All Rights Reserved

THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

FINAL EXAMINATION – DECEMBER 2009

(33) Taxation Practice 02-01-2010

Morning
[9.00 – 12.00]
Time: 3 hours
• Instructions to candidates: No. of Pages: 08
No. of Questions: 05
(1) All questions should be answered.
(2) Answers should be in one language, in the medium applied for, in the booklets provided.
(3) Use of calculators is permitted.
(4) Attach all workings and computations. State clearly assumptions made by you, if any.
(5) 100 marks.

01. Dunhinda (Pvt) Ltd. was incorporated on 01st April 2006 and commenced business
the same day. The company is in the business of producing agricultural implements
for the local market. The factory and office are both situated at Kundasale and
dwelling houses are being constructed for the factory staff in the land (which is on a
thirty three year lease) as part of a corporate social responsibility project.

The profit before tax for the year ended 31st March 2009 was Rs.15,256,000/- after
charging all expenditure and crediting all income including other operating income.

Notes to the accounts:

Note 1
Property, Plant and Equipment

Cost
Balance Additions Disposals Balance
as at as at
Particulars
01.04.2008 31.03.2009
Rs. Rs. Rs. Rs.
Land 6,930,000 - - 6,930,000
Buildings 7,800,000 2,100,000 - 9,900,000
Plant & Machinery 8,040,000 - - 8,040,000
Loose tools 3,450,000 2,400,000 (1,920,000) 3,930,000
Motor Vehicles 5,200,000 1,500,000 (2,400,000) 4,300,000
Information Tech.
1,650,000 - - 1,650,000
equipment
Computer Software 750,000 1,150,000 - 1,900,000
Furniture 940,000 - - 940,000
Capital work in progress 4,300,000 2,250,000 (2,100,000) 4,450,000
39,060,000 9,400,000 (6,420,000) 42,040,000
Depreciation
Balance Charge for On Balance
as at the year Disposals as at
Particulars
01.04.2008 31.03.2009
Rs. Rs. Rs. Rs.
Land 315,000 210,000 - 525,000
Buildings 390,000 390,000 - 780,000
Plant & Machinery 670,000 670,000 - 1,340,000
Loose tools 1,150,000 1,150,000 (1,280,000) 1,020,000
Motor Vehicles 1,040,000 1,040,000 (960,000) 1,120,000
Information Technology
330,000 330,000 - 660,000
equipment
Computer Software 250,000 250,000 - 500,000
Furniture 94,000 94,000 - 188,000
Capital work in progress - - - -
4,239,000 4,134,000 (2,240,000) 6,133,000

Unless stated otherwise all items of Property, Plant and Equipment as at 01st April
2008 were acquired on 01st April 2006.

The land belonging to the company is on a lease covering a period of thirty three
(33) years commencing from 01st October 2006.

The buildings have all been constructed on the company’s leasehold land.
Buildings as at 01st April 2008 consist of factory buildings whereas those
transferred during the year from capital work in progress are dwellings for the
factory staff none of whom is in an executive category.

Some loose tools were replaced during the year. The additions during the year
are replacements for the items discarded.

Motor Vehicles as at 01st April 2008 included a car used for business travelling.
The cost of the car is Rs.1,600,000/-. The rest are delivery vehicles. Two lorries
each of which costs Rs.1,200,000/- were disposed of on 30th September 2008 at
a price of rupees 1 million each. One of those two lorries was replaced during the
year whereas the other was replaced on 30th April 2009.

The information technology equipment (computers) have been acquired on a five

year finance lease commencing 01st October 2006. Each monthly instalment of
the lease is Rs.40,000/- (excluding VAT). Due to surplus cash being available 14
instalments had been paid during the year.

All the computer software have been developed locally.

Furniture costing Rs.200,000/- is for the use of the Factory Manager at his
residence. The rest consists of furniture used in the factory and office.

Capital work in progress consists of dwelling Houses under construction for the
factory staff.

2
Note 2

Other Operating Income

Rs.
Interest on fixed deposits 191,000
Interest on Treasury Bills 108,000
Profit on disposal of Motor Lorries 560,000

The interest on fixed deposits had not been subject to any withholding tax deduction.
The interest on Treasury Bills has not been grossed up with a ‘Notional Credit’.

Note 3

The expenditure charged in arriving at the profit before tax included the following:

Rs.
Depreciation of Property, Plant and Equipment 4,134,000
Loss on discard of loose tools 640,000
Repairs and improvements to public road (Note 4) 720,000
Legal expenses in defending an action brought by a
566,000
claimant to the land
Fixed deposit in a financial institution written off as
(Note 5) 850,000
irrecoverable
Resurveying the land (Note 6) 410,000
Repair of fence including posts (Note 7) 1,275,000
Advertising (Note 8) 427,000
Bad and doubtful debts (Note 9) 175,000
Charity and donations (Note 10) 250,000
Interest on finance lease 175,000
One years rent paid for Factory Managers residence (Note 11) 420,000
Staff defined benefit plan cost (Note 12) 245,000

Note 4

The repairs and improvements were to a public road in the vicinity of the factory.
The cost incurred on the repairs and improvements has been duly certified by the
relevant local authority.

Note 5

The fixed deposit in question had been classified in the company’s balance sheet as a
long term investment.

Note 6
The resurvey of the land has been done at the request of the bank in order to raise
long term finance for the company.

3
Note 7

The fence consisting of concrete posts and barbed wire had been repaired.

Note 8

Advertising
The break-up is as follows:
Rs.
Advertising of staff vacancies 185,000
Advertising of the company’s products in Newspapers 242,000

Note 9

Bad and doubtful debts

The break-up is as follows:

Specific General
Total
provision Provision
Rs.
Rs. Rs.
Balance at the beginning of the year 850,000 1,100,000 1,950,000
Bad debts written off (360,000) - (360,000)
490,000 1,100,000 1,590,000
Charge for the year 200,000 100,000 300,000
Balance at the end of the year 690,000 1,200,000 1,890,000

Rs.
Charge for the year (see analysis below) 300,000
Less: Bad debts recovered (125,000)
175,000

The bad debts written off during the year, which were provided for in the previous
year had not been allowed by the Assessor previously.

The specific provision during the year represents debts estimated to have been bad
during the year.

The bad debts recovered had been allowed previously.

Note 10

Charity and Donations

This amount is the cost of painting the Children’s ward at the Government Cancer
Hospital. The Director of the Hospital has by a letter confirmed the expenditure
incurred as being correct.

4
 Note 11

You are informed in this connection that the profit from employment of T. Rex the
Factory Manager (excluding the value of a conveyance granted to him free of charge
by the company) is Rs.1,680,000/- for the entire year.

Note 12

Staff Defined Benefit plan cost (ie. Gratuity)

The details of the provision for Retiring Gratuity account are as follows:

Rs.
Balance at the beginning of the year 350,000
Provision for the year 245,000
595,000
Less: Payments during the year (105,000)
Balance at the end of the year 490,000

You are required to compute:

(a) Statutory income from Business,

(b) Total Statutory Income from all sources,
(c) Assessable Income,
(d) Taxable Income,
(e) Gross Income Tax,
(f) Balance Income Tax Payable,

of Dunhinda (Pvt) Ltd. for the year of assessment 2008/09. (35 marks)

02. Hillary an engineer by profession retired from the public service on 31st December
2007 and has been employed from 01st January 2008 at UBC Ltd. a company
engaged in medical research. Hillary who is 62 years of age is a resident individual.

The following particulars are relevant for filing his income tax return for the year of
assessment 2008/09.

(1) Pension from the government of Sri Lanka Rs.32,000/- per month.

(2) Employment income from UBC Ltd.

Rs.
Salary for the year 375,000
Bonus 180,000
Travelling allowance for the year 60,000
Rent paid by the employer for a residence provided rent free
(the net annual value of the house is Rs.48,000/- and the rates 480,000
paid by the owner is Rs.12,000/-)

5
(3) Hilary has rented his house which he received as a gift from his late father
about 25 years ago.
Rs.
Rent received for 13 months at Rs.20,000/- per month
260,000
(the tenant has paid one months rent as an advance)
Rates paid by the owner 16,000
The cost of repairs borne by Hillary for the year 72,000

(4) Interest for the year on a fixed deposit of Rs.2,000,000/- at the National
Savings Bank was Rs.280,000/-. (Withholding tax has not been deducted).

Interest received by his son Tyson (whose date of birth is 13th January 1992)
on a savings account at the Bank of Ceylon. For the year (interest credited
monthly) is Rs.12,000/-.

(5) Dividend received by him comprised of the following,

Rs.
Dividends - from profits exempt from tax 24,000
Dividends - received from other companies, which have been
36,000
subject to 10% withholding tax

(6) Rs.
Profits from a nursery for indoor plants (horticulture)
(His wife who is the Manager of the nursery was paid a salary
30,000
of Rs.60,000/- for the year and her salary has been deducted
in arriving at the profit)

(7) Rs.
Interest paid on a Credit Card
(the Credit Card was used only for the purpose of paying for 22,000
the repairs of his house)

(8) Rs.
Provident Fund contributions made by Hillary as employee 30,000
12% Provident Fund contributed by the employer in UBC Ltd. 45,000

ETF Contribution by the employer 11,250

6
 (9) Donations consisted of the following:

Rs.
Donation of Dry rations to a home for destitute run by an
28,000
approved charity
Cash donations to ‘Marc Sri’ an approved charity 50,000

(10) PAYE deduction for the year amounted to Rs.25,500/-.

You are required to compute Hillary's:

(a) Statutory Income from each source of income,

(b) Total Statutory Income from all sources,

(c) Assessable Income,

(d) Taxable Income,

(e) Gross Income Tax,

(f) Balance Income Tax Payable / Refund due, and

(g) Exempt Income, if any

for the year of assessment 2008/09. (25 marks)

03. Styls Ltd. owns a garment factory which produces clothes for the local market. The
transactions for the month of January 2009 are given below:

All transactions are shown exclusive of VAT where applicable except for sales to
unregistered persons which are shown inclusive of VAT.

Rs.
Outputs
Sales to VAT registered persons 5,000,000
Sales to unregistered persons (inclusive of VAT) 280,000

Inputs
Purchases of Sewing Machines for the factory 1,200,000
Purchases of Air Conditioners for the office and factory 850,000
Electricity 88,000
Telephone 50,000
Staff salaries and wages 1,250,000
Purchases of raw materials from VAT registered persons 3,400,000

Brought forward
VAT brought forward under 31st December 2008 245,000

From the above particulars you are required to compute the VAT payable by
Styls Ltd. for January 2009 and the VAT carry forward, if any. (20 marks)

7
04. (a) On what kind of business is the Provincial Council turnover tax imposed?
(02 marks)

(b) From the following particulars you are required to compute the
Provincial Council turnover tax payable by Exe Ltd., a dealer in textiles in
Colombo, for the quarter ended 31st March 2009.

The following are the transactions for such quarter:

Rs.
Sales (Textiles) 2,150,000
Sales returns (Textiles) 75,500
Cash discounts to debtors for early settlement 24,600
Bad debts incurred by the business 27,000
Bad debts recovered 5,500
Sale of some old furniture which formed a part of fixed assets 32,000

(09 marks)

(c) To whom would Exe Ltd. pay the Provincial Council Turnover Tax? (01 mark)
(Total 12 marks)

05. A person has to pay his income tax under self assessment. State the provisions
applicable to this scheme for the year of assessment 2008/09, the amounts to be
paid, and the dates on which the amounts should be paid. Penalties for non
compliance should be clearly stated. (08 marks)

– o0o –