CAF-2 · Chapter 12

Taxation of Individual and Association of Persons MCQs with Answers

15 multiple-choice questions on Taxation of Individual and Association of Persons for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.

1. Question 1

   To be classified as a "salaried individual" for the purpose of applying the relevant tax slab rates, what condition must be met regarding the person's income?

   • A) A) The person's salary income must be exactly equal to 50% of their taxable income.
   • B) B) The person's taxable salary income must exceed 75% of their total taxable income.
   • C) C) The person must solely earn income from salary and have no other source of income.
   • D) D) The person's salary income must exceed Rs. 600,000.
   Show answer & explanation

   Answer: B) B) The person's taxable salary income must exceed 75% of their total taxable income.

   A salaried taxpayer is defined as a taxpayer whose income chargeable under the head “salary” constitutes more than 75% of his taxable income.

2. Question 2

   Mr. Ahmed died leaving behind an estate worth Rs. 2,000,000. His outstanding income tax liability calculated up to the date of his death was Rs. 3,500,000. What is the extent of the tax liability for his legal representative?

   • A) A) The legal representative is personally liable for the full Rs. 3,500,000.
   • B) B) The legal representative is liable to pay Rs. 2,000,000, limited to the extent of the deceased's estate.
   • C) C) The entire tax liability is waived upon the death of the taxpayer.
   • D) D) The legal representative is only liable for 50% of the deceased's tax liability.
   Show answer & explanation

   Answer: B) B) The legal representative is liable to pay Rs. 2,000,000, limited to the extent of the deceased's estate.

   The legal representative is liable for any tax that the deceased would have become liable for, but this liability is strictly limited to the extent to which the deceased's estate is capable of meeting the liability.

3. Question 3

   Mr. Zaid, an author, spent 30 months writing a novel and received a lump-sum royalty of Rs. 1,500,000 in the tax year 2026. Under the Income Tax Ordinance, 2001, what special tax treatment can he elect for this income?

   • A) A) He can treat the entire Rs. 1,500,000 as exempt from tax.
   • B) B) He can elect to treat the royalty as having been received in tax year 2026 and the preceding two tax years in equal proportions (i.e., Rs. 500,000 each year).
   • C) C) He can elect to defer the taxation of this amount to the next three future tax years.
   • D) D) He must declare the entire Rs. 1,500,000 in the tax year 2026 with no spreading allowed.
   Show answer & explanation

   Answer: B) B) He can elect to treat the royalty as having been received in tax year 2026 and the preceding two tax years in equal proportions (i.e., Rs. 500,000 each year).

   Where the time taken by an author of a literary or artistic work to complete the work exceeds 24 months, the author may elect to treat any lump sum amount received on account of royalties as having been received in that tax year and the preceding two tax years in equal proportions.

4. Question 4

   A 15-year-old minor child earns Rs. 800,000 from a retail business that his father started for him with gifted capital. The father has a taxable income of Rs. 2,000,000, and the mother has a taxable income of Rs. 3,000,000. How will the minor's business income be taxed?

   • A) A) It will be taxed separately in the hands of the minor child.
   • B) B) It will be added to the father's taxable income since he provided the capital.
   • C) C) It will be added to the mother's taxable income since she has the highest taxable income.
   • D) D) It will be completely exempt from tax until the child turns 18.
   Show answer & explanation

   Answer: C) C) It will be added to the mother's taxable income since she has the highest taxable income.

   Any income of a minor child chargeable under the head "Income from Business" shall be chargeable to tax as the income of the parent with the highest taxable income for that year (unless the business was acquired by the child through inheritance).

5. Question 5

   An Association of Persons (AOP) operates a business. During the tax year, it paid a salary of Rs. 600,000 to one of its partners and a commission of Rs. 200,000 to another partner. How will these payments be treated when computing the AOP's taxable income?

   • A) A) Both amounts are fully allowed as deductible business expenses.
   • B) B) Only the salary is allowed as a deduction; the commission is inadmissible.
   • C) C) Both the salary and the commission are inadmissible deductions and must be added back to the AOP's taxable income.
   • D) D) They are allowed as deductions up to 50% of the amounts paid.
   Show answer & explanation

   Answer: C) C) Both the salary and the commission are inadmissible deductions and must be added back to the AOP's taxable income.

   Any profit on debt, brokerage, commission, salary, or other remuneration paid by an Association of Persons to a member of the association is not allowed as an expense and must be added back to the taxable income of the AOP.

6. Question 6

   XYZ & Co. is an AOP consisting of two individuals and one Private Limited Company, sharing profits equally (1/3rd each). The AOP earned a total taxable income of Rs. 3,000,000. How will this income be assessed for tax purposes?

   • A) A) The entire Rs. 3,000,000 will be taxed in the hands of the AOP.
   • B) B) The company's share (Rs. 1,000,000) will be excluded from the AOP's total income and taxed separately at corporate rates, while the remaining Rs. 2,000,000 will be taxed in the hands of the AOP.
   • C) C) The income will be completely divided and taxed only in the hands of the respective members.
   • D) D) The AOP will pay tax on the entire amount, and the company will pay tax again on its share.
   Show answer & explanation

   Answer: B) B) The company's share (Rs. 1,000,000) will be excluded from the AOP's total income and taxed separately at corporate rates, while the remaining Rs. 2,000,000 will be taxed in the hands of the AOP.

   If at least one of the members of an AOP is a company, the share of such company shall be excluded for the purpose of computing the total income of the AOP, and the company shall be taxed separately at the rates applicable to companies according to its share.

7. Question 7

   During the tax year, an AOP incurred a net business loss of Rs. 1,500,000. Partner A, who has a 50% share in the AOP, earned a personal business income of Rs. 2,000,000. Can Partner A set off his share of the AOP's loss (Rs. 750,000) against his personal business income?

   • A) A) Yes, he can set it off because members are fully entitled to the AOP's losses.
   • B) B) No, the share of loss from an AOP is neither adjustable against the income of its members nor considered for rate purposes; only the AOP can carry it forward.
   • C) C) Yes, but only up to 30% of his personal business income.
   • D) D) No, AOP losses lapse immediately and cannot be carried forward by anyone.
   Show answer & explanation

   Answer: B) B) No, the share of loss from an AOP is neither adjustable against the income of its members nor considered for rate purposes; only the AOP can carry it forward.

   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.

8. Question 8

   Mr. Qasim received Rs. 400,000 as his share of profit from an AOP that has already paid tax on its income. He also has a personal taxable business income of Rs. 800,000. What is the tax treatment of his Rs. 400,000 share from the AOP?

   • A) A) It is fully taxable again in his hands to avoid revenue loss.
   • B) B) It is exempt from tax and completely ignored for all tax calculations.
   • C) C) It is exempt from tax, but it will be included in his total income solely for the purpose of determining the applicable average rate of tax on his personal business income.
   • D) D) It is taxed as a separate block of income at a flat 15% rate.
   Show answer & explanation

   Answer: C) C) It is exempt from tax, but it will be included in his total income solely for the purpose of determining the applicable average rate of tax on his personal business income.

   If the AOP has paid tax, the share received by a member is exempt from tax. However, such share is included in the income of the member for determination of the tax rate (i.e., for rate purposes).

9. Question 9

   An AOP has an annual turnover of Rs. 350 million. The AOP did not file audited financial statements with its income tax return. What is the tax consequence for the members receiving a share of profit from this AOP?

   • A) A) The members will face a penalty of Rs. 100,000 each, but the share remains exempt.
   • B) B) The share of the members will not be exempt from tax and will be fully taxable in their hands.
   • C) C) The AOP's registration will be immediately cancelled.
   • D) D) There is no consequence; the share remains exempt regardless of turnover.
   Show answer & explanation

   Answer: B) B) The share of the members will not be exempt from tax and will be fully taxable in their hands.

   In case an association of persons has a turnover of Rs. 300 million or more, the share of a member will not be exempt from tax unless the association files financial statements duly audited by a firm of Chartered Accountants or Cost and Management Accountants.

10. Question 10

    Mr. Y has a personal taxable income of Rs. 1,000,000 (represented as 'C') and an exempt share from an AOP of Rs. 500,000. His total income for rate purposes is Rs. 1,500,000 (represented as 'B'). The notional tax on Rs. 1,500,000 is Rs. 150,000 (represented as 'A'). Using the formula (A/B) x C, what is the actual tax payable by Mr. Y?

    • A) A) Rs. 150,000
    • B) B) Rs. 100,000
    • C) C) Rs. 50,000
    • D) D) Rs. 0
    Show answer & explanation

    Answer: B) B) Rs. 100,000

    The tax payable is computed using the formula (A/B) x C. (150,000 / 1,500,000) x 1,000,000 = Rs. 100,000.

11. Question 11

    A professional firm of Chartered Accountants operates as an AOP because they are prohibited from incorporating as a company by their regulatory body. For the tax year 2026, their taxable income exceeds Rs. 5,600,000. What is the maximum marginal tax rate applicable to this professional firm?

    • A) A) 45%
    • B) B) 29%
    • C) C) 40%
    • D) D) 35%
    Show answer & explanation

    Answer: C) C) 40%

    In the case of an AOP that is a professional firm prohibited from incorporation by any law or regulatory body, the maximum rate applicable on income exceeding Rs. 5.6 million shall be 40% instead of the standard 45%.

12. Question 12

    Mr. A transferred a commercial plaza to his wife solely out of natural love and affection (without adequate financial consideration). The property generates a rental income of Rs. 2,000,000 annually. Under Section 90 of the Income Tax Ordinance, 2001, who will be taxed on this rental income?

    • A) A) The wife, because she is the new legal owner.
    • B) B) Mr. A (the transferor), because the transfer to a spouse was made without adequate consideration.
    • C) C) The income will be split equally between husband and wife.
    • D) D) The income is exempt as it is an intra-family transfer.
    Show answer & explanation

    Answer: B) B) Mr. A (the transferor), because the transfer to a spouse was made without adequate consideration.

    Where property is transferred by a person to his spouse (or minor child) without adequate consideration or not in connection with an agreement to live apart, the property income will be treated as the income of the transferor.

13. Question 13

    Mr. B transfers an income-generating asset to his minor child without adequate consideration. To which of the following minor children can the asset be transferred WITHOUT the income being clubbed back into Mr. B's hands?

    • A) A) A minor son
    • B) B) An adopted minor son
    • C) C) A married minor daughter
    • D) D) An unmarried minor daughter
    Show answer & explanation

    Answer: C) C) A married minor daughter

    The clubbing of income under Section 90 applies to transfers made to a spouse or minor child, specifically other than a married daughter. Therefore, a transfer to a married minor daughter is an exception, and the income would not be clubbed in the transferor's hands.

14. Question 14

    Mr. Junaid succeeded Mr. Tariq's manufacturing business on 1 January 2026 (mid-way through the tax year). Mr. Tariq subsequently disappeared and cannot be found by the tax authorities to pay the tax liability for the period up to the date of succession. Under Section 98C, what is the legal recourse for the tax department?

    • A) A) The tax department must write off the tax liability as a bad debt.
    • B) B) The tax liability for the period prior to succession shall be recovered from Mr. Junaid (the successor), who is then entitled to recover it from Mr. Tariq.
    • C) C) The tax department can only seize the personal bank accounts of Mr. Tariq's relatives.
    • D) D) Mr. Junaid is only liable to pay a 10% penalty on behalf of the predecessor.
    Show answer & explanation

    Answer: B) B) The tax liability for the period prior to succession shall be recovered from Mr. Junaid (the successor), who is then entitled to recover it from Mr. Tariq.

    Where the predecessor cannot be found or the tax cannot be recovered from him, the tax liability for the year of succession up to the date of succession (and preceding years) shall be recoverable from the successor. The successor is then entitled to recover it from the predecessor.

15. Question 15

    AOP 'X' has two partners, Ali and Bilal. AOP 'X' derived an income of Rs. 1,000,000 which strictly falls under the Final Tax Regime (FTR). How will this FTR income affect the individual tax returns of Ali and Bilal?

    • A) A) Their share of the FTR income will be added to their normal taxable income for rate purposes.
    • B) B) Their share of the FTR income will be taxed at the normal progressive slab rates in their hands.
    • C) C) The FTR income will not be included in the taxable income of the members at all, not even for rate purposes.
    • D) D) They will each pay a flat 15% tax on their share of the AOP's FTR income.
    Show answer & explanation

    Answer: C) C) The FTR income will not be included in the taxable income of the members at all, not even for rate purposes.

    If an AOP has any income that falls under the Final Tax Regime (FTR), the members' share from such income shall not be added to the taxable income of the member. Income falling under FTR is not to be included in any taxable income calculation, meaning it is excluded even for rate purposes.