Given below is the trading, profit and loss account of a proprietorship organization: Particulars Amount Particulars Amount : : : : To Opening stock 425,000 By Sales 8,600,000 To Purchase 49,50,000…

Solution to Taxation in Nepal (TU Board 2082) – 15 Marks

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(a) Net (Assessable) Income from Business

To determine the net assessable income from business, we must adjust the net profit as per the provisions of the Income Tax Act, 2058 (Amended). The adjustments include:

1. Revaluation of opening and closing stock (undervaluation correction).
2. Exclusion of non-business income (e.g., dividend, speculation income, agriculture income).
3. Addition of disallowed expenses (e.g., fine, penalties, personal insurance premium).
4. Adjustment for depreciation (plant purchase and depreciation).
5. Adjustment for bad debts recovered (only 40% is taxable).
6. Adjustment for general expenses (only 60% of printing and stationery is deductible).
7. Adjustment for donations (only 30% is deductible).
8. Adjustment for previous year’s loss (carry forward allowed).

Step 1: Adjust Net Profit for Undervaluation of Stock

• Opening stock undervaluation: Rs. 25,000 (add to profit)
• Closing stock undervaluation: Rs. 30,000 (deduct from profit) Net adjustment: $25,000-30,000=-5,000$ (deduct Rs. 5,000)

Step 2: Exclude Non-Business Income

From the Sundry Receipts side:

• Dividend received: Rs. 50,000 (excluded)
• Refund of customs duty: Rs. 50,000 (excluded, as it is a recovery)
• Agriculture income: Rs. 10,000 (excluded)
• Rent from staff quarter: Rs. 25,000 (excluded, unless it is a business activity)
• Speculation income: Rs. 25,000 (excluded)
• Gain on non-chargeable business assets: Rs. 100,000 (excluded)

Total non-business income to exclude: 50,000 + 50,000 + 10,000 + 25,000 + 25,000 + 100,000 = **Rs. 260,000** (deduct from profit) ### **Step 3: Adjust for Disallowed Expenses** From the **Profit & Loss Account (P&L)**: - **Fine and penalties:** Rs. 5,000 (not deductible) - **Life insurance premium (own):** Rs. 30,000 (not deductible) - **General expenses (fine to Nepal Electricity Corporation):** Rs. 5,000 (already included in fine) - **Printing and stationery (Rs. 60,000):** Only **40% (Rs. 24,000)** is deductible (since 60% was paid in cash without banking facility within 10 KM). **Adjustment:** \(60,000 - 24,000 = **Rs. 36,000** (add back to profit) ```figure {"type":"bar","labels":["Fine & Penalties","Life Insurance (Own)","Printing & Stationery (Non-Deductible)","Total Disallowed"],"values":[5000,30000,36000,71000],"ylabel":"Amount (Rs.)","caption":"Breakdown of disallowed expenses (Rs. 71,000 total) as per Income Tax Act, 2058"} ``` ### **Step 4: Adjust for Depreciation on Plant Purchase** - **Plant purchased in previous year (Kartik):** Rs. 250,000 - **Depreciation base (previous year):** Rs. 50,000 - **Depreciation rate for plant (Block D):** 20% (as per IT Act) - **Depreciation for previous year:** \(50,000 \times 20\% = **Rs. 10,000**

• Depreciation for current year: $(250,000-10,000)\times 20\%=\ast \ast Rs.48,000\ast \ast$
• But in P&L, depreciation shown is Rs. 50,000 (Block D). Since the plant was purchased in the previous year, only Rs. 48,000 is deductible in the current year. Adjustment: 50,000 - 48,000 = **Rs. 2,000** (add back to profit) ```figure {"type":"t-account","title":"Depreciation Adjustment (Plant Purchase)","dr":[["To Depreciation Expense",10000]],"cr":[["By Plant and Machinery A/c",10000]],"caption":"Example of depreciation adjustment for plant purchase (assuming Rs. 10,000 depreciation)"} ``` ### **Step 5: Adjust for Bad Debts Recovered** - **Bad debts recovered:** Rs. 40,000 - **Only 40% is taxable (as 60% was previously allowed as bad debt).** **Taxable amount:** \(40,000 \times 40\% = **Rs. 16,000** (add back to profit)

Step 6: Adjust for Donations

• Total donation: Rs. 110,000
• 70% (Rs. 77,000) paid to non-approved institution (not deductible)
• 30% (Rs. 33,000) paid to TE organization (deductible) Adjustment: 110,000 - 33,000 = **Rs. 77,000** (add back to profit) ### **Step 7: Adjust for Previous Year’s Loss** - **Loss from business last year:** Rs. 150,000 (carry forward allowed) **Adjustment:** **Rs. 150,000 (deduct from current year’s profit)** ### **Step 8: Calculate Net Assessable Income from Business** | **Particulars** | **Amount (Rs.)** | |----------------|----------------| | **Net Profit (P&L)** | 21,35,000 | | **Add: Undervaluation of stock (-5,000)** | -5,000 | | **Add: Non-business income (260,000)** | 260,000 | | **Add: Disallowed expenses (36,000 + 2,000 + 16,000 + 77,000)** | 1,31,000 | | **Less: Previous year’s loss (1,50,000)** | -1,50,000 | | **Net Assessable Income from Business** | **21,66,000** | **Final Net Assessable Income from Business:** **Rs. 21,66,000** --- ## **(b) Statement of Total Taxable Income** The **total taxable income** includes: 1. **Net assessable income from business (Rs. 21,66,000)** 2. **Other income (if any, but in this case, only non-business income was excluded)** Since all other incomes were excluded in part (a), the **total taxable income** is the same as the **net assessable income from business**. | **Particulars** | **Amount (Rs.)** | |----------------|----------------| | **Net Assessable Income from Business** | 21,66,000 | | **Total Taxable Income** | **21,66,000** | **Final Total Taxable Income:** **Rs. 21,66,000** --- ## **(c) Tax Liabilities** Tax is calculated based on the **slab rates** as per the **Income Tax Act, 2058 (Amended)**. ### **Tax Slab Rates (FY 2082/83)** | **Income Slab (Rs.)** | **Tax Rate (%)** | |----------------------|----------------| | Up to 5,00,000 | 0% | | 5,00,001 to 10,00,000 | 10% | | 10,00,001 to 15,00,000 | 20% | | 15,00,001 to 20,00,000 | 25% | | Above 20,00,000 | 30% | ```figure {"type":"bar","labels":["Up to Rs. 400,000","Rs. 400,001 - Rs. 800,000","Rs. 800,001 - Rs. 1,200,000","Above Rs. 1,200,000"],"values":[0,10,20,30],"ylabel":"Tax Rate (%)","caption":"Simplified tax slab rates for FY 2082/83 (Nepal)"} ``` ### **Step-by-Step Tax Calculation** 1. **First Rs. 5,00,000:** \(5,00,000 \times 0\% = **0**

2. Next Rs. 5,00,000 (5,00,001 to 10,00,000): $5,00,000\times 10\%=\ast \ast 50,000\ast \ast$
3. Next Rs. 5,00,000 (10,00,001 to 15,00,000): $5,00,000\times 20\%=\ast \ast 1,00,000\ast \ast$
4. Next Rs. 5,00,000 (15,00,001 to 20,00,000): $5,00,000\times 25\%=\ast \ast 1,25,000\ast \ast$
5. Remaining Rs. 1,66,000 (20,00,001 to 21,66,000): $1,66,000\times 30\%=\ast \ast 50,000(approx.)\ast \ast$

Total Tax Before Deductions: $$0+50,000+1,00,000+1,25,000+50,000=\ast \ast Rs.3,25,000\ast \ast$$

Adjustments for Tax Paid

From the P&L Account:

• Provision for tax: Rs. 10,000 (already accounted in P&L)
• Advance tax paid: Rs. 20,000 (deduct from total tax liability)

Net Tax Liability: $$3,25,000-20,000=\ast \ast Rs.3,05,000\ast \ast$$

Final Tax Liability: Rs. 3,05,000

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Summary of Tax Computation

Final Answer:

• (a) Net Assessable Income from Business: Rs. 21,66,000
• (b) Total Taxable Income: Rs. 21,66,000
• (c) Tax Liabilities: Rs. 3,05,000