CAF-2 · Chapter 10

Income from Other Sources MCQs with Answers

15 multiple-choice questions on Income from Other Sources for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.

1. Question 1

   Under the Income Tax Ordinance, 2001, what is the basis of chargeability for income falling under the head "Income from Other Sources"?

   • A) A) Accrual basis
   • B) B) Receipt basis
   • C) C) Whichever is earlier between accrual and receipt
   • D) D) The method of accounting regularly employed by the taxpayer
   Show answer & explanation

   Answer: B) B) Receipt basis

   Income from other sources is strictly chargeable to tax on a 'receipt basis'. Any income from other sources which is accrued for a tax year but is not received is not chargeable in that tax year.

2. Question 2

   Mr. Kashif leased out a commercial building along with the plant and machinery installed in it for a composite rent of Rs. 500,000 per month. Under which head of income will this composite rent be chargeable to tax?

   • A) A) Income from Property
   • B) B) Income from Business
   • C) C) Capital Gains
   • D) D) Income from Other Sources
   Show answer & explanation

   Answer: D) D) Income from Other Sources

   Income from the lease of any building together with plant or machinery is specifically chargeable to tax under the head "Income from Other Sources".

3. Question 3

   Mr. Zaid received a lump-sum amount of Rs. 3,000,000 as consideration for vacating the possession of a rented commercial building. He did not pay any amount to originally acquire possession of the building. How will this amount be taxed?

   • A) A) The entire Rs. 3,000,000 will be taxed in the year of receipt under 'Income from Property'.
   • B) B) It will be completely exempt from tax as a capital receipt.
   • C) C) Rs. 300,000 will be chargeable to tax under 'Income from Other Sources' in the year of receipt and the following nine tax years.
   • D) D) Rs. 3,000,000 will be taxed under 'Capital Gains'.
   Show answer & explanation

   Answer: C) C) Rs. 300,000 will be chargeable to tax under 'Income from Other Sources' in the year of receipt and the following nine tax years.

   Any amount received as consideration for vacating the possession of a building (reduced by any amount paid to acquire possession) shall be chargeable to tax under "Income from Other Sources" in the tax year in which it was received and the following nine tax years in equal proportion (i.e., 1/10th or Rs. 300,000 each year).

4. Question 4

   Mr. Ali received a cash gift of Rs. 1,000,000 from his father, and a gift of an antique painting worth Rs. 500,000 from his mother. What is the tax treatment of these gifts?

   • A) A) Both gifts are fully exempt from tax.
   • B) B) The cash gift is taxable under 'Income from Other Sources', while the painting is exempt.
   • C) C) Both gifts are taxable under 'Income from Other Sources'.
   • D) D) The painting is taxable, while the cash gift is exempt.
   Show answer & explanation

   Answer: B) B) The cash gift is taxable under 'Income from Other Sources', while the painting is exempt.

   Gifts received in the form of assets from relatives (like an ancestor) are exempt from tax. However, any gift received in *cash* even from relatives is taxable under the head "Income from Other Sources".

5. Question 5

   A taxpayer received a valuable gift from his current tenant. Under which head of income will this gift be classified and taxed?

   • A) A) Income from Salary
   • B) B) Income from Other Sources
   • C) C) Income from Property
   • D) D) Income from Business
   Show answer & explanation

   Answer: C) C) Income from Property

   A gift received from a tenant is considered a form of rental income linked to the property, and is therefore taxable under the head "Income from Property".

6. Question 6

   XYZ (Pvt.) Limited extended a loan of Rs. 3,000,000 to one of its shareholders on 1 July 2025. The company’s accumulated profits on that date were Rs. 2,200,000. How much of this loan will be treated as a "dividend" for the shareholder under Section 2(19)?

   • A) A) Rs. 3,000,000
   • B) B) Rs. 800,000
   • C) C) Rs. 2,200,000
   • D) D) Nil
   Show answer & explanation

   Answer: C) C) Rs. 2,200,000

   Any payment by a private company by way of advance or loan to a shareholder is treated as a dividend *to the extent* to which the company possesses accumulated profits. Therefore, Rs. 2,200,000 is treated as a dividend.

7. Question 7

   Which of the following distributions or remittances is explicitly EXCLUDED from the definition of a "dividend"?

   • A) A) Any distribution by a company of accumulated profits to its shareholders.
   • B) B) Remittance of after-tax profit by a branch of a foreign company operating in Pakistan.
   • C) C) Remittance of after-tax profit by a branch of a Petroleum Exploration and Production (E&P) foreign company operating in Pakistan.
   • D) D) Any distribution made to the shareholders of a company on its liquidation.
   Show answer & explanation

   Answer: C) C) Remittance of after-tax profit by a branch of a Petroleum Exploration and Production (E&P) foreign company operating in Pakistan.

   Remittance of after-tax profit by a branch of a Petroleum Exploration and Production (E&P) foreign company operating in Pakistan is explicitly excluded from the definition of dividend.

8. Question 8

   Mr. A, an individual, received a dividend of Rs. 170,000 (net of 15% tax) from a listed company. No Zakat was deducted. What is his gross taxable dividend income, and what is the final tax liability on this amount?

   • A) A) Gross dividend Rs. 170,000; Tax Rs. 25,500
   • B) B) Gross dividend Rs. 200,000; Tax Rs. 30,000
   • C) C) Gross dividend Rs. 200,000; Tax Rs. 0
   • D) D) Gross dividend Rs. 170,000; Tax Rs. 0
   Show answer & explanation

   Answer: B) B) Gross dividend Rs. 200,000; Tax Rs. 30,000

   The gross dividend is calculated by grossing up the net receipt: 170,000 / (1 - 0.15) = 170,000 / 0.85 = Rs. 200,000. The tax rate for individuals on normal dividends is 15%, so the tax liability is Rs. 30,000 (which has already been deducted at source).

9. Question 9

   Mr. Bashir, a resident individual, earned a profit on debt of Rs. 4,500,000 from his savings account in a commercial bank. He has no other source of income. How will this profit on debt be taxed?

   • A) A) Taxable under the Normal Tax Regime (NTR) at applicable slab rates.
   • B) B) Taxable as a separate block of income at a flat rate of 15%.
   • C) C) Fully exempt from tax.
   • D) D) Taxable under 'Income from Business'.
   Show answer & explanation

   Answer: B) B) Taxable as a separate block of income at a flat rate of 15%.

   For individuals and AOPs, profit on debt up to Rs. 5 million received from prescribed persons (like banks) is taxable as a separate block at the rate of 15% under section 7B.

10. Question 10

    Mr. Junaid, a resident individual, earned a profit on debt of Rs. 7,000,000 during the tax year. How will this income be classified and taxed?

    • A) A) The entire Rs. 7,000,000 is taxable as a separate block at 15%.
    • B) B) Rs. 5,000,000 is taxed as a separate block at 15%, and Rs. 2,000,000 is taxed under NTR.
    • C) C) The entire Rs. 7,000,000 is taxable under the Normal Tax Regime (NTR) under the head 'Income from Other Sources' at applicable slab rates.
    • D) D) Taxable under 'Income from Business' at 15%.
    Show answer & explanation

    Answer: C) C) The entire Rs. 7,000,000 is taxable under the Normal Tax Regime (NTR) under the head 'Income from Other Sources' at applicable slab rates.

    Any profit on debt exceeding Rs. 5 million derived by an individual is entirely taxable under the Normal Tax Regime (NTR) under the head 'Income from Other Sources' at the applicable progressive slab rates.

11. Question 11

    If Zakat is deducted at the time of the receipt of profit on debt, how is this Zakat treated when computing the taxpayer's taxable income?

    • A) A) It is claimed as a deductible allowance against the total taxable income of the person.
    • B) B) It is allowed as a direct deduction against the gross 'Income from Other Sources' before applying the tax rate.
    • C) C) It is treated as a tax credit to directly reduce the tax liability.
    • D) D) Zakat deducted on profit on debt is entirely ignored for tax purposes.
    Show answer & explanation

    Answer: B) B) It is allowed as a direct deduction against the gross 'Income from Other Sources' before applying the tax rate.

    In the case of profit on debt, Zakat paid under the Zakat & Ushr Ordinance, 1980 is allowed as a deduction in computing the income under the head "Income from Other Sources" itself, rather than as a general deductible allowance against total income.

12. Question 12

    ABC Bank Limited’s core business is providing loans, and it earned Rs. 500 million as profit on debt during the year. Under which head of income will this amount be chargeable to tax?

    • A) A) Income from Other Sources
    • B) B) Final Tax Regime (FTR)
    • C) C) Income from Business
    • D) D) Capital Gains
    Show answer & explanation

    Answer: C) C) Income from Business

    Any profit on debt derived by a person where the person’s *business* is to derive such income (e.g., banks and financial institutions) shall be chargeable to tax under the head "Income from Business" and not under the head "Income from Other Sources".

13. Question 13

    Mr. X rented a commercial building from the original owner. He later sub-leased a portion of this building to Mr. Y. Under which head of income will the rent received by Mr. X from Mr. Y be taxed?

    • A) A) Income from Property
    • B) B) Income from Business
    • C) C) Income from Other Sources
    • D) D) Exempt Income
    Show answer & explanation

    Answer: C) C) Income from Other Sources

    Rent from the sub-lease of land or a building is specifically classified and chargeable to tax under the head "Income from Other Sources".

14. Question 14

    In computing income under the head "Income from Other Sources", which of the following rules applies to the deduction of expenditures?

    • A) A) Capital expenditures are fully allowed as deductions in the year they are incurred.
    • B) B) Expenditures are allowed on an accrual (payable) basis regardless of actual payment.
    • C) C) Expenditures paid for earning Income from Other Sources are allowed as deductions on a 'paid basis'.
    • D) D) No deductions are allowed under this head under any circumstances.
    Show answer & explanation

    Answer: C) C) Expenditures paid for earning Income from Other Sources are allowed as deductions on a 'paid basis'.

    In computing "Income from Other Sources", any expenditure paid for earning this income (other than capital expenditure) is allowed as a deduction. Because the basis of chargeability is 'receipt basis', the basis for the allowability of deductions is strictly 'paid basis'.

15. Question 15

    A taxpayer leased out a building together with plant and machinery installed in it. Which of the following deductions can the taxpayer claim against this lease income under the head "Income from Other Sources"?

    • A) A) Depreciation on the plant and machinery only.
    • B) B) Initial allowance on the building.
    • C) C) Depreciation on the plant, machinery, and building, and initial allowance on the plant and machinery only.
    • D) D) Only actual repair and maintenance expenses.
    Show answer & explanation

    Answer: C) C) Depreciation on the plant, machinery, and building, and initial allowance on the plant and machinery only.

    In the case of income from the lease of a building together with machinery or plant, the taxpayer is allowed a deduction for depreciation on the plant, machinery, and building under Section 22, and an initial allowance on the plant and machinery only under Section 23.