI for PCC and R&D 680,000
Add: Assessable income from investment 150,000
Adjusted taxable income for donation 830,000
∴ Allowable donation
5% of 830,000 Rs. 41,500
Or, actual donation paid 150,000
Or, Maximum limit (whichever is lower) 100,000
∴ Allowable donation = Rs. 41,500
 Chapter 6 • Income from Business 19

Allowable donation to Religious Heritage

10% of 530,000 Rs. 53,000
Or, Actual donation 100,000
Or, Maximum limit (whichever is lower) 1,000,000
∴ Allowable donation to Religious Heritage = Rs. 53,000
Total Donation = 41,500 + 53,000 = Rs. 94,500
Note: Donation paid to public school is allowed 5% of adjusted taxable income. However,
donation paid to religious is allowed 10% of assessable income.

SOLUTION - 8
Calculation of assessable from profession of a lawyer for the income year 2079/80:
Particulars Rs. Rs.
Admissible income/inclusions:
Consultancy fees 350,000
Legal fees 420,000
Commission relating to legal work 30,000
Interest relating to profession 4,000
Gross income from profession 804,000 804,000
Less: Allowable Deductions:
Office salary to staff 50,000
Office expenses 30,000
Interest collection charge 500
Telephone and electricity 5,000
Total deduction allowed 85,500 (85,500)
Assessable income from profession 718,500
Note:
1. Income from agriculture of an individual is tax exempt under Section 11.
2. Interest on fixed deposit is subject to final withholding income under Section 92.
3. Domestic expenses is not allowable for deduction under Section 21.
4. Collection charge of interest on government security is not allowable for deduction since it
is relating to non-taxable income.

SOLUTION - 9
a. Computation of assessable income from professional business of Mr. Pyakurel for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Legal fees 98,000
Consultation fees 22,200
Gift from client 10,000
Fees from attesting document 20,000
Gross income from profession 150,200 150,200
Less: Allowable Deductions:
Office rent 12,000
Telephone charges 1,000
Stationeries and printings 7,000
Electricity charges 7,000
Subscription to law journal 1,500
Total deduction allowed 28,500 28,500
Assessable income from profession 121,700
Note:
1. Donation given to beggar is not allowable for reduction.
2. Interest on personal loan is not allowable for deduction because it is a personal expenses
of tax payer.
20 Solution Manual to Taxation and Auditing

3. Interest on saving deposit, lottery win and dividend from Prabhu Bank are subject to final
withholding income.

SOLUTION - 10
a. Computation of assessable income from profession of Mr. B.K. Shrestha for the income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Audit fees 950,000
Consultation fees 550,000
Sale of old Journals and magazines 35,000
Miscellaneous income 10,000
Gross income from profession 1,545,000 1,545,000
Less: Allowable Deductions:
Office expenses (185,000 –5,000) 180,000
Office rent 120,000
Telephone and stationery 15,000
26,087
( 100
Interest on loan 30,000 × 115 ) 1,000
Membership subscription
500
Renewal of license
4,500
Journals and periodicals
5,000
Car expenses
25,000
Allowable depreciation
5,000
Miscellaneous expenses
Total deduction allowed 382,087 382,087
Assessable income from profession 1,162,913
b. Statement of Total Taxable Income
Assessable income from profession 1,162,913
Assessable income from investment Nil
Assessable income form employment Nil
Total assessable income 1,162,913
Less: Common deduction
Donation:
5% of 1,162,913 58,146
or Actual donation paid 50,000
or Maximum limit (whichever is lower) 100,000 (50,000)
Taxable income before exemption
Less: Life insurance premium
Actual premium paid 60,000
or Maximum limit (whichever is lower) 40,000 (40,000)
Taxable income 1,072,913
 Chapter 6 • Income from Business 21

c. Computation of Tax Liability

First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance 72,913 @ 30% 21,874
Total tax liability 101,874
Less: Medical tax credit:
15% of 5,500
or Maximum 825
(whichever is lower) 750 (750)
Total tax payable 101,124
Note:
1. Dividend from resident company is subject to final withholding income.
2. Bad debt recovered not allowed previously is not required to be included into income.
3. Salary paid to household servant is not allowable for deduction.
4. Since Mr. Shrestha is adopting cash basis of accounting, outstanding expenses Rs. 10,000
is not required to be included into expenses.
5. Last year receivable received in the current year is included in income under cash b asis
system.

PP -11
Computation of assessable income from profession of Dr. Bhattarai for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Consultancy fees 750,000
Visiting fee 725,000
Income from minor surgery 30,000
Income from writing articles 9,000
Gift from patient 5,000
Award relating to profession 30,000
Gross income from business/ Profession 1,549,000 1,549,000
Less: Allowable Deductions:
Office salaries 200,000
Car expenses 20,000
Telephone and electricity 20,000
Purchase of news paper 1,000
Interest on loan 3,000
Auditors fees 10,000
Rent of the office 60,000
Depreciation on surgical equipment 10,500
Total deduction allowed 324,500 324,500
Assessable income from profession 1,224,500

b. Statement of Total Taxable Income

Assessable income from profession 1,224,500
Assessable income from investment Nil
Assessable income form employment Nil
Total assessable income 1,224,500
Less: Allowable Donation:
22 Solution Manual to Taxation and Auditing

5% of 1,224,500 61,225
or Actual 5,000
or Maximum limit (whichever is lower) 100,000 (5,000)
Taxable income before exemption 1,219,500
Less: Health insurance Premium exemption:
Actual premium paid 15,000
or Maximum limit (whichever is lower) 20,000 (15,000)
Taxable income 1,204,500
c. Computation of Tax Liability
First Rs. 500,000 (single) Nil
Next 200,000 @ 10% 20,000
Next 300,000 @ 20% 60,000
Bal. 204,500 @ 30% 61,350
Total tax liability 141,350
Less: Advance tax paid 7,000
Tax payable 134,350
Working note:
1. Allowable depreciation block-D
Opening WDV Rs.50,000
Add: Additions:

(
Beginning 10,000 × 3
3
) 10,000

Falgun (10,000 × 23) 6,667

Baisakh (10,000 × 3)
1
3,333

Less: Disposal during the year Nil

Depreciation base amount 70,000
Allowable depreciation @ 15% 10,500
Note:
1. Interest on securities, dividend from resident company, lottery win, part-time salary and
meeting fees are subject to final withholding income.
2. Interest on loan taken to purchase equipment is allowable for deduction.
3. Securities were purchase by his ancestor's property indicate that the interest on security is
not relating to profession.
4. Income from paper setting and examining the answer sheet is final withholding income.
5. Dr. Bhattarai adopting cash basis, hence advance received for next year is taxable.

SOLUTION - 12
a. Computation of assessable income from profession of Mr. Devendra for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Consultation fees (425,000/85 × 100) 500,000
Sale of old newspaper 1,150
Survey and designing service 348,000
Fees from valuation properties 435,000
Gift from client 200,000
Gross income from profession 1,484,150 1,484,150
Less: Allowable Deductions:
Administrative expenses 163,000
Interest on bank loan (45,000 × 60/100) 27,000
 Chapter 6 • Income from Business 23

Rent of office 132,000

Staff uniform expenses 15,000
Car expenses 47,500

( 20
Depreciation on car 700,000 × 100 ) 140,000
Total deduction allowed 524,500 (524,500)
Assessable income from profession 959,650
b. Statement of Total Taxable Income
Assessable income from profession 959,650
Assessable income from investment Nil
Assessable income from employment Ni
Total assessable income 959,650
Less: Donation to public school:
5% of 959,650 47,983
or Actual donation paid 10,000
or Maximum limit (whichever is lower) 100,000 (10,000)
Taxable income before exemption 949,650
Less: LIP exemption:
Actual LIP paid 40,000
or Maximum limit (whichever is lower) 40,000 (40,000)
Taxable income 909,650
Note:
1. Interest on debenture, salary as a part time lecturer, rent from house, and dividend income
are final withholding income.
2. Bank loan is not a income.
3. Interest on loan relating to daughter's admission to a college is not allowed for deduction as
it is a personal expenses.
4. Domestic expenses is not allowable for deduction.
SOLUTION - 13
a. Computation of assessable income from profession of Mr. Pandey for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Auditing fees (980,000 – 100,000) 880,000
Income from project analysis 220,000
Consultation fees (115,000 + 100,000) 215,000
Fees from drafting rule 35,000
Sale of newspaper 1,000
Fees from writing articles 21,500
Income from conducting training programme 65,500
Miscellaneous income 22,000
Gross income from profession 1,460,000 1,460,000
Less: Allowable Deductions:
Office expenses 70,000
Office rent 18,000

(
Electricity and telephone 13000 × 2
1
) 6,500
1,500
Subscription to ICAN journal
Membership fees 2,500
Staff salaries 32,000
24 Solution Manual to Taxation and Auditing

Miscellaneous expenses 6,000

Allowable depreciation 45,000
Allowable repair cost 6,000
Interest expenses 12,000
Stationeries 4,000
Guest entertainment 1,000
Renewal of membership (late fees) 2,500
Total deduction allowed 207,000 207,000
Assessable income from profession 1,253,000
b. Statement of total taxable Income
Assessable income from profession 1,253,000
Assessable income from investment Nil
Assessable income form employment Nil
Total assessable income 1,253,000
Less: Common Donation:
Donation to a college (assume tax exempt)
5% of 1,253,000 62,650
or Actual 4,000
or Maximum limit (whichever is lower) 100,000 4,000
Taxable income before exemption 1,249,000
c. Computation of tax liability
Particulars Rs.
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 249,000 @ 30% 74,700
Total tax liability 154,700
Note:
1. Interest on fixed deposits is final withholding income.
2. Fine and penalty is not allowable for deduction.
3. Electricity and telephone expenses relating to personal use of tax payer is not allowable for
deduction.
4. Renewable of membership is allowable for deduction.
SOLUTION - 14
a. Computation of assessable income from profession/business of Mr. Mahat for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Consultancy fees (510,000 × 100/85) 600,000
Advisory fees 315,000
Income from project analysis 67,000
Professional receipts 70,000
Receipts from conducting training programme 76,300
Gifts from clients 13,000
Gross income from profession 1,141,300 1,141,300
Less: Allowable Deductions:
Salary to staff (27,000 –5,000) 22,000
Travelling expenses (46,500 – 15,000) 31,500
Interest on loan (41,000 × 1/2) 20,500
Firm renewal fees 1,500
Vehicles expenses (15,000 × 1/2) 7,500
Office expenses including rent (68,000 – 1/4 × 40,000) 58,000
Allowable depreciation 45,000
 Chapter 6 • Income from Business 25

Allowable repair cost 7,500

Total deduction allowed 193,500
Assessable income from profession 947,800
Assessable income from investment:
Net gain from sale of share (82,000 –50,000) 32,000
b. Statement of taxable income
Assessable income from profession 947,800
Assessable income from investment 32,000
Assessable income form employment Nil
Total assessable income 979,800
Less: Allowable reduction:
Donation to tax exempt organization
5% of 979,800 48,990
or Actual (113,000 × 60/100) 67,800
or Maximum limit (whichever is lower) 100,000 (48,990)
Taxable income before exemption 930,810
Less: Health insurance Premium
Actual 11,000
Or, Maximum (whichever is lower) 20,000 (11,000)
Taxable income 919,810
Taxable income excluding capital gain 887,810
(Rs.919,810 – Rs.32,000)
c. Computation of tax liability
Particulars Rs.
First Rs.500,000 (Basic exemption- single) Nil
Next Rs.200,000 @ 10% 20,000
Balance Rs.187,810 @ 20% 37,562
Capital gain Rs.32,000 @ 10% 3,200
Total tax liability 60,762
Less: Advance tax paid (90,000 + 3,200) 93,200
Tax refundable (32,438)
Note:
1. Interest on fixed deposits and dividend from a mutual fund are final withholding income.
2. Interest on loan taken to pay income tax is not allowable.

SOLUTION - 15
a. Computation of assessable income from business of Mr. Shyam for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales revenue 1,500,000
Commission received 7000,000
Discount received 10,000
Miscellaneous income 10,000
Gross income from business 2,220,000
Less: Allowable Deductions:
Cost of trading stock (WN-1) 845,000
Depreciation: block-c (WN-2) 67,667
Bad debts 8,000
26 Solution Manual to Taxation and Auditing

Salaries 100,000
Hospitality expenses 20,000
Fire insurance premium 20,000
Allowable repair: block-c (WN-3) 10,000
Discount and commission 39,000
Advertisement expenses 25,000
Total deduction allowed 1,134,667 (1,134,667)
Assessable income from business 1,085,333
b. Statement of Total Income
Assessable income from business 1,085,333
Assessable income from investment Nil
Assessable income form employment Nil
Total assessable income 1,085,333
Less: Common Donation:
Donation to tax exempt organization:
Fully allowable sector (80,000)
Public school:
5% of 1,085,333 54,267
or Actual donation paid 15,000
or Maximum limit (whichever is lower) 100,000 (15,000)
Taxable income before exemption 990,333
Less: LIP exemption (self):
Actual LIP paid 30,000
or Maximum limit (whichever is lower) 40,000 (30,000)
Taxable amount 960,333
c. Computation of tax liability
Particulars Rs.
First Rs.500,000 (Single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 260,333 @ 20% 52,067
Total tax liability 72,067
Working note:
1. Cost of trading stock
Opening stock 200,000
Add: Purchase (850,000 –80,000) 770,000
Less: Closing stock (125,000)
Cost of trading stock 845,000
2. Calculation of allowable depreciation block-c
Opening WDV Rs.320,000
Add: Additions during the year:

(
Chaitra: 80,000 × 3 )
2 53,333

Less: Disposal during the year (35,000)

Depreciation base amount 338,333
Allowable depreciation @ 20% 67,667
 Chapter 6 • Income from Business 27

3. Allowable repair cost:

7% of 338333 23,683
or Actual repair cost (whichever is lower) 10,000
SOLUTION - 16
1. Assessable income from business of Mr. Prapanna for the income year 2079/80
Particulars Rs.
Sales 2,500,000
Interest 140,000
Miscellaneous income 150,000
Amount received for accepting business restrictions 45,000
Bad-debt recovered (50% of Rs. 20,000) 10,000
Gross income from business 2,845,000
Less: Allowable deduction:
Cost of trading stock (WN a) 1,200,000
Office salaries 100,000
Printing and stationery 130,000
Legal expenses (20,000 – 15,000) 5,000
General expenses including electricity and telephone 160,000
Interest on loan 60,000
Depreciation on plant (WN-b) 30,000
Fire insurance premium 15,000
Miscellaneous expenses 40,000
Discount allowed 2,000
Bad-debts 7,000
Advertising 20,000
Total deduction before R&D cost 1,769,000 1,769,000
Adjusted taxable income before loss adjustment 1,076,000
Less: Business loss NIL
Adjusted taxable income for PCC and R&D 1,076,000
Less: R&D cost
50% of 1,076,000 538,000
Actual (whichever is lower) 40,000 (40,000)
Assessable income from Business 1,036,000
2. Assessable income from investment
Particulars Rs.
Gain on sale of non-business chargeable assets (capital gain) 60,000
Gross income from investments 60,000
Less: Allowable deduction Nil
Assessable income from investment 60,000
3. Statement of total taxable income
Particulars Rs.
Assessable income from business 1,036,000
Assessable income from investment 60,000
Assessable income from employment Nil
Total assessable income 1,096,000
Less: Allowable reduction:
Donation (WN c) (30,000)
Life insurance premium
Actual 5,000
Or Maximum (whichever is lower) 40,000 (5,000)
Total taxable income 1,061,000
Less: Capital gain (gain on sale of non business assets) 60,000
Taxable income excluding capital gain 1,001,000
28 Solution Manual to Taxation and Auditing

4. Tax liability
Particulars Rs.
First Rs. 500,000 (assumed single) Nil
Next Rs. 200,000 @ Rs. 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 1,000 @ 30% 300
Capital gain Rs. 60,000 @ 10% 6,000
Total tax liability 86,300
Working notes:
a. Cost of trading stock:
Opening stock 200,000
Add: Purchase (Rs. 1,300,000 – 150,000) 1,150,000
Wages 300,000
Custom duty 150,000
Less: Closing stock (600,000)
1,200,000
b. Calculation of depreciation on plant:
Depreciation base: Rs. 50,000 + Rs. 150,000 × 3/3 – Nil = Rs. 200,000
Depreciation = Rs. 200,000 × 15/100 = Rs. 30,000
c. Donation
Adjusted taxable income from business for R&D 1,076,000
Assessable income from investment 60,000
Assessable income from employment Nil
Total adjusted income 1,136,000
5% of Rs. 1,136,000 56,800
or, Actual (60% of 50,000) 30,000
Maximum
(whichever is lower) 100,000

e. Donation to non-exempt entity is not allowable.

SOLUTION - 17
Calculation of assessable income from business of Mr. Kishor Kumar for the income year
2079/80
Particulars Rs.
Income from business
Sales (6,500,000 – 500,000) 6,000,000
Commission 50,000
Sundry receipts (Rs. 70,000 – Rs. 5,000) 65,000
Gross income from business 6,115,000
Less: Allowable deduction:
Cost of trading stock (WN-1) 2,840,909
Legal expenses (Rs. 10,000 – Rs. 5,000) 5,000
Hospitality expense 15,000
Repairs (Others Rs. 200,000 – Rs. 40,000) 160,000
Repairs expenses of car (WN-2) 35,000
Depreciation of car (20% of Rs. 500,000) 100,000
Depreciation (others) 300,000
Bonus to staff 70,000
Audit fee 40,000
Office salaries (300,000 – 30,000) 270,000
Bad debts 20,000
 Chapter 6 • Income from Business 29

Total deduction before PCC and R&D cost 3,855,909 3,855,909

Adjusted taxable income before loss adjustment 2,259,091
Less: Business loss 150,000
Adjusted taxable income for PCC and R&D 2,109,091
Less: Allowable R&D cost
50% of Rs. 2,109,091 1,054,545
or actual Rs. 50,000 (whichever is lower) 50,000 (50,000)
Assessable income from business 2,059,091
Income from investment
Interest on investment + Royalty (40,000 + 50,000) 90,000
Assessable income from investment 90,000
Statement of Total Taxable Income
Particulars Rs.
Assessable income from business 2,059,091
Assessable income from investment 90,000
Assessable income from employment Nil
Total assessable income 2,149,091
Less: Allowable reduction
Donation: 5% (2,109,091 + 90,000) 109,955
or, Actual donation 150,000
or, Maximum 100,000 (100,000)
Total taxable income 2,049,091
Calculation of Tax Liability
First Rs. 500,000 (assumed individual) Nil
Next Rs. 200,000 @ 10% Rs. 20,000
Next Rs. 300,000 @ 20% 60,000
Next Rs. 1,000,000 @ 30% 300,000
Balance Rs. 49,091 @ 36% 17,673
Total tax liability 397,673
Less: Advance income tax paid 50,000
Tax payable 347,673
Working notes:
1. Calculation of cost of trading stock
Opening stock (200,000/110 × 100) 181,818
Add: Purchase (2,000,000 – 150,000) 1,850,000
Manufacturing expenses 800,000
Wages outstanding 100,000
Less: Closing stock (100,000/110 × 100) (90,909)
Cost of trading stock 2,840,909
2. Allowable repair of car
7% of 500,000 Rs. 35,000
Or actual (whichever is lower) 40,000
30 Solution Manual to Taxation and Auditing

SOLUTION - 18
a. Calculation of assessable income from business of Mr. Bikash for the income
year 2079/80
Particulars Rs.
Income from business:
Sales 5,500,000
Sundry incomes (50,000 – 20,000) 30,000
Bad debts recovered (60% of Rs.15,000) 9,000
Refund of custom duty 10,000
Gross income from business 5,549,000
Less: Allowable deductions:
Cost of trading stock (WN-1) 2,400,000
Salaries (120,000 + 30,000 – 20,000) 130,000
General expenses (excluding telephone) 15,000
Telephone expenses 5,000
Interest on loan 15,000
Rent and taxes 12,000
Employee's welfare expenses (Rs.25,000 – Rs.10,000) 15,000
Fire insurance premium 10,000
Bad debts written off 5,000
Advertisement expenses 22,000
Depreciation on machinery (WN-2a) 52,500
Repairs of machinery (WN-3) 5,000
Total deduction before PCC and R&D cost 2,686,500 2,686,500
Adjusted taxable income before loss adjustment 2,862,500
Less: Business loss 120,000
Adjusted income from business before R & D cost 2,742,500
Less: R & D cost
50% of Rs.2,742,500 1,371,250
or actual Rs.50,000 (whichever is lower) 50,000 (50,000)
Assessable income from business 2,692,500
Income from investment:
Interest from investment 80,000
Gain on sale of non-business chargeable assets 90,000
Assessable income from investment 170,000
b. Statement of taxable income
Particulars Rs.
Assessable income from business 2,692,500
Assessable income from investment 170,000
Assessable income from employment Nil
Total assessable income 2,862,500
Less: Allowable reductions:
Donation to exempt organization (WN-4) (10,000)
Total taxable income 2,852,500
Less: Life insurance premium
Actual (self) (17,000 – 4,000) 13,000
or maximum (whichever is less) 40,000 (13,000)
Remaining taxable income 2,839,500
Less: Capital gain 90,000
Taxable income excluding capital gain 2,749,500
 Chapter 6 • Income from Business 31

C. Calculation of tax liability

Particulars Rs.
First Rs.500,000 (single) Nil
Next Rs.200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Next Rs. 1,000,000 @ 30% 300,000
Balance Rs. 749,500 @ 36% 269,820
Capital gain Rs. 90,000 @ 10% 9,000
Total tax liability 658,820
Working notes:
1. Cost of trading stock
Opening stock 150,000
Add: Purchase during the year (2,500,000 – 200,000 – 50,000) 2,250,000
Custom duty 100,000
Wages 200,000
Less: Closing stock (300,000)
Cost of trading stock 2,400,000
2. Allowable depreciation (block-D)
Opening WDV 150,000
Add: Additions:
Marga (200,000 × 3/3) 200,000
Less: Disposal Nil
Depreciation basis 350,000
Allowable depreciation @ 15% 52,500
3. Allowable repair
7% of 350,000 24,500
Or Actual repair (whichever is lower) 5,000
4. Calculation of allowable donation to exempt organization
Adjusted taxable income for R & D cost Rs.2,742,500
Add: Assessable income from investment Rs.170,000
Adjusted taxable income for donation Rs.2,912,500
∴ Allowable donation:
5% of Rs.2,912,500 Rs. 145,625
Or Actual Rs. 10,000
Or Maximum (whichever is lower) Rs. 100,000
5. Provision for tax is not deductible.
6. Dividend (net) is assumed to be received from resident company which is subject to final tax.
Note: Health insurance premium paid to India is not eligible for exemption..

SOLUTION - 19
a. Computation of assessable income from business of Mr. Y for the income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Gross profit (565,500 – 10,000) 555,500
Discount received (2,300 + 35,000) 37,300
Speculation gain 500,000
Commission received 4,000
Bad debt recovered 56,000
Sundry income 27,200
Gross income from business 1,180,000 1,180,000
Less: Allowable Deductions:
Office salaries including P.F. 82,000
General expenses (38,500 – 3,500) 35,000
32 Solution Manual to Taxation and Auditing

Rent, rates and taxes 1,800

Advertisement paid 20,000
Postage and telegram 4,000
Legal charges 10,300
Bad debts 2,500
Fire insurance 12,200
Audit fees 43,000
Staff welfare expenses 24,000
Allowable depreciation (55,000/110 × 100) 50,000
Allowable repair cost 7,000
Interest expenses 30,000
Robbery of cash 10,000
Total deduction allowed 331,800 331,800
Assessable income from business 848,200
b. Statement of total taxable income
Assessable income from business 848,200
Assessable income from investment Nil
Assessable income from employment Nil
Total assessable income 848,200
Less: Common Donation/Reduction:
Allowable donation to tax exempt organization
5% of 848,200 42,410
or Actual donation paid 7,000
or Maximum limit (whichever is lower) 100,000 (7,000)
Taxable income before exemption 841,200
c. Computation of tax liability
Particulars Rs.
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 141,200 @ 20% 28,240
Total tax liability 48,240
Less: Medical tax credit:
15% of Rs. 10,000 1,500
or, Maximum 750 (750)
Total tax payable 47,490

SOLUTION - 20
a. Computation of assessable income from business of Shrestha Trading firm for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 3,000,000
Amount received for business restriction 150,000
Income from change in accounting system 110,000
Interest subsidy 40,000
Gross assessable income from profession 3,300,000 3,300,000
Less: Allowable Deductions:
Cost of sales 1,425,000
Administrative and other expenses 310,000
Total deduction before PCC and R & D 1,735,000 (1,735,000)
Adjusted taxable income before loss 1,565,000
 Chapter 6 • Income from Business 33

Less: Business loss 130,000

Adjusted taxable income for PCC, R & D 1,435,000
Less: Allowable pollution control cost
50% of 1,435,000 717,500
or Actual pollution cost (whichever is lower) 80,000 (80,000)
∴ Research and development cost
50% of 1,435,000 717,500
or Actual of R & D cost (whichever is lower) 90,000 (90,000)
Assessable income from business 1,265,000
Less: Allowable donation
5% of 1,435,000 71,750
or Actual donation paid 40,000
or Maximum limit (whichever is lower) 100,000 (40,000)
Taxable income 1,225,000
Computation of tax liability
Particulars Rs.
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 225,000 @ 30% 67,500
Total Tax liability 147,500
Less: Advance tax paid 8,000
Tax payable 139,500

SOLUTION - 21
Computation of assessable income from business of a trading company for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales revenue 5,660,000
Income from godown rent 30,000
Commission received 20,000
Other income (75,000 –40,000) 35,000
Gross assessable income from business 5,745,000 5,745,000
Less: Allowable Deductions:
Cost of trading stock 2,119,300
Allowable depreciation (WN-2):
Block - A 75,000
Block-B 50,000
Block-C 200,000 325,000
Office expenses 130,000
Selling and distribution expenses 44,000
Marketing expenses 120,000
Hospitality expenses 37,000
Legal charges (17,000 – 5,500) 11,500
Audit fees 15,000
Discount and commission 7,500
Rent and rates 17,500
Total deduction before PCC and R&D 2,826,800 2,826,800
Adjusted income (loss) from business before loss (2,918,200)
Less: Business loss previous (118,200)
34 Solution Manual to Taxation and Auditing

Adjsuted taxable income for PCC and RD 2,800,000

Less: Allowable PCC:
50% of Rs. 2,800,000 1,400,000
or, Actual PCC 400,000 (400,000)
(whichever is lower)
Assessable income from business 2,400,000
Assessable Income from Investment
Interest from investment 65,500

( 100
Gain on sale of securities 51,000 × 85 ) 60,000
(20,000)
Less: Loss on sale of securities (last year)
Net gain on sale of securities 40,000
Assessable income from investment 105,500
Statement of Total Taxable Income
Assessble income from business Rs. 2,400,000
Assessable income from investment 105,500
Total assessable income 2,505,500
Less: Donation of religious heritage
10% of Rs. 2,505,500 250,550
or Actual donation 100,000
or Maximum 1,000,000 (100,000)
(whichever is lower)
Taxable income 2,405,500

Tax liability (2,405,500 @ 25%) 601,375

Less: Advance tax paid 9,000
∴ Tax liability 592,375
Working notes:
1. Cost of trading stock
Opening stock (550,000/110 × 100) 500,000
Purchase 2,000,000
Labour charges 18,000
Transportation expenses 1,300
Closing stock (440,000/110 × 100) (400,000)
Cost of trading stock 2,119,300
2. Calculation allowable depreciation
Block-A Block-B Block-C
Opening WDV 1,500,000 200,000 1,000,000
Add: loss: Addition/disposal Nil Nil Nil
Depreciation base amount 1,500,000 200,000 1,000,000
Rate of depreciation 5% 25% 20%
Allowable depreciation 75,000 50,000 200,000
 Chapter 6 • Income from Business 35

SOLUTION - 22
a. Computation of assessable income from business of Bishal Trading company for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 590,000
Interest income 130,000
Gross income from business 720,000 720,000
Less: Allowable Deductions:
Cost of sales 125,000
Salaries 65,000
Exchange loss 20,000
Bad debt 15,000
Advertisement paid 5,000
Commission 3,000
Entertainment expenses 1,000
Loss on stock in trade 300,000
Audit fees 6,000
Allowable interest paid to controlling (WN-1) 60,000
Total deduction allowed 600,000 600,000
Assessable income from business 120,000
b. Statement of total taxable income
Assessable income from business 120,000
Assessable income from investment Nil
Total assessable income 120,000
Less: Allowable Donation to PADT:
10% of 120,000 12,000
or Actual donation 10,000
or Maximum limit (whichever is lower) 1,000,000 (10,000)
Taxable amount 110,000
c. Computation of tax liability
Total tax liability @ 25% 27,500
Working note:
1. Adjusted taxable income and allowable
Interest paid to controlling entity Rs.590,000
Gross income excluding interest 540,000
Adjusted taxable income 50,000
Allowable interest:
50% of 50,000 25,000
Add: Interest income 130,000
Maximum allowable limit 155,000
or Actual interest paid (whichever is lower) 60,000
Allowable interest 60,000
36 Solution Manual to Taxation and Auditing

SOLUTION - 23
a. Computation of assessable income from business of Homeland Developers & Co. Ltd. for
the income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Rent income collected 4,000,000
Sale of house 38,000,000
Interest on bank deposit (425,000/85 × 100) 500,000
Commission received 35,000
Gross income from business 42,535,000 42,535,000
Less: Allowable Deductions:
Office expenses 550,000
Purchase of house 31,000,000
Salaries to staff 450,000
Property insurance 40,000
Advertisement 300,000
Vehicle expenses (150,000 × 80/100) 120,000
Allowable depreciation 425,000
Allowable repair 75,000
Audit fees 20,000
Bonus to staff 80,000
Interest on loan 480,000
Legal expenses (160,000 × 60/100) 96,000
Miscellaneous expenses 300,000
Total deduction allowed 33,936,000 (33,936,000)
Assessable income from business 8,599,000
Income from investment
Interest on investment 200,000
Less: Allowable deduction Nil
Assessable income from investment 200,000
b. Statement of total income
Assessable income from business 8,599,000
Assessable income from investment 200,000
Total assessable income 8,799,000
Less: Allowable donation:
10% of 8,799,000 879,900
or Actual 460,000
or Maximum limit (whichever is lower) 1,000,000 (460,000)
Taxable income 8,339,000
c. Computation of tax liability
Particulars Rs.
Tax liability @ 25% 2,084,750
Less: Advance tax paid 75,000
Tax payable 2,009,750
Note: Interest on bank deposit is advance TDS to the company, so it should be included in income.
 Chapter 6 • Income from Business 37

SOLUTION - 24
a. Computation of assessable income from business of a manufacturing company for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 13,500,000
Sales of scraps 25,000
Commission received 50,000
Interest received (asumed business) 80,000
Gain on sale of land (Business land) 500,000
Bad debt recovered (80,000 – 20,000) 60,000
Gross income from business 14,215,000 14,215,000
Less: Allowable Deductions:
Cost of trading stock (CTS) 8,705,000
Allowable repair cost 100,000
Salaries 300,000
Water and electricity 50,000
General charges 290,000
Legal expenses 80,000
Allowable depreciation 600,000
Entertainment expenses 160,000
Advertisement expenses 200,000
Bad debt 150,000
Total deduction before PCC and R & D 10,635,000 10,635,000
Adjusted taxable income before loss 3,580,000
Less: Allowable for PCC:
50% of 3,580,000 1,790,000
or Actual pollution control cost (whichever is lower) 300,000 (300,000)
∴ Allowable R & D cost:
50% of 3,580,000 1,790,000
or Actual R & D cost (whichever is lower) 150,000 (150,000)
Assessable income from business 3,130,000
b. Statement of Total Income
Assessable income from business 3,130,000
Assessable income from investment Nil
Total assessable income 3,130,000
Less: Allowable Deduction:
Donation to Kamalamai Municipality
5% of 3,580,000 179,000
or Actual donation paid 400,000
or Maximum limit (whichever is lower) 100,000 (100,000)
Taxable income 3,030,000
c. Computation of tax liability
Particulars Rs.
Rs.3,030,000 @ 17% (20 – 15% of 20) Rs.515,100
Less: Advance tax paid 40,000
Tax payable 475,100
Working note:
1. Calculation of cost of trading stock
Opening stock (770,000/110 × 100) 700,000
Add: Purchase (5,340,000 – 200,000) 5,140,000
Freight 345,000
Wages 1,500,000
Royalty 500,000
38 Solution Manual to Taxation and Auditing

Manufacturing expenses 1,000,000

Custom duty paid 20,000
Less: Closing stock (500,000)
Cost of trading stock 8,705,000
Note: Manufacturing entity listed in Stock Exchange Centre is allowed 15% tax rebate on its
applicable. Thus, tax rate becomes (20 – 15% of 20) = 17%

SOLUTION - 25
Computation of assessable income from business for the income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Gross profit (2,065,000 + 40,000) 2,105,000
Gain on disposal land (business) 200,000
Bad debt recovered 51,000
Interest received (business) 55,000
House rent (business) (85,000/90 × 100) 94,444
Interest subsidy 5,000
Gross income from business 2,510,444 2,510,444
Less: Allowable Deductions:
Office salary 150,000
Interest on bank loan 20,000
General expenses (250,000 –100,000) 150,000
Compensation to old employee 100,000
Bad debts 20,000
Advertisement expenses 245,000
Entertainment expenses 200,000
Depreciation (allowable) 140,000
Contribution to retirement fund (employee) 250,000
Legal charge 50,000
Car expenses 10,000
Miscellaneous expenses (335,000 – 300,000) 35,000
Depreciation block-E (40,000/5.5) 7,273
Total deduction before PCC and R & D 1,377,273 1,377,273
Adjusted taxable income before loss 1,133,171
Less: Business loss Nil
Adjusted taxable income from business 1,133,171
Less: Allowable R & D cost
50% of 113,3171 566,585
or Actual R & D cost (whichever is lower) 160,000 (160,000)
Less: Allowable PCC
50% of 113,3171 566,585
or Actual PCC (whichever is lower) 300,000 (300,000)
Assessable income from business 673,171
Assessable income from investment:
Interest on investment 20,000
Less: Allowable deduction Nil
Net assessable income from investment 20,000
b. Statement of total income
Assessable income from business 673,171
Assessable income from investment 20,000
Total assessable income 693,171
Less: Common Deduction:
Donation to tax exempt organization:
57,659
5% of 1,153,171 (1,133,171 + 20,000)
110,000
 Chapter 6 • Income from Business 39

or Actual donation 100,000

or Maximum limit (whichever is lower) (57,659)
Taxable income 635,512
Tax liability @ 25% 158,878
Note: It is assumed that depreciation of block E assets is not included into allowable
depreciation given above, since the cost included in purchase cost)
SOLUTION - 26
a. Computation of assessable income from business of a manufacturing company for the
income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 2,200,000
Bad debt recovered (40,000 × 60/100) 24,000
Commission received 20,000
Amount received for accepting restriction 125,000
House rent 75,000
Sales of newspaper 1,000
Gross income from business 2,445,000 2,445,000
Less: Allowable Deductions:
Cost of trading stock (CTS) (WN-1) 859,000
Salaries (100,000 – 40,000) 60,000
Interest on loan (55,000 × 100/110) 50,000
Allowable depreciation (WN-2) 463,000
Exchange loss 5,000
Repair cost (allowable) (WN-3) 88,500
Legal expenses 20,000
Miscellaneous expenses 50,000
Total deduction before PCC and R & D 1,595,500 (1,595,500)
Adjusted taxable income before PCC and R&D 849,500
Less: Business loss Nil
Adjusted taxable income for PCC and R & D 849,500
50% of 849,500 424,750
or Actual PCC (whichever is lower) 200,000 (200,000)
∴ Allowable R & D cost
50% of 849,500 424,750
or Actual R & D cost (whichever is lower) 230,000 (230,000)
Assessable income from business 419,500
Assessable income from investment
Gain on sale of share (49,000/85 × 100) 57,648
Less: Loss on sale of share (last year) 25,000
Assessable income from investment 32,648
b. Statement of total income
Assessable income from business 419,500
Assessable income from investment 32,648
Total assessable income 452,148
Less: Donation to PADT (Religious Heritage)
10% of 452,148 45,215
40 Solution Manual to Taxation and Auditing

or Actual 192,000
or Maximum limit (whichever is lower) 1,000,000 (45,215)
Taxable income 406,933
c. Computation of tax liability
Particulars Rs.
First Rs.406,933 @ 4% Rs.16,277
Less: Advance payment of tax (Gain on sale of share) 8,648
Tax payable 7,629
Working notes:
1. Cost of trading stock (CTS)
Opening stock Rs.300,000
Add: Direct material (700,000 – 50,000) 650,000
Manufacturing expenses 300,000
Direct labour i.e. wages (50,000 – 1,000) 49,000
Less: Closing stock (440,000)
Cost of trading stock 859,000
2. Computation of allowable depreciation
Particulars Block-A Block-B Block-C Block-D
Opening WDV 600,000 300,000 150,000 450,000
Add: Additions – 51,000 660,000 –
Less: Disposal – – – –
Depreciation base amount 600,000 351,000 810,000 450,000
Depreciation (rate) 5% 25% 20% 15%
Normal depreciation 30,000 87,750 162,000 67,500
Add: Additional depreciation 1/3 10,000 29,250 54,000 22,500
Total depreciation 40,000 117,000 216,000 90,000
Total depreciation = Rs.463,000
3. Allowable repair cost
Particulars Block-A Block-B Block-D
7% of base value 42,000 24,570 31,500
or Actual (whichever is lower) 45,000 15,000 55,000
Allowable repairs 42,000 15,000 31,500
Total repair = Rs.88,500
Note: Tax rate for undeveloped area (20% of 20) = 4%
Tax rate for 340 employed (80% of 20) = 16%
(Lower of above two)

SOLUTION - 27
a. Computation of assessable income from business of a steel manufacturing company for
the income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 10,019,000
Rent from staff quarter 37,500
Discount received 100,000
Gain on disposal of commercial building 600,000
Exchange gain 10,000
Gross income from business 10,766,500 10,766,500
Less: Allowable Deductions:
 Chapter 6 • Income from Business 41

Cost of trading stock (CTS) (WN-1) 6,586,000

Allowable depreciation 250,000
Allowable repair cost 60,000
Business Tour (Director) 200,000
Audit fee 50,000
Legal expenses (50,000 – 20,000 – 25,000) 5,000
Employee welfare expenses (60,000 – 15,000) 45,000
General charge (75,000 – 40,000) 35,000
Interest paid (50,000 – 15,000) 35,000
Total deduction before PCC and R & D 7,266,000 (7,266,000)
Adjusted taxable income for PCC and R & D 3,500,500

Less: Allowable pollution control cost:

50% of 3,500,500 1,750,250
or Actual PCC (whichever is lower) 200,000 (200,000)
∴ Allowable R & D cost
50% of 3,500,500 1,750,250
or Actual R & D cost (whichever is lower) 300,000 (300,000)
Assessable income from business 3,000,500
Assessable Income from investment
Interest on investment 400,000
Assessable income from investment 400,000
b. Statement of total taxable income
Assessable income from business 3,000,500
Assessable income from investment 400,000
Total assessable income 3,400,500
Less: Donation to Kathmandu Metropolice
5% of (3,500,500 + 400,000) 195,025
or Actual donation paid 50,000
or Maximum limit (whichever is lower) 100,000 (50,000)
Taxable amount 3,350,500
c. Computation of tax liability
Particulars Rs.
Rs.33,50,500 @ 10% Rs.335,050
Working note:
1. Cost of trading stock (CST)
Opening stock Rs.550,000
Add: Purchase (5,560,000 – 550,000) 5,010,000
Freight inward 600,000
Manufacturing expenses (1,456,000 – 200,000) 1,256,000
Less: Closing stock (830,000)
Cost of closing stock 6,586,000
42 Solution Manual to Taxation and Auditing

SOLUTION - 28
a. Computation of assessable income from business/profession of Barbarik Oil Factory for
the income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Sales 8,100,000
Gain sale of business liability 37,000
Compensation received (150,000 – 75,000) 75,000
Gift received (50,000 – 7,500) 42,500
Gain on disposal of block-D 10,000
Under payment of interest 57,500
Gain on sale of business land 50,000
Gross income from business 8,372,000 8,372,000
Less: Admissible expenses:
Cost of trading stock (WN-1) 6,285,000
Salaries 500,000
Audit fees 100,000
Legal expenses 50,000
Allowable repair cost (WN-3) 42,518
General expenses (245,000 – 201,000) 44,000
Rent expenses 16,000
Interest on bank overdraft 230,000
Bad debt written off 55,000
Allowable depreciation (WN-2) 70,733
Advertisement expenses 50,000
Allowable depreciation (block-E) 20,000
Total deduction before PCC and R & D 7,463,251 (7,463,251)
Adjusted taxable income before loss: 908,749
Less: Business loss Nil
Adjusted taxable income 908,749
Less: Allowable R & D cost:
50% of 908,749 454,375
or Actual R & D (whichever is lower) 692,000 (454,375)
Assessable income from business 454,374
Income from investment
Interest on investment 45,000
Income from natural resources 120,000
Compensation 75,000
Gross income 240,000
Les: Allowable deduction
Loss on sell of share 30,000
Assessable income from investment 210,000
b. Statement of total taxable income
Assessable income from business 454,374
Assessable income from investment 210,000
Total assessable income 664,374
Less: Donation (WN-4) 50,000
Taxable amount/income 614,374
 Chapter 6 • Income from Business 43

c. Computation of tax liability

Particulars Rs.
Rs.614,374 @ 16.20% 99,528
Total tax liability Rs. 99,528
Working note:
1. Opening 460,000
Add: purchase 5,440,000
Manufacturing expenses 125,000
Direct wages 200,000
Freight in 400,000
Less: Closing (340,000)
CTS 6,285,000
2. Calculation of allowable depreciation
Particulars Block-A Block-B Block-C
Opening WDV 500,000 45,000 2,400
Add: Additions – 60,000 –
Less: Disposal – – –
Depreciation base value 500,000 105,000 2400
Normal depreciation rate 5% 25% 20%
Normal depreciation 25,000 26,250 480
Additional depreciation 1/3 8,333 8,750 160
Total depreciation 33,333 35,000 640 = 2,400
3 Allowable repair cost
Particulars Block-A Block-B Block-D
Depreciation base value 50,000 105,000 2,400
7% of base value 35,000 7,350 168
or Actual (whichever is lower) 85,000 25,000 4,000
35,000 7,350 168
4. Allowable donation
Particulars
AIT for PCC and R & D 908,749
Add: Assessable income form investment 210,000
AIT for donation 1,118,749
∴ 5% of 1,118,749 55,937
or Actual 50,000
or Maximum (whichever is lower) 100,000
Note: Industry providing employment to 150 Nepalese worker is taxed @ 90% of normal rate i.e. 18.
A further rebate 10% is allowed to the industry including 33% woman worker. Therefore, tax rate
= 18 – 10% of 18 = 16.2%

Q
 Set-off and Carry
Forward of Losses

Q Practical Problems
SOLUTION -1
Statement of set-off losses
Business Investment Un-
Particulars Nepal Bhutan Nepal Bhutan recovered
loss
Net income 200,000 80,000 50,000 50,000 –
Set-off losses:
Business loss Bhutan – (80,000) – (50,000) 20,000
Assessable income 200,000 Nil 50,000 Nil

Statement of total Income

Assessable income from business:
Nepal source 200,000
Bhutan source Nil
Assessable income from investment:
Nepal Source 50,000
Bhutan Source Nil
Total assessable income 250,000
Less: Common deduction Nil
Taxable income 250,000

Explanation:
1. Foreign business loss can be setup against foreign business and investment income in the
same country. There for business of loss of Bhutan has been setup from business and
investment income in Bhutan.
2. There is unrecovered business loss Rs. 20,000 which can be carry forward against business
and investment income for next 7 yeas.
 Chapter 7 • Set-off and Carry Forward of Losses 45

SOLUTION -2
Statement of set-off losses
Business Investment Un-
Particulars Sri Lanka Nepal USA recovered
loss
Net income 600,000 50,000 200,000 –
Set-off losses:
Investment loss Nepal – (50,000) (200,000) 100,000
Assessable income 600,000 Nil Nil

Statement of taxable Income

Income from business (foreign) Rs.600,000
Income from investment Nil
Total taxable income 600,000
Explanation:
1. Investment loss of Nepal can be se-off against global investment income. Therefore, investment
loss of Nepal has been set-up against another investment in Nepal and same income from USA.
2. There is unrecovered investment loss amounting to Rs. 100,000, which can be carry forward up
to next 7 years from global investment income.

SOLUTION -3
Statement of set-off losses
Un-
Business Investment recovered
Particulars
loss
Nepal India Nepal India Bhutan
Net income 500,000 200,000 100,000 50,000 50,000 –
Set-off losses:
Investment in India – – – (50,000) – 30,000
Assessable income 500,000 200,000 100,000 Nil 50,000 –
Statement of taxable Income
Assessable income from business
Nepal source 500,000
Indian source 200,000
Assessable income from investment
Nepal sources 100,000
Bhutan source 50,000
Total assessable income 850,000
Less: Common deduction Nil
Total taxable income 850,000
Explanation:
1. Investment loss in India can only be set-off against another investment income only. Therefore
loss of investment in India has been set-off from another investment income and remaining
unrecovered loss can be carry forward up to next 7 years from investment income in India. .
46 Solution Manual to Taxation and Auditing

SOLUTION -4
Statement of set-off losses
Business Investment Un-
Particulars recovered
Nepal India Pakistan
loss
Net income Nil 300,000 100,000 –
Set off of losses:
Investment loss (Nepal) – – (60,000) –
Business loss Nepal – (300,000) (40,000) 260,000
Assessable income Nil Nil Nil –
1. Domestic business loss can be set-off against global business and investment income.
2. Domestic investment loss can be set-off from global investment income only.

SOLUTION -5
Statement showing carry forward of losses
Years 1 2 3 4 5 6
P/L (Rs.) (50,000) (30,000) 15,000 20,000 15,000 50,000
Add : Back donation 20,000 - - 5,000 - -
: PCC - - - - - 100,000
P/L before loss adj. (30,000) (30,000) 15,000 25,000 15,000 150,000
Recovery of losses:
Year 1 - - (15,000) (15,000) - -
Year 2 - - - (10,000) (15,000) (5,000)
Adjusted taxable income Nil Nil Nil Nil Nil 145,000
Less: Allowable PCC - - - - - (72,500)
Taxable income Nil Nil Nil Nil Nil 72,500
Explanation:
1. General business loss can be carry forward up to next 7 years.
2. Loss due to donation, PCC and R & D cost is not allowable for carry forward.

SOLUTION -6
Statement showing carry forward of losses
Year Carry forward of loss
1 2 3 4 5 6
P/L Rs. (200,000) (500,000) 175,000 300,000 300,000 400,000
Add: Donation 300,000 50,000 – 150,000 – –
P/L before loss adj. 100,000 (450,000) 175,000 450,000 300,000 400,000
Forward of losses
Year 2 – – (175,000) (275,000) – –
Adjusted taxable income 100,000 Nil Nil 175,000 300,000 400,000
Less: Allowable donation 5,000 – – 8,750 – –
Taxable income 95,000 Nil Nil 166,250 300,000 400,000
Tax liability@25% 23,750 Nil Nil 41,562 75,000 100,000
Explanation:
1. General business loss can be carry forward up to next 12 years.
2. Loss due to donation is not allowed for carry forward.
 Chapter 7 • Set-off and Carry Forward of Losses 47

SOLUTION -7
Statement showing carry forward of losses
Year Carry forward of loss
1 2 3 4 5 6 7
P/L Rs. (30,000) (10,000) (140,000) 50,000 (150,000) 300,000 500,000
Add: Donation 10,000 – 200,000 – – – –
Less: Interest – – – – – (30,000) –
P/L before loss adj. (20,000) (10,000) 60,000 50,000 (150,00) 270,000 500,000
Carry forward of loss:
Year 1 – – (20,000) – – – –
Year 2 – – (10,000) – – – –
Year 5 – – – – – (150000) –
Adjusted taxable income Nil Nil 30,000 50,000 Nil 120,000 500,000
Less: Pcc – – – – – – (200,000)
Donation – – (3,000) – – – –
Taxable income Nil Nil 27,000 50,000 Nil 120,000 300,000
Tax liability@25% Nil Nil 6,750 12,500 Nil 30,000 75,000
Explanation:
1. General business loss can be carry forward up to next 7 years.
2. Loss due to donation is not allowed for carry forward.
3. Interest cost is deductible expenses.

SOLUTION -8
Statement showing carry forward of losses
Year Carry forward of loss
8 9 10 11 12
P/L Rs. 150,000 250,000 (350,000) 400,000 450,000
Add: Donation – – – – 75,000
Less: Depreciation – – – (75,000) –
P/L before loss adj. 150,000 250,000 (350,000) 325,000 525,000
Recovery of loss:
Year 1 (150,000) – – – –
Year 2 – (50,000) – – –
Year 10 – – 350,000 (325,000) (25,000)
Adjusted taxable income – 200,000 Nil Nil 500,000
Less: Donation – – – – (25,000)
Taxable income Nil 200,000 Nil Nil 475,000
Tax liability@25% Nil 50,000 Nil Nil 118,750

SOLUTION -9
Statement showing carry forward of loss
Carry forward of loss
Years
7 8 9 10 11 12 13 14 15
P/L (Rs.) 25000 15000 7500 (10000) 20000 2500 5000 15000 30000
Recovery of
losses:
Year 1 (25000) (15000) (7500) – (2500) – – – –
Year 2 – – – – (17500) (2500) (5,000) (15000) –
Year 5 – – – – – – – – (30,000)
Taxable
income Nil Nil Nil Nil Nil Nil Nil Nil Nil
48 Solution Manual to Taxation and Auditing

Explanation:
1. Loss of the petroleum business can be carry forward up to next 12 years.
2. There is unrecovered loss of Rs. 40,000 which is not allowed carry forward for the coming year
due to lapse of loss recovery period.

SOLUTION -10
Statement showing carry forward of losses
Year Carry forward of loss
3 4 5 6 7 8 9
P/L Rs. (20,000) 30,000 50,000 200,000 300,000 200,000 300,000
Add: Donation – – – – 50,000 – –
R & D cost – – – – 250,000 – –
P/L before loss (20,000) 30,000 50,000 200,000 600,000 200,000 300,000
Forward of loss:
Year 1 – (30,000) (50,000) (20,000) – – –
Year 2 – – – (50,000) – – –
Year 3 – – – (20,000) – – –
Adjusted taxable income Nil Nil Nil 110,000 600,000 200,000 300,000
Less: Allowable R & D
Less: Donation – – – – (250,000) – –
– – – – (30,000) – (30,000)
Taxable income Nil Nil Nil 110,000 320,000 200,000 270,000

SOLUTION -11
Statement showing carry forward of losses
Year Carry forward of loss
5 6 7 8 9 10
P/L Rs. (20,000) (40,000) 160,000 120,000 400,000 200,000
Add: Donation – – – – 400,000 –
R & D cost – – – – – 40,000
Commission income – 120,000 – – – –
Less: Interest cost – (20,000) – – – –
P/L before loss (20,000) 60,000 160,000 120,000 800,000 240,000
Forward of loss:
Year 2 – (46,400) – – – –
Year 5 – (13,600) (6,400) – – –
Adjusted taxable income Nil Nil 153,600 120,000 800,000 240,000
Less: R & D cost – – – – – (40,000)
Less: Donation – – – – (80,000) –
Taxable income Nil Nil 153,600 120,000 720,000 200,000

Q
 Income from Employment
Q Practical Problems

SOLUTION -1
Computation of Assessable Income from Employment
Admissible income inclusion:
Salary (40,000 ×12) 480,000
Dashain Kharcha (one month) 40,000
P.F. contribution by government (10% of 480,000) 48,000
Total allowance 150,000
Assessable income from employment 718,000
520,000
Monthly salary = 13 = Rs.40,000

SOLUTION - 2
Computation of Assessable Income from Employment
Assessable income from employment
Salary income Rs.540,000
Dashain Kharcha (one month) (540,000/12) 45,000
Government contribution to P.F. 10% 54,000
Accommodation facility 2% 10,800
Assessable income from employment 649,800
Note: Meeting allowance is final withholding income.

SOLUTION - 3
Assessable income from employment of Mr. Dahal for the income year 2079/80
Salary (71,000 × 12) Rs.852,000
Dashain Kharcha 71,000
Allowance (5,000 × 12) 60,000
TU Contribution to P.F. 10% 85,200
Accommodation facility 2% 17,040
Vehicle facility 0.5% 4,260
Assessable income from employment 1,089,500

SOLUTION - 4
Calculation of taxable income of Mrs. Janaki
Taxable income before exemption Rs.1,600,000
Less: Exemption for disable individual (50% of 500,000: Single) (250,000)
Remote area exemption - A (50,000)
LIP: Actual Rs.25,000 or Rs.40,000, whichever is lower (25,000)
Health insurance premium:
Actual premium 22,000
Or Maximum (whichever is lower) 20,000 (20,000)
Taxable amount 1,255,000
50 Solution Manual to Taxation and Auditing

Note: Disable individual is allowed exemption 50% of basic exemption.

Computation of tax liability
First Rs.500,000 (statutory exemption- single) @ 1% Rs.5,000
Next Rs.200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs.255,000 @ 30% 76,500
Total tax liability 161,500
Less: Tax rebate @ 10% 16,150
Tax payable 145,350
145‚350
Average monthly TDS = 12 = Rs. 12,212.5

SOLUTION - 5
Computation of retirement payment
Total payment 2,700,000
Less: Retirement saving upto 18th Chaitra 2058 (Tax exempt) (1,500,000)
Retirement saving after 18th Chaitra 2058 (2,700,000 – 1,500,000) 1,200,000
Less: Exemption:
50% of 1,200,000 Rs. 600,000
or Fixed amount 500,000 (600,000)
(whichever is higher is tax free)
Taxable amount (Remaining) 600,000
TDS @ 5% 30,000
∴ Net amount payable (2,700,000 – 30,000) 2,670,000
Note: Retirement saving upto 18th Chaitra 2058 is exempt from tax (Provision of Income Tax
Act, 2031). However out of retirement saving after 18th Chaitra 2058, 50% of total payment of
Rs. ,500,000 whichever is higher is tax free and remaining is tax @ 5% final TDS. (Provision of
Income Tax Act. 2058)

SOLUTION - 6
Calculation of current salary for 2079/80
FY 2073/74 = Rs. 31,000 p.m.
FY 2074/75 = Rs. 32,800 p.m.
FY 2075/76 = Rs. 34,600 p.m.
FY 2076/77 = Rs. 36,400 p.m.
FY 2077/78 = Rs. 38,000 p.m.
FY 2078/79 = Rs. 40,000 p.m.
Income year 2079/80 = Rs. 42,000 p.m.
∴ Total salary for 2079/80 = Rs. 42,000 × 12 months = Rs. 504,000
Note: In grade system, the first grade starts after completing 12 months or no grade for first 12
month.

SOLUTION - 7
Calculation of current year salary
Appointment year 2073/74 = Rs. 31,000 × 7 months
FY 2074/75 = Rs. 31,000 × 5 + 32,200 × 7 months
FY 2075/76 = Rs. 32,200 × 5 + 33,400 × 7 months
FY 2076/77 = Rs. 33,400 × 5 + 34,600 × 7 months
FY 2077/78 = Rs. 34,600 × 5 + 35,800 × 7 months
FY 2078/79 = Rs. 35,800 × 5 + 37,000 × 7 months
∴ Total salary for the year 2079/80 = 37,000 × 5 + 38,500 × 7= Rs. 454,500

SOLUTION - 8
Calculation of current year salary 2079/80
FY 2072/73 = 43,000 × 3 months
FY 2073/74 = 43,000 × 9 + 44,500 × 3 months
 Chapter 8 • Income from Employment 51

FY 2074/75 = 44,500 × 9 + 46,000 × 3 months

FY 2075/76 = 46,000 × 9 + 47,500 × 3 months
FY 2076/77 = 47,500 × 9 + 49,000 × 3 months
FY 2077/78 = 49,000 × 9 + 50,500 × 3 months
FY 2078/79 = 50,500 × 9 + 52,000 × 3 months
∴ Total salary for the year 2079 / 80= 52,000 × 9 + 53,800 × 3 = Rs. 629,400

SOLUTION - 9
Gross salary = Net salary + P.F. + TDS = Rs. 500,000 + 40,000 + 60,000 = Rs. 600,000
Rs. 600‚000
Salary P.M = 12 = Rs. 50,000

SOLUTION - 10
Gross salary = (45000090+ 36000 × 100) = (486000
90 × 100) = Rs. 540,000
Rs 540‚000
Salary = 12 = Rs. 45,000
Note: Net Salary after P.F. = 450,000 + 36,000 = Rs. 486,000 = 90% of his salary because
contribution to P.F. is 10%.

SOLUTION - 11
Gross salary = (Rs 50‚400
10 × 100) = Rs. 504,000
Rs. 5‚04‚000
Salary P.M = 12 = Rs. 42,000
Note: Amount of P.F. Rs. 50,400 = 10% of his salary.

SOLUTION - 12
Gross salary = (6‚04‚800
90 × 100) = Rs. 672,000

Rs. 6‚72‚000
Salary P.M = 12 = Rs. 56,000
Note: Net salary Rs. 604800 after P.F = 90% of his salary.

SOLUTION - 13
Assessable income from employment of Mrs. Prativa for the income year 2079/80
Particulars Rs. Rs.
Admissible income/ inclusion:
Salary (65,000 × 12) 780,000
Allowance 25,000
LIP paid by office 30,000
Tiffin allowance (8,000 × 12) 96,000
Medical expenses reimbursed by office 15,000
House rent allowance (6,000 × 12) 72,000
Conveyance allowance (20% of 780,000) 156,000
Dearness allowance (2,000 × 12) 24,000
Uncertified business promotion expenses (40%) 24,000
Employer contribution to P.F. 10% of Rs. 780,000 78,000
News paper allowance 6,250
Dashain Kharcha (one month) 65,000
Assessable income from employment 1,371,250 1,371,250
Less: Common deduction/Allowable Reduction:
Contribution to P.F.
Actual (20% of 780,000): both side 156,000
or, 1/3 of 1,371,250 (Assessable income) 457,083
or, Maximum limit (whichever is lower) 300,000 (156,000)
52 Solution Manual to Taxation and Auditing

Less: Donation to public school:

5% of (1,371,250 – 156,000) 60,763
Or, Actual donaion 50,000
Or, Maximum limit 100,000 (50,000)
Taxable income before exemption 1,165,250
Less: Life insurance premium
Actual 30,000
Or, Maximum 40,000 (30,000)
Taxable income before exemption 1,135,250
Computation of tax liability
First Rs.500,000 (single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs.135,250 @ 30% 40,575
Total tax liability 125,575
Less: Tax rebate @ 10% 125,57
Medical tax credit (750)
(15% of 15,000 i.e. Rs. 2250 or Max Rs.750, whichever is lower)
Tax payable 112,268

SOLUTION - 14
Computation of assessable income from employment of Mr. Kamal for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (60,000 × 12) 720,000
Accommodation facility (2% of 720,000) 14,400
Entertainment allowance (10,000 × 12) 120,000
Dashain allowance 60,000
Car facility (0.5% of 720,000) 3,600
Bonus (60,000 × 2) 120,000
NEA contribution to P.F. 10% of Rs. 720,000 72,000
Under payment of interest (1,000,000 × 8/100) 80,000
Cook facility (Rs.10,000 – 4,000) × 12 72,000
Assessable income from employment 1,262,000 1,262,000
Less: Common Deductions:
Contribution to retirement fund
1/3 of 1,262,000 420,667
or Actual: P.F. (20% of 720,000) 144,000
CIT (25% of 720,000) 180,000 324,000
or Maximum limit 300,000
(whichever is lower) (300,000)
Less: Donation to political party :
5% of (1,262,000 – 300,000) 48,100
or Actual donation 50,000
or Maximum limit 100,000 (48,100)
(whichever is lower)
Total income before exemption 913,900
Health insurance premium: 18,000
Actual premium paid 20,000 18,000
 Chapter 8 • Income from Employment 53

or Maximum limit
(whichever is lower)
Taxable income 895,900
Computation of tax liability
Particulars Rs.
First Rs.500,000 @ 1% (Single) 5,000
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 195,900 @ 20% 39,180
Total tax liability 64,180

SOLUTION - 15
a. Computation of assessable income from employment of Mr. Bhandari for the income
year 2079/80
Particulars Rs.
Admissible income/inclusions:
Salary (90,000 × 12) 1,080,000
Dashain Kharcha (one month) 90,000
Vehicle facility (0.5% of 1,080,000) 5,400
Medical expenses reimbursement by office 6,000
Interest subsidy (Rs.1,000,000 × 10/100 × 6/12) 50,000
Tuition fees paid by bank 10,000
Bank's contribution to SSF (10%) 108,000
Assessable income from employment 1,349,400
Less: Contribution to SSF (20%) 216,000
Contribution to CIT (10%) 108,000
Total actual contribution 324,000
or, 1/3 of Rs. 1,349,400 (Assessable income) 449,800
or, Maximum limi (whichever is lower) 500,000 324,000
Less: Donation to political party:
5% of (1,349,400 – 324,000) 51,270
Or, Actual donation 50,000
Or, Maximum limit (whichever is lower) 100,000 50,000
975,400
Less: Donation (if any) Ni
Taxable income from employment 975,400
c. Computation of tax liability
Particulars Rs.
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 275,400 @ 20% 55,080
Tax liability 75,080
Less: Medical tax credit
15% of 60,000 or 750 which ever is lower) (750)
Tax payable 74,330
Note: Interest on government securities is final withholding income, so it is not included.
Individual contributed to SSF is not liable to pay 1% social security tax.
54 Solution Manual to Taxation and Auditing

SOLUTION - 16
Computation of assessable income from employment of Mr. Bishnu for the income year
2079/80
Particulars Rs.
Admissible income/inclusions:
Salary income 1,200,000
Foreign allowance 300,000
Children education allowance 36,000
Entertainment allowance 12,000
House rent allowance 36,000
Government contribution to P.F. @ 10% 120,000
Subscription fees paid by office 5,000
Reward as best employee 100,000
Leader allowance 5,000
Dashain kharcha (one month salary) (1,200,000 /12) 100,000
Domestic assitance [(15,000 – 5,000) × 12] 120,000
Assessable income from employment 2,034,000
Statement of total income
Assessable income from employment Rs.2,034,000
Assessable income from business/profession Nil
Assessable income from investment NIl
Total assessable income 2,034,000
Less: Common Deduction:
Contribution to Retirement Fund 1/3 of 2,034,000 678,000
or Actual 20% of 1,200,000 240,000
or Maximum limit (whichever is lower) 300,000 (240,000)
∴ Donation (fully allowable) (20,000)
Taxable income before exemption 1,774,000
Less: Foreign allowance exemption (75% of 300,000) (225,000)
LIP exemption (Self)
Actual 23,000
Or maximum (whichever is lower) 40,000 (23,000)
Remaining taxable income 1,526,000
Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (single) 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 526,000 @ 30% 157,800
Total tax liability 242,800
Note: (i) Pocket/daily allowance and travelling expenses are non taxable income of an employee, so
they are not included.
(ii) Hosting dinner in honor of all participating member is also non taxable income.
(iii) Health insurance premium paid to foreign insurance company is not allowable for reduction.
(iv) Life insurance and Life insurance paid for his family members are not allowable for reduction.
 Chapter 8 • Income from Employment 55

SOLUTION - 17
a. Computation of assessable income from employment of Mr. Malla for the assessment
year 2079/80
Particulars Rs.
Admissible income/inclusions:
Salary (71,000 × 12) 852,000
local allowance (8,000 × 12) 96,000
Dashain kharcha 71,000
Contribution to P.F. by employer @ 10% of 852,000 85,200
Prize for best employee 80,000
Chairmanship allowance (1,500 × 12) 18,000
Department head allowance (1,300 × 12) 15,600
Under payment of interest 120,000
Assessable income from employment 1,337,800
Statement of total taxable income
Assessable income from employment 1,337,800
Assessable income from profession Nil
Assessable income from investment Nil
Total assessable income 1,337,800
Less: Common Deduction:
Contribution to retirement fund
1/3 of 1,337,800 445,933
or Actual (20% of 852,000) 170,400
or Maximum limit (whichever is lower) 300,000 (170,400)
Taxable income before exemption 1,167,400
Less: Remote area - class A (50,000)
Less: LIP exemption (self):
Actual LIP paid 21,000
or Maximum limit (p.a.) (whichever is lower) 40,000 (21,000)
Taxable amount 1,096,400
Computation of tax liability
Particulars Rs.
First Rs. 500,000 (statutory exemption - single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Next Rs.300,000 @ 20% 60,000
Balance Rs. 96,400 @ 30% 28,920
Total tax liability 113,920
Note: (i) Any expenses of an employee except common deduction/reduction are not allowable
for deduction. (ii) Salary from part time lecturer is final TDS. (iii) Examinership remuneration is
final TDS.

SOLUTION - 18
a. Computation of assessable income from employment of Mr. Shankhar for the Income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary: Investment bank (250,000 × 4) 1,000,000
Bank of Kathmandu (300,000 × 7) 2,100,000
Accommodation facility (2% of 31,00,000) 62,000
Vehicle facility (0.5% of 3,100,000) 15,500
Commission from BOK 100,000
P.F. contribution by bank (10% of 3100,000) 310,000
Bonus from BOK 300,000
Dashain kharcha from Investment Bank 250,000
56 Solution Manual to Taxation and Auditing

LIP paid by BOK 50,000

Medical allowance (500 × 7) 3,500
Assessable income from employment 4,191,000 4,191,000
Income from profession:
Income from writing articles 13,000
Assessable income from profession 13,000
Statement of total taxable income
Assessable income from employment Rs.4,191,000
Assessable income from business/profession 13,000
Assessable income from investment Nil
Total assessable income 4,204,000
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 4,204,000 1,401,333
or Actual 20% of 3,100,000 620,000
or Maximum limit (whichever is lower) 300,000 (300,000)
∴ Donation to PADT (Religious heritage):
5% of (4,204,000 – 300,000) 195,200
or Actual donation paid 20,000
or Maximum limit (whichever is lower) 100,000 (20,000)
Taxable amount (before exemption) 3,884,000
Less: LIP exemption
Actual 50,000 or maximum Rs.40,000 (whichever is lower) (40,000)
Taxable amount 3,844,000
c. Computation of tax liability
Particulars Rs.
First Rs.600,000 (statutory exemption - couple) @ 1% 6,000
Next Rs.200,000 @ 10% 20,000
Next Rs.300,000 @ 20% 60,000
Next Rs. 900,000 @ 30% 270,000
Balance Rs.1,844,000 @ 36% 663,840
Total tax liability 1,019,840
Note: Interest from bank deposit is final withholding income. House rent income is excluded.
Meal and tiffin facilites provided to all employed in equal team is not included in income.
SOLUTION - 19
a. Computation of assessable income from employment of Mr. A for the income year
2079/80
Particulars Rs. Rs.
Admissible income/ Inclusions
Salary (90,800 × 12) 1,089,600
Bonus (80,000 × 2) 160,000
Dashain Bonus (90,800 × 1) 90,800
Medical allowance (5% of 1,089,600) 54,480
Servant facility (Rs. 10,000 × 12) 120,000
House facility (2% of 1,089,600) 21,792
Employer contribution to P.F. 10% (unrecognized) 108,960
Received for accepting employment restriction 250,000
Assessable income from employment 1,895,632
Income from profession
Royalty from books 60,000
Royalty from writing articles 10,000
Gross income from profession 70,000
Less: Related expenses Nil
Assessable income from profession 70,000
 Chapter 8 • Income from Employment 57

b. Statement of total income

Particulars Rs. Rs.
Assessable income from employment 1,895,632
Assessable income from investment Nil
Assessable income from business/profession 70,000
Total assessable income 1,965,632
Less: Common deductions:
Donation to tax exempt org:
5% of 1,965,632 98,282
Or, Actual donation paid 15,000
Or, Maximum limit 100,000 (15,000)
(whichever is lower is allowable)
Taxable income before exemption 1,950,632
Less: House premium paid
Actual 10,000
or Maximum 5,000 (5,000)
(whichever is lower)
Less: Remote area class- C (30,000)
Taxable income 1,915,632
c. Computation of tax liability
Particulars Rs.
first Rs. 500,000 @ 1% (Single) 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 915,632 @ 30% 274,690
359,690
Less: Medical tax credit:
15% of Rs. 10,000 1,500
or Max (whichever is lower) 750 (750)
Total tax liability 358,940
Working note:
1. Calculation of current salary
FY 2070/71 Rs. 80,000 FY 2075/76 Rs. 86,000
FY 2071/72 Rs. 81,200 FY 2076/77 Rs. 87,200
FY 2072/73 Rs. 82,400 FY 2077/78 Rs. 88,400
FY 2073/74 Rs. 83,600 FY 2078/79 Rs. 89,600
FY 2074/75 Rs. 84,800 FY2079/80 Rs. 90,800
Alternatively,
Salary = Basic salary + grade = 80,000 + (9 × 1200) = Rs. 90,800 p.m.
No. of grade = Current income year – Appointment year = 2079/80 – 2070/71 = 9 grades
2. Contribution made to unrecognized P.F. is not allowable for reduction. However employer contribution
to such fund should be included into income.
SOLUTION - 20
a. Computation of assessable income from employment of Mr. Rai for income year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (Rs.55,000 × 12) 660,000
Dearness allowance (1,500 × 12) 18,000
Transportation allowance (1,000 × 12) 12,000
Pay for leave 80,000
Overtime pay 120,000
Prize for best performance 75,000
58 Solution Manual to Taxation and Auditing

Tuition fees paid by hospital 150,000

Reimbursement of other personal expenses 10,000
Interest subsidy (400,000 × 6/100 × 12/12) 24,000
Hospital contribution to SSF @ 15% 99,000
Free treatment provided to wife 15,000
Dashain kharcha (one month) 55,000
Assessable income from employment 1,318,000 1,318,000
Statement of taxable income
Assessable income from employment 1,318,000
Assessable income from business/profession Nil
Assessable income from investment Nil
Total assessable income 1,318,000
Less: Common Deduction:
Contribution to retirement fund (SSF):
1/3 of 1,318,000 439,333
or Actual (30% of 660,000) 198,000
or Maximum limit (whichever is lower) 500,000 (198,000)
Total taxable income 1,120,000
Computation of tax liability
Particulars Rs.
First Rs. 500,000 (Single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 120,000 @ 30% 36,000
Total tax liability 116,000
Working note:
1. Calculation of Salary
FY 2074/75 50,000 × 12
FY 2075/76 51,000 × 12
FY 2076/77 52,000 × 12
FY 2077/78 53,000 × 12
FY 2078/79 54,000 × 12
FY 2079/80 55,000 × 12 = Rs. 660,000
2. Individual contributed to SSF is not liable to pay 1% social security tax.

SOLUTION - 21
Income year's salary = Basic salary + 11 grade
= 70,000 + (1,000 × 10) + (1 × 2,000) = Rs. 82,000
a. Computation of assessable income from employment of Mr. Shovit for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (82,000× 12) 984,000
Clothing allowance 24,000
Dearness allowance (9,000 × 12) 108,000
Project allowance (1,000 × 12) 12,000
Transportation allowance 12,000
House rent allowance 120,000
Telephone bill paid by employer 5,000
Tuition fees paid by employer 30,000
Medical bill reimbursed by office 16,000
 Chapter 8 • Income from Employment 59

Gift for performing job 150,000

LIP paid by office (28,000 × 40/100) 11,200
Interest subsidy (4,000,000 × 6/100 × 7/12) 140,000
Festival allowance (one month salary) 82,000
P.F. contribution by employer @ 10% 98,400
Compensation from previous employer 250,000
Assessable income from employment 2,042,600
Statement of total taxable income
Assessable income from employment 2,042,600
Assessable income from business/profession Nil
Assessable income from investment Nil
Total assessable income 2,042,600
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 2,042,600 680,867
or Actual (20% of 984,000) 196,800
or Maximum limit (whichever is lower) 300,000 (196,800)
Donation to Ram Krishna Ashram:
5% of (2,042,600– 196,800) 92,290
or Actual donation paid 10,000
or Maximum limit (whichever is lower) 100,000 (10,000)
Taxable income before exemption 1,835,800
Less: LIP exemption:
Actual 28,000
or Maximum (whichever is lower) 40,000 28,000
Total Taxable income remained 1,807,800
Computation of tax liability
Particulars Rs.
First Rs.500,000 (Basic exemption - single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs.807,800 @ 30% 242,340
Total tax liability 327,340
Less: Medical tax credit:
15% of 16,000 2,400
or Maximum limit (whichever is lower) 750 750
Total payable 326,590

SOLUTION - 22
Working notes:
Calculation of current salary for income year 2079/80
FY 2072/73 60,000 × 8
FY 2073/74 60,000 × 4 + 61,800 × 8
FY 2074/75 61,800 × 4 + 63,800 × 8
FY 2075/76 63,800 × 4 + 65,400 × 8
FY 2076/77 65,400 × 4 + 67,200 × 8
FY 2077/78 67,200 × 4 + 69,000 × 8
FY 2078/79 69,000 × 4 + 70,800 × 8
Income year 2079/80 70,800 × 4 + 72,600 × 8
60 Solution Manual to Taxation and Auditing

a. Computation of assessable income from employment of Mr. Tandukar for the Income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (70,800 × 4 + 72,600 × 8) 864,000
Dearness allowance (10% of 864,000) 86,400
Telephone allowance (1,200 × 12) 14,400
Foreign allowance 900,000
Department head allowance (10% of 864,000) 86,400
Transport allowance (1,500 × 12) 18,000
P.F. contribution by office 10% or 864,000 86,400
Dashain kharcha (One month) 70,800
Assessable income from employment 2,126,400 2,126,400
Statement of total taxable income
Assessable income from employment 2,126,400
Assessable income from business/profession 250,000
Assessable income from investment 200,000
(Gain on sale of shares) (190,000/95× 100)
Total assessable income 2,576,400
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 2,576,400 858,800
or Actual (20% of 864,000) 172,800
or Maximum limit (whichever is less) 300,000 (172,800)
Allowable deduction:
5% of (2,576,400 – 172,800) 120,180
or Actual 60,000
or Maximum 100,000 (60,000)
(Whichever is lower)
Taxable income before exemption 2,343,600

Less: LIP exemption (self)

Actual LIP paid 25,000
or Maximum limit (whichever is lower) 40,000 (25,000)
Taxable income 2,318,600
Less: Foreign allownce exempt 675,000
75% of 900,000
Taxable income including capital gain 1,643,600
Taxable income excluding capital gain = 1,643,600 – 200,000 = 1,443,600
Computation of tax liability
Particulars Rs. Rs.
First Rs. 500,000 (Basic exemption - single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Next Rs.300,000 @ 20% 60,000
Balance Rs. 443,600 @ 30% 133,080
Capital gain Rs. 200,000 @ 5% 10,000
Total tax liability 228,080
Less: Advance tax paid (10,000)
Medical tax credit
15% of 10,000 1,500
or Maximum limit (whichever is lower) 750 (750)
Tax payable 217,330
 Chapter 8 • Income from Employment 61

SOLUTION - 23
Computation of assessable income from employment of Mr. Ashim for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (84,000 × 9 + 85,000 × 3) 1,011,000
Local allowance @ 10% of 960,000 (basic salary) 96,000
House rent allowance @ 20% of 1,011,000 202,200
Medical expenses borne by employer 10,000
Prize few best employee 50,000
Vehicle facility (0.5% of 1,011,000) 5,055
Guard and cook facility (9,000 – 5,500) × 12 42,000
Bonus (85,000 × 2) 170,000
Dashain kharcha 84,000
Entertainment allowance (2,500 × 12) 30,000
Advance salary 160,000
Employer contribution to retirement fund
Provident fund @ 10% of 1,011,000 101,100
CIT 30,000
Reimbursement of air travel fare 40,000
Assessable income from employment 2,031,355
Statement of total taxable income
Assessable income from employment 2,031,355
Assessable income from business/profession Nil
Assessable income from investment Nil
Total assessable income 2,031,355
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 2,031,355 677,118
or Actual contribution (1,011,000 × 20/100) + 30,000 232,200
or Maximum limit (whichever is less) 300,000 (232,200)
Donation to Nepali Congress:
5% of (2,031,355 – 232,200) 89,958
or Actual 12,000
or Maximum limit (whichever is lower) 100,000 (12,000)
Total taxable income 1,787,155
Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (single) 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 787,155 @ 30% 236,146
Total tax liability 321,146
Less: MTC
15% of Rs. 10,000 1,500
or, Maximum 750 (750)
Tax payable 320,396
62 Solution Manual to Taxation and Auditing

Working note:
Calculation of salary
FY 2074/75 = 80,000 × 3
FY 2075/76 = 80,000 × 9 + 81,000 × 3
FY 2076/77 = 81,000 × 9 + 82,000 × 3
FY 2077/78 = 82,000 × 9 + 83,000 × 3
FY 2078/79 = 83,000 × 9 + 84,000 × 3
FY 2079/80 = 84,000 × 9 + 85,000 × 3 = 1,011,000
SOLUTION - 24
a. Computation of assessable income from employment of Ram Krishna for the Income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (55,000 × 2 + 56,500 × 10) 675,000
Dearness allowance (1,000 × 12) 12,000
Dashain kharcha (one month) 56,500
Salary in lieu of leave 120,000
Government contribution to P.F @ 10% 67,500
Prize as best employee of the year 100,000
Vehicle facility (0.5% of 675,000) 3,375
Accommodation facility (2% of 675,000) 13,500
Assessable income from employment 1,047,875 1,047,875
Less: Common deduction:
Retirement contribution
1/3 of 1,047,875 349,292
or Actual 40% of 675,000 (PF + CIT) 270,000
or Maximum limit (whichever is lower) 300,000 (270,000)
Taxable income before exemption 777,875
Less: LIP exemption:
Actual premium paid 26,000
or Maximum limit (whichever is lower) 40,000 (26,000)
751,875
Less: Disabled exemption (50% of 500,000) 250,000
Taxable income 501,875
Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (single) 5,000
Balance Rs.1,875 @ 10% 187.5
Total tax liability 5,187
Working note:
Year 1 = 52,000 × 10
Year 2 = 52,000 × 2 + 53,500 × 10
Year 3 = 53,500 × 2 + 55,000 × 10
Year 4 = 55,000 × 2 + 56,500 × 10 = Rs. 675,000

SOLUTION - 25
Working note:
Computation of Salary for the income year
Year 1 = 150,000 × 9 months
Year 2 = 150,000 × 3 months + 160,000 × 9 months
Year 3 = 160,000 × 3 months + 170,000 × 9 months
Year 4 = 170,000 × 3 months + 180,000 × 9 months
Year 5 = 180,000 × 3 months + 190,000 × 9 months
 Chapter 8 • Income from Employment 63

Year 6 = 190,000 × 3 months + 200,000 × 9 months

Computation of assessable income from employment of Mr. Khanal for the income year
2079/80
Particulars Rs.
Salary (190,000 × 3 + 200,000 × 9) 2,370,000
Bonus two months (200,000 × 2) 400,000
Dashain kharcha (one month) 190,000
P.F. contribution by office (10% of 2,370,000) 237,000
Accommodation facility (2% of 2,370,000) 47,400
Vehicle facility (0.5% of 2,370,000) 11,850
Assessable income from employment 3,256,250
Statement of total taxable income
Particulars Rs. Rs.
Assessable income from employment 3,256,250
Assessable income from business/profession Nil
Assessable income from investment Nil
Total assessable income 3,256,250
Less: Allowable reduction:
Contribution to retirement fund:
1/3 of 3,256,250 1,085,417
or Actual contribution (40% of 2,370,000) 948,000
or Maximum (whichever is lower) 300,000 (300,000)
Donation to PM Relief Fund (fully) (100,000)
Total taxable income 2,856,250
Computation of tax liability
Particulars Rs.
First Rs. 500,000 (Basic exemption) @ 1% 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Next Rs. 1,000,000 @ 30% 300,000
Balance Rs. 856,250 @ 36% 308,250
Total tax liability 693,250
Note:
1. Meeting allowance is final withholding income.
2. Remuneration from guest lecture is final withholding income.
3. In case of vehicle facility provided by office, 0.5% of salary should be included into income. Other
payment like driver salary, fuel expenses should be ignored.
4. In case of accommodation facility, 2% of salary should be included. Rent paid by office for such
facility should be ignored.
5. Other expenses relating to employment are not allowable for deduction.
SOLUTION - 26
a. Computation of assessable income from employment of Mr. Sudarshan for the Income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (59,000 × 12) 708,000
Dashain kharcha (one month) 59,000
P.F. contribution by government @ 10% 70,800
Outstation allowance Rs.1,500 × 12 18,000
House rent allowance (2,500 × 12) 30,000
Dearness allowance (1,000 × 12) 12,000
Vehicle facility (0.5% of 708,000) 3,540
64 Solution Manual to Taxation and Auditing

Accommodation facility (2% of 708,000) 14,160

LIP paid by office 19,500
Tuition fees paid by office (1,500 × 12) 18,000
Award for best employee 100,000
Salary in lien of leave 90,000
Assessable income from employment 1,143,000
Statement of total income
Assessable income from employment 1,143,000
Assessable income from profession Nil
Assessable income from investment Nil
Total assessable income 1,143,000
Less: Common deduction:
Contribution to retirement fund:
1/3 of 1,143,000 381,000
or Actual (20% of 708,000) + 80,000 CIT 221,600
or Maximum limit (whichever is lower) 300,000 (221,600)
Less: Donation:
5% of (1,143,000 – 221,600) 46,070
or actual donationpaid 50,000
or Maximum limit (whichever is lower) 100,000 46,070
Taxable income before exemption 875,330
Less: LIP exemption
Actual LIP paid 19,500
or Maximum limit (whichever is lower) 40,000 (19,500)
∴ Remote area B (40,000)
Taxable income 815,830
c. Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (single assumed) 5,000
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 115,830 @ 20% 23,166
Total Tax liability 48,166
Less: Medical tax credit:
15% of 15,000 2,250
or Maximum (whichever is lower) 750 (750)
Tax payable 47,416
Working note: Current salary = Basic salary + Grade = 50,000 + 6 × 1,500 = 59,000
SOLUTION - 27
a. Computation of assessable income from employment of for the income year 2079/80
Particulars Rs.
Admissible income/inclusions:
Salary (66,000 × 12) 792,000
Dashain allowance 66,000
Employer contribution to SSF @ 10% 79,200
Dearness allowance (1,500 × 12) 18,000
Business promotion allowance 15,000
Bonus (3 × 60,000) 180,000
Pension from previous employer 240,000
Accommodation facility @ 2% of 792,000 15,840
Vehicle facility @ 0.5% of Rs. 792,000 3,960
Driver's facility (20,000 – 8,000) × 12 144,000
Tihar allowance (66,000 × 1/2) 33,000
Assessable income from employment 1,587,000
 Chapter 8 • Income from Employment 65

b. Statement of total income

Assessable income from employment 1,587,000
Assessable income from business/profession Nil
Assessable income from investment Nil
Total assessable income 1,587,000
Less: Common Deduction:
Contribution to retirement fund: (SSF + CIT)
1/3 of 1,587,000 529,000
or Actual (30% of Rs. 792,000) 237,600
or Maximum limit (whichever is less) 500,000 (237,600)
Taxable income before exemption 1,349,400
Less: LIP exemption
Actual LIP paid 42,000
or Maximum limit (whichever is lower) 40,000 (40,000)
Less: Exempt for pension:
or, 25% of 600,000 150,000
or, Pension (Whichever is lower) 240,000 150,000
Taxable amount 1,159,400
c. Computation of tax liability
Particulars Rs. Rs.
First Rs.600,000 @ 1% (Couple) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 59,400 @ 30% 17,820
Total tax liability: 97,820
Less: Medical tax credit:
15% of 12,000 Rs.1,800
or Maximum limit (whichever is lower) 750 (750)
Tax payable 97,070
Salary p.m. = 60,000 + (1,500 × 4) = Rs. 66,000 p.m.
Note: Individual contributed to social security fund is not liable to pay 1% social security fund.

SOLUTION - 28
Working notes:
Calculation of gross salary
Particulars Rs.
Net salary 1,000,000
Add: Tax deducted at source 80,000
His contribution to P.F. 120,000
Total 1,200,000
Rs.1‚200,000
Salary per month = 12 = Rs.100,000
Computation of assessable income from employment of Mr. Mandal for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (100,000 × 12) 1,200,000
Employer contribution to P.F. @ 10% 120,000
Dashain kharcha (one month) 100,000
Dearness allowance (40% of 1,200,000) 480,000
House rent allowance (15,000 × 12) 180,000
Insurance premium paid by office 45,000
66 Solution Manual to Taxation and Auditing

Overtime pay 120,000

Mobile bill paid by office (12,000 × 1/2) 6,000
Assessable income from employment 2,251,000 2,251,000
Assessable income from investment
Interest received from friend 48,000
Gain on sale of share (250,000 – 150,000) 100,000
Less: Allowable deduction Nil
Assessable income from investment 148,000
Statement of Total Taxable Income
Assessable income from employment 2,251,000
Assessable income from business/profession Nil
Assessable income from investment 148,000
Total assessable income 2,399,000
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 2,399,000 799,667
or Actual contribution made (120,000 + 120,000) 240,000
or Maximum limit (whichever is less) 300,000 (240,000)
Donation to tax exempt organization
5% of 2,159,000 107,950
or, Actual 30,000
or, Maximum 100,000 30,000
(Whichever is lower)
Taxable income before exemption 2,129,000
Less: LIP exemption (self)
Actual LIP paid 45,000
or Maximum limit (whichever is lower) 40,000 (40,000)
∴ Remote area (class-D) (20,000)
Less: House premium
or, Actual 8,000
or, Maximum 5,000 (5,000)
Taxable amount including captial gain 2,064,000
Taxable amount excluding capital gain 1,964,000
Computation of Tax Liability
Particulars Rs.
First Rs.500,000 (Basic exemption - single) @ 1% 5,000
Next Rs.200,000 @ 10% 20,000
Next Rs.300,000 @ 20% 60,000
Balance Rs. 964,000 @ 30% 289,200
Capital gain Rs. 100,000 @ 5% 5,000
Total tax liability 379,200
Less: Advance tax paid (80,000 + 5,000) 85,000
Medical tax credit
15% of 12,000 1,800
Or, Maximum (Whichever is lower) 750 (750)
Tax payable 293,450
 Chapter 8 • Income from Employment 67

SOLUTION - 29
Calculation of gross salary
Particulars Rs.
Net salary Rs.1,130,000
Add: Tax deducted at source 70,000
Total 1,200,000
Rs.1‚200,000
Salary per month = 12 = Rs.100,000
Computation of assessable income from employment of Mr. Punya for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (100,000 × 12) 1,200,000
Commission 75,000
Other incentive 15,000
Gift relating to employment 25,000
Leave pay 10,000
Interest subsidy (Rs.1,000,000 × 4/100) 40,000
Accommodation facility (2% of 1,200,000) 24,000
Employer contribution to P.F. @ 10% of 1,200,000 120,000
Dashain kharcha (one month) 100,000
Assessable income from employment 1,609,000 1,609,000
Less: Retirement contribution Nil
Less: Donation
5% of (1,609,000) 80,450
or Actual donation paid 15,000
or Maximum limit (whichever is lower) 100,000 (15,000)
Taxable income before exemption 1,594,000
Less: Health insurance premium
Actual 4,000
or Maximum (which ever is lower) 20,000 (4,000)
Taxable income 1,590,000
Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (Single) 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 590,000 @ 30% 177,000
Total tax liability 262,000
Less: Advance tax 70,000
Tax payable 192,000

SOLUTION - 30
Working notes:
Calculation of gross salary
Particulars Rs.
Net salary 990,000
Add: His contribution to P.F. 108,000
Tax deduction at source 72,000
68 Solution Manual to Taxation and Auditing

Total salary for 13 month including Dashain 1,170,000

Rs.1‚170,000
Salary per month = 13 = Rs.90,000
Computation of assessable income from employment of Mr. Sailesh for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (90,000 × 12) 1,080,000
Dashain kharcha 90,000
Employer contribution to P.F. @ 10% 108,000
Car facility (0.5% of 1,080,000) 5,400
Telephone bill paid by office (2,500 × 12 × 1/2) 15,000
Cook facility (15,000 – 5,000) × 12 120,000
Assessable income from employment 1,418,400 1,418,400
Less: Common deduction
Contribution to retirement fund:
1/3 of 1,418,400 472,800
or Actual (108,000 + 108,000) 216,000
or Maximum limit (whichever is lower) 300,000 (216,000)
Donation to PADT:
5% of (1,418,400 – 216,800) 60,120
or Actual donation paid 75,000
or Maximum limit (whichever is lower) 100,000 (60,120)
Taxable income before exemption 1,142,280
Less: LIP exemption (own)
Actual LIP paid 30,000
or Maximum limit (whichever is lower) 40,000 (30,000)
Taxable amount 1,112,280
Computation of tax liability
Particulars Rs.
First Rs. 500,000 @ 1% (single) 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 112,280 @ 30% 33,684
Total tax liability 118,684
Less: Advance tax paid (72,000)
Tax payable 46,684

SOLUTION - 31
Working notes:
Calculation of gross salary
Net salary 810,000
Tax deduction at source 54,000
Net salary after his P.F. (10%) 864,000 = 90%
∴ Gross salary = 864,000/90 × 100 = Rs. 960,000
Salary per month (960,000/12) = 80,000 p.m.
 Chapter 8 • Income from Employment 69

a. Computation of assessable income from employment of Mr. Rajendra for the income
year 2079/80
Particulars Rs. Rs.
Admissible income/ Inclusions
Salary (80,000 × 12) 960,000
Employer contribution to P.F. (10% of 960,000) 96,000
Dashain Kharcha (one month salary) 80,000
Tihar Kharcha (half month salary) 40,000
Dearness allowance (40% of 960,000) 384,000
Interest subsidy (12% of 2,000,000) 240,000
House rent allowance 180,000
Assessable income from employment 1,980,000
Income from investment
Interest from a friend 120,000
Less: Related expenses Nil
Assessable income from investment 120,000

b. Statement of taxable total income

Particulars Rs. Rs.
Assessable income from employment 1,980,000
Assessable income from investment 120,000
Assessable income from business Nil
Total assessable income 2,100,000
Less: Common deductions:
Retirement contribution
1/3 of 2,100,000 700,000
Or Actual (20% of 960,000) 192,000
Or maximum limit 300,000 (192,000)
(whichever is lower)
Donation to PM relief fund (fully) allowable) (20,000)
Taxable income before exemption 1,888,000
Less: Remote area exemption (class - C) (30,000)
Taxable income 1,858,000
Computation of tax liability
Particulars Rs.
First Rs. 500,000 (basic exemption-single assumed) @ 1% 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 858,000 @ 30% 257,400
Total tax liability 342,400
Less: Advance tax paid (54,000)
Tax payable 288,400
Note:
1. Dividend received from a resident bank is final withholding payment.
2. TADA received from employer is not required to include in income.
3. Interest credited by provident fund is final withholding payment.
4. Meal and Tiffin facility in equal term to all employees is not required to include in taxable income.
70 Solution Manual to Taxation and Auditing

5. It does not matter how much rent he paid. But it is the matter of IT Act how much cash he
received from employer as a house rent allowance. Therefore house rent allowance received
Rs. 180,000 is included in income.
SOLUTION - 32
a. Computation of assessable income from employment of Mr. Dulal for the income year
2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (28,000 × 12) 336,000
Dearness allowance (1,000 × 12) 12,000
Bonus (28,000 × 3) 84,000
Children education allowance 15,000
Launch and refreshment allowance 18,000
Bank contribution to P.F. (12% of Rs. 336,000) 40,320
Medical expenses reimbursement by bank 16,000
Telephone bill paid by bank 6,000
Car facility (0.5% of 336,000) 1,680
Electricity bill paid by bank 4,000
LIP reimbursed by bank (his + son) 31,000
Dashain kharcha (one month) 28,000
Assessable income from employment 592,000 592,000
Assessable income from investment:
Gain on sale of share (140,000 – 68,200) (Listed Co.) 71,800
Statement of total taxable income
Assessable income from employment 592,000
Assessable income from business/profession Nil
Assessable income from investment 71,800
Total assessable income 663,800
Less: Common Deduction:
Contribution to retirement fund:
1/3 of 663,800 221,267
or Actual (24% of 336,000) 80,640
or Maximum limit (whichever is lower) 300,000 (80640)
Donation Nil
Taxable income before exemption 583,160
Less: LIP exemption (self)
Actual LIP paid 25,000
or Maximum limit (whichever is lower) 40,000 (25,000)
Total taxable income including capital gain 558,160
Less: Capital gain (71,800)
Taxable income excluding capital gain 486,360
Computation of tax liability
Particulars Rs. Rs.
First Rs.500,000 (single) (1% of Rs. 486,360) 4,864
Capital gain Rs.58,160 @ 5% 2,908
Total tax liability 7,772
Less: Advance tax paid (TDS on gain on sale of share) (3,590)
Medical tax credit:
15% of 8,000 1,200
or Maximum limit (whichever is lower) 750 (750)
Tax payable 3,432
Note: 1% tax is applicable to the extent of employment income only.
 Chapter 8 • Income from Employment 71

SOLUTION - 33
Computation of assessable income from employment of Mrs. Samjhana for the income
year 2079/80
Particulars Rs. Rs.
Admissible income/inclusions:
Salary (85,000 × 12) 1,020,000
Dashain bonus 80,000
Contribution to P.F. by firm 102,000
Dearness allowance 60,000
LIP paid by office 23,000
Assessable income from employment 1,285,000 1,285,000
Less: Contribution to retirement fund:
1/3 of 1,285,000 428,333
or Actual (20% of 1,020,000 + 10,000 × 12) 324,000
or Maximum limit (whichever is lower) 300,000 (300,000)
Donation Nil
Taxable income before exemption: 985,000
Less: LIP exemption self
Actual LIP paid 23,000
or Maximum limit (whichever is lower) 40,000 23,000
Taxable income 962,000
Computation of tax liability
Particulars Rs.
First Rs.500,000 (Basic exemption - single) @ 1% 5,000
Next Rs. 200,000 @ 10% 20,000
Balance Rs.262,000 @ 20% 52,400
Total tax liability 77,400
Less: Rebate for women 10% 7,740
Tax payable 69,660
69‚660
Monthly TDS = 12 = 5,805
Working note:
Calculation of Salary:

Total Salary for the year =

Employee contribution to P.F.
10 × 100% = (1‚020‚000
10 × 100)

= Rs. 1,020,000
1‚020‚000
Salary per month = 12 = Rs. 85,000
72 Solution Manual to Taxation and Auditing

SOLUTION - 34
a. Let x be the assessable income (gross salary) of Mr. Adhikari.
or, 1,814,500 = x – 6,000 – 20,000 – 60,000 – 270,000 – 0.36 (x – 2,000,000)
or, 1,814,500 = x – 356,000 – 0.36x + 720,000
1‚450‚500
or, x = 0.64 = Rs. 2,266,406.25

∴ Total taxable income (gross salary) Rs. 2,266,406.25

b. Computation of tax liability:
First Rs. 600,000 @ 1% Rs. 6,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Next Rs. 900,000 @ 30% 270,000
Balance Rs. 266,406.25 @ 36% 95,906.25
Total tax liability 451,906.25
∴ Net salary after tax = 2,266,406.25 – 451,906.25 = Rs. 1,814,500
Rs. 451‚906.25
c. Average monthly TDS = 12 = Rs. 37,659 (approx)

SOLUTION - 35
a. Let x be the total taxable income of Mr. Bhattarai
or, 3,014,192 = x – 5,000 – 20,000 – 60,000 – 300,000 – 0.36 (x – 2,000,000)
or, 3,014,192 = x – 385,000 – 0.36x + 720,000
3‚014‚192 – 335‚000
or, x = 0.64 = Rs. 4,186,237.5

∴ His gross salary should be Rs. 4,186,237.5

b. Computation of tax liability
First Rs. 500,000 @ 1% Rs. 5,000
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Next Rs. 1,000,000 @ 30% 300,000
Balance Rs. 2,186,237.5 @ 36% 787,045.50
Total tax liability 1,172,045.5
∴ Net salary after tax = Rs. 4,186,237.5 – 1,172,045.5 = Rs. 3,014,192
Rs. 1‚172‚045.5
c. Average monthly TDS = 12 = Rs. 97,670 (approx)

R
 Income from Investment
Q Practical Problems

SOLUTION -1
Calculation of Gross income from investment for the income year 2079/80
Particulars Rs.
Income from natural resources (255,000 ÷ 0.85) 300,000
Rent by letting computer (270,000/90 × 100) 300,000
Gross income from investment 600,000
Note: Interest from fixed deposit and rent from house are final withholding income. Local
government is responsible to collect rent from house and land of an individual.

SOLUTION - 2
Calculation of assessable income from investment
Particulars Rs. Rs.
Interest from private money lending 118,250
payment from natural resources (136,000 ÷ 0.85) 160,000
Royalty income (255,000 ÷ 0.85) 300,000
Gross income from investment 578,250
Less: Allowable deductions:
Collection charges on:
Interest 2,500
Natural resources 4,500
Royalty 2,000 (9,000)
Assessable income from investment 569,250

SOLUTION - 3
Calculation of assessable income from investment of Mr. P for the income year
2079/80
Particulars Rs. Rs.
Interest from private money lending 800,000
Income from natural resources (595,000 ÷ 0.85) 700,000
Gain on sale of non-listed securities (90,000/90 × 100) 100,000
Gross income from investment 1,600,000
Less: Allowable deduction
Expenses relating to natural resources 1,000
Interest collection charge 5,000 (6,000)
Assessable income from investment 1,594,000
Income from profession:
Income from writing articles 50,000
Gross income from profession 50,000
74 Solution Manual to Taxation and Auditing

Less: Allowable deduction Nil

Assessable income from profession 50,000
Statement of total taxable income
Assessable income from investment 1,594,000
Assessable income from profession 50,000
Assessable income from employment Nil
Total assessable income 1,644,000
Less: Donation: Nil
Total taxable income 1,644,000
Less: Life insurance Premium exemption
Actual premium 16,000
Or Maximum (whichever is lower) 20,000 (16,000)
Total taxable income (including capital gain) 1,628,000
Less: Capital gain (gain on sale of securities) (100,000)
Total taxable income (excluding capital gain) 1,528,000
Computation of tax liability
Particulars Rs.
First Rs. 600,000 (couple) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 428,000 @ 30% 128,400
Capital gain Rs. 100,000 @ 10% 10,000
Total tax liability 218,400
Less: Advance tax (105,000 + 10,000) 115,000
Tax refundable 103,400
Note: Interest on saving account dividend from Nepal Bank Limited and money found lying in
the street are final withholding income.

SOLUTION - 4
Computation of assessable income from investment of Mr. Amar Raj for the income year
2079/80
Particulars Rs. Rs.
Income from Investment (Nepal Source):
Royalty receipt (42,5000/85 × 100) 500,000
Payment from natural resources (680,000 ÷ 0.85) 800,000
Interest from private party (85,000/85 × 100) 100,000
Gift in respect of investment 10,000
Rent from letting an asset (180,000/90 × 100) 200,000
Gross income from investment 1,610,000
Less: Allowable deduction:
Royalty related expenses (10,000)
Assessable income from investment (Nepal Source) 1,600,000
Income from Investment (Foreign Source):
Net dividend 85,000
Add: Tax paid to foreign government 15,000
Gross income from investment 100,000
Less: Related expenses Nil
Assessable income from investment (Foreign Source) 100,000
 Chapter 9 • Income from Investment 75

Statement of total taxable income

Assessable income from investment (Nepal source) 1,600,000
Assessable income from investment (Foreign source) 100,000
Assessable income from employment Nil
Assessable income from business Nil
Total assessable income 1,700,000
Less: Donation to a public hospital
Actual 25,000
or 5% of 1,700,000 85,000
or Maximum 100,000 (whichever is lower) 100,000 (25,000)
Total taxable income 1,675,000
Computation of tax liability
Particulars Rs. Rs.
First Rs.500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs.675,000 @ 30% 202,500
Total tax liability 282,500
Less: Foreign tax credit (WN) (15,000)
Advance tax on:
Royalty 75,000
Natural resources 120,000
Interest 15,000
Rent 20,000 (230,000)
Total tax payable 37,500
Working note:
Allowable foreign tax credit:
Total tax liability
Average rate of NIT = Total taxable income for tax purpose × 100%
282‚500
= 1‚675‚000 × 100% = 16.87%
Allowable FTC = 16.87% of Rs. 100,000 = 16,870
or Rs.15,000 (whichever is lower)

SOLUTION - 5
Computation of assessable income from investment of Mr. Ashok
for the previous year
Particulars Rs. Rs.
Income from investment (Nepal Source):
Natural resource payment (850,000 ÷ 0.85 1,000,000
Interest from private party (170,000 ÷ 0.85) 200,000
Gift in respect of investment 100,000
Income from letting a machinery (135,000 ÷ 0.90) 150,000
Amount received from computer let out (30,000 ÷ 0.90) 33,333
Amount for accepting restriction 100,000
Gain on sale of shares (300,000 – 250,000) 50,000
Gross income from investment 1,633,333
Less: Allowable deduction:
Interest collection charge (private party) 200
Total eligible repair 2,000
Total eligible depreciation 12,500 (14,700)
Assessable income from investment (Nepal Source) 1,618,633
76 Solution Manual to Taxation and Auditing

Income from investment (Foreign Source):

Net dividend received 80,000
Add: Tax paid to foreign government 10,000
Gross income from investment 90,000
Less: Related expenses Nil
Assessable income from investment (Foreign Source) 90,000

Statement of total taxable income

Assessable income from investment (Nepal Source) 1,618,633
Assessable income from investment (Foreign Source) 90,000
Assessable income from business Nil
Assessable income from employment Nil
Total assessable income (including capital gain) 1,708,633
Less: Donation Nil
Total taxable income (including capital gain) 1,708,633
Less: Gain on sale of shares (capital gain) (50,000)
Total taxable income (excluding capital gain) 1,658,633

Computation of tax liability

Particulars Rs. Rs.
First Rs. 500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs.658,633 @ 30% 197,590
277,590
Add: Capital gain tax:
Rs.50,000 @ 5% 2,500
Total tax liability 280,090
Less: Advance tax on:
Natural resources 150,000
Interest 30,000
Rent from machinery 15,000
Rent from computer 3,333
Gain on sale of share 2,500 (200,833)
Less: FTC (WN) (10,000)
Total tax payable 69,257
Working notes:
1. Allowable foreign tax credit
TTL 280‚090
Average rate of NIT = TTI = × 100 = 16.39%
1‚708,633
Foreign tax credit: 16.39% of 90,000 = 14,751 or 10,000 (Whichever is lower)
2. Interest collection cost of private party should be calculated based on the ratio of income
Interest from bank 100,000 (gross)
Interest from private party 200,000 (gross)
Total 300,000

( 200‚000
)
Interest collection of private = 300 × 300‚000 = Rs. 200
 Chapter 9 • Income from Investment 77

SOLUTION - 6
Computation of assessable income from investment of Mr. Bhattarai
Particulars Rs. Rs.
Income from joint investment (50%) 500,000
Gifts received from debtors 5,000
Exchange gain 200,000
Interest on investment (170,000/85 × 100) 200,000
B/D recovered (70%) 14,000
Gain on disposal of depreciable assets 40,000
Net gain on disposal of land (Non business assets) 125,000
Rent received by letting computers (45,000/90 × 100) 50,000
Gross income from investment 1,134,000
Less: Allowable deductions:
Expenses related to joint investment 5,000
Eligible depreciation/Block 'B' 50,000
Eligible repair/Block 'B' (WN-1) 14,000 (69,000)
Assessable income from investment (including capital gain) 1,065,000
Particulars Rs. Rs.
Income from writing articles 30,000
Gross income from profession 30,000
Less: Allowable deductions:
Related expenses (taxi fare) (200)
Assessable income from profession 29,800
Statement of total taxable income
Assessable income from investment (including capital gain) 1,065,000
Assessable income from profession 29,800
Total assessable income (including capital gain) 1,094,800
Less: Donation
Actual 50,000
or 5% of 1,094,800 54,740
or Maximum 100,000 (50,000)
(whichever is lower)
Total taxable income (including capital gain) 1,044,800
Less: Capital gain (125,000)
Total taxable income (excluding capital gain) 919,800
Computation of tax liability
Particulars Rs. Rs.
First Rs.500,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 219,800 @ 20% 43,960
Capital gain Rs. 125,000 @ 7.5% 9,375
Total tax liability 73,335
Less: Advance tax:
Interest 30,000
Rent 5,000
Capital gain 9,375 (44,375)
Less: Medical tax credit:
15% of Rs. 20,000 3,000
or Maximum (Whichever is lower) 750 (750)
78 Solution Manual to Taxation and Auditing

Tax payable 28,210

Note: There is no sufficient tax liability to claim medical tax credit for the years, so it can be
carried forward to next year.
Working notes:
Computation of depreciation base value (Block B)
Allowable depreciation = 25% of x (Here, x = Depreciation base value)
or, 0.25x = 50,000
∴ x = Rs. 200,000
Computation of allowable repair
Actual repairs = 20,000
or 7% of 200,000 = 14,000 (whichever is lower)

SOLUTION - 7
Computation of assessable income from investment
Particulars Rs. Rs.
Income from natural resources (170,000/85 × 100) 200,000
Interest on bank deposit (255,000/85 × 100) 300,000
Rent from subletting a house to few families 180,000
Amount received for accepting restriction 50,000
Gross income from investment 730,000
Less: Allowable deduction
Expenses for natural resources 13,000
Rent paid for subletted house 120,000
Interest collection charge 1,000
Commission to agent for subletting 10,000 (144,000)
Assessable income from investment before loss adjustment 586,000
Less: Loss from investment (last 6th year) (40,000)
Assessable income from investment 546,000
Statement of total taxable income
Assessable income from investment 546,000
Assessable income from business 2,000,000
` Total assessable income 2,546,000
Less: Donation to cultural heritage (10% of Rs.2,546,000 or actual
Rs. 40,000 or Max. Rs. 1,000,000) (whichever is lower) (40,000)
Total taxable income 2,506,000
Computation of tax liability
Particulars Rs. Rs.
Rs.2,506,000 @ 25% 626,500
Less: Advance tax on
Natural resources 30,000
Interest 45,000 (75,000)
Total tax payable 551,500

SOLUTION - 8
Computation of assessable income from investment of Mr. Sapana
Particulars Rs. Rs.
Income from joint investment (900,000 × 2/3) 600,000
Gift related to investment 10,000
Compensation 400,000
Payment for natural resource (170,000 ÷ 0.85) 200,000
Gross income from investment 1,210,000
Less: Allowable deductions:
Expenses related to joint investment (300,000 × 2/3) 200,000
Collection cost of natural resource 10,000 (210,000)
 Chapter 9 • Income from Investment 79

Assessable income from investment 1,000,000

Less: Donation to ANFA (5% of Rs.1,200,000) = 60,000
or Actual 10,000 or maximum Rs.100,000 (whichever is lower) (10,000)
Taxable income 990,000
Note: There is no gain on sale of share to adjust the loss on disposal of shares of a bank.
SOLUTION - 9
Computation of assessable income
Particulars Rs. Rs.
Payment from natural resources (255,000/85 × 100) 300,000
Interest received from, bank (170,000/85 × 100) 200,000
Net gain on disposal of shares [(85,000 ÷ 0.85) – 20,000] 80,000
House rent received (90,000/90 × 100) 100,000
Gross income from investment 680,000
Less: Allowable deduction Nil
Assessable income from investment 680,000
Statement of total taxable income
Assessable income from investment 680,000
Assessable income from business 200,000
Total assessable income 880,000
Less: Donation to PADT
Actual (60%) of 40,000 = 24,000
or 10% of 880,000 = 88,000
or Rs.1,000,000 (whichever is lower) (24,000)
Total taxable income 856,000
Computation of tax liability
Particulars Rs. Rs.
Rs.856,000 @ 25% 214,000
Less: Advance tax (total) (45,000 + 30,000 + 15,000 + 10,000) (100,000)
Total tax payable 114,000
SOLUTION - 10
Computation of assessable income of Mr. Ram
Particulars Rs. Rs.
Interest from private money lending 600,000
Payment from natural resources (425,000 + 75,000) 500,000
Amount received for accepting restriction regarding investment 73,600
Gain on sale of shares 12,000
Gross income from investment 1,185,600
Less: Allowable deduction
Salary to assistants 60,000
Legal expenses related to restriction 2,000
Office rent 36,000
Taxi charge 1,800
Depreciation on furniture (WN) 20,000
Office electricity and water (20%) 3,000 (122,800)
Assessable income from investment 1,062,800
80 Solution Manual to Taxation and Auditing

Computation of assessable income from profession

Particulars Rs. Rs.
Royalty from books (123,760 + 21,840) 145,600
Gross income from profession 145,600
Less: Allowable deduction
Collection cost of royalty (600)
Assessable income from profession 145,000
Statement of total taxable income
Particulars Rs. Rs.
Assessable income from investment 1,062,800
Assessable income from profession 145,000
Assessable income from business 270,560
Total assessable income 1,478,360
Less: Donation:
5% of 1,478,360 73,918
or Actual 5,500
or Maximum (whichever is lower) 100,000 (5,500)
Total taxable income (including capital gain) 1,472,860
Less: Gain on sale of shares (capital gain) (12,000)
Total taxable income (excluding capital gain) 1,460,860
Computation of tax liability
Particulars Rs.
First Rs. 600,000 (single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs.300,000@ 20% 60,000
Balance Rs. 360,860 @ 30% 108,258
Add: Capital gain tax Rs.12,000 @ 5% 600
Total tax liability 188,858
Less: Advance tax (total) (75,000 + 21,840 + 600) 97,440
Tax payable 91,418
Working note:
Depreciation on furniture (Block 'B')
Depreciation base = Opening of WDV + Absorbed addition – Disposal
3
= Nil + 3 × 80,000 – Nil = 80,000
∴ Depreciation = 25% of 80,000 = 20,000
R
 Total Assessable Income,
Taxable Income, Tax Liability
and Tax Payable
Q Practical Problems
SOLUTION - 1
Statement of Taxable Income
Particulars Rs. Rs.
Taxable income before exemption 1,050,000
Less: Remote area– A (50,000)
Less: Life insurance premium:
Actual premium paid 13,000
or, Maximum limit 40,000 (13,000)
(whichever is less)
Taxable income 987,000
Computation of Tax Liability
Particulars Rs. Rs.
First Rs. 500,000 (Single) Nil
Next Rs. 200,000 @ 10% 20,000
Balance Rs. 287,000 @ 20% 57,400
Total tax liability 77,400
Less: Medical tax credit: (55,000)
15% of Rs. 6,000 Rs. 900
or, Maximum 750 (750)
(Whichever is less)
Tax payable 21,650

SOLUTION - 2
Statement of total taxable income
Taxable income from domestic investment 800,000
Taxable income from foreign investment 200,000
Total taxable income 1,000,000
Statement of tax liability
First Rs. 500,000 (Statutory exemption) Nil
Next Rs.200,000 @ 10% 20,000
Balance Rs. 300,000 @ 20% 60,000
Total tax liability 80,000
Less: Foreign tax credit (WN-1) (16,000)
Tax payable 64,000
82 Solution Manual to Taxation and Auditing

Working note:
Total tax liability 80,000
Average rate of NIT = Total taxable income = × 100 = 8%
1‚000,000
Allowable FTC = 8% of 200,000 = 16,000 or 40,000 (whichever is lower)

SOLUTION - 3
Statement of total taxable income of Mr. Kabiraj
Particulars Rs. Rs.
Assessable income from employment 450,000
Assessable income from business 500,000
Assessable income from investment 200,000
Total assessable income 1,150,000
Less: Donation Nil
Total taxable income 1,150,000
Computation of tax liability
Particulars Rs. Rs.
First Rs.500,000 (single @ 1% of 450,000) (employment) 4,500
Next Rs. 200,000 @10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 150,000 @ 30% 45,000
Tax liability 129,500
Less: MTC
15% of 30,000 = 6,000
or Maximum = 750 (whichever is lower) (750)
Total tax payable 128,750
Note: 1% social security tax is applicable to the extent of employment income only.

SOLUTION - 4
Statement of Taxable Income
Particulars Rs. Rs.
Assessable income from business 1,500,000
Assessable income from investment 300,000
Total assessable income 1,800,000
Less: Donation: 5% of 1,800,000 90,000
Or Actual 43,250
Or, Maximum 100,000 (43,250)
Less: Life insurance premium:
Or, Actual 52,000
Or, Maximum 40,000 (40,000)
(Whichever is less)
Taxable income 1,716,750
Less: Capital gain 100,000
Taxable income excluding capital gain 1,616,750
Computation of Tax Liability
Particulars Rs. Rs.
First Rs. 500,000 (Single) Nil
Next Rs. 200,000 @ 10% 20,000
Next Rs. 300,000 @ 20% 60,000
Balance Rs. 616,750 @ 30% 185,025
Capital gain rs. 100,000 @ 10% 10,000
 Chapter 10 • Total Assessable Income, Taxable Income, . . . 83

Total tax liability 275,025

Less: Advance tax paid 10,000
Tax payable 265,025

SOLUTION - 5
Statement of total taxable income of company
Particulars Rs. Rs.
Assessable income from business 1,685,000
Assessable income from investment 325,000
Total assessable income 2,010,000
Less: Donation to religious heritage
Actual = 45,500
or 10% of 2,010,000 = 201,000
or MaximumRs.1,000,000 (whichever is lower) (45,550)
Total taxable income 1,964,450
Computation of tax liability
Particulars Rs. Rs.
Rs.1,964,450 @ 25% 491,113
Less: Advance tax paid (30,925)
Total tax payable 460,188

SOLUTION - 6
PP - 15
Statement of total taxable income of Mr. Jagdish
Particulars Rs. Rs.
Assessable income from business 900,000
Assessable income from investment 400,000
Total assessable income 1,300,000
Less: Contribution to CIT: 433,333
1/3 of 1,300,000 300,000 300,000
or, Maximum limit
Less: Donation:
Actual = 40,000 40,000
or 5% of 1,000,000 50,000
or Maximum 100,000 (40,000)
(whichever is lower)
Total taxable income 960,000
Computation of tax liability
Particulars Rs. Rs.
First Rs. 500,000 (single) Nil
Next Rs. 2,00,000 @ 20% 20,000
Balance Rs. 260,000 @ 20% 52,000
Total tax liabilities 72,000
Less: Medical tax credit
15% of 20,000 3,000
Or, Maximum 750 750
(Whichever is lower)
Total tax payable 71,250

R
 Value Added Tax (VAT)
Q Practical Problems
SOLUTION - 1
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Cost of
10,000 – – – – –
production
Producer-
10,000 1,000 11,000 1,430 12,430 1,430
wholesaler
Wholesaler-
11,000 1,880 12,880 1,674 14,554 244
Retailer
Retailer-
12,880 2,162 15,042 1,955 16,997 281
consumer
Total 1,955
Working notes:
1. Value added by wholesaler
Value added = Additional cost + Profit
Total cost = 11,000 + 200 = 11,200
15
Profit = 11,200 × 100 = 1,680

∴ Value added = 200 + 1,680 = 1,880

Or, Value added = 200 + (11200 × 100

15
) = Rs.1,880
2. Value added by retailer

Value added = 200 + (13080 × 100

15
) = Rs.2,162
SOLUTION - 2
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Cost of
11,000 – – – – –
production
Producer-
11,000 1,100 12,100 1,573 13,673 1,573
wholesaler
Wholesaler- 12,100 2,420 14,520 1,888 16,408 315
 Chapter 12 • Value Added Tax 85

Retailer
Retailer-
14,520 2,904 17,424 2,265 19,689 377
Consumer
Total 2,265

SOLUTION - 3
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive exclusive of @ including
value government
of VAT VAT 13% VAT
Imported
15,000 – – – – –
price
Importer-
15,000 2,222 17,222 2,239 19,461 2,239
Retailer
Retailer-
17,222 2,580 19,802 2,574 22,376 335
Consumer
Total 2,574
Working notes:
1. Value added by importer = Additional cost + Profit
Profit
Total cost
= 100 – Rate of profit × Rate of Profit =
15500
(
90 × 10 ) = 1,722
Value added = 500 + 1,722 = 2,222
2. Value added by retailer = 600 + (
17‚822
90 × 10 = 2,580 )
PP-4
Statement showing computation of VAT
Cost price Selling price Selling price
Added VAT @ VAT payable
Channels exclusive of exclusive of including
value 13% to government
VAT VAT VAT
Importer
153,600 – – 19,968 – 19,968
price
Importer-
153,600 38,400 192,000 24,960 216,960 4,992
Wholesaler
Wholesaler-
192,000 48,000 240,000 31,200 271,200 6,240
Retailer
Retailer-
240,000 60,000 300,000 39,000 339,000 7,800
Consumer
Total 39,000
Working notes:
39‚000
Selling price excluding VAT for Retailer =13 × 100 = Rs. 300,000
Value added by retailer = 20% of 300,000 = Rs. 60,000
SOLUTION - 5
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive exclusive of @ including
value government
of VAT VAT 13% VAT
Imported price 15,000 – – 1,950 – 1,950
Importer-
15,000 4,200 19,200 2,496 21,696 546
Retailer
Retailer-
19,200 5,040 24,240 3,151 27,391 655
Consumer
Total 3,151
86 Solution Manual to Taxation and Auditing

Working notes:
16‚950
Imported price = 113 × 100 = Rs. 15,000
1. Value added by Importer
Value added = Additional cost + Profit
Total cost = 15,000 + 1,000 = 16,000
20
Profit = 16,000 × 100 = 3,200
∴ Value added = 1,000 + 3,200 = 4,200
2. Value added by Retailer
Total cost = 19,200 + 1,000 = Rs. 20,200

( 20
)
Profit = 20‚200 × 100 = Rs. 4,040
∴ Value added = 1,000 + 4,040 = Rs. 5,040
SOLUTION - 6
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Imported price 30,000 – – 3,900 – 3,900
Importer-
30,000 7,500 37,500 4,875 42,375 975
Manufacturer
Manufacturer-
37,500 3,750 41,250 5,363 46,613 488
Wholesaler
Wholesaler-
41,250 8,250 49,500 6,435 55,935 1,072
Retailer
Retailer-
49,500 7,425 56,925 7,400 64,325 965
Consumer
Total 7,400
SOLUTION - 7
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive of exclusive of @ including
value government
VAT VAT 13% VAT
Imported
5,000 – – 650 – 650
price
Importer-
5,000 2,500 7,500 975 8,475 325
Retailer
Retailer-
7,500 4,375 11,875 1,544 13,419 569
Consumer
Total 1544
Working notes:
Imported price = 650/13 × 100= Rs. 5,000
1. Value added by Importer
Value added = Additional cost + Profit
Total cost = 5,000 + 1,000 = 6,000

(
Total cost
) (
6‚000
Profit = 100 – Rate × Rate = 100 – 20 × 20 ) = 6‚000
80 × 20 = 1,500
∴ Value added = 1,000 + 1,500 = Rs. 2,500
2. Value added by Retailer
Total cost = 7,500 + 2,000 = Rs. 9,500
9‚500
Profit = 80 × 20 = Rs. 2,375
∴ Value added = 2,375 + 2,000 = Rs. 4,375
 Chapter 12 • Value Added Tax 87

SOLUTION - 8
Statement showing computation of VAT
Selling Selling VAT
Cost price
Added SP before price VAT @ price payable to
Channels exclusive Discount
value discount exclusive of 13% including governme
of VAT
VAT VAT nt
Cost of
10,000 – – – – – – –
production
Producer-
10,000 2,000 12,000 1,200 10,800 1,404 12,204 1,404
wholesaler
Wholesaler-
10,800 1,500 12,300 615 11,685 1,519 13,204 115
Retailer
Retailer-
11,685 2,500 14,185 709 13,476 1,752 15,228 233
consumer
Total 1,752
SOLUTION - 9
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive of exclusive of @ including
value government
VAT VAT 13% VAT
Imported
424 – – 55 – 55
price
Importer-
424 42 466 61 527 6
Retailer
Retailer-
466 12 478 62 540 1
Consumer
Total 62
Working notes:

Value added by retailer = 10 + (105

50
× 5) = 12

= 20 + (105 × 5) = 42
465
Value added by importer

SOLUTION - 10
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Purchase by
4,231 - - 550 - 550
wholesaler
Wholesaler-
4,231 846 5,077 660 5,737 110
Retailer
Retailer-
5,077 1,015 6,092 792 6,884 132
Consumer
Total 792

SOLUTION - 11
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Wholesaler-
16,529 1,653 18,182 2,364 20,546 2,364
Retailer
Retailer-
18,182 1,818 20,000 2,600 22,600 236
Consumer
Total 2,600
88 Solution Manual to Taxation and Auditing

SOLUTION - 12
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive of exclusive of @ including
value government
VAT VAT 13% VAT
Imported
4,500 – – – – –
price
Importer-
4,500 780 5,280 686 5,966 686
Retailer
Retailer-
5,280 1,080 6,360 827 7,187 141
Consumer
Total 827

SOLUTION - 13
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive of exclusive of @ including
value government
VAT VAT 13% VAT
Purchase by
38,938 - - 5,062 - 5,062
Ganesh
Ganesh-
38,938 10,441 49,379 6,419 55,798 1,357
Consumer
Total 6,419

SOLUTION - 14
Statement showing computation of VAT
Cost price Selling price Selling price
Added VAT @ VAT payable
Channels exclusive of exclusive of including
value 13% to government
VAT VAT VAT
Cost of
94,523 – – – – –
production
Producer-
94,523 23,631 118,154 15,360 133,514 15,360
Dealer
Dealer-
118,154 29,538 147,692 19,200 166,892 3,840
Wholesaler
Wholesaler-
147,692 36,923 184,615 24,000 208,615 4,800
Retailer
Retailer-
184,615 46,154 230,769 30,000 260,769 6,000
Consumer
Total 30,000

SOLUTION - 15
Statement showing computation of VAT
Cost price Selling price Selling price
Added VAT @ VAT payable
Channels exclusive of exclusive of including
value 13% to government
VAT VAT VAT
Cost of
105,078 – – – – –
production
Producer -
105,078 10,508 115,586 15,026 130,612 15,026
Dealer
Dealer-
115,586 11,559 127,145 16,529 143,674 1,503
Wholesaler
Wholesale-
127,145 12,715 139,860 18,182 158,042 1,653
Retailer
 Chapter 12 • Value Added Tax 89

Retailer-
139,860 13,986 153,846 20,000 173,846 1,818
Consumer
Total 20,000

SOLUTION - 16
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable
Channels exclusive of exclusive of @ including
value to government
VAT VAT 13% VAT
Cost of
19,469 – – 2,531 – 2,531
production
Producer-
19,469 9,735 29,204 3,796 33,000 1,265
Dealer
Dealer-
29,204 5,796 35,000 4,550 39,550 754
Supermarket
Supermarket-
35,000 3,938 38,938 5,062 44,000 512
Binod
Total 5,062

SOLUTION - 17
Statement showing computation of VAT
Cost price Selling price VAT Selling price
Added VAT payable to
Channels exclusive of exclusive of @ including
value government
VAT VAT 13% VAT
Imported
6,154 – – 800 – 800
price
Importer-
6,154 1,538 7,692 1,000 8,692 200
Dealer
Dealer-
7,692 3,846 11,538 1,500 13,038 500
Retailer
Retailer-
11,538 2,308 13,846 1,800 15,646 300
Consumer
Total ` 1800

SOLUTION - 18
1. VAT collection from customer
Particulars Rs.
Sony TV 2 pieces @ Rs.24,000 48,000
Sony DBVD 3 pieces @ Rs.4,200 12,600
Total 60,600
Less: Discount @ 10% 6,060
Taxable amount 54,540
Add: VAT collected @ 13% 7,090
SP inclusive VAT 61,630
∴ VAT collected from customer = Rs.7,090
2. VAT collected to government office
Particulars Rs.
VAT collected from customer (output) Rs.7,090
Less: VAT paid on purchase (input tax) 2,990
Net amount of tax collected 4,100
90 Solution Manual to Taxation and Auditing

SOLUTION - 19
a. Amount of input tax/ Tax paid on purchase and service
Particulars Rs.
Indirect material (Rs.90,400 × 13/113) Rs.10,400
Technical assistant (Rs.45,200/113 × 13) 5,200
Total input tax paid 15,600

b. Amount of output tax = (900,000 × 100

13
) = Rs.117,000 (VAT collected on sold)
c. Net amount of value added
Particulars Rs. Rs.
Sales Rs.900,000
Less: Cost of input and services
Material 500,000
Indirect material (excluding VAT) 80,000
Technical services (excluding VAT) 40,000 (620,000)
Net value added 280,000
d. Net amount of tax collected to IRO
Particulars Rs. Rs.
Output tax collected 117,000
Less: Input tax paid 15,600
Tax refundable last month 8,000 (23,600)
Net VAT collected by IRO 93,400
e. Calculation of Fine payable
0.05
Rs. 93,400 × 100 × 20 days Rs. 934
Or Flat amount Rs. 1,000
(whichever is higher)
∴ Amount of line higher payable equal to Rs. 1,000.
Note: As per VAT Act 2052, the VAT registrant should submit the VAT return of the month by
the end of 25 days of next month, otherwise the fine of 0.05% per day for delay period or flat
amount Rs. 1,000, whichever is higher will be imposed on tax payable amount.

SOLUTION - 20
a. Journal Entries
Date Particulars L.F. Debit (Rs.) Credit (Rs.)
a. Cash a/c ............................................................................. Dr. 565,000
To Advertisement sales 500,000
To VAT 65,000
(To record advertisement sold)
b. Cash a/c ............................................................................. Dr. 452,000
To Design sales 400,000
To VAT 52,000
(To record design sold)
c. Advertisement purchase a/c .............................................. Dr. 54,600
VAT Dr. 420,000
To Cash 474,600
(To record advertisement purchase)
d. Computer a/c ...................................................................... Dr. 100,000
VAT a/c .............................................................................. Dr. 13,000
To cash 113,000
(To record purchase of computer)
 Chapter 12 • Value Added Tax 91

e. Cash a/c ............................................................................. Dr. 56,500

To Design sales 50,000
To VAT 6,500
(To record design sold)
f. Purchase a/c ...................................................................... Dr. 70,000
VAT a/c .............................................................................. Dr. 9,100
To Cash 79,100
(To record software purchase)
b. Amount of output tax collected Or VAT collected on sales
Particulars Rs.
Advertisement sold (565000/113 × 13) 65,000
Design sales (452,000/113 × 13) 52,000
Design sold to foreign customer (56,500/113 × 13) 6,500
Total output tax 123,500
Amount of input tax paid/ VAT paid on purchase or input
Particulars Rs.
Advertisement purchase (474,600/113 × 13) 54,600
Computer purchase (113,000/113 × 13) 13,000
Software purchase (79,100/113 × 13) 9,100
Total input tax 76,700
c. Net amount of VAT collected to IRO
Particulars Rs.
Amount of output tax collected 123,500
Less: Amount of input tax paid 76,700
46,800
d. Calculation of fine payable
0.05
Rs. 46,800 × 100 × 6 days Rs. 140
Or Flat amount per period Rs. 1,000
(whichever is higher)
∴ Amount of line higher payable equal to Rs. 1,000.