CAF-2 · Chapter 15

Assessment, Records and Audit MCQs with Answers

15 multiple-choice questions on Assessment, Records and Audit for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.

1. Question 1

   Under the Universal Self-Assessment Scheme (USAS) principles in Section 120, if a taxpayer furnishes a complete return of income, when is it treated to be an assessment order issued by the Commissioner?

   • A) A) On the exact date the return is physically received by the FBR.
   • B) B) On the day the adjustments (if any) were made through the automated system under section 120(2A).
   • C) C) Exactly 180 days after the return is filed.
   • D) D) On the last day of the financial year.
   Show answer & explanation

   Answer: B) B) On the day the adjustments (if any) were made through the automated system under section 120(2A).

   If a taxpayer furnishes a complete return, the Commissioner shall be treated to have assessed the income, and the return shall be taken to be an assessment order issued on the day the adjustments were made under section 120(2A).

2. Question 2

   If a return of income is filed and no adjustments are made by the FBR's automated system within a specified period, the amounts declared by the taxpayer are deemed to have been taken as adjusted amounts. What is this statutory period?

   • A) A) 3 months from the filing of the return.
   • B) B) 6 months from the filing of the return.
   • C) C) 1 year from the end of the tax year.
   • D) D) 5 years from the filing of the return.
   Show answer & explanation

   Answer: B) B) 6 months from the filing of the return.

   Where no adjustments have been made within 6 months of the filing of the return, the amounts specified in the return as declared by the taxpayer shall be deemed to have been taken as adjusted amounts on the day the return was filed.

3. Question 3

   What is the standard statutory time limit within which a Best Judgment Assessment order under Section 121 must be issued?

   • A) A) Within 5 years from the end of the financial year in which the return was filed.
   • B) B) Within 6 years from the end of the tax year to which it relates.
   • C) C) Within 10 years from the end of the tax year to which it relates.
   • D) D) There is no time limit for a Best Judgment Assessment.
   Show answer & explanation

   Answer: B) B) Within 6 years from the end of the tax year to which it relates.

   An assessment order under section 121 (Best Judgment Assessment) shall only be issued within six years from the end of the tax year to which it relates.

4. Question 4

   If a taxpayer fails to produce books of accounts during an audit, how may the Commissioner determine the taxable income for making a Best Judgment Assessment?

   • A) A) By applying a flat 15% tax rate on the taxpayer's bank deposits.
   • B) B) By arbitrarily adopting the taxable income of the preceding tax year.
   • C) C) On the basis of sectoral benchmark ratios prescribed by the Board.
   • D) D) By seizing the taxpayer's personal assets.
   Show answer & explanation

   Answer: C) C) On the basis of sectoral benchmark ratios prescribed by the Board.

   For the purposes of making a best judgment assessment, the Commissioner may determine taxable income on the basis of sectoral benchmark ratios prescribed by the Board (e.g., gross profit ratio, net profit ratio, wastage ratio, etc.).

5. Question 5

   Under which of the following circumstances is the Commissioner empowered to issue a "Provisional Assessment Order" under Section 123 before making a best judgment or amended assessment?

   • A) A) When a taxpayer fails to file an annual wealth statement.
   • B) B) When a mathematical error is found in the return.
   • C) C) When an offshore asset not declared earlier is discovered or a concealed asset is impounded.
   • D) D) When a taxpayer files a revised return voluntarily.
   Show answer & explanation

   Answer: C) C) When an offshore asset not declared earlier is discovered or a concealed asset is impounded.

   A provisional assessment is applicable in cases where any concealed asset of a person is impounded by any government agency, or where an offshore asset of any person, not declared earlier, is discovered.

6. Question 6

   An assessment order can be amended by the Commissioner if he has acquired "definite information" from an audit. Which of the following situations also legally empowers the Commissioner to amend an assessment order under Section 122(5A)?

   • A) A) The taxpayer requests a change in the accounting method.
   • B) B) The Commissioner considers the original assessment to be erroneous in so far as it is prejudicial to the interest of revenue.
   • C) C) The Commissioner simply changes his opinion on a previously accepted legal interpretation.
   • D) D) The taxpayer changes their business address.
   Show answer & explanation

   Answer: B) B) The Commissioner considers the original assessment to be erroneous in so far as it is prejudicial to the interest of revenue.

   The Commissioner may amend, or further amend, an assessment order if he considers that it is erroneous in so far as it is prejudicial to the interest of revenue. Note that a mere change of opinion does not constitute definite information or make the assessment erroneous and prejudicial.

7. Question 7

   What is the maximum time limit for the Commissioner to amend an assessment order under Section 122?

   • A) A) 3 years from the end of the tax year to which it relates.
   • B) B) 5 years from the end of the financial year in which the original assessment order is issued or treated as issued.
   • C) C) 6 years from the end of the tax year.
   • D) D) 10 years from the end of the tax year.
   Show answer & explanation

   Answer: B) B) 5 years from the end of the financial year in which the original assessment order is issued or treated as issued.

   Amendment of assessment shall not be made after the expiry of 5 years from the end of the financial year in which the order is issued or treated as issued.

8. Question 8

   The Commissioner Inland Revenue has the power to suo-moto revise an order passed by a subordinate officer under Section 122A. Which of the following is a strict condition for such a revision?

   • A) A) The revised order must increase the tax liability.
   • B) B) The order shall not be prejudicial to the person to whom the order relates.
   • C) C) The revision must be made within 180 days.
   • D) D) The taxpayer must request the revision in writing.
   Show answer & explanation

   Answer: B) B) The order shall not be prejudicial to the person to whom the order relates.

   The Commissioner may suo-moto call for the record and revise an order, but any such order shall not be prejudicial to the person to whom the order relates.

9. Question 9

   If a taxpayer discovers an omission in his previously filed and assessed return and subsequently files a revised return of income (fulfilling all conditions including payment of tax), what is the legal status of this revised return?

   • A) A) It is kept pending until a formal audit is conducted.
   • B) B) It is treated as an amended assessment order issued by the Commissioner on the day the revised return was furnished.
   • C) C) It is treated as a fresh appeal to the Commissioner (Appeals).
   • D) D) It automatically triggers a mandatory best judgment assessment.
   Show answer & explanation

   Answer: B) B) It is treated as an amended assessment order issued by the Commissioner on the day the revised return was furnished.

   If a taxpayer furnishes a revised return of income, the Commissioner shall treat the revised return as an amended assessment, and it shall be taken to be an amended assessment order issued to the taxpayer on the day the revised return was furnished.

10. Question 10

    A taxpayer intends to settle an amendment of assessment case through the Assessment Oversight Committee (Agreed Assessment). Who among the following is NOT a member of this Committee?

    • A) A) Chief Commissioner Inland Revenue.
    • B) B) Commissioner Inland Revenue.
    • C) C) Additional Commissioner Inland Revenue.
    • D) D) A reputable businessman nominated by the Chamber of Commerce.
    Show answer & explanation

    Answer: D) D) A reputable businessman nominated by the Chamber of Commerce.

    Under Section 122D, the Assessment Oversight Committee comprises exactly three tax authorities: the Chief Commissioner Inland Revenue, the Commissioner Inland Revenue, and the Additional Commissioner Inland Revenue. (A businessman is a member of the ADRC, not the Assessment Oversight Committee).

11. Question 11

    Generally, taxpayers are required to maintain books of accounts and records for six years after the end of the tax year to which they relate. However, this 6-year time limit is NOT applicable in which of the following cases?

    • A) A) Records relating to domestic salary income.
    • B) B) Records relating to foreign source income, assets, and expenses, which must be maintained for an indefinite period.
    • C) C) Records of a company with a turnover below Rs. 100 million.
    • D) D) Records of agricultural income.
    Show answer & explanation

    Answer: B) B) Records relating to foreign source income, assets, and expenses, which must be maintained for an indefinite period.

    The time limit of 6 years will not be applicable in the case of foreign source income, assets, expenses, etc., and the taxpayer is required to maintain this specific record for an indefinite period of time.

12. Question 12

    The Commissioner is generally restricted from selecting a person's income tax affairs for audit under Section 177 if they have been audited in any of the preceding three tax years. Under what condition can this restriction be bypassed?

    • A) A) If the taxpayer is a public limited company.
    • B) B) If the Commissioner obtains prior approval from the Federal Board of Revenue (FBR).
    • C) C) If the taxpayer failed to file a wealth statement.
    • D) D) If the taxpayer's turnover exceeds Rs. 500 million.
    Show answer & explanation

    Answer: B) B) If the Commissioner obtains prior approval from the Federal Board of Revenue (FBR).

    The provision for selection of a person for audit shall not apply if their tax affairs have been audited in any of the preceding three tax years, provided that the Commissioner may still select them for audit with the specific approval of the Board.

13. Question 13

    If a registered person voluntarily files a revised return and deposits the tax sought to be evaded along with default surcharge during an audit, but before the issuance of a show-cause notice under section 122(9), what is the penalty consequence?

    • A) A) No penalty will be recovered.
    • B) B) 25% of the leviable penalty must be paid.
    • C) C) 50% of the leviable penalty must be paid.
    • D) D) 100% of the leviable penalty must be paid.
    Show answer & explanation

    Answer: B) B) 25% of the leviable penalty must be paid.

    If the taxpayer deposits the amount pointed out during the audit (or before the show cause notice), he shall deposit the evaded tax, default surcharge, and 25% of the penalties leviable. (If done before notice of audit, 0% penalty; if after show cause, 50% penalty).

14. Question 14

    The Federal Board of Revenue (FBR) may appoint a Special Audit Panel to conduct a forensic audit of a taxpayer. Who is legally required to head this special audit panel?

    • A) A) A senior partner from a firm of Chartered Accountants.
    • B) B) An independent technical expert.
    • C) C) A Chairman who shall be an Officer of Inland Revenue.
    • D) D) A retired judge of the High Court.
    Show answer & explanation

    Answer: C) C) A Chairman who shall be an Officer of Inland Revenue.

    The Special Audit Panel shall be headed by a Chairman who must be an officer of Inland Revenue.

15. Question 15

    Under Section 175B of the Income Tax Ordinance, 2001, which authority is empowered to compute the "indicative income and tax liability" of a person using artificial intelligence or mathematical modeling for the broadening of the tax base?

    • A) A) The Securities and Exchange Commission of Pakistan (SECP).
    • B) B) The Federal Investigation Agency (FIA).
    • C) C) The National Database and Registration Authority (NADRA).
    • D) D) The State Bank of Pakistan (SBP).
    Show answer & explanation

    Answer: C) C) The National Database and Registration Authority (NADRA).

    The National Database and Registration Authority (NADRA) may compute indicative income and tax liability by use of artificial intelligence, mathematical or statistical modeling, which the FBR can then use to issue tax notices.