CAF-2 · Chapter 11
Losses, Deductible Allowances, Tax Credits and Exemptions MCQs with Answers
15 multiple-choice questions on Losses, Deductible Allowances, Tax Credits and Exemptions for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following losses can be legally set-off against income chargeable under the head "Salary" in the same tax year?
- A) A) Loss from non-speculation business
- B) B) Loss from property
- C) C) Capital loss
- D) D) No loss can be set-off against income from salary
Show answer & explanation
Answer: D) D) No loss can be set-off against income from salary
If a person sustains a loss under any head of income, it can be set-off against any other head of income *except* for income under the head "Salary". No loss from any head can be adjusted against salary income.
Question 2
During the tax year, Mr. A suffered a loss of Rs. 400,000 in a speculation business and earned a profit of Rs. 1,000,000 from a normal trading (non-speculation) business. How will the speculation loss be treated?
- A) A) It will be set off against the normal trading profit, leaving a taxable business income of Rs. 600,000.
- B) B) It can be set off against any head of income except Salary.
- C) C) It cannot be set off against normal business income and must be carried forward to be set off only against future speculation business profits.
- D) D) It will lapse immediately.
Show answer & explanation
Answer: C) C) It cannot be set off against normal business income and must be carried forward to be set off only against future speculation business profits.
Loss in a speculation business cannot be set-off against any other income (including normal business income). It can only be carried forward up to six tax years to be set off against future speculation gains.
Question 3
ABC Ltd has an unabsorbed tax depreciation loss brought forward from the previous year amounting to Rs. 20 million. Its current year's business income (before this adjustment) is Rs. 30 million. Assuming its taxable income exceeds Rs. 10 million, what amount of the unabsorbed depreciation can be set off this year?
- A) A) Rs. 30 million
- B) B) Rs. 20 million
- C) C) Rs. 15 million
- D) D) Nil
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Answer: C) C) Rs. 15 million
Where the taxable income is Rs. 10 million or more, unabsorbed depreciation/amortization loss can only be set off against 50% of the person's balance income chargeable under the head "Income from Business" for the year. Thus, 50% of 30 million = Rs. 15 million.
Question 4
XYZ Associates is an Association of Persons (AOP). During the tax year, the AOP incurred a business loss of Rs. 1 million. How will this loss be treated under the Income Tax Ordinance, 2001?
- A) A) It will be apportioned among the members and set off against their individual incomes.
- B) B) It can only be carried forward by the AOP to be set off against the AOP's future income.
- C) C) It can be surrendered to a member with the highest taxable income.
- D) D) It will lapse immediately.
Show answer & explanation
Answer: B) B) It can only be carried forward by the AOP to be set off against the AOP's future income.
Any member of an AOP shall not be entitled to set off or carry forward and set off the loss of the AOP against his personal income. The AOP itself is entitled to set off and carry forward its own losses.
Question 5
When computing a person's taxable income, which of the following deductions or losses must be taken into account LAST?
- A) A) Brought forward normal business loss
- B) B) Current year business expenses
- C) C) Deductible allowances like Zakat
- D) D) Deductions for depreciation, initial allowance, and amortization
Show answer & explanation
Answer: D) D) Deductions for depreciation, initial allowance, and amortization
While computing a person’s taxable income, the deductions available for depreciation, initial depreciation, first-year allowance, accelerated depreciation, and amortization shall be taken into account last.
Question 6
Mr. Y has a taxable income of Rs. 1,400,000. He paid tuition fees of Rs. 500,000 for his three children during the tax year. What is his maximum deductible allowance for education expenses under Section 60D?
- A) A) Rs. 25,000
- B) B) Rs. 350,000
- C) C) Rs. 180,000
- D) D) Rs. 500,000
Show answer & explanation
Answer: A) A) Rs. 25,000
For individuals with taxable income under Rs. 1.5 million, the allowance is the lesser of (a) 5% of tuition fee (25,000), (b) 25% of taxable income (350,000), or (c) Rs. 60,000 x 3 children (180,000). The lowest is Rs. 25,000.
Question 7
Mr. Z, an individual, makes a donation via crossed cheque to an approved non-profit organization which is an *associate* of Mr. Z. His taxable income is Rs. 2,000,000, and his actual donation was Rs. 500,000. What is the maximum eligible amount (Component C) to be used in the formula (A/B x C) for calculating his tax credit?
- A) A) Rs. 500,000
- B) B) Rs. 600,000
- C) C) Rs. 300,000
- D) D) Rs. 200,000
Show answer & explanation
Answer: C) C) Rs. 300,000
Component C is the lesser of the actual donation or a percentage of taxable income. Normally it is 30% for individuals, but where the donation is given to an *associate*, the limit is restricted to 15% of taxable income (15% of 2,000,000 = Rs. 300,000).
Question 8
If a taxpayer is eligible for multiple tax credits in a tax year, in what mandatory order must they be applied against the gross tax liability?
- A) A) Advance tax, then Foreign tax credit, then Charitable donations.
- B) B) Foreign tax credit, then Tax credit on donations/investments, then Advance tax.
- C) C) Charitable donations, then Foreign tax credit, then Advance tax.
- D) D) They can be applied in any order at the taxpayer's discretion.
Show answer & explanation
Answer: B) B) Foreign tax credit, then Tax credit on donations/investments, then Advance tax.
Tax credits must be applied in the specific order: (i) Foreign tax credit, (ii) Tax credit on donations, investments, etc., and (iii) Quarterly advance tax and tax deducted/collected at source.
Question 9
A Tier-1 retailer installs a new point of sale (POS) machine integrated with the FBR’s system, costing Rs. 180,000. What is the maximum tax credit allowed for this machine under Section 64D?
- A) A) Rs. 180,000
- B) B) Rs. 150,000
- C) C) 50% of the cost (Rs. 90,000)
- D) D) Nil
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Answer: B) B) Rs. 150,000
The tax credit for a POS machine is allowed at the lower of the amount actually invested in purchasing the machine or Rs. 150,000 per machine.
Question 10
Which of the following is NOT treated as agricultural income and is therefore fully taxable under the Income Tax Ordinance, 2001?
- A) A) Rent received from land used for agricultural purposes.
- B) B) Income derived by a cultivator from selling raw agricultural produce.
- C) C) Dividend received by a shareholder from a corporate farming company.
- D) D) Income from a building owned by a cultivator situated in the immediate vicinity of the agricultural land.
Show answer & explanation
Answer: C) C) Dividend received by a shareholder from a corporate farming company.
Agricultural income includes rent from land, income from cultivation, and income from connected buildings. However, dividends paid by a corporate entity (even if derived from farming) are classified as dividend income, not agricultural income.
Question 11
Mr. Ahmed cultivates cotton on his own agricultural land and uses it as raw material in his textile factory. The market value of the cotton at the time it was used in the factory was Rs. 2,000,000, but his actual cost of cultivation was Rs. 1,200,000. For the purpose of computing his 'Income from Business', what amount will be allowed as a deduction for this raw material?
- A) A) Rs. 1,200,000 (Cost of cultivation only)
- B) B) Rs. 2,000,000 (Market value)
- C) C) Nil, because agricultural income is exempt.
- D) D) Rs. 800,000
Show answer & explanation
Answer: B) B) Rs. 2,000,000 (Market value)
Rule 11 states that where a person uses their own agricultural produce as raw material in their business, the *market value* of the agricultural produce at the time it is used is allowed to be deducted from business income.
Question 12
A citizen of Pakistan returns to the country and becomes a resident individual in Tax Year 2026. For how many preceding tax years must he have been a non-resident to claim the "returning expatriate" exemption on his foreign-source income?
- A) A) 2 years
- B) B) 3 years
- C) C) 4 years
- D) D) 5 years
Show answer & explanation
Answer: C) C) 4 years
Foreign-source income derived by a citizen of Pakistan is exempt in the year they become resident and the following one tax year, provided they were not a resident individual in any of the *four* tax years preceding the year of return.
Question 13
A foreign national is a resident individual in Pakistan solely by reason of his employment. His stay in Pakistan will not exceed three years. Which of his foreign-source incomes will STILL be taxable in Pakistan?
- A) A) All of his foreign-source income is completely exempt.
- B) B) Only foreign-source income that is derived from a business established in Pakistan or brought into/received in Pakistan.
- C) C) Only his foreign-source salary.
- D) D) Foreign-source dividend income kept in a foreign bank account.
Show answer & explanation
Answer: B) B) Only foreign-source income that is derived from a business established in Pakistan or brought into/received in Pakistan.
The short-term resident exemption does not apply to any income derived from a business established in Pakistan or any foreign-source income that is brought into or received in Pakistan.
Question 14
According to Section 54 of the Income Tax Ordinance, 2001, if any other general law in Pakistan provides for an exemption from income tax, what is its legal effect?
- A) A) It is immediately effective, overriding the Income Tax Ordinance.
- B) B) It has no legal effect unless it is also specifically provided for within the Income Tax Ordinance, 2001.
- C) C) It is only effective for corporate entities.
- D) D) It requires a special approval certificate from the Supreme Court.
Show answer & explanation
Answer: B) B) It has no legal effect unless it is also specifically provided for within the Income Tax Ordinance, 2001.
No provision contained in any other law providing for an exemption or reduction in tax liability shall have legal effect unless it is also provided for in the Income Tax Ordinance, 2001.
Question 15
A taxpayer sustains a general business loss in Tax Year 2020. Up to which tax year can this loss be carried forward to be set off against future business income?
- A) A) Tax Year 2023
- B) B) Tax Year 2025
- C) C) Tax Year 2026
- D) D) It can be carried forward indefinitely.
Show answer & explanation
Answer: C) C) Tax Year 2026
Normal business losses can be carried forward up to six (6) tax years immediately succeeding the tax year in which the loss was first computed. Thus, a loss in 2020 can be carried forward up to Tax Year 2026.